Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity, and capital resources during the two-year period ended December 31, 2020. Unless otherwise noted, all references herein for the years 2020 and 2019 represent the fiscal years ended December 31, 2020 and 2019, respectively. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted in the United States of America. This discussion and analysis is presented in five sections:
•Business Overview
•Results of Operations and Non-GAAP Financial Measures
•Liquidity and Capital Resources
•Off-Balance Sheet Arrangements and Contractual Obligations
•Significant Accounting Policies and Estimates
Business Overview
COVID-19 Update
The impact of COVID-19, including changes in consumer behavior, pandemic fears, and market downturns as well as restrictions on business and individual activities has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by federal, state, and local public health and governmental authorities to contain the spread of COVID-19 and although many restrictions that were in place have eased in many localities, some areas that had previously eased restrictions have reverted to more stringent limitations. If new strains of COVID-19 develop or sufficient amounts of vaccines are not available or widely administered for a significant period of time, the continued impacts to our business could continue to be material.
We are an essential business and remain open in all locations, adhering to the health guidelines to operate safely provided by our government officials and the U.S. Centers for Disease Control and Prevention. Throughout the COVID-19 pandemic, our first priority has been to safeguard the health of our employees. This includes restricting outside personnel and visitors as well as requiring a face covering when a visitor is on-site, creating space between work areas for employees, providing ample PPE and cleaning supplies in our offices and manufacturing plants, restricting travel, and having formal policies for mitigation in the event of cases of illness.
During 2020, COVID-19 has had an adverse effect on our reported results and operations. The Company has seen wide ranging impacts partially attributable to COVID-19 that have included:
•A $16.2 million non-cash goodwill impairment charge related to our Metals Segment;
•Continued curtailment of operations at our Palmer facility that has resulted in $4.0 million of operating losses and $6.2 million of non-cash, pre-tax asset impairment charges related to that business; and
•Technical defaults of our debt covenants in the second and third quarter of 2020 and the need to obtain waivers for compliance.
There remains significant uncertainty concerning the magnitude of the impact and the duration of the COVID-19 pandemic. We believe that, at a minimum, the manufacturing sector will continue to face challenges over the next several quarters. Given that, we are unable to predict the ultimate impact it may have on our business, future operations, financial position or cash flows. The extent that our operations will continue to be impacted by the COVID-19 pandemic will depend on future developments, including any new potential waves of the virus, new strains of the virus, and the success of vaccination programs, all of which are highly uncertain and cannot be accurately predicted. See Part I - Item 1A, "Risk Factors," included herein for updates to our risk factors regarding risks associated with the COVID-19 pandemic.
Goodwill Impairment
During the second quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment existed. Continued deterioration in macroeconomic conditions, continued risks within the stainless steel industrial business, reporting unit operating losses and a decline in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event, thereby requiring the Company to quantitatively evaluate the reporting unit for impairment. As a result of the goodwill impairment evaluation in the second quarter, it was concluded that the estimated fair value of the reporting unit was greater than its carrying value by 1.7% and, as such, no goodwill impairment was necessary.
During the third quarter of 2020, continued declines in the Company's stock price, reporting unit operating losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the Welded Pipe and Tube reporting unit had experienced a triggering event resulting in the Company performing another quantitative interim evaluation of goodwill. As a result of the goodwill impairment evaluation in the third quarter, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value by 9.7% resulting in a goodwill impairment charge of $10.7 million.
Further, continued risks within the stainless steel industrial business, reporting unit operating losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the Welded Pipe and Tube reporting unit had experienced a triggering event in the fourth quarter of 2020, resulting in the Company performing another quantitative interim evaluation of goodwill. As a result of the goodwill impairment evaluation in the fourth quarter, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value by 24.1% resulting in the remainder of the goodwill attributable to the Welded Pipe and Tube reporting unit being impaired and an additional goodwill impairment charge of $5.5 million. See Note 5 - Goodwill for further discussion on the Company's goodwill and these impairment charges.
Results of Operations
Comparison of 2020 to 2019 – Consolidated
Consolidated net sales for the full-year 2020 decreased $49.2 million, or 16 percent, over the full-year 2019 to $256.0 million. Net sales for the fourth quarter of 2020 decreased $12.0 million, or 18 percent, over the fourth quarter of 2019 to $55.9 million. The decrease in sales was driven by our Metals Segment, which had a decrease of $46.6 million, or 19 percent, for the full-year of 2020 and a decrease of $10.6 million, or 19 percent, for the fourth quarter of 2020.
For the full-year 2020, net loss totaled $27.3 million, or $3.00 diluted loss per share. This compared to full-year 2019 net loss of $3.0 million, or $0.34 diluted loss per share. The full-year 2020 was negatively impacted by:
•Non-cash goodwill impairment in our Welded Pipe and Tube reporting unit of $16.2 million;
•Operating losses at Palmer totaling $4.0 million and $6.2 million in non-cash, pre-tax asset impairment charges;
•Proxy contest costs of $3.1 million related to the Company's proxy contest and election of directors at the 2020 Annual Meeting of Shareholders;
•Costs related to the hotline investigation regarding the accounting for Palmer and other matters of $0.7 million; and
•Severance costs of $1.1 million related to the retirement of the former President and CEO.
For the fourth quarter of 2020 the Company recorded a net loss of $8.6 million, or $0.94 diluted loss per share. This compares to a net loss of $0.9 million, or $0.10 diluted loss per share for fourth quarter of 2019. The fourth quarter of 2020 was negatively impacted by:
•Non-cash goodwill impairment in our Welded Pipe and Tube reporting unit of $5.5 million;
•Operating losses at Palmer totaling $0.4 million; and
•Severance costs of $1.1 million related to the retirement of the former President and CEO.
Full-year 2020 consolidated gross profit decreased 26 percent to $22.7 million, or nine percent of sales, compared to $30.8 million, or 10 percent of sales, in the full-year 2019. For the fourth quarter of 2020, consolidated gross profit was $6.1 million, a decrease of 12 percent from the fourth quarter of 2019 of $7.0 million. Consolidated gross profit was 11 percent of sales for the fourth quarter of 2020 and 10 percent of sales for the same period of 2019. The decreases in dollars was attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2020 to 2019 below.
Consolidated selling, general and administrative expense for the full-year 2020 decreased by $3.9 million to $28.7 million, or 11 percent of sales, compared to $32.6 million, or 11 percent of sales for the full-year 2019. These costs decreased $0.1 million during the fourth quarter of 2020 to $7.6 million compared to $7.7 million for the same period of 2019 and were 14 percent of sales for the fourth quarter of 2020 compared to 11 percent of sales for the fourth quarter of 2019. The Company experienced decreased SG&A costs for both the full year and fourth quarter of 2020 when compared to the same periods of 2019 resulting from:
•Decreases in personnel costs related to salaries, commissions and employee benefits ($2.3 million lower for the full-year and $0.5 million lower for the fourth quarter);
•Decreases in travel expense related to the Company's suspension of all non-essential travel in response to the COVID-19 pandemic ($0.9 million lower for the full-year and $0.2 million lower for the fourth quarter); and
•Decreases in amortization expense due to the passage of time and write down of intangible assets in the second quarter of 2020 at Palmer ($0.5 million lower for the full-year and $0.2 million lower for the fourth quarter).
The full-year and fourth quarter decreases were offset by:
•Increases in bad debt expense ($0.6 million higher for the full-year and $0.3 million higher for the fourth quarter);
•Increases in stock compensation expense ($0.4 million higher in the fourth quarter), related to the retirement of the former President and CEO; and
•Increases in taxes and licenses fees ($0.1 million higher in the fourth quarter).
Consolidated operating loss for the full-year 2020 totaled $31.1 million compared to an operating loss of $1.7 million for the full-year 2019. For the fourth quarter of 2020, operating loss was $6.9 million compared to an operating loss of $1.8 million
in the fourth quarter of 2019. Operating losses for the full-year 2020 were primarily attributable to our Metals Segment as discussed in the Metals Segment Comparison of 2020 to 2019 below.
Metals Segment
The following table summarizes operating results for the two years indicated. Reference should be made to Note 14 to the consolidated financial statements included in Item 8 of this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
(in thousands)
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Net sales
|
$
|
204,459
|
|
|
100.0
|
%
|
|
$
|
251,078
|
|
|
100.0
|
%
|
Cost of goods sold
|
189,103
|
|
|
92.5
|
%
|
|
226,852
|
|
|
90.4
|
%
|
Gross profit
|
15,356
|
|
|
7.5
|
%
|
|
24,226
|
|
|
9.6
|
%
|
Selling, general and administrative expense
|
17,538
|
|
|
8.6
|
%
|
|
20,534
|
|
|
8.2
|
%
|
Asset impairments
|
6,214
|
|
|
3.0
|
%
|
|
—
|
|
|
—
|
%
|
Goodwill impairment
|
16,203
|
|
|
7.9
|
%
|
|
—
|
|
|
—
|
%
|
Operating (loss) income
|
$
|
(24,599)
|
|
|
(12.0)
|
%
|
|
$
|
3,692
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
Comparison of 2020 to 2019 - Metals Segment
Net sales for the Metals Segment totaled $204.5 million for the full year of 2020, a decrease of 19 percent compared to the same period of 2019. Net sales for the fourth quarter of 2020 totaled $44.7 million, a decrease of 19 percent compared to the fourth quarter of 2019 net sales of $55.4 million. During the second quarter of 2020, the Company curtailed operations at its Palmer facility due to the impact of the COVID-19 pandemic on the oil and gas industry and the Permian Basin. Excluding Palmer, net sales for the full-year and fourth quarter of 2020 decreased 11 percent and 15 percent, respectively.
Welded Pipe & Tube Operations net sales decreased nine percent and 13 percent for the full-year and fourth quarter of 2020, respectively, when compared to the same periods of the prior year. The total sales decrease for the year resulted from a five percent decrease in unit volumes combined with a three percent decrease in average selling price. For the fourth quarter of 2020, unit volumes decreased nine percent while the average selling price decreased four percent compared to 2019. The lower average selling price for the full-year was significantly impacted by the pass through of input and cost changes related to 304 alloy surcharges and a slightly less favorable product mix for stainless steel pipe and tube and the decline in indexed pricing for galvanized pipe and tube.
Seamless heavy-wall carbon steel pipe and tube sales decreased 23 percent and 29 percent for the full-year and fourth quarter, respectively, of 2020 compared to the same periods of 2019. The full-year sales decrease was comprised of a 15 percent decrease in unit volumes combined with a nine percent decrease in average selling price. For the fourth quarter, unit volumes decreased 20 percent while average selling prices decreased 11 percent. Lower pricing was primarily due to a lower mix of energy based sales throughout the year and lower mill pricing while volume was impacted by the on-going impacts of COVID-19 in the oil and gas industry.
As mentioned above, during the second quarter of 2020, the Company curtailed operations at its Palmer facility due to the impact of the COVID-19 pandemic on the oil and gas industry and the Permian Basin. As a result, storage tank sales decreased 81 percent and 84 percent for the full-year and fourth quarter, respectively, of 2020 when compared to the same periods for the prior year. The full-year decrease was comprised of a 50 percent decrease in the average selling price and a 61 percent decline in the number of tanks sold. For the fourth quarter, the storage tank sales decrease resulted from a 90 percent decrease in average selling price offset by a 74 percent increase in unit volumes.
The Metals Segment's operating loss totaled $24.6 million for the full-year 2020 compared to operating income of $3.7 million for 2019. For the fourth quarter 2020, operating loss was $4.8 million compared to operating income of $0.6 million for the fourth quarter of 2019. Current year operating results were affected by the following factors:
•Non-cash goodwill impairment related to the Welded Pipe and Tube reporting unit totaling $16.2 million. See Note 5- Goodwill for further discussion on the Company's goodwill;
•Operating losses at Palmer totaling $4.0 million and $6.2 million in non-cash, pre-tax asset impairment charges related to this business;
•Nickel prices and resulting surcharges for 304 and 316 alloys experienced significant increases and decreases during 2020, with the net result being significant margin reduction as inventories bought at higher surcharge levels were sold during declining pricing periods. As a result, the full year of 2020 generated a net unfavorable operating impact of $5.3 million related to metal pricing, compared to a net unfavorable operating impact of $6.4 million in 2019;
•Operating income from seamless carbon pipe and tube showed a decline of $2.4 million related to lower volume and pricing noted above; and
•Year over year changes in volume, pricing and product mix in welded pipe and tube, as noted above, combined for a $0.5 million decline in operating profit margins in 2020 compared to 2019.
Selling, general and administrative expense decreased $3.0 million, or 15 percent, for the full-year 2020 when compared to 2019. This expense category was nine percent of sales for 2020 and eight percent of sales for 2019. For the fourth quarter of 2020, selling, general and administrative expense was $3.9 million (nine percent of sales), a decrease of $1.2 million from $5.1 million (nine percent of sales) for the same period of 2019. The changes in selling, general and administrative expense resulted from:
•Salaries, commissions and employee benefit costs (lower by $1.8 million and $0.5 million for the full-year and fourth quarter, respectively);
•Incentive bonus and stock compensation expense (lower by $1.2 million and $0.9 million for the full-year and fourth quarter, respectively);
•Amortization expense (lower by $0.5 million and $0.2 million for the full-year and fourth quarter, respectively); and
•Travel expense related to the Company reducing all non-essential travel in response to the COVID-19 pandemic (lower by $0.5 million and $0.1 million for the full-year and fourth quarter, respectively).
The full-year and fourth quarter decreases were offset by:
•Bad debt expense ($0.7 million and $0.3 million higher for the full-year and fourth quarter, respectively);
•Higher professional fees ($0.2 million higher for the full-year 2020); and
•Taxes and Licenses fees ($0.1 million higher for the full-year 2020 and the fourth quarter, respectively).
Specialty Chemicals Segment
The following tables summarize operating results for the two years indicated. Reference should be made to Note 14 to the consolidated financial statements included in Item 8 of this Form 10-K.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
(in thousands)
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Net sales
|
$
|
51,541
|
|
|
100.0
|
%
|
|
$
|
54,090
|
|
|
100.0
|
%
|
Cost of goods sold
|
43,736
|
|
|
84.9
|
%
|
|
46,983
|
|
|
86.9
|
%
|
Gross profit
|
7,805
|
|
|
15.1
|
%
|
|
7,107
|
|
|
13.1
|
%
|
Selling, general and administrative expense
|
3,772
|
|
|
7.3
|
%
|
|
4,296
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
4,033
|
|
|
7.8
|
%
|
|
$
|
2,811
|
|
|
5.2
|
%
|
Comparison of 2020 to 2019 – Specialty Chemicals Segment
Net sales for the Specialty Chemicals Segment decreased five percent, or $2.5 million, to $51.5 million for 2020 compared to $54.1 million in 2019. For the fourth quarter of 2020, sales were $11.2 million, representing an 11 percent decrease from $12.6 million for the same quarter of 2019. For the full-year, overall shipped pounds were up flat to prior year on a decrease in volume of four percent for contract manufactured products and a seven percent increase in tolled products. For the fourth quarter of 2020, pounds shipped increased two percent. Overall selling prices decreased five percent and 13 percent for the full-year and fourth quarter of 2020, respectively, compared to the same periods of 2019. Net sales were unfavorably impacted during the full-year of 2020 from downturns in demand due to weak industrial and manufacturing activities related to the COVID-19 pandemic. The Specialty Chemicals Segment was able to increase production of hand sanitizer and cleaning aids to help offset the reduced production into the oil and gas industry while also implementing cost cutting measures allowing the Segment to generate increased profits on lower sales volume.
The Specialty Chemicals Segment's operating income for the full-year of 2020 totaled $4.0 million compared to operating income of $2.8 million for the full-year 2019. The fourth quarter of 2020 increased 24 percent from the prior year quarter to $0.5 million. During 2020, gross profit margin increased as a percentage of net sales over 2019 levels, at 15 percent versus 13 percent, respectively, primarily driven by favorable reductions in shipping costs ($0.1 million), inventory shrinkage ($0.1 million) and favorable manufacturing variance adjustments ($0.7 million) over 2019.
Selling, general and administrative expense decreased $0.5 million or 12 percent, to $3.8 million in 2020 when compared to 2019 expense of $4.3 million, which represented seven percent of sales and eight percent of sales, respectively. For the fourth quarter, selling, general and administrative expense was $1.1 million (10 percent of sales) in 2020, an increase of $0.1 million when compared to $1.0 million (eight percent of sales) for the same period of 2019.
The full-year decreases in selling, general and administrative expenses resulted from:
•Salaries, commissions and employee benefits ($0.5 million and $0.1 million lower for the full-year and fourth quarter, respectively);
•Travel expense related to the Company reducing all non-essential travel in response to the COVID-19 pandemic ($0.1 million lower for the full-year 2020); and
•Bad debt expense ($0.1 million lower for the full-year 2020).
The full-year and fourth quarter decreases were offset by:
•Incentive bonus expense ($0.1 million and $0.2 million higher for the full-year and fourth quarter, respectively); and
•Higher professional fees ($0.1 million higher for the full-year 2020).
Comparison of 2020 to 2019 - Corporate
Corporate expenses decreased $0.5 million to $7.9 million, or three percent of sales, in 2020 down from $8.4 million, or three percent of sales, in 2019. The full-year decrease resulted primarily from:
•Travel expense decreased $0.3 million as a result of COVID-19 and the Company's decision to eliminate all non-essential travel;
•Professional fees decreased by $0.2 million from the prior year resulting from lower banking fees in the current year;
•Performance based bonuses decreased $0.2 million due to lower attainment of pre-defined Adjusted EBITDA targets in the year; and
•Other corporate overhead expenses decreased $0.6 million driven by lower repair and maintenance expense and lower directors' fees for the year.
The full-year decreases were partially offset by:
•Employee benefit costs increased $0.9 million driven by severance costs of $1.1 million related to the retirement of the former President and CEO.
Interest expense was $2.1 million and $3.8 million for the full-years of 2020 and 2019, respectively. The decrease was primarily related to lower average debt outstanding in the full year of 2020 driven by $10.7 million of working capital reductions in the year.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States ("GAAP"), we use the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), and Adjusted Diluted Earnings (Loss) Per Share. Management believes that these non-GAAP measures provide additional useful information to allow readers to compare the financial results between periods. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP.
EBITDA and Adjusted EBITDA
We define "EBITDA" as earnings before interest (including change in fair value of interest rate swap), income taxes, depreciation and amortization. We define "Adjusted EBITDA" as EBITDA further adjusted for the impact of non-cash and other items we do not consider in our evaluation of ongoing performance. These items include: goodwill impairment, asset impairment, gain on lease modification, interest expense (including change in fair value of interest rate swap), income taxes, depreciation, amortization, stock-based compensation, non-cash lease cost, acquisition costs and other fees, proxy contest costs, shelf registration costs, earn-out adjustments, realized and unrealized (gains) and losses on investments in equity securities, retention costs, restructuring and severance costs and other adjustments from net income. We caution investors amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.
Consolidated EBITDA and Adjusted EBITDA are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
($ in thousands)
|
2020
|
|
2019
|
Consolidated
|
|
|
|
Net loss
|
$
|
(27,267)
|
|
|
$
|
(3,036)
|
|
Adjustments:
|
|
|
|
|
Interest expense
|
2,110
|
|
|
3,818
|
|
|
Change in fair value of interest rate swap
|
51
|
|
|
141
|
|
|
Income taxes
|
(4,706)
|
|
|
(727)
|
|
|
Depreciation
|
7,572
|
|
|
7,578
|
|
|
Amortization
|
3,028
|
|
|
3,486
|
|
EBITDA
|
(19,212)
|
|
|
11,260
|
|
|
Acquisition costs and other
|
861
|
|
|
1,936
|
|
|
Proxy contest costs
|
3,105
|
|
|
—
|
|
|
Shelf registration costs
|
—
|
|
|
10
|
|
|
Earn-out adjustments
|
(1,195)
|
|
|
(747)
|
|
|
Gain on investments in equity securities
|
(170)
|
|
|
(1,873)
|
|
|
Asset impairments
|
6,214
|
|
|
—
|
|
|
Goodwill impairment
|
16,203
|
|
|
—
|
|
|
Gain on lease modification
|
(171)
|
|
|
—
|
|
|
Stock-based compensation
|
1,791
|
|
|
2,091
|
|
|
Non-cash lease expense
|
510
|
|
|
560
|
|
|
Retention expense
|
235
|
|
|
223
|
|
|
Restructuring and severance costs
|
1,076
|
|
|
—
|
|
Adjusted EBITDA
|
$
|
9,247
|
|
|
$
|
13,460
|
|
|
% sales
|
3.6
|
%
|
|
4.4
|
%
|
Metals Segment EBITDA and Adjusted EBITDA are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
($ in thousands)
|
2020
|
|
2019
|
Metals Segment
|
|
|
|
Net (loss) income
|
$
|
(22,388)
|
|
|
$
|
4,356
|
|
Adjustments:
|
|
|
|
|
Interest expense
|
11
|
|
|
83
|
|
|
Depreciation
|
5,855
|
|
|
5,954
|
|
|
Amortization
|
3,028
|
|
|
3,486
|
|
EBITDA
|
(13,494)
|
|
|
13,879
|
|
|
Acquisition costs and other
|
16
|
|
|
1,381
|
|
|
Earn-out adjustments
|
(1,195)
|
|
|
(747)
|
|
|
Asset impairments
|
6,214
|
|
|
—
|
|
|
Goodwill impairment
|
16,203
|
|
|
—
|
|
|
Stock-based compensation
|
303
|
|
|
663
|
|
|
Retention expense
|
—
|
|
|
123
|
|
Metals Segment Adjusted EBITDA
|
$
|
8,047
|
|
|
$
|
15,299
|
|
|
% of segment sales
|
3.9
|
%
|
|
6.1
|
%
|
Specialty Chemicals Segment EBITDA and Adjusted EBITDA are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
($ in thousands)
|
2020
|
|
2019
|
Specialty Chemicals Segment
|
|
|
|
Net income
|
$
|
4,046
|
|
|
$
|
2,811
|
|
Adjustments:
|
|
|
|
|
Interest expense
|
9
|
|
|
—
|
|
|
Depreciation
|
1,552
|
|
|
1,461
|
|
EBITDA
|
5,607
|
|
|
4,272
|
|
|
Stock-based compensation
|
207
|
|
|
226
|
|
Specialty Chemicals Segment Adjusted EBITDA
|
$
|
5,814
|
|
|
$
|
4,498
|
|
|
% of segment sales
|
11.3
|
%
|
|
8.3
|
%
|
Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) per Share
Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) per Share are non-GAAP measures and exclude goodwill impairment, asset impairment, gain on lease modification, stock-based compensation, non-cash lease costs, acquisition costs, proxy contest costs, shelf registration costs, earn-out adjustments, realized and unrealized (gains) and losses on investments in equity securities, retention costs and restructuring and severance costs from net income. They also utilize a constant effective tax rate to reflect tax neutral results. Adjusted net (loss) income and adjusted diluted (loss) earnings per share should not be considered an alternative to, or a more meaningful indicator of, the Company's net (loss) income or diluted (loss) earnings per share as prepared in accordance with GAAP. The Company's methods of determining this non-GAAP financial measure may differ from the method used by other companies for this or similar non-GAAP financial measures. Accordingly, these non-GAAP measures may not be comparable to the measures used by other companies.
The reconciliation of net income (loss) and earnings (loss) per share to adjusted net income (loss) and adjusted earnings (loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Amounts in thousands, except per share data)
|
2020
|
|
2019
|
Loss before income taxes
|
$
|
(31,973)
|
|
|
$
|
(3,763)
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
Acquisition costs and other
|
861
|
|
|
1,936
|
|
|
Proxy contest costs
|
3,105
|
|
|
—
|
|
|
Shelf registration costs
|
—
|
|
|
10
|
|
|
Earn-out adjustments
|
(1,195)
|
|
|
(747)
|
|
|
Gain on investments in equity securities
|
(170)
|
|
|
(1,873)
|
|
|
Asset impairments
|
6,214
|
|
|
—
|
|
|
Goodwill impairment
|
16,203
|
|
|
—
|
|
|
Gain on lease modification
|
(171)
|
|
|
—
|
|
|
Stock-based compensation
|
1,791
|
|
|
2,091
|
|
|
Non-cash lease expense
|
510
|
|
|
560
|
|
|
Retention expense
|
235
|
|
|
223
|
|
|
Restructuring and severance costs
|
1,076
|
|
|
—
|
|
Adjusted loss before income taxes
|
(3,514)
|
|
|
(1,563)
|
|
|
Benefit for income taxes at 21%
|
(738)
|
|
|
(328)
|
|
|
|
|
|
|
Adjusted net loss
|
$
|
(2,776)
|
|
|
$
|
(1,235)
|
|
|
|
|
|
|
Average shares outstanding, as reported
|
|
|
|
|
Basic
|
9,099
|
|
|
8,983
|
|
|
Diluted
|
9,099
|
|
|
8,983
|
|
|
|
|
|
|
Adjusted net loss per common share
|
|
|
|
|
Basic
|
$
|
(0.31)
|
|
|
$
|
(0.14)
|
|
|
Diluted
|
$
|
(0.31)
|
|
|
$
|
(0.14)
|
|
Liquidity and Capital Resources
Summary
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities and working capital management. Capital expenditures and share repurchases are a component of our cash flow and capital.
Cash Flows
Cash flows were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
(in thousands)
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Total cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
17,978
|
|
|
28,640
|
|
|
|
|
|
Investing activities
|
|
|
|
|
994
|
|
|
(25,695)
|
|
|
|
|
|
Financing activities
|
|
|
|
|
(19,362)
|
|
|
(4,539)
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
|
|
$
|
(390)
|
|
|
$
|
(1,594)
|
|
|
|
|
|
Operating Activities
The decrease in net cash provided by operating activities for the full-year 2020 compared to the full-year 2019 was primarily driven by a net loss of $27.3 million for 2020 compared to a net loss of $3.0 million for 2019, and changes in working capital, driven by accounts receivable and inventory, which increased operating cash flow for 2020 by approximately $14.6 million, compared to an increase of approximately $29.6 million in 2019. In 2020, accounts receivable and inventory decreased over prior year but at a slower rate. The decrease in accounts receivable was driven by lower sales and a decrease in days sales outstanding to 45 days as of December 31, 2020 from 46 days as of December 31, 2019. The decrease in inventory was due to continued inventory rationalization efforts throughout 2020 to enhance the Company's liquidity position during the COVID-19 pandemic and an increase in inventory turns from 1.62 turns as of December 31, 2019 to 1.70 turns as of December 31, 2020.
Investing Activities
Net cash provided by investing activities primarily consists of transactions related to capital expenditures, equity security transactions, and acquisitions. The increase in cash provided by investing activities for the full-year 2020 compared to cash used in investing activities for the full-year 2019 was primarily due to a decrease in cash outflows related to the American Stainless acquisition in the prior year not in the current year ($21.9 million), an increase in net proceeds from the sale of equity securities in the current year over the prior year ($4.4 million) and decreases in capital expenditures ($0.8 million).
Financing Activities
Net cash used in financing activities primarily consist of transactions related to our long-term debt. The increase in net cash used in financing activities for the full-year 2020 compared to the full-year 2019 was primarily due to borrowings from the Term Loan related to the American Stainless acquisition in the prior year not in the current year.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents and our credit facilities are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations, debt obligations and anticipated capital expenditures over the next 12 months.
The Company has a $100 million asset-backed revolving Line with a maturity date of December 20, 2021 and a $20 million Term Loan with a maturity date of February 1, 2024. As of December 31, 2020, the Company had $61.4 million of total borrowings outstanding with its lender, down $14.2 million from the balance as of December 31, 2019. As of December 31, 2020, the Company had $11.0 million of remaining available capacity under the Line. See Note 6 - Long-term Debt, in the notes to the consolidated financial statements for additional information.
The Company is subject to certain covenants including maintaining a minimum fixed charge coverage ratio of not less than 1.25, maintaining a minimum tangible net worth of not less than $60.0 million, and a limitation on the Company's maximum amount of capital expenditures per year, which is in line with current projected needs.
The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarters ended June 30, 2020 and September 30, 2020. To address the technical defaults, the Company entered into two amendments to its Credit Agreement with its bank subsequent to the end of the each quarter. See Note 6 - Long-term Debt, in the notes to the consolidated financial statements for additional information.
As of December 31, 2020, the Company had a minimum fixed charge coverage ratio of 1.43, a minimum tangible net worth of $67.1 million and was in compliance with all debt covenants.
On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A. providing the Company with a new four-year revolving credit facility (the "Facility"). The new Credit Agreement provides the Company with up to $150.0 million of borrowing capacity. The Facility refinances and replaces the Company's previous $100.0 million asset based revolving line of credit with Truist Bank ("Truist"), which was scheduled to mature on December 21, 2021, and the remaining portion of the Company's five-year $20 million term loan with Truist, which was scheduled to mature on February 1, 2024. The initial borrowing capacity under the Facility totals $110.0 million. See Note 6 and Note 18 for additional details on this new agreement.
Stock Repurchases and Dividends
We repurchase common stock and pay dividends pursuant to programs approved by our Board of Directors. The payment of cash dividends is also subject to customary legal and contractual restrictions. Our capital allocation strategy is to first fund operations and investments in growth and then return excess cash over time to shareholders through share repurchases and dividends.
On February 21, 2019, the Board of Directors authorized a stock repurchase program for up to 850,000 shares of its outstanding common stock over 24 months. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. As of December 31, 2020, the Company has 790,383 shares of its share repurchase authorization remaining.
Stock repurchase activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Number of shares repurchased
|
|
|
|
|
59,617
|
|
|
—
|
|
|
|
|
|
Average price per share
|
|
|
|
|
$
|
10.65
|
|
|
—
|
|
|
|
|
|
Total cost of shares repurchased
|
|
|
|
|
$
|
636,940
|
|
|
$
|
—
|
|
|
|
|
|
At the end of each fiscal year, the Board reviews the financial performance and capital needed to support future growth to determine the amount of cash dividend, if any, which is appropriate. In 2020 and 2019, no dividends were declared or paid by the Company.
Other Financial Measures
Below are additional financial measures that we believe are important in understanding the Company's liquidity position from year to year. The metrics are defined as:
Current ratio = current asset divided by current liabilities
Debt to capital = Total debt divided by total capital
Return on average equity = net income divided by the trailing 12-month average of equity
Results of these additional financial measures are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Current ratio
|
|
|
|
|
4.1
|
|
3.6
|
|
|
|
|
Debt to capital
|
|
|
|
|
43%
|
|
41%
|
|
|
|
|
Return on average equity
|
|
|
|
|
(29.2)%
|
|
(2.9)%
|
|
|
|
|
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on the Company's financial position, revenues, results of operations, liquidity, or capital expenditures.
As of December 31, 2020, the Company's contractual obligations and other commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Obligations for the Year Ended
|
(in thousands)
|
Total
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility(1)
|
$
|
49,037
|
|
|
$
|
49,037
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Term loans(1)
|
12,333
|
|
|
4,000
|
|
|
4,000
|
|
|
4,000
|
|
|
333
|
|
|
—
|
|
|
—
|
|
Interest on bank debt
|
1,284
|
|
|
1,102
|
|
|
131
|
|
|
48
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Finance lease
|
58
|
|
|
20
|
|
|
15
|
|
|
15
|
|
|
8
|
|
|
—
|
|
|
—
|
|
Operating leases
|
61,682
|
|
|
3,610
|
|
|
3,665
|
|
|
3,699
|
|
|
3,549
|
|
|
3,619
|
|
|
43,540
|
|
Total
|
$
|
124,394
|
|
|
$
|
57,769
|
|
|
$
|
7,811
|
|
|
$
|
7,762
|
|
|
$
|
3,893
|
|
|
$
|
3,619
|
|
|
$
|
43,540
|
|
(1) On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A .providing the Company with a new four-year revolving credit facility. The amounts in the table above do not include the effects of the debt refinance. See Note 6 and Note 18 for additional details on this new agreement
Critical Accounting Policies and Estimates
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations in accordance with GAAP. Under this method, the total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets, if any, acquired and liabilities assumed.
Earn-Out Liabilities
In connection with the American Stainless acquisition, the Company is required to make quarterly earn-out payments to American Stainless for a period of three years following closing equal to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period.
In connection with the MUSA-Galvanized acquisition, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube.
In connection with the MUSA-Stainless acquisition, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of stainless steel pipe and tube (outside diameter of 10 inches or less).
The fair value of the contingent consideration earn-out liabilities are estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liabilities are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the consolidated statements of operations and comprehensive loss.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is tested for impairment at least on an annual basis. Goodwill was $1.4 million and $17.6 million as of December 31, 2020 and 2019, respectively.
Impairment of Goodwill
We evaluate the carrying value of goodwill annually as of October 1 and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. The fair value of the reporting units are estimated using a combination of the discounted cash flow method and the market based approach. This method uses projections of cash flows from the reporting unit as well as available comparable company information. This approach requires significant judgments including the Company's projected net cash flows, the weighted average cost of capital used to discount the cash flows and terminal value assumptions. We derive these assumptions used in the testing from several sources. Many of these assumptions are derived from our internal budgets, which would include existing sales data based on current product lines and assumed production levels, manufacturing costs and product pricing. We believe that our internal forecasts are consistent with those that would be used by a potential buyer in valuing our reporting units. Goodwill is considered impaired if the carrying value of the reporting unit exceeds it fair value.
During 2020, goodwill was allocated to the Welded Pipe & Tube reporting unit found within the Metals Segment and the Specialty Chemicals Segment. During the second quarter, third quarter, and fourth quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit existed and interim goodwill impairment tests were performed. As a result of these interim impairment tests, the Company recorded goodwill impairment of $16.2 million related to the Welded Pipe and Tube reporting unit.
We conducted our annual impairment test of the Specialty Chemicals Segment as of October 1, 2020 and 2019. As of December 31, 2020 and 2019, we determined that no impairment of the carrying value of goodwill for this reporting unit was required. See Note 5 - Goodwill in the notes to the consolidated financial statements included in this report for additional information.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods. At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below our cost. This would indicate that an adjustment would be required. Factors influencing these adjustments include changes in demand, product life cycle, cost trends and product pricing.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from adverse changes in interest rates and nickel prices.
Changes in United States interest rates affect the interest earned on the Company's cash and cash equivalents as well as interest paid on its indebtedness. Except as described below, the Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. The Company is exposed to changes in interest rates primarily as a result of its borrowing activities used to maintain liquidity and fund business operations.
Fair value of the Company's debt obligations as of December 31, 2020, which approximated the recorded value, consisted of:
•$49.0 million under a revolving line of credit with an availability of $11.0 million, maturing December 20, 2021 with a variable interest rate of 1.81 percent;
•$12.3 million under a term loan, maturing February 1, 2024 with a variable interest rate of 2.06 percent; and
•An interest rate swap contract with a notional amount of $3.8 million which fixes the term loan interest rate at 3.74 percent. The fair value of the interest rate swap contract was a liability to the Company of $45,041.
On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A. providing the Company with a new four-year revolving credit facility. See Note 18 for additional details on this new agreement.
The Company occasionally hedges its nickel exposure to provide coverage against extreme downside product pricing exposure related to the content of nickel alloy contained in purchased stainless steel inventory. The sales price of stainless steel product (containing nickel alloy) is subject to a variable pricing component for alloys (nickel, chrome, molybdenum and iron) contained in the product. As of December 31, 2020, the Company had no such hedge contracts in place.
Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control involves maintaining records that accurately represent our business transactions, providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be detected or prevented on a timely basis.
Because of innate limitations, internal control over our financial statements is not intended to provide absolute guarantee that a misstatement can be detected or prevented in the statements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO framework). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Based on this evaluation, and those criteria, the Company's CEO and CFO concluded that the Company's internal control over financial reporting was effective as of December 31, 2020.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management's report in this Annual Report as a non-accelerated filer.
Changes in Internal Control Over Financial Reporting
Other than the actions taken as described below under "Remediation Efforts to Address Material Weakness," there were no changes in the Company's internal control over financial reporting during the fourth quarter of 2020, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation Efforts to Address Material Weakness
In response to the material weakness identified in Management’s Report on Internal Control Over Financial Reporting as set forth in item 4 “Controls and Procedures” in the second quarter 2020 Form 10-Q filing, management, with oversight from the Audit Committee of the Board of Directors, developed and fully executed a plan to remediate the material weakness at Synalloy. The remediation actions included the following:
•Conducted executive coaching and mentoring sessions with select executives to reinforce their responsibility in maintaining effective internal control over financial reporting;
•Performed activities to identify, evaluate, and align job descriptions with job responsibilities;
•Reaffirmed communication protocols and refreshed policies related to the transition process for new finance executives and Audit Committee members; and
•Implemented an independent third-party Ethics and Compliance Hotline service for the receipt and timely reporting to the Audit Committee.
During our fourth fiscal quarter of 2020, we completed our testing of the operating effectiveness of the controls and found them to be effective. As a result, we have concluded the material weakness has been remediated as of December 31, 2020.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Synalloy Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the years then ended, and the related notes and financial statement Schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Earn-out liabilities
As discussed in Notes 1 and 3 to the consolidated financial statements, the Company has recorded a liability for the quarterly earn-out payments to be made to the previous owners of acquired businesses, which included MUSA-Galvanized and ASTI. The earn-out payments are based on actual revenues earned over the respective earn-out periods pursuant to the asset purchase agreements. The fair value of the earn-out liabilities was estimated by applying the probability-weighted expected return method using management’s revenue projections, which required an estimation of pounds to be shipped and future price per unit. The fair value of the earn-out liabilities as of December 31, 2020 was $3.7 million, of which $3.3 million related to the MUSA-Galvanized and ASTI acquisitions. The liabilities are classified as Level 3 in the fair value hierarchy.
We identified the earn-out liabilities for the MUSA-Galvanized and ASTI acquisitions as a critical audit matter. Significant auditor judgment was required in evaluating management’s revenue projections used in the fair value estimation of the related earn-out liabilities due to the unobservable nature of management’s projections of pounds to be shipped and the future price per unit.
The following are the primary procedures we performed to address this critical audit matter. We compared the Company’s historical revenue forecasts to actual results to assess the Company’s ability to accurately forecast and we performed sensitivity analyses over the Company’s revenue projections (pounds and price) to assess the impact on the Company’s determination of the fair value of the earn-out liabilities. We involved valuation professionals with specialized skills and knowledge, who utilized third-party market research tools to assist in the evaluation of the revenue projections by comparing third-party market data to the Company’s revenue projections.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Richmond, Virginia
March 9, 2021
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
|
|
|
|
|
|
|
|
Financial Statements
|
Page
|
|
|
|
|
|
|
|
|
|
|
SYNALLOY CORPORATION
Consolidated Balance Sheets
As of December 31, 2020 and 2019
(in thousands, except par value and share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
236
|
|
|
$
|
626
|
|
Accounts receivable, net
|
28,183
|
|
|
35,074
|
|
Inventories, net
|
|
|
|
Raw materials
|
35,997
|
|
|
42,643
|
|
Work-in-process
|
20,304
|
|
|
17,354
|
|
Finished goods
|
28,779
|
|
|
38,189
|
|
Total inventories, net
|
85,080
|
|
|
98,186
|
|
|
|
|
|
Prepaid expenses and other current assets
|
13,384
|
|
|
13,229
|
|
|
|
|
|
Total current assets
|
126,883
|
|
|
147,115
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
35,096
|
|
|
40,690
|
|
Right-of-use assets, operating leases, net
|
31,769
|
|
|
35,772
|
|
Goodwill
|
1,355
|
|
|
17,558
|
|
Intangible assets, net
|
11,426
|
|
|
15,714
|
|
|
|
|
|
Deferred charges, net
|
455
|
|
|
348
|
|
Total assets
|
$
|
206,984
|
|
|
$
|
257,197
|
|
|
|
|
|
Liabilities and Shareholders' equity
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
$
|
19,732
|
|
|
$
|
21,150
|
|
Accrued expenses and other current liabilities
|
6,123
|
|
|
6,037
|
|
Current portion of long-term debt
|
875
|
|
|
4,000
|
|
Current portion of earn-out liability
|
3,434
|
|
|
5,576
|
|
Current portion of operating lease liabilities
|
867
|
|
|
3,562
|
|
Current portion of finance lease liabilities
|
19
|
|
|
253
|
|
Total current liabilities
|
31,050
|
|
|
40,578
|
|
|
|
|
|
Long-term debt
|
60,495
|
|
|
71,554
|
|
Long-term portion of earn-out liability
|
287
|
|
|
3,578
|
|
Long-term portion of operating lease liabilities
|
32,771
|
|
|
33,723
|
|
Long-term portion of finance lease liabilities
|
37
|
|
|
336
|
|
Deferred income taxes
|
1,957
|
|
|
790
|
|
Other long-term liabilities
|
92
|
|
|
127
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
Common stock, par value $1 per share - authorized 24,000,000 shares; issued 10,300,000 shares
|
10,300
|
|
|
10,300
|
|
Capital in excess of par value
|
37,719
|
|
|
37,407
|
|
Retained earnings
|
42,835
|
|
|
70,552
|
|
|
|
|
|
|
90,854
|
|
|
118,259
|
|
Less cost of common stock in treasury - 1,123,319 and 1,257,784 shares, respectively
|
10,559
|
|
|
11,748
|
|
Total shareholders' equity
|
80,295
|
|
|
106,511
|
|
Commitments and contingencies – see Note 12
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
206,984
|
|
|
$
|
257,197
|
|
See accompanying notes to consolidated financial statements.
SYNALLOY CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
For the years ended December 31, 2020 and 2019
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Net sales
|
$
|
256,000
|
|
|
$
|
305,168
|
|
|
|
Cost of sales
|
233,348
|
|
|
274,395
|
|
|
|
Gross profit
|
22,652
|
|
|
30,773
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
28,718
|
|
|
32,627
|
|
|
|
Acquisition related costs
|
845
|
|
|
601
|
|
|
|
Proxy contest costs
|
3,105
|
|
|
—
|
|
|
|
Earn-out adjustments
|
(1,195)
|
|
|
(747)
|
|
|
|
Asset impairments
|
6,214
|
|
|
—
|
|
|
|
Goodwill impairment
|
16,203
|
|
|
—
|
|
|
|
Gain on lease modification
|
(171)
|
|
|
—
|
|
|
|
Operating loss
|
(31,067)
|
|
|
(1,708)
|
|
|
|
Other (income) and expense
|
|
|
|
|
|
Interest expense
|
2,110
|
|
|
3,818
|
|
|
|
Change in fair value of interest rate swap
|
51
|
|
|
141
|
|
|
|
Other, net
|
(1,255)
|
|
|
(1,904)
|
|
|
|
Loss before income taxes
|
(31,973)
|
|
|
(3,763)
|
|
|
|
Benefit from income taxes
|
(4,706)
|
|
|
(727)
|
|
|
|
Net loss and comprehensive loss
|
(27,267)
|
|
|
(3,036)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
Basic
|
$
|
(3.00)
|
|
|
$
|
(0.34)
|
|
|
|
Diluted
|
$
|
(3.00)
|
|
|
$
|
(0.34)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
Basic
|
9,099
|
|
|
8,983
|
|
|
|
Diluted
|
9,099
|
|
|
8,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
SYNALLOY CORPORATION
Consolidated Statement of Cash Flows
For the years ended December 31, 2020 and 2019
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Operating activities
|
|
|
|
|
|
Net loss
|
$
|
(27,267)
|
|
|
$
|
(3,036)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation expense
|
7,572
|
|
|
7,578
|
|
|
|
Amortization expense
|
3,028
|
|
|
3,486
|
|
|
|
Amortization of debt issuance costs
|
177
|
|
|
160
|
|
|
|
Asset impairments
|
6,214
|
|
|
—
|
|
|
|
Goodwill impairment
|
16,203
|
|
|
—
|
|
|
|
Unrealized gain on equity securities
|
(208)
|
|
|
(1,547)
|
|
|
|
Deferred income taxes
|
1,167
|
|
|
(773)
|
|
|
|
Proceeds from business interruption insurance
|
1,040
|
|
|
—
|
|
|
|
Loss (gain) on sale of equity securities
|
38
|
|
|
(326)
|
|
|
|
Earn-out adjustments
|
(1,195)
|
|
|
(747)
|
|
|
|
Payments of earn-out liabilities in excess of acquisition date fair value
|
(292)
|
|
|
(448)
|
|
|
|
Provision for (reduction of) losses on accounts receivable
|
890
|
|
|
(171)
|
|
|
|
Provision for losses on inventories
|
271
|
|
|
1,617
|
|
|
|
Loss (gain) on sale of property, plant and equipment
|
237
|
|
|
(50)
|
|
|
|
|
|
|
|
|
|
Non-cash lease expense
|
510
|
|
|
560
|
|
|
|
Non-cash lease termination loss
|
24
|
|
|
—
|
|
|
|
Gain on lease modification
|
(171)
|
|
|
—
|
|
|
|
Change in fair value of interest rate swap
|
51
|
|
|
(141)
|
|
|
|
Issuance of treasury stock for director fees
|
345
|
|
|
304
|
|
|
|
Stock-based compensation expense
|
1,791
|
|
|
2,091
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
5,552
|
|
|
9,696
|
|
|
|
Inventories
|
9,122
|
|
|
19,962
|
|
|
|
Other assets and liabilities
|
(912)
|
|
|
179
|
|
|
|
Accounts payable
|
(1,418)
|
|
|
(5,323)
|
|
|
|
Accrued expenses
|
86
|
|
|
(3,317)
|
|
|
|
Accrued income taxes
|
(4,877)
|
|
|
(1,114)
|
|
|
|
Net cash provided by operating activities
|
17,978
|
|
|
28,640
|
|
|
|
Investing activities
|
|
|
|
|
|
Purchases of property, plant and equipment
|
(3,748)
|
|
|
(4,537)
|
|
|
|
Proceeds from sale of property, plant and equipment
|
312
|
|
|
189
|
|
|
|
Purchases of equity securities
|
—
|
|
|
(544)
|
|
|
|
Proceeds from sale of equity securities
|
4,430
|
|
|
1,092
|
|
|
|
Acquisitions
|
—
|
|
|
(21,895)
|
|
|
|
Net cash provided by (used in) investing activities
|
994
|
|
|
(25,695)
|
|
|
|
Financing activities
|
|
|
|
|
|
Repayments on line of credit
|
(10,184)
|
|
|
(17,185)
|
|
|
|
Borrowings from term loan
|
—
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
(4,000)
|
|
|
(3,666)
|
|
|
|
Principal payments on finance lease obligations
|
(109)
|
|
|
(106)
|
|
|
|
Payments for finance lease terminations
|
(204)
|
|
|
—
|
|
|
|
Payments on earn-out liabilities
|
(3,946)
|
|
|
(3,627)
|
|
|
|
Payments of deferred financing costs
|
(284)
|
|
|
—
|
|
|
|
Proceeds from exercised stock options
|
—
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
(635)
|
|
|
—
|
|
|
|
Net cash used in financing activities
|
(19,362)
|
|
|
(4,539)
|
|
|
|
Decrease in cash and cash equivalents
|
(390)
|
|
|
(1,594)
|
|
|
|
Cash and cash equivalents at beginning of year
|
626
|
|
|
2,220
|
|
|
|
Cash and cash equivalents at end of year
|
$
|
236
|
|
|
$
|
626
|
|
|
|
See accompanying notes to consolidated financial statements.
SYNALLOY CORPORATION
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2020 and 2019
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Capital in Excess of
Par Value
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Cost of Common Stock in Treasury
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2018
|
$
|
10,300
|
|
|
$
|
36,521
|
|
|
$
|
68,965
|
|
|
$
|
—
|
|
|
$
|
(13,302)
|
|
|
$
|
102,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
(3,036)
|
|
|
—
|
|
|
—
|
|
|
(3,036)
|
|
Cumulative-effect adjustment related to ASU 2016-02, net of tax
|
—
|
|
|
—
|
|
|
4,623
|
|
|
—
|
|
|
—
|
|
|
4,623
|
|
Issuance of 162,869 shares of common stock from the treasury
|
—
|
|
|
(1,217)
|
|
|
—
|
|
|
—
|
|
|
1,521
|
|
|
304
|
|
Stock options exercised for 3,628 shares, net
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
45
|
|
Stock-based compensation
|
—
|
|
|
2,091
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,091
|
|
Balance December 31, 2019
|
$
|
10,300
|
|
|
$
|
37,407
|
|
|
$
|
70,552
|
|
|
$
|
—
|
|
|
$
|
(11,748)
|
|
|
$
|
106,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
(27,267)
|
|
|
—
|
|
|
—
|
|
|
(27,267)
|
|
Cumulative adjustment due to adoption of ASU 2016-13
|
—
|
|
|
—
|
|
|
(450)
|
|
|
—
|
|
|
—
|
|
|
(450)
|
|
Issuance of 194,082 shares of common stock from treasury
|
—
|
|
|
(1,479)
|
|
|
—
|
|
|
—
|
|
|
1,824
|
|
|
345
|
|
Stock-based compensation
|
—
|
|
|
1,791
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,791
|
|
Purchase of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(635)
|
|
|
(635)
|
|
Balance December 31, 2020
|
$
|
10,300
|
|
|
$
|
37,719
|
|
|
$
|
42,835
|
|
|
$
|
—
|
|
|
$
|
(10,559)
|
|
|
$
|
80,295
|
|
See accompanying notes to consolidated financial statements.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Description of Business
Synalloy Corporation (the "Company") was incorporated in Delaware in 1958 as the successor to a chemical manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. The Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060.
The Company's business is divided into two reportable operating segments, the Metals Segment and the Specialty Chemicals Segment. As of December 31, 2020, the Metals Segment operated as three reportable units including Welded Pipe & Tube Operations, a unit that includes Bristol Metals, LLC ("BRISMET") and American Stainless Tubing, LLC ("ASTI"), which began operations effective January 1, 2019 pursuant to our acquisition of substantially all of the assets of American Stainless Tubing, Inc. ("American Stainless") (see Note 15 to the consolidated financial statements), Palmer of Texas Tanks, Inc. ("Palmer"), and Specialty Pipe & Tube, Inc. ("Specialty"). Welded Pipe & Tube Operations manufactures stainless steel, galvanized, ornamental stainless steel pipe and tube, and other alloy pipe and tube. Palmer manufactures liquid storage solutions and separation equipment. Specialty is a master distributor of seamless carbon pipe and tube. The Specialty Chemicals Segment operates as one reportable unit and is comprised of Manufacturers Chemicals, LLC ("MC"), a wholly-owned subsidiary of Manufacturers Soap and Chemical Company ("MS&C"), and CRI Tolling, LLC ("CRI Tolling") and produces specialty chemicals.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. The Metals Segment is comprised of four subsidiaries: Synalloy Metals, Inc. which owns 100 percent of BRISMET, located in Bristol, Tennessee and Munhall, Pennsylvania; ASTI, located in Troutman and Statesville, North Carolina; Palmer, located in Andrews, Texas; and Specialty, located in Mineral Ridge, Ohio and Houston, Texas. The Specialty Chemicals Segment consists of two subsidiaries: MS&C which owns 100 percent of MC, located in Cleveland, Tennessee and CRI Tolling, located in Fountain Inn, South Carolina. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform with current year presentation.
Use of Estimates
The preparation of the Company's financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying value of assets and liabilities that are readily available from other sources. Actual results may differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable from the sale of products are recorded at net realizable value and the Company generally grants credit to customers on an unsecured basis. Substantially all of the Company's accounts receivable are due from companies located throughout the United States. The Company provides an allowance for credit losses for projected uncollectible amounts. The allowance is based upon an analysis of accounts receivable balances with similar risk characteristics on a collective basis, considering factors such as the aging of receivables balances, historical loss experience, current information, and future expectations. Each reporting period, the Company reassesses whether any accounts receivable no longer share similar risk characteristics and should instead be evaluated as part of another pool or on an individual basis. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 to 60 days. Delinquent receivables are written off based on individual credit evaluations and specific circumstances of the customer.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Inventories
Inventory is stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods.
At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below our cost. This would indicate that an adjustment would be required.
During the year ended December 31, 2020, adjustments of $3.8 million to inventory cost were required by our storage tank facility due to the curtailment of operations at our Palmer facility as a result of the COVID-19 pandemic and lower demand for oil and gas products which caused the net realizable value to fall below inventory cost for certain tanks.
During the year ended December 31, 2019, adjustments of $0.2 million to inventory cost were required by our storage tank facility as lower demand for oil and gas products caused the net realizable value to fall below inventory cost for certain tanks.
Stainless steel, both in its raw material (coil or plate) or finished goods (pipe and tube) state is purchased/sold using a base price plus an additional surcharge which is dependent on current nickel prices. As raw materials are purchased, it is priced to the Company based upon the surcharge at that date. When the selling price of the finished pipe is set for the customer, approximately three months later, the then-current nickel surcharge is used to determine the proper selling prices. A lower of cost or net realizable value ("LCNRV") adjustment is recorded when the Company's inventory cost, based upon a historical nickel price, is greater than the current selling price of that product due to a reduction in the nickel surcharge. During the years ended December 31, 2020 and 2019, respectively, no material LCNRV adjustments were required by our Metals Segment other than those at our storage tank facility.
In addition, the Company establishes inventory reserves for:
•Estimated obsolete or unmarketable inventory. The Company identified inventory items with no sales activity for finished goods or no usage for raw materials for a certain period of time. For those inventory items not currently being marketed and unable to be sold, a reserve was established for 100 percent of the inventory cost less any estimated scrap proceeds. The Company reserved $0.2 million and $0.3 million as of December 31, 2020 and 2019, respectively.
•Estimated quantity losses. The Company performs an annual physical count of inventory during the fourth quarter each year. For those facilities that complete their physical inventory counts before the end of December, a reserve is established for the potential quantity losses that could occur subsequent to their physical inventory. This reserve is based upon the most recent physical inventory results. The Company had $0.5 million and $0.4 million reserved for physical inventory quantity losses as of December 31, 2020 and 2019, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is determined based on the straight-line method over the estimated useful life of the assets. Leasehold improvements are depreciated over the shorter of their useful lives or the remaining non-cancellable lease term, buildings are depreciated over a range of 10 years to 40 years, and machinery, fixtures and equipment are depreciated over a range of three years to 20 years. The costs of software licenses are amortized over five years using the straight-line method. The Company continually reviews the recoverability of the carrying value of long-lived assets. The Company also reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. When the future undiscounted cash flows of the operation to which the assets relate do not exceed the carrying value of the asset, the assets are written down to fair value.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations. Under this method, the total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired, if any, and liabilities assumed.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Goodwill and Intangible Assets
Goodwill, arising from the excess of purchase price over fair value of net assets of businesses acquired, is not amortized but is reviewed annually, at the reporting unit level, in the fourth quarter for impairment and whenever events or circumstances indicate that the carrying value may not be recoverable. During the second quarter, third quarter, and fourth quarter of 2020, the Company identified potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment existed and performed interim goodwill impairment testing analyses. As a result of these analyses, the Company recorded a full goodwill impairment charge of $10.7 million in the third quarter of 2020 and $5.5 million in the fourth quarter of 2020. No goodwill impairment was identified as a result of the annual testing procedures performed for the Specialty Chemicals Segment for the year ended December 31, 2020.
No goodwill impairment was identified as a result of the testing procedures performed for the year ended December 31, 2019.
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions and are amortized over their estimated useful lives using either an accelerated or straight-line method over a period ranging from eight to 15 years. The weighted average amortization period for the customer relationships is approximately 11 years.
During the second quarter of 2020, due to the continued curtailment of operations related to the COVID-19 pandemic and management's decision to pursue a sale and exit of the Palmer business, the intangible customer list related to Palmer was written down to its estimated fair market value of zero, resulting in an impairment charge of $1.3 million, which is included in "Asset impairments" on the consolidated statement of operations and comprehensive loss. Intangible assets totaled $31.7 million and $32.6 million as of December 31, 2020 and 2019, respectively. Accumulated amortization of intangible assets as of December 31, 2020 and 2019 totaled $19.8 million and $16.6 million, respectively.
Estimated amortization expense for the next five fiscal years based on existing intangible assets is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
2021
|
2,721
|
|
|
|
|
2022
|
2,501
|
|
|
|
|
2023
|
1,050
|
|
|
|
|
2024
|
952
|
|
|
|
|
2025
|
855
|
|
|
|
|
Thereafter
|
3,347
|
|
|
|
|
Total
|
11,426
|
|
|
|
|
The Company recorded amortization expense of $3.0 million and $3.5 million for 2020 and 2019, respectively, which excludes amortization expense of debt issuance costs, which is reflected in the consolidated financial statements as interest expense.
Long-Lived Asset Impairment
The carrying amounts of long-lived assets are reviewed whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. A potential impairment has occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the use and eventual disposition of the assets are less than the carrying amounts of the assets. An impairment loss is recorded for long-lived assets held-for-use when the carrying amount of the asset is not recoverable and exceeds its fair value.
For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used. Until it ceases to be used, the Company continues to classify the asset as held-for-use and test for potential impairment accordingly. If the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, its depreciable life is re-evaluated.
Fair value measurements associated with long-lived asset impairments are included in Note 3 to the consolidated financial statements.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Earn-Out Liabilities
In connection with the American Stainless acquisition, the Company is required to make quarterly earn-out payments to American Stainless for a period of three years following closing equal to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period.
In connection with the MUSA-Galvanized acquisition, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube.
In connection with the MUSA-Stainless acquisition, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of stainless steel pipe and tube (outside diameter of 10 inches or less).
The fair value of the earn-out liabilities are estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liabilities are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the consolidated statements of operations and comprehensive loss. See Note 3 for additional information on the Company's earn-out liabilities.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Substantially all of the Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time. Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance obligation is based on its standalone selling price and revenue is recognized as each performance obligation is satisfied. The Company generally determines standalone selling prices based on the prices charged to customers using the adjusted market assessment approach or expected cost plus margin. Deferred revenues are recorded when cash payments are received in advance of satisfying the performance obligation, including amounts which are refundable. See Note 2 - Revenue Recognition for additional information on the Company's revenue.
Shipping Costs
Shipping costs of approximately $8.0 million and $10.9 million in 2020 and 2019, respectively, are recorded in cost of goods sold on the consolidated statement of operations and comprehensive loss.
Research and Development Expenses
The Company incurred research and development expense of approximately $0.5 million and $0.6 million in 2020 and 2019, respectively.
Stock-Based Compensation
Share-based payments to employees, including grants of employee stock options, are recognized in the consolidated statements of operations and comprehensive loss as compensation expense (based on their estimated fair values at grant date) generally over the vesting period of the awards using the straight-line method. Any forfeitures of stock-based awards are recorded as they occur. See Note 8 for disclosures related to stock-based compensation.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing accounts and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
Additionally, the Company maintains reserves for uncertain tax provisions, if necessary. See Note 9 for additional information on the Company's income taxes.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Earnings Per Share of Common Stock
Earnings per share of common stock are computed based on the weighted average number of basic and diluted shares outstanding during each period.
Leases
The Company determines whether an arrangement is a lease at contract inception. For leases in which the Company is the lessee, the Company recognizes a right-of-use asset and corresponding lease liability on the consolidated balance sheets equal to the present value of the fixed lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets. Lease liabilities represent an obligation to make lease payments arising from a lease while right-of-use assets represent a right to use an underlying asset during the lease term. The Company's leases generally do not have an implicit rate. The Company uses its incremental borrowing rate to determine the present value of fixed lease payments based on information available at the lease commencement date. Lease costs are recognized on a straight-line basis over the lease term.
Right-of-use assets and operating lease liabilities are remeasured upon certain modifications to leases using the present value of the remaining lease payments and estimated incremental borrowing rate upon lease modification. The difference between the remeasured right-of-use asset and the operating lease liabilities are recognized as a gain or loss within operating expenses. The Company reviews any changes to its lease agreements for potential modifications and/or indicators of impairment of the respective right-of-use asset. See Note 11 for additional information on the Company's leases.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable.
Recent accounting pronouncements
Recently Issued Accounting Standards - Adopted
On January 1, 2020, the Company adopted ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The updated guidance removes disclosure requirements pertaining to the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. In addition, the amendment clarifies that the measurement uncertainty disclosure is to communicate information about uncertainty in measurement as of the reporting date. The guidance also adds disclosure requirements for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 measurements held at the end of the reporting period as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The adoption of this standard by the Company did not have a material impact on the consolidated financial statements or footnote disclosures. See Note 3 for further discussion on the Company's fair value measurements.
On January 1, 2020, the Company adopted ASU No. 2017-04 Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The updated guidance eliminated step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to a reporting unit with a zero or negative carrying amount of net assets should be disclosed. The adoption of this standard by the Company did not have a material impact on the consolidated financial statements.
On January 1, 2020, the Company adopted ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated guidance amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions, and reasonable and supportable forecasts rather than the incurred loss model which reflects losses that are probable. Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company evaluated its financial instruments and determined that its trade accounts receivable are subject to the new current expected credit loss model. Based upon the application of the new current expected credit loss model, on January 1, 2020, we recorded a cumulative effect adjustment of $0.4 million to Retained Earnings. The adoption of this standard by the Company did not have a material impact on the consolidated statement of operations and comprehensive loss or cash flows.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
On September 30, 2020, the Company early adopted ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences as well as adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods. The adoption of this standard by the Company did not have a material effect on the consolidated financial statements or footnote disclosures.
Recently Issued Accounting Standards - Not Yet Adopted
The Company considers the applicability and impact of all ASU's. Recently issued ASU's not listed were assessed and determined to be either not applicable or are expected to have no material impact on our consolidated financial statements.
Note 2: Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following table presents the Company's revenues, disaggregated by product group. Substantially all of the Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
(in thousands)
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Specialty chemicals
|
|
|
|
$
|
51,541
|
|
|
$
|
54,090
|
|
|
|
|
|
|
|
Stainless steel pipe and tube
|
|
|
|
154,974
|
|
|
167,907
|
|
|
|
|
|
|
|
Heavy wall seamless carbon steel pipe and tube
|
|
|
|
23,670
|
|
|
30,607
|
|
|
|
|
|
|
|
Fiberglass and steel liquid storage tanks and separation equipment
|
|
|
|
5,503
|
|
|
28,722
|
|
|
|
|
|
|
|
Galvanized pipe and tube
|
|
|
|
20,312
|
|
|
23,842
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
$
|
256,000
|
|
|
$
|
305,168
|
|
|
|
|
|
|
|
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance obligation is based on its stand-alone selling price and revenue is recognized as each performance obligation is satisfied. The Company generally determines stand-alone selling prices based on the prices charged to customers using the adjusted market assessment approach or expected cost plus margin.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 3: Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 - Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 - Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
•Quoted prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in non-active markets;
•Inputs other than quoted prices that are observable for the asset or liability; and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using model-based techniques, including option pricing models, discounted cash flow models, probability weighted models, and Monte Carlo simulations.
The Company's financial instruments include cash and cash equivalents, accounts receivable, derivative instruments, accounts payable, earn-out liabilities, revolving line of credit and equity investments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Level 1: Equity securities
During 2020, the Company sold 1.2 million shares of equity securities for a realized loss of $37,954. During 2019, the Company sold 0.5 million shares of equity securities for a realized gain of $0.3 million.
The Company held no equity securities as of December 31, 2020. The fair value of equity securities held by the Company as of December 31, 2019 was $4.3 million and is included in "Prepaid expenses and other current assets" on the accompanying consolidated balance sheets.
Level 2: Derivative instruments
The Company had one interest rate swap contract, which is classified as a Level 2 financial instrument as it is not actively traded and is valued using pricing models that use observable inputs. The fair value of the interest swap contract entered into on August 21, 2012 was a liability of $45,041 and an asset of $6,088 as of December 31, 2020 and 2019, respectively. The interest rate swap was priced using discounted cash flow techniques. Changes in its fair value are recorded to other income (expense) with corresponding offsetting entries to current assets or liabilities, as appropriate. Significant inputs to the discounted cash flow model include projected future cash flows based on projected one-month LIBOR and the average margin for companies with similar credit ratings and similar maturities.
Level 3: Contingent consideration (earn-out) liabilities
The fair value of contingent consideration liabilities ("earn-out") resulting from the 2019 American Stainless acquisition, 2018 MUSA-Galvanized acquisition and 2017 MUSA-Stainless acquisition are classified as Level 3. The fair value as of December 31, 2020 of the MUSA-Stainless earn-out, the MUSA-Galvanized earn-out and the American Stainless earn-out was estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Each quarter-end, the Company re-evaluates its assumptions for all earn-out liabilities and
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are reflected in the results of operations in the periods in which they are identified. Changes in the fair value of the earn-out liabilities may materially impact and cause volatility in the Company's operating results.
The following table presents a summary of changes in fair value of the Company's Level 3 earn-out liabilities measured on a recurring basis for 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
MUSA-Stainless
|
|
MUSA-Galvanized
|
|
American Stainless
|
|
Total
|
Balance December 31, 2018
|
$
|
4,252
|
|
|
$
|
3,358
|
|
|
$
|
—
|
|
|
$
|
7,610
|
|
Fair value of the earn-out liability associated with the American Stainless (ASTI) acquisition
|
—
|
|
|
—
|
|
|
6,366
|
|
|
$
|
6,366
|
|
Earn-out payments during period
|
(1,634)
|
|
|
(712)
|
|
|
(1,729)
|
|
|
$
|
(4,075)
|
|
Changes in fair value during the period
|
(215)
|
|
|
(864)
|
|
|
332
|
|
|
$
|
(747)
|
|
Balance December 31, 2019
|
$
|
2,403
|
|
|
$
|
1,782
|
|
|
$
|
4,969
|
|
|
$
|
9,154
|
|
Earn-out payments during period
|
(1,625)
|
|
|
(611)
|
|
|
(2,002)
|
|
|
$
|
(4,238)
|
|
Changes in fair value during the period
|
(403)
|
|
|
(230)
|
|
|
(562)
|
|
|
$
|
(1,195)
|
|
Balance December 31, 2020
|
$
|
375
|
|
|
$
|
941
|
|
|
$
|
2,405
|
|
|
$
|
3,721
|
|
For the year ended December 31, 2020, the Company had no unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value instruments.
Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements
The following table summarizes the significant unobservable inputs in the fair value measurement of our contingent consideration (earn-out) liabilities as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instrument
|
Fair Value
December 31, 2020
|
Principal Valuation Technique
|
Significant Unobservable Inputs
|
Range
|
Weighted
Average
|
Contingent consideration (earn-out) liabilities
|
$3,721
|
Probability Weighted Expected Return
|
Discount rate
|
-
|
5%
|
Timing of estimated payouts
|
2021 - 2022
|
-
|
Future revenue projections
|
$4.7M - 12.7M
|
$9.7M
|
The weighted average discount rate was calculated by applying an equal weighting to each contingent consideration's (earn-out liabilities) discount rate. The weighted average future revenue projection was calculated by applying an equal weighting of probabilities to each forecasted scenario within the valuation models to determine the probability weighted sales applicable to the contingent consideration (earn-out liabilities).
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company's significant assets or liabilities measured at fair value on a non-recurring basis subsequent to their initial recognition were certain long-lived assets and goodwill for the year ended December 31, 2020.
The Company reviews the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. With input from executive management, the Company's accounting and finance personnel that organizationally report to the chief financial officer, assess performance quarterly against historical patterns, projections of future profitability, and whether it is more likely than not that the assets will be disposed of significantly prior to the end of their estimated useful life for evidence of possible impairment. An impairment loss is recognized when the carrying amount of the asset (disposal) group is not recoverable and exceeds fair value. The Company estimates the fair values of assets subject to long-lived asset impairment based on the Company's own judgments about the assumptions market participants would use in pricing the assets and observable market data, when available. The Company classifies these fair value measurements as Level 3.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
During 2020, due to the continued curtailment of operations related to the COVID-19 pandemic, inventory of Palmer was written down to its net realizable value of $2.1 million and certain long-lived assets of Palmer, including tangible and intangible assets, were written down to their estimated fair value of $1.4 million, resulting in asset impairment charges of $6.2 million.
The Company evaluates goodwill for impairment annually and earlier if an event or other circumstances indicates that we may not recover the carrying value of the asset. During 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment existed and, as a result of the Company's goodwill impairment evaluations, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value resulting in a full impairment charge of $16.2 million. See Note 5 - Goodwill for additional details. The Company classifies these fair value measurements as Level 3.
The Company's significant measurements of assets and liabilities at fair value on a non-recurring basis subsequent to their initial recognition were certain acquisition related assets and liabilities for the year ended December 31, 2019.
Customer List Intangible Asset
During the second quarter of 2019, management revised the initial estimate of the fair value of the customer list intangible asset acquired during the American Stainless acquisition, resulting in a decrease to the customer list intangible asset of $0.5 million (see Note 15 to the consolidated financial statements for additional information regarding this fair value measurement).
Contingent consideration (earn-out) liabilities
During the second quarter of 2019, management revised the initial estimate of the fair value of the contingent consideration (earn-out) liability from the American Stainless acquisition, resulting in an increase to the earn-out liability of $0.2 million (see Note 15 to the consolidated financial statements for additional information regarding this fair value measurement).
Fair Value of Financial Instruments
For short-term instruments, other than those required to be reported at fair value on a recurring and non-recurring basis and for which disclosures are included above, management concluded the historical carrying value is a reasonable estimate of the fair value because of the short period of time between origination of such instruments and their expected realization. Therefore, as of December 31, 2020 and 2019, the carrying amount for cash and cash equivalents, accounts receivable, accounts payable, and the Company's revolving line of credit, which is based on a variable rate, approximates fair value.
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 or changes in the fair value methodologies used by the Company in the years ended December 31, 2020 or 2019, respectively.
Note 4: Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
Land
|
$
|
3
|
|
|
$
|
63
|
|
Leasehold improvements
|
2,939
|
|
|
1,921
|
|
Buildings
|
84
|
|
|
214
|
|
Machinery, fixtures and equipment
|
100,352
|
|
|
100,300
|
|
Construction-in-progress
|
2,772
|
|
|
2,999
|
|
|
106,150
|
|
|
105,497
|
|
Less accumulated depreciation
|
71,054
|
|
|
64,807
|
|
Property, plant and equipment, net
|
$
|
35,096
|
|
|
$
|
40,690
|
|
The Company recorded depreciation expense of $7.6 million for 2020 and 2019.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 5: Goodwill
During the second quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment, with an associated goodwill balance of $16.2 million, existed. Continued deterioration in macroeconomic conditions, continued risks within the stainless steel industrial business, reporting unit operating losses and a decline in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event. As a result, the Company quantitatively evaluated the Welded Pipe & Tube reporting unit for impairment. Fair value of the reporting unit was determined using an income approach. Determining the fair value of the reporting unit to determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions. These estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts, including sales growth, gross margins, and operating margins. Any changes in the judgments, estimates, or assumptions could produce significantly different results. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was greater than its carrying value by 1.7% and, as such, no goodwill impairment was necessary in the quarter ended June 30, 2020.
During the third quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment, with an associated goodwill balance of $16.2 million, existed. Continued declines in the Company's stock price, reporting unit operating losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event and the need to perform another quantitative evaluation of goodwill. As a result, the Company quantitatively evaluated the Welded Pipe & Tube reporting unit for impairment. Fair value of the reporting unit was determined using a combination of an income approach and a market-based approach with equal weighting applied to each approach. The income approach utilized the estimated discounted cash flows expected to be generated by the reporting unit's assets while the market-based approach utilized comparable company information. Determining the fair value of the reporting unit to determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions. These estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts, including sales growth, gross margins, and operating margins. Any changes in the judgments, estimates, or assumptions could produce significantly different results. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value by 9.7% resulting in a goodwill impairment charge of $10.7 million for the quarter ended September 30, 2020.
During the fourth quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment, with an associated goodwill balance of $5.5 million, existed. Continued risks within the stainless steel industrial business, reporting unit operating losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event and the need to perform another quantitative evaluation of goodwill. As a result, the Company quantitatively evaluated the Welded Pipe & Tube reporting unit for impairment. Fair value of the reporting unit was determined using a combination of an income approach and a market-based approach with equal weighting applied to each approach. The income approach utilized the estimated discounted cash flows expected to be generated by the reporting unit's assets while the market-based approach utilized comparable company information. Determining the fair value of the reporting unit to determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions. These estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts, including sales growth, gross margins, and operating margins. Any changes in the judgments, estimates, or assumptions could produce significantly different results. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value by 24.1% resulting in the remainder of the goodwill attributable to the Welded Pipe and Tube reporting unit being impaired and a goodwill impairment charge of $5.5 million for the quarter ended December 31, 2020.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
During the fourth quarter of 2020, the Company completed its annual goodwill impairment evaluation for the Specialty Chemicals Segment with an associated goodwill balance of $1.4 million. As part of the annual impairment evaluation, the Company quantitatively evaluated the reporting unit for impairment. Fair value of the reporting unit was determined using a combination of an income approach and a market-based approach with equal weighting applied to each approach. The income approach utilized the estimated discounted cash flows expected to be generated by the reporting unit's assets while the market-based approach utilized comparable company information. Determining the fair value of the reporting unit to determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions. These estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts, including sales growth, gross margins, and operating margins. Any changes in the judgments, estimates, or assumptions could produce significantly different results. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Specialty Chemicals Segment was greater than its carrying value by 7.4% and, as such, no goodwill impairment was necessary.
Changes in the carrying amount of goodwill by segment for the year ended December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Specialty Chemicals Segment
|
|
Metals Segment
|
|
Total
|
Balance December 31, 2018
|
$
|
1,355
|
|
|
$
|
8,445
|
|
|
$
|
9,800
|
|
American Stainless Acquisition
|
—
|
|
|
7,758
|
|
|
$
|
7,758
|
|
Balance December 31, 2019
|
$
|
1,355
|
|
|
$
|
16,203
|
|
|
$
|
17,558
|
|
Impairment charges
|
—
|
|
|
(16,203)
|
|
|
$
|
(16,203)
|
|
Balance December 31, 2020
|
$
|
1,355
|
|
|
$
|
—
|
|
|
$
|
1,355
|
|
Note 6: Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
$100 million Revolving line of credit, due December 20, 2021
|
$
|
49,037
|
|
|
$
|
59,221
|
|
$20 million Term loan, due February 1, 2024
|
$
|
11,458
|
|
|
$
|
12,333
|
|
Current portion of long-term debt
|
$
|
875
|
|
|
$
|
4,000
|
|
Total long-term debt
|
$
|
61,370
|
|
|
$
|
75,554
|
|
Debt Refinancing: On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A. ("BMO"). The new Credit Agreement provides the Company with a new four-year revolving credit facility with up to $150.0 million of borrowing capacity (the "Facility"). The Facility refinances and replaces the Company's previous $100.0 million asset based revolving line of credit with Truist Bank ("Truist"), which was scheduled to mature on December 21, 2021, and the remaining portion of the Company's five-year $20 million term loan with Truist, which was scheduled to mature on February 1, 2024. The initial borrowing capacity under the Facility totals $110.0 million. The current portion of long-term debt as of December 31, 2020 reflects expected payments during 2021.
In addition to refinancing the Company's previously existing bank debt, the Facility will be used for ongoing working capital needs, capital expenditures, and general corporate purposes. Interest on the revolving line of credit portion of the Facility is calculated using the LIBOR Rate (as defined in the Credit Agreement) plus 1.50%, subject to increase based on the calculation of Applicable Margin (as defined in the Credit Agreement). Borrowings under revolving line of credit portion of the Facility are limited to an amount equal to the Borrowing Base calculation (as defined in the Credit Agreement) that includes eligible accounts receivable, inventory, machinery and equipment. Interest on the term potion of the Facility is calculated using the LIBOR Rate (as defined in the Credit Agreement) plus 1.65%, subject to increase based on the calculation of Applicable Margin (as defined in the Credit Agreement).
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries. The Credit Agreement does not include any financial covenants so long as the availability under the Facility exceeds $11.0 million. If the availability falls below the availability threshold amount, the Credit Agreement provides for a minimum fixed charge coverage ratio equal to 1.0.
Credit Facilities Prior to Debt Refinance: On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase its Line of Credit (the "Line") from $80 million to $100 million and to create a new 5-year
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
term loan in the principal amount of $20 million (the “Term Loan”). The Term Loan was used to finance the American Stainless acquisition (see Note 15). The Term Loan’s maturity date is February 1, 2024 and shall be repaid in 60 consecutive monthly installments. Interest on the Term Loan is calculated using the One Month LIBOR Rate (as defined in the Credit Agreement), plus 1.90 percent. The Line will be used for working capital needs and as a source for funding future acquisitions. The maturity date of the Line is December 20, 2021. Interest on the Line remains unchanged and is calculated using the One Month LIBOR Rate, plus 1.65 percent. Borrowings under the Line are limited to an amount equal to a Borrowing Base calculation that includes eligible accounts receivable and inventory. The Company evaluated this transaction and determined the restructuring should be accounted for as a debt modification. The Company incurred lender and third-party costs associated with the debt restructuring that were capitalized on the balance sheet in non-current assets
The Line interest rate was 1.81 percent and 3.50 percent as of December 31, 2020 and 2019, respectively. Additionally, the Company is required to pay a fee equal to 0.15 percent on the average daily unused amount of the Line on a quarterly basis. As of December 31, 2020, the amount available for borrowing under the Line was $60.0 million of which $49.0 million was borrowed, leaving $11.0 million of availability. Average Line borrowings outstanding during fiscal 2020 and 2019 were $60.3 million and $69.1 million with weighted average interest rates of 3.50 percent and 5.52 percent, respectively.
The term loan interest rate was 2.06 percent and 3.69 percent as of December 31, 2020 and 2019, respectively. The Company had outstanding borrowings against the term loan of $12.3 million and 16.3 million as of December 31, 2020 and 2019, respectively.
The Company made interest payments on all credit facilities of $2.0 million and $3.5 million in 2020 and 2019, respectively.
Principal payments on long-term debt during the next five fiscal years and thereafter are as follows (in thousands):
|
|
|
|
|
|
2021(1)
|
53,037
|
|
2022
|
4,000
|
|
2023
|
4,000
|
|
2024
|
333
|
|
2025
|
—
|
|
Thereafter
|
—
|
|
(1)The amounts in the table above do not include the effects of the Company's debt refinance. The Company's new revolving credit facility includes a $17.5 million machinery and equipment sub-limit which requires repayments of $0.4 million quarterly starting in July 2021 with a balloon payment due upon maturity of the credit facility in 2025.
Pursuant to the Credit Agreement, the Company is subject to certain covenants including maintaining a minimum fixed charge coverage ratio of not less than 1.25, maintaining a minimum tangible net worth of not less than $60.0 million, and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs.
The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarter ended June 30, 2020. To address the technical default, the Company entered into two amendments to its Credit Agreement with its bank subsequent to the end of the second quarter. On July 31, 2020, the Company entered into the Third Amendment to the Third Amended and Restated Loan Agreement (the "Third Amendment") with its bank. The Third Amendment amended the definition of the fixed charge coverage ratio to include the proxy contest costs in the numerator of the ratio calculation. Additionally, on August 13, 2020, the Company entered into the Fourth Amendment to the Third Amended and Restated Loan Agreement (the "Fourth Amendment") with its bank. The Fourth Amendment amended the definition of the fixed charge coverage ratio to include the lesser of the actual non-cash asset impairment charge related to Palmer, or $6.0 million in the numerator of the ratio calculation. The amendments are effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020.
The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarter ended September 30, 2020. To address the technical default, on October 23, 2020, the Company entered into the Fifth Amendment to the Third Amended and Restated Loan Agreement (the "Fifth Amendment") with its bank. The Fifth Amendment amended the definition of the fixed charge coverage ratio to include in the numerator (i) the calculation of losses from the suspended operations of Palmer in the amount of $1,560,000, which is effective for the quarter ended June 30, 2020 and for the directly following three quarters after June 30, 2020, (ii) the calculation of losses from the suspended operations of Palmer in the amount of $740,000, which is effective for the quarter ended September 30, 2020 and for the directly following three quarters after September 30, 2020, and (iii) the extraordinary expenses related to the investigation of a
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
whistleblower complaint in the amount of $636,000, which is effective for the quarter ended September 30, 2020 and for the directly following three quarters after September 30, 2020.
As of December 31, 2020, the Company had a minimum fixed charge coverage ratio of 1.43 and a minimum tangible net worth of $67.1 million.
Note 7: Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
|
|
|
Salaries, wages, and commissions
|
3,776
|
|
|
2,972
|
|
|
|
|
|
Taxes, other than income taxes
|
133
|
|
|
406
|
|
Advances from customers
|
298
|
|
|
153
|
|
Insurance
|
702
|
|
|
578
|
|
Professional fees
|
272
|
|
|
265
|
|
|
|
|
|
Warranty reserve
|
233
|
|
|
11
|
|
|
|
|
|
Benefit plans
|
238
|
|
|
242
|
|
Insurance financing liability
|
—
|
|
|
668
|
|
Current portion, capital lease obligation
|
—
|
|
|
39
|
|
Interest rate swap liability
|
45
|
|
|
—
|
|
Customer rebate liability
|
168
|
|
|
275
|
|
Other accrued items
|
258
|
|
|
428
|
|
Total accrued expenses
|
$
|
6,123
|
|
|
$
|
6,037
|
|
Note 8: Stock-Based Compensation
Overview of Stock-Based Compensation Plans
The Company has a number of active equity incentive plans under which the Company has been authorized to grant share-based awards to key employees and non-employee directors. A total of 500,000 shares have been previously authorized for grant to key employees and non-employee directors. As of December 31, 2020, there were no shares remaining available for grants under the currently active equity incentive plans.
The Company recognized stock-based compensation expense within SG&A expense on the consolidated statement of operations and comprehensive loss of $1.8 million and $2.1 million in 2020 and 2019, respectively. The associated income tax benefit recognized was $0.2 million for 2020 and $0.4 million for 2019, respectively.
Stock Options
2011 Long-Term Incentive Stock Option Plan
The 2011 Long-Term Incentive Stock Option Plan (the "2011 Plan") is an incentive stock option plan; therefore, there are no income tax consequences to the Company when an option is granted or exercised. The stock options will vest in 20 percent or 33 percent increments annually on a cumulative basis, beginning one year after the date of grant. In order for the options to vest, the employee must be in the continuous employment of the Company since the date of the grant. Except for death, disability, or qualifying retirement, any portion of the grant that has not vested will be forfeited upon termination of employment. Shares representing grants that have not yet vested will be held in escrow by the Company. An employee will not be entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.
On February 5, 2020 the Compensation Committee approved stock option grants under the 2011 Plan. Options for a total of 123,500 shares, with an exercise price of $12.995 per share, were granted under the 2011 Plan to certain management employees of the Company. The stock options will vest in 33 percent increments annually on a cumulative basis, beginning one year after the date of grant. The per share weighted-average fair value of this stock option grant was $4.53. The Black-Scholes model for this grant was based on a risk-free interest rate of 1.66 percent, an expected life of 10 years, an expected
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
volatility of 35.1 percent and a dividend yield of 1.79 percent. Compensation expense totaling $0.6 million will be recorded against earnings over the following 36 months from the date of grant with the offset recorded in Shareholders' Equity.
On June 30, 2020 the Compensation Committee approved stock option grants under the 2011 Plan. Options for a total of 20,000 shares, with an exercise price of $7.33 per share, were granted under the 2011 Plan to certain management employees of the Company. The stock options will vest in 33 percent increments annually on a cumulative basis, beginning one year after the date of grant. The per share weighted-average fair value of this stock option grant was $2.59. The Black-Scholes model for this grant was based on a risk-free interest rate of 0.64 percent, an expected life of 10 years, an expected volatility of 38.7 percent and a dividend yield of 1.89 percent. Compensation expense totaling $0.1 million will be recorded against earnings over the following 36 months from the date of grant with the offset recorded in Shareholders' Equity.
A summary of activity in the Company's stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
Outstanding
|
|
Weighted
Average
Contractual
Term
(in years)
|
|
Intrinsic
Value of
Options
|
|
Options
Available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
$
|
14.16
|
|
|
59,096
|
|
|
4.8
|
|
$
|
143,737
|
|
|
155,845
|
|
Exercised
|
$
|
12.61
|
|
|
(3,628)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
$
|
14.26
|
|
|
55,468
|
|
|
3.8
|
|
$
|
18,331
|
|
|
155,845
|
|
Granted February 5, 2020
|
$
|
13.00
|
|
|
123,500
|
|
|
|
|
|
|
(123,500)
|
|
Granted June 30, 2020
|
$
|
7.33
|
|
|
20,000
|
|
|
|
|
|
|
(20,000)
|
|
|
|
|
|
|
|
|
|
|
|
Canceled, forfeited, or expired
|
$
|
13.14
|
|
|
(19,437)
|
|
|
|
|
|
|
19,437
|
|
December 31, 2020
|
$
|
12.74
|
|
|
179,531
|
|
|
7.2
|
|
$
|
9,402
|
|
|
31,782
|
|
Exercisable options
|
$
|
13.77
|
|
|
86,531
|
|
|
5.1
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest:
|
|
|
|
|
|
|
Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
$
|
15.83
|
|
|
9,969
|
|
|
6.0
|
|
$
|
6.44
|
|
|
|
Vested
|
$
|
15.72
|
|
|
(6,246)
|
|
|
|
|
$
|
6.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
$
|
16.01
|
|
|
3,723
|
|
|
5.1
|
|
$
|
6.11
|
|
|
|
Granted February 5, 2020
|
$
|
13.00
|
|
|
123,500
|
|
|
|
|
$
|
4.53
|
|
|
|
Granted June 30, 2020
|
$
|
7.33
|
|
|
20,000
|
|
|
|
|
$
|
2.59
|
|
|
|
Vested
|
$
|
13.24
|
|
|
(34,786)
|
|
|
|
|
$
|
4.68
|
|
|
|
Canceled, forfeited, or expired
|
$
|
13.14
|
|
|
(19,437)
|
|
|
|
|
$
|
4.62
|
|
|
|
December 31, 2020
|
$
|
11.78
|
|
|
93,000
|
|
|
9.2
|
|
$
|
5.53
|
|
|
|
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Outstanding Stock Options
|
|
Exercisable Stock Options
|
|
Shares
|
|
Weighted Average
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
|
Exercise Price
|
|
Remaining Contractual Life in Years
|
|
|
$
|
11.35
|
|
|
11,713
|
|
|
$
|
11.35
|
|
|
1.10
|
|
11,713
|
|
|
$
|
11.35
|
|
$
|
13.70
|
|
|
13,994
|
|
|
$
|
13.70
|
|
|
2.10
|
|
13,994
|
|
|
$
|
13.70
|
|
$
|
14.76
|
|
|
8,109
|
|
|
$
|
14.76
|
|
|
3.13
|
|
8,109
|
|
|
$
|
14.76
|
|
$
|
16.01
|
|
|
20,715
|
|
|
$
|
16.01
|
|
|
4.11
|
|
20,715
|
|
|
$
|
16.01
|
|
$
|
13.00
|
|
|
105,000
|
|
|
$
|
13.00
|
|
|
9.10
|
|
32,000
|
|
|
$
|
13.00
|
|
$
|
7.33
|
|
|
20,000
|
|
|
$
|
7.33
|
|
|
9.50
|
|
—
|
|
|
$
|
7.33
|
|
|
|
179,531
|
|
|
|
|
|
|
86,531
|
|
|
|
There were no options exercised by employees and directors in 2020. In 2019, options for 3,628 shares were exercised by employees and directors for an aggregate exercise price of $45,734.
At the 2020 and 2019 respective year ends, options to purchase 86,531 and 51,745 shares, respectively, with weighted average exercise prices of $13.77 and $14.13, respectively, were fully exercisable.
Compensation cost charged against income before taxes for the options was approximately $0.4 million for 2020 and $31,186 for 2019, respectively. As of December 31, 2020, there was $0.2 million of unrecognized compensation cost related to unvested stock options granted under the Company's stock option plans. The weighted average period over which the stock option compensation cost is expected to be recognized is 2.14 years.
Restricted Stock Awards
2005 Stock Awards Plan
The Compensation & Long-Term Incentive Committee ("Compensation Committee") of the Board of Directors of the Company approved stock grants under the Company's 2005 Stock Awards Plan to certain management employees of the Company. The stock grants will vest in 20 percent or 33 percent increments annually on a cumulative basis, beginning one year after the date of grant. In order for the grants to vest, the employee must be in the continuous employment of the Company since the date of the grant. Any portion of the grant that has not vested will be forfeited upon termination of employment. Shares representing grants that have not vested will be held in escrow by the Company. An employee will not be entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.
2015 Stock Awards Plan
The 2015 Stock Awards Plan was approved by the Compensation Committee and originally authorized the issuance of up to 250,000 shares which can be awarded for a period of 10 years from the effective date of the plan. On May 17, 2018, a majority of the shareholders of the Company, upon the recommendation of the Company's Board of Directors, voted to amend and restate the 2015 Stock Awards Plan to increase the authorization of issuances from 250,000 shares to 500,000 shares. Prior to May 9, 2017, the stock awards vest in 20 percent increments annually on a cumulative basis, beginning one year after the date of grant from shares held in treasury with the Company. In order for the awards to vest, the employee must be in the continuous employment of the Company since the date of the award. Except for death, disability, or qualifying retirement, any portion of an award that has not vested is forfeited upon termination of employment. The Company may terminate any portion of the award that has not vested upon an employee's failure to comply with all conditions of the award or the 2015 Stock Awards Plan. An employee is not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable. The fair value of the restricted stock awards are determined based on the average of the high and low common stock price on the day prior to the date of grant.
On February 6, 2019, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where 44,949 shares with a market price of $15.72 per share were granted
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
under the Plan. These stock awards vest in either 20 percent or 33 percent increments annually on a cumulative basis, beginning one year after the date of grant.
On February 5, 2020, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where 45,418 shares with a market price of $13.00 per share were granted under the Plan. The stock awards vest in either 20 percent or 33 percent increments annually on a cumulative basis, beginning one year after the date of grant.
On November 10, 2020, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan in conjunction with the appointment of the Company's Interim President and Chief Executive Officer where 50,000 shares with a market price of $5.65 per share were granted under the Plan. Under the terms of the associated employment agreement, two-thirds of the stock award vests over a one-year period from the effective date of the agreement while one-third of the award vests over an 18-month period from the effective date of the agreement.
A summary of plan activity for the 2005 and 2015 Stock Awards Plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date Fair Value
|
Outstanding December 31, 2018
|
142,174
|
|
|
$
|
11.45
|
|
Granted February 6, 2019
|
44,949
|
|
|
$
|
15.72
|
|
Vested
|
(84,734)
|
|
|
$
|
11.76
|
|
Forfeited
|
(1,614)
|
|
|
$
|
12.44
|
|
Outstanding December 31, 2019
|
100,775
|
|
|
$
|
13.28
|
|
Granted February 5, 2020
|
45,418
|
|
|
$
|
13.00
|
|
Granted November 10, 2020
|
50,000
|
|
|
$
|
5.65
|
|
Vested
|
(81,233)
|
|
|
$
|
12.87
|
|
Forfeited
|
(17,535)
|
|
|
$
|
13.11
|
|
Outstanding December 31, 2020
|
97,425
|
|
|
$
|
11.97
|
|
Compensation expense on the grants issued is charged against earnings equally before forfeitures, if any, with the offset recorded in Shareholders' Equity. Compensation cost charged against income for the awards was approximately $1.0 million and $1.4 million for 2020 and 2019, respectively. As of December 31, 2020, there was $0.5 million of total unrecognized compensation cost related to unvested restricted stock grants under the Company's Stock Awards Plan. The weighted average period over which the stock grant compensation cost is expected to be recognized is 2.78 years.
Performance-Based Restricted Stock Awards
The Company issues performance-based restricted stock classified as equity awards. Expense is recognized on a straight-line method over the requisite service period, based on the probability of achieving the performance condition, with changes in expectations recognized as an adjustment to earnings in the period of change. Compensation cost is not recognized for performance-based restricted stock awards that do not vest because service or performance conditions are not satisfied and any previously recognized compensation cost is reversed. Performance-based restricted stock awards do not have dividend rights. The Company recognized forfeitures as they occur.
The Company's performance-based restricted stock awards are classified as equity and contain performance and service conditions that must be satisfied for an employee to earn the right to benefit from the award. The performance condition is based on the achievement of the Company's EBITDA targets. The fair value of the performance-based restricted stock awards are determined based on the average of the high and low common stock price on the day prior to the date of grant.
In general, 0% to 150% of the Company's performance-based restricted stock awards vest at the end of a three year service period from the date of grant based upon achievement of the specified performance condition.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The weighted-average grant-date fair value per unit of performance-based restricted stock classified as equity awards granted was $13.00 and $15.72 in 2020 and 2019, respectively. The total fair value of performance-based restricted stock awards vesting was approximately $0.6 million and $0.4 million in 2020 and 2019, respectively.
On November 10, 2020, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan in conjunction with the appointment of the Company's Interim President and Chief Executive Officer where 90,000 shares were granted under the Plan, with 50,000 shares vesting when, during the term of the employment agreement, the thirty-day volume weighted average price of a Company common share equals $8 per share or more, and the remaining 40,000 shares vesting when, during the term of the employment agreement, the thirty-day volume weighted average price of a Company common share equals $11 or more. The grant is contingent upon shareholder approval of an increase in the number of shares of our common stock that may be issued pursuant to the 2015 Stock Awards Plan. Shareholders will vote on this matter at our 2021 Annual Meeting of Shareholders.
A summary of the status of our non-vested performance-based restricted stock awards as of December 31, 2020, and changes during fiscal 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units(1)
|
|
Weighted-Average Grant Date Fair Value
|
Outstanding December 31, 2019
|
77,986
|
|
|
$
|
13.66
|
|
Granted(2)
|
36,647
|
|
|
$
|
13.00
|
|
Vested(3)
|
(64,711)
|
|
|
$
|
13.21
|
|
Forfeited/Canceled
|
(20,558)
|
|
|
$
|
13.73
|
|
Non-vested December 31, 2020
|
29,364
|
|
|
$
|
13.76
|
|
(1) The number of units presented is based on achieving the targeted performance goals as defined in the performance award agreement. As of December 31, 2020, the maximum number of non-vested shares under the provisions of the agreement was 44,046.
(2) Contingent shares have been excluded from the table above.
(3) Excludes the vesting of an additional 5,074 shares due to performance conditions of the awards exceeding target.
As of December 31, 2020, there was $0.2 million of unrecognized compensation expense related to non-vested performance-based restricted stock awards that is expected to be recognized over a weighted-average period of 2.12 years.
Non-Employee Director Compensation Plan
Each year, the Company allows each non-employee director to elect to receive up to 100 percent of the director's annual retainer in restricted stock. The number of restricted shares issued is determined by the average of the high and low common stock price on the day prior to the Annual Meeting of Shareholders or the date prior to the appointment to the Board for those individuals that are appointed mid-term. On December 18, 2020 and May 16, 2019, non-employee directors received an aggregate of 43,063 and 15,909 shares, respectively, of restricted stock in lieu of total retainer fees of $345,000 and $304,000, respectively. The shares granted to the directors are not registered under the Securities Act of 1933 and are subject to forfeiture in whole or in part upon the occurrence of certain events.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 9: Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows at the respective year ends:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
Inventory valuation reserves
|
176
|
|
|
199
|
|
|
|
|
|
Inventory capitalization
|
1,120
|
|
|
1,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued bonus
|
328
|
|
|
497
|
|
|
|
|
|
State net operating loss carryforwards
|
1,669
|
|
|
1,835
|
|
Federal net operating loss carryforwards
|
—
|
|
|
139
|
|
Equity security mark to market
|
—
|
|
|
217
|
|
|
|
|
|
Lease liabilities
|
7,484
|
|
|
8,945
|
|
Interest limitation carryforwards
|
—
|
|
|
754
|
|
Accrued Federal Insurance Contributions Act ("FICA") deferral
|
299
|
|
|
—
|
|
Intangible asset basis differences
|
3,706
|
|
|
—
|
|
Other
|
534
|
|
|
445
|
|
Total deferred income tax assets
|
15,316
|
|
|
14,727
|
|
Federal & State valuation allowance
|
(4,243)
|
|
|
(1,700)
|
|
Total net deferred income tax assets
|
11,073
|
|
|
13,027
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
Fixed asset basis differences
|
5,562
|
|
|
4,859
|
|
Prepaid expenses
|
276
|
|
|
296
|
|
Lease assets
|
7,067
|
|
|
8,537
|
|
Interest rate swap
|
68
|
|
|
77
|
|
Other
|
57
|
|
|
48
|
|
Total deferred income tax liabilities
|
13,030
|
|
|
13,817
|
|
Deferred income taxes
|
$
|
(1,957)
|
|
|
$
|
(790)
|
|
Significant components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(6,024)
|
|
|
$
|
(10)
|
|
|
|
State
|
23
|
|
|
57
|
|
|
|
Total current
|
(6,001)
|
|
|
47
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
1,011
|
|
|
(833)
|
|
|
|
State
|
284
|
|
|
59
|
|
|
|
Total deferred
|
1,295
|
|
|
(774)
|
|
|
|
Total
|
$
|
(4,706)
|
|
|
$
|
(727)
|
|
|
|
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The reconciliation of income tax computed at the U. S. federal statutory tax rates to income tax expense is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
Tax at U.S. statutory rates
|
$
|
(6,714)
|
|
|
21.0
|
%
|
|
$
|
(790)
|
|
|
21.0
|
%
|
|
|
|
|
State income taxes, net of federal tax benefit
|
73
|
|
|
(0.2)
|
%
|
|
165
|
|
|
(4.4)
|
%
|
|
|
|
|
Federal and State valuation allowance
|
2,541
|
|
|
(7.9)
|
%
|
|
(60)
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARES Act carryback benefits
|
(1,123)
|
|
|
3.5
|
%
|
|
—
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation
|
65
|
|
|
(0.2)
|
%
|
|
(155)
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive compensation limitation
|
280
|
|
|
(0.9)
|
%
|
|
57
|
|
|
(1.5)
|
%
|
|
|
|
|
Other nondeductible expenses
|
35
|
|
|
(0.1)
|
%
|
|
64
|
|
|
(1.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
137
|
|
|
(0.5)
|
%
|
|
(8)
|
|
|
0.2
|
%
|
|
|
|
|
Total
|
$
|
(4,706)
|
|
|
14.7
|
%
|
|
$
|
(727)
|
|
|
19.3
|
%
|
|
|
|
|
The Company made income tax payments of $16,000 and $1.2 million in 2020 and 2019, respectively. The Company has no U.S. Federal net operating loss carryforwards and no interest limitation carryforwards at the end of 2020 compared with $0.7 million of U.S. Federal net operating loss carryforwards and $3.5 million of interest limitation carryforwards at the end of 2019. During the current period, in response to the COVID-19 pandemic, the Coronavirus, Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. Among various income and payroll tax provisions, the CARES Act permitted the Company to carryback net operating losses realized in 2020 and 2019, refunding previous taxes paid over tax years 2014 through 2018, resulting in no U.S. Federal net operating loss carryforwards to 2021. This resulted in $1.1 million of income tax benefits realized in 2020 due to tax rate differentials between the tax years.
During 2020, the Company increased the combined U.S. federal and state valuation allowance by $2.5 million because it is not more likely than not that the underlying deferred tax assets will be realized in the foreseeable future. While no U.S. federal net operating losses exist as of December 31, 2020, the current year increase in the valuation allowance is principally related to deferred tax assets created in the current year associated with the impairment of intangible assets. In addition, on a gross basis the Company had state operating loss carryforwards of $39.4 million and $43.6 million at the end of 2020 and 2019, respectively. The majority of these losses will expire between the years of 2021 and 2038, while certain losses are not subject to expiration. A valuation allowance has been established for $39.4 million and $40.3 million of these state net operating losses at the end of 2020 and 2019, respectively, or $1.7 million on an after-tax basis at each period.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to U.S. federal examinations for years before 2015 or state examinations for years before 2014.
The Company had no uncertain tax position activity during 2020 or 2019. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in the provision for income taxes. The Company had no accruals for uncertain tax positions including interest and penalties at the end of 2020.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 10: Benefit Plans and Collective Bargaining Agreements
The Company has a 401(k) Employee Stock Ownership Plan (the "401(k)/ESOP Plan") covering all non-union employees. Employees could contribute to the 401(k)/ESOP Plan up to 100 percent of their wages with a maximum of $19,500 for 2020. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional $6,500 per year for a maximum of $26,000 for 2020. Contributions by the employees are invested in one or more funds at the direction of the employee; however, employee contributions cannot be invested in Company stock. For the year ended December 31, 2015, contributions by the Company were made in cash and then used by the 401(k)/ESOP Plan Trustee to purchase Company stock. Effective January 1, 2016, contributions by the Company are made in accordance with the investment elections made by each participant for his or her deferral contributions. The Company contributes on behalf of each eligible participant a matching contribution equal to a percentage determined each year by the Board of Directors. For 2020 and 2019 the maximum was 100 percent of employee contributions up to a maximum of four percent of their eligible compensation. The matching contribution is applied to the employee accounts after each payroll. Matching contributions of approximately $0.4 million and $0.8 million were made for 2020 and 2019, respectively. The Company may also make a discretionary contribution, which if made, would be distributed to all eligible participants regardless of whether they contribute to the 401(k)/ESOP Plan. No discretionary contributions were made to the 401(k)/ESOP Plan in 2020 or 2019.
The Company also has a 401(k) and Profit Sharing Plan (the "Bristol Plan") covering all employees as part of the United Steel Workers of America, Local Union 4586 Collective Bargaining Agreement (the "Bristol CBA"). Employees could contribute to the Bristol Plan up to 60 percent of pretax annual compensation, as defined in the Bristol Plan, with a maximum of $19,500 for 2020. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional $6,500 per year for a maximum of $26,000 for 2020. During 2020, the Company contributed three percent of a participant's eligible compensation from January to July and increased this amount to four percent for the remainder of the plan year, regardless of whether the participants contribute to the Bristol Plan. The Company's contributions were $0.2 million for 2020 and 2019, respectively. Additional profit sharing amounts may also be contributed at the option of the Company's Board of Directors, which if made, would be allocated to participants based on the ratio of the participant's compensation to the total compensation of all participants eligible to participate in the Bristol Plan. No discretionary contributions were made to the Bristol Plan in 2020 or 2019.
The Company maintains a Collective Bargaining Agreement (the "Munhall CBA") with the United Steel Workers of America, Local Union 5852-22 (the "Munhall Union"), which represents the employees at the Munhall facility. As a part of this Munhall CBA, the Company assumed the obligation of participating in the Steelworkers Pension Trust, a union-sponsored multi-employer defined benefit plan (the "Munhall Plan"), which covers all the Company's eligible Munhall Union employees. The Munhall Plan has a calendar plan year. Per the most recent available annual funding notice, the plan was at least 84 percent funded for the plan year ended December 31, 2019. Per the terms of the Munhall CBA the Company contributes 4.25 percent of each participant's eligible compensation for the 2020 plan year. Munhall Union employees make no contributions to the Munhall Plan. The Company's contributions are less than five percent of total contributions to the plan based on contributions for the plan year ended December 31, 2019. The Company's contributions to the Munhall Plan totaled $0.2 million for the year ended December 31, 2020 and 2019, respectively. Additionally, as part of the Munhall CBA, members of the union are eligible to make deferral contributions to the Company's 401(k)/ESOP Plan per the plan guidelines; however they do not receive matching contributions of the 401(k)/ESOP Plan.
The Company also maintains a Collective Bargaining Agreement ( the "Mineral Ridge CBA") with the United Steel Workers of America, Local Union 4564-07, which represents employees at the Specialty-Mineral Ridge facility. In connection with the Mineral Ridge CBA, the Company contributes to union-sponsored defined contribution retirement plans. Contributions relating to these plans were $29,851 and $28,469 for 2020 and 2019, respectively.
Note 11: Leases
The Company's portfolio of leases contains both finance and operating leases that relate to real estate and manufacturing equipment. Substantially all of the value of the Company's lease portfolio relates to the Master Lease with Store Master Funding XII, LLC (“Store”), an affiliate of Store Capital Corporation ("Store Capital") that was entered into in 2016 and amended with the 2019 American Stainless acquisitions as well as the 2020 sale of land at the Munhall facility. As of December 31, 2020, operating lease liabilities related to the master lease agreement with Store Capital totaled $32.9 million, or 98 percent of the total lease liabilities on the consolidated balance sheet.
In determining the lease liability and corresponding right-of-use asset for its operating leases, the Company calculates the present value of future lease payments using the interest rate implicit in the lease, when available, or the Company's
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
incremental borrowing rate ("IBR"). The Company determines the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. Such adjustments include assuming the Store Capital lease would require two lenders with the secondary lender being secured on a second lien requiring mezzanine rates. The Company utilizes a single discount rate for its portfolio of operating leases because of similar lease characteristics; the resulting calculation does not differ materially from applying the standard to the individual leases.
On January 2, 2019, the Company and Store Master Funding XII, LLC, a Delaware limited liability company and the Company's sale-leaseback partner, amended and restated the Master Lease, pursuant to which the Company leases the Statesville and Troutman, NC facilities, purchased by Store Capital from American Stainless on January 1, 2019, for the remainder of the initial term of 20 years set forth in the Master Lease, with two renewal options of 10 years each. Because the Company is not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments. The Master Lease includes a rent escalator equal to the lesser of 1.25 times the percentage increase in the Consumer Price Index since the previous increase or two percent.
On September 10, 2020, the Company and Store closed on a transaction pursuant to which Store sold to a third party approximately 12.5 acres of unimproved land and immaterial improvements located at Synalloy’s facility in Munhall, Pennsylvania. Synalloy subleases the Munhall facility to Bristol Metals, LLC.
As a result of the sale, on September 10, 2020, the Company and Store entered into a Third Amended and Restated Master Lease Agreement (the “Third Master Lease”) to reduce the Company's rent at the Munhall facility pursuant to the terms and conditions of the Second Amended and Restated Master Lease Agreement between the parties dated January 2, 2019. The Third Master Lease was determined to be a lease modification that qualified for a change of accounting on the existing lease and not a separate contract. Upon modification of the Third Master Lease, the right-of-use asset and operating lease liability were remeasured using an incremental borrowing rate determined on the date of modification. As such, the Company recognized a reduction in the right-of-use asset and operating lease liability related to the Third Master Lease of $3.2 million and $3.4 million, respectively, and recognized a gain on the modification of $0.2 million, which is reported within operating expenses on the consolidated statement of operations and comprehensive loss.
Weighted average discount rates for operating and finance leases are as follows:
|
|
|
|
|
|
Operating Leases
|
8.33
|
%
|
Finance Leases
|
2.44
|
%
|
Balance Sheet Presentation
Operating and finance lease amounts included in the consolidated balance sheet are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
Financial Statement Line Item
|
|
December 31, 2020
|
Assets
|
|
Right-of-use assets, operating leases
|
|
$
|
31,769
|
|
Assets
|
|
Property, plant and equipment, net
|
|
56
|
|
Current liabilities
|
|
Current portion of lease liabilities, operating leases
|
|
867
|
|
Current liabilities
|
|
Current portion of lease liabilities, finance leases
|
|
19
|
|
Non-current liabilities
|
|
Non-current portion of lease liabilities, operating leases
|
|
32,771
|
|
Non-current liabilities
|
|
Non-current portion of lease liabilities, finance leases
|
|
37
|
|
Total Lease Cost
Individual components of the total lease cost incurred by the Company are as follows:
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
Operating lease cost
|
$
|
4,124
|
|
Finance lease cost:
|
|
Reduction in carrying amount of right-of-use assets
|
92
|
|
Interest on finance lease liabilities
|
24
|
|
Total lease cost
|
$
|
4,240
|
|
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Reduction in carrying amounts of right-of-use assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line method over the term of the lease including any periods of free rent and are included in selling, general, and administrative expense on the consolidated statement of operations and comprehensive loss.
Maturity of Leases
The amounts of undiscounted future minimum lease payments under leases as of December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating
|
|
Finance
|
2021
|
$
|
3,610
|
|
|
$
|
20
|
|
2022
|
3,665
|
|
|
15
|
|
2023
|
3,699
|
|
|
15
|
|
2024
|
3,549
|
|
|
8
|
|
2025
|
3,619
|
|
|
—
|
|
Thereafter
|
43,540
|
|
|
—
|
|
Total undiscounted minimum future lease payments
|
61,682
|
|
|
58
|
|
Imputed Interest
|
28,044
|
|
|
2
|
|
Total lease liabilities
|
$
|
33,638
|
|
|
$
|
56
|
|
Additional Information
Weighted average remaining lease terms for operating and finance leases as of December 31, 2020 are as follows:
|
|
|
|
|
|
Operating Leases
|
15.47 years
|
Finance Leases
|
2.91 years
|
During the year ended December 31, 2020, the Company had no right-of-use assets recognized in exchange for new operating lease liabilities.
Note 12: Commitments and Contingencies
Management is not currently aware of any asserted or unasserted matters which could have a material effect on the financial condition or results of operations of the Company.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 13: Loss Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
2020
|
|
2019
|
|
|
Numerator:
|
|
|
|
|
|
Net loss
|
$
|
(27,267)
|
|
|
$
|
(3,036)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average shares
|
9,099
|
|
|
8,983
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Employee stock options and stock grants
|
—
|
|
|
—
|
|
|
|
Denominator for diluted earnings per share - weighted average shares
|
9,099
|
|
|
8,983
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
Basic
|
$
|
(3.00)
|
|
|
$
|
(0.34)
|
|
|
|
Diluted
|
$
|
(3.00)
|
|
|
$
|
(0.34)
|
|
|
|
The diluted earnings per share calculations exclude the effect of potentially dilutive shares when the inclusion of those shares in the calculation would have an anti-dilutive effect. The Company had weighted average shares of common stock of 194,576 in 2020 and 300 in 2019, which were not included in the diluted earnings per share calculation as their effect was anti-dilutive.
Note 14: Industry Segments
The Company's business is divided into two operating segments: Metals and Specialty Chemicals. The Company identifies such segments based on products and services, long-term financial performance and end markets targeted. The Metals Segment operates as three reporting units including Welded Pipe & Tube Operations, Palmer and Specialty. The Specialty Chemicals Segment operates as one reporting unit which includes MC and CRI Tolling.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being operating income (loss). The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Segment operating income is the segment's total revenue less operating expenses. Identifiable assets, all of which are located in the U.S., are those assets used in operations by each segment. Centralized data processing and accounting expenses are allocated to the two segments based upon estimates of their percentage of usage. Corporate assets consist principally of cash, certain investments and equipment.
The following table summarizes certain information regarding segments of the Company's operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
|
Net sales
|
|
|
|
|
|
Metals Segment
|
$
|
204,459
|
|
|
$
|
251,078
|
|
|
|
Specialty Chemicals Segment
|
51,541
|
|
|
54,090
|
|
|
|
|
$
|
256,000
|
|
|
$
|
305,168
|
|
|
|
Operating (loss) income
|
|
|
|
|
|
Metals Segment
|
$
|
(24,599)
|
|
|
$
|
3,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Chemicals Segment
|
4,033
|
|
|
2,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,566)
|
|
|
6,503
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
7,917
|
|
|
8,357
|
|
|
|
Acquisition related costs
|
845
|
|
|
601
|
|
|
|
Proxy contest costs
|
3,105
|
|
|
—
|
|
|
|
Earn-out adjustments
|
(1,195)
|
|
|
(747)
|
|
|
|
Gain on lease modification
|
(171)
|
|
|
—
|
|
|
|
Operating loss
|
(31,067)
|
|
|
(1,708)
|
|
|
|
Interest expense
|
2,110
|
|
|
3,818
|
|
|
|
Change in fair value of interest rate swap
|
51
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
(1,255)
|
|
|
(1,904)
|
|
|
|
Loss before income taxes
|
$
|
(31,973)
|
|
|
$
|
(3,763)
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
|
|
|
|
Metals Segment
|
$
|
141,799
|
|
|
$
|
186,758
|
|
|
|
Specialty Chemicals Segment
|
25,039
|
|
|
25,428
|
|
|
|
Corporate
|
40,146
|
|
|
45,011
|
|
|
|
|
|
|
|
|
|
|
$
|
206,984
|
|
|
$
|
257,197
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
Metals Segment
|
$
|
8,883
|
|
|
$
|
9,439
|
|
|
|
Specialty Chemicals Segment
|
1,552
|
|
|
1,461
|
|
|
|
Corporate
|
165
|
|
|
164
|
|
|
|
|
$
|
10,600
|
|
|
$
|
11,064
|
|
|
|
Capital expenditures
|
|
|
|
|
|
Metals Segment
|
$
|
1,761
|
|
|
$
|
2,812
|
|
|
|
Specialty Chemicals Segment
|
866
|
|
|
1,157
|
|
|
|
Corporate
|
1,121
|
|
|
568
|
|
|
|
|
$
|
3,748
|
|
|
$
|
4,537
|
|
|
|
Sales by product group
|
|
|
|
|
|
Specialty chemicals
|
$
|
51,541
|
|
|
$
|
54,090
|
|
|
|
Stainless steel pipe and tube
|
154,974
|
|
|
167,907
|
|
|
|
Heavy wall seamless carbon steel pipe and tube
|
23,670
|
|
|
30,607
|
|
|
|
Fiberglass and steel liquid storage tanks and separation equipment
|
5,503
|
|
|
28,722
|
|
|
|
Galvanized pipe and tube
|
20,312
|
|
|
23,842
|
|
|
|
|
$
|
256,000
|
|
|
$
|
305,168
|
|
|
|
Geographic sales
|
|
|
|
|
|
United States
|
$
|
248,470
|
|
|
$
|
297,808
|
|
|
|
Elsewhere
|
7,530
|
|
|
7,360
|
|
|
|
|
$
|
256,000
|
|
|
$
|
305,168
|
|
|
|
Note 15: Acquisitions
Acquisition of the Assets and Operations of American Stainless Tubing, Inc.
On January 1, 2019, ASTI completed the American Stainless Tubing, Inc. ("American Stainless") acquisition. The purchase price for the all-cash acquisition was $21.9 million, subject to a post-closing working capital adjustment. The Company funded the acquisition with a new five-year $20 million term note and a draw against asset-based line of credit (see Note 6).
The transaction is accounted for using the acquisition method of accounting for business combinations. Under this method, the total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired and liabilities assumed. During the third quarter of 2019, the Company finalized the purchase price allocation for the American Stainless acquisition.
The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining American Stainless' production capabilities with the Metals Segment current operations. All of the goodwill recognized was assigned to the Company's Metals Segment.
During the second quarter of 2019, management identified circumstances that existed on the date of acquisition and as a result, revised the purchase price allocation of certain acquired assets and liabilities as allowable during the measurement period.
The following table shows the initial estimate of value and revisions made during 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Initial estimate
|
|
Revisions
|
|
Final
|
Inventories
|
$
|
5,564
|
|
|
$
|
—
|
|
|
$
|
5,564
|
|
Accounts receivable
|
3,534
|
|
|
—
|
|
|
3,534
|
|
Other current assets - production and maintenance supplies
|
605
|
|
|
—
|
|
|
605
|
|
Property, plant and equipment
|
2,793
|
|
|
—
|
|
|
2,793
|
|
Customer list intangible
|
10,000
|
|
|
(496)
|
|
|
9,504
|
|
Goodwill
|
7,044
|
|
|
714
|
|
|
7,758
|
|
Contingent consideration (earn-out liability)
|
(6,148)
|
|
|
(218)
|
|
|
(6,366)
|
|
Accounts payable
|
(1,400)
|
|
|
—
|
|
|
(1,400)
|
|
Other liabilities
|
(97)
|
|
|
—
|
|
|
(97)
|
|
|
$
|
21,895
|
|
|
$
|
—
|
|
|
$
|
21,895
|
|
For the year ended December 31, 2019, cost of sales included $1.1 million representing the fair value above predecessor cost associated with acquired inventory that was sold during the year ended December 31, 2019.
Note 16: Shareholders Equity
Stock Repurchase Program
On February 21, 2019, the Board of Directors authorized a stock repurchase program for up to 850,000 shares of its outstanding common stock over 24 months. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted.
During the year ended December 31, 2020, the Company purchased 59,617 shares under the stock repurchase program at an average price of approximately $10.65 per share for an aggregate amount of $0.6 million.
During the year ended December 31, 2019, the Company purchased no shares under the stock repurchase program.
As of December 31, 2020, the Company has 790,383 shares of its share repurchase authorization remaining.
Shareholder Rights Plan
On March 31, 2020, the Board of Directors unanimously authorized the adoption of a limited duration shareholder rights plan expiring on March 31, 2021 and an ownership trigger threshold of 15%. In connection with the shareholder rights plan, the Board of Directors authorized and declared a dividend of one right (each, a "Right") for each outstanding share of the Company's common stock, par value $1.00 per share ("Common Stock") to stockholders of record at the close of business on April 10, 2020 (the "Record Date"). The complete terms of the Rights are set forth in a Rights Agreement dated March 31, 2020 (the "Rights Agreement"), by and between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The Rights will become exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's outstanding Common Stock or announces a tender or exchange offer that would result in beneficial ownership of 15% or more of the Company's Common Stock. Each Right would entitle the holder to purchase from the Company one half of one share of Common Stock at a purchase price of $22.50 per right, subject to adjustments (equivalent to $45.00 for each whole share of Common Stock).
On June 27, 2020, the Company entered into Amendment 1 to the Rights Agreement (the "Amendment"). The Amendment terminated the Rights Agreement by accelerating the expiration of the Rights to June 28, 2020. At the time of the termination of the Rights Agreement, all of the Rights, which were distributed to holders of the Company's common stock, par value, $1.00, pursuant to the Rights Agreement, expired.
Dividends
At the end of each fiscal year the Board reviews the financial performance and capital needed to support future growth to determine the amount of cash dividend, if any, which is appropriate. In 2020 and 2019, no dividends were declared or paid by the Company.
Note 17: Proxy Contest and Related Costs
During the six months ended June 30, 2020, the Company engaged in a proxy contest with Privet Fund Management, LLC ("Privet") and UPG Enterprises, LLC ("UPG"), which parties acted as a group during the proxy contest. At the Company’s Annual Meeting of Shareholders held on June 30, 2020 (the “Annual Meeting”), the Company’s independent shareholders voted the Company’s proxy card, resulting in five (of eight) incumbent Board members being re-elected to the Board of Directors. Due to cumulative voting, a unique voting method permitted by the Company’s Certificate of Incorporation, Privet and UPG were able to cumulate their group-owned shares to elect three (of eight) new directors at the Annual Meeting.
During the year ended December 31, 2020, total costs incurred by the Company relating to the proxy contest were $3.1 million.
Note 18: Subsequent Events
As discussed in Note 6, on January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A. The new Credit Agreement provides the Company with a new four-year revolving credit facility with up to $150.0 million of borrowing capacity. The Facility refinances and replaces the Company's previous $100.0 million asset based revolving line of credit with Truist Bank, which was scheduled to mature on December 21, 2021, and the remaining portion of the Company's five-year $20 million term loan with Truist, which was scheduled to mature on February 1, 2024. The initial borrowing capacity under the Facility totals $110.0 million.
On February 10, 2021, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where 15,181 shares with a market price of $8.575 per share were granted under the Plan. The stock awards vest in 20 percent increments annually on a cumulative basis, beginning one year after the date of grant. In order for the awards to vest, the employee must be in the continuous employment of the Company since the date of the award. Except for death, disability, or qualifying retirement, any portion of an award that has not vested is forfeited upon termination of employment. The Company may terminate any portion of the award that has not vested upon an employee's failure to comply with all conditions of the award or the 2015 Stock Awards Plan. An employee is not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable. The grants are contingent upon shareholder approval of an increase in the number of shares of our common stock that may be issued pursuant to the 2015 Stock Awards Plan. Shareholders will vote on this matter at our 2021 Annual Meeting of Shareholders.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
On February 17, 2021, the Board of Directors re-authorized the Company's stock repurchase program. The previous stock repurchase program had a term of 24 months and terminated on February 21, 2021. This stock repurchase program allows for repurchase of up to 790,383 shares of the Company's outstanding common stock over 24 months. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, if any, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted.
On February 17, 2021, the Board of Directors authorized the permanent closure of the Company's Palmer facility. The Company will cease operations and divest all remaining assets at the facility. Costs associated with this closure cannot be determined at this time. This closure will not affect any of the Company's other operating units.