What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-09 compared with 2020-09-03 · 225 added, 162 removed, 428 unchanged (47% of the section changed)

3 unchanged sentences

(in thousands, except par value and share data)

June 30, 2020

December 31, 2019

September 30, 2020 December 31, 2019

Current assets

1 unchanged sentence

Accounts receivable, net of allowance for credit losses of $ 237 and $ 70 , respectively

33,132 35,074

Inventories, net 89,007 98,186

3 unchanged sentences

Right-of-use assets, operating leases, net 32,090 35,772

Goodwill 6,810 17,558

Intangible assets, net 12,131 15,714

Deferred income taxes 1,327 —

Deferred charges, net 271 348

Total assets $ 224,715 $ 257,197

Liabilities and Shareholders' Equity

3 unchanged sentences

Current portion of long-term debt 4,000 4,000

Current portion of earn-out liability 3,959 5,576

Current portion of operating lease liabilities 835 3,562

13 unchanged sentences

issued 10,300,000 shares

10,300 10,300

Capital in excess of par value 37,664 37,407

Retained earnings 51,428 70,552

99,392 118,259

Less cost of common stock in treasury - 1,191,309 and 1,257,784 shares, respectively

11,199 11,748

Total shareholders' equity 88,193 106,511

5 unchanged sentences

(in thousands, except per share data)

Three Months Ended June 30,

Six Months Ended

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net sales $ 59,266 $ 73,640 $ 200,099 $ 237,222

Cost of sales 54,271 66,352 183,592 213,412

Gross profit 4,995 7,288 16,507 23,810

Selling, general and administrative expense 6,275 8,361 21,088 24,920

3 unchanged sentences

Asset impairments — — 6,079 —

Goodwill impairment 10,748 — 10,748 —

Gain on lease modification ( 171 ) — ( 171 ) —

Operating (loss) income ( 12,574 ) 79 ( 24,176 ) 95

2 unchanged sentences

Change in fair value of interest rate swaps ( 16 ) 21 65 145

Other, net 59 180 ( 1,244 ) ( 224 )

Loss before income taxes ( 13,069 ) ( 1,066 ) ( 24,700 ) ( 2,803 )

Income tax benefit ( 2,530 ) ( 112 ) ( 6,026 ) ( 660 )

Net loss $ ( 10,539 ) $ ( 954 ) $ ( 18,674 ) $ ( 2,143 )

Net loss per common share:

Basic $ ( 1.16 ) $ ( 0.11 ) $ ( 2.06 ) $ ( 0.24 )

Diluted $ ( 1.16 ) $ ( 0.11 ) $ ( 2.06 ) $ ( 0.24 )

Weighted average shares outstanding:

Basic 9,105 8,995 9,079 8,969

Dilutive effect from stock options and grants — — — —

Diluted 9,105 8,995 9,079 8,969

See accompanying notes to condensed consolidated financial statements

2 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities

Net loss $ ( 18,674 ) $ ( 2,143 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

2 unchanged sentences

Asset impairments 6,079 —

Goodwill impairment 10,748 —

Amortization of debt issuance costs 129 120

2 unchanged sentences

Proceeds from business interruption insurance 1,040 —

Gain on sale of equity securities

Loss (gain) on sale of equity securities 38 ( 474 )

Earn-out adjustments ( 969 ) ( 1,643 )

5 unchanged sentences

Non-cash lease termination loss 24 —

Gain on lease modification ( 171 ) —

Change in fair value of interest rate swap 65 145

3 unchanged sentences

Accounts receivable 1,438 2,779

Inventories 4,593 12,169

Other assets and liabilities ( 1,902 ) ( 1,035 )

2 unchanged sentences

Accrued income taxes ( 3,963 ) ( 1,263 )

Net cash (used in) provided by operating activities

Net cash provided by operating activities 5,970 17,927

Investing activities

13 unchanged sentences

Repurchase of common stock ( 635 ) —

Net cash provided by financing activities

Increase (Decrease) in cash and cash equivalents

Payments for deferred financing costs ( 52 ) —

Net cash (used in) provided by financing activities ( 8,141 ) 4,105

Decrease in cash and cash equivalents ( 463 ) ( 1,967 )

Cash and cash equivalents at beginning of period 626 2,220

2 unchanged sentences

Cash paid for:

Interest $ 1,573 $ 2,780

Income taxes $ 16 $ 1,174

See accompanying notes to condensed consolidated financial statements

2 unchanged sentences

(in thousands)

Three Months Ended June 30, 2020

Capital in Excess of

Retained Earnings

Cost of Common Stock in Treasury

Balance at March 31, 2020

Stock-based compensation

Three Months Ended September 30, 2020

Common Stock Capital in Excess of

Par Value Retained Earnings Cost of Common Stock in Treasury Total

Balance at June 30, 2020 $ 10,300 $ 37,465 $ 61,967 $ ( 11,675 ) $ 98,057

Six Months Ended June 30, 2020

Capital in Excess of

Retained Earnings

Cost of Common Stock in Treasury

Net loss — — ( 10,539 ) — ( 10,539 )

Issuance of 50,652 shares of common stock from treasury

( 71 ) 476 405

Stock-based compensation — 270 — — 270

Balance at September 30, 2020 $ 10,300 $ 37,664 $ 51,428 $ ( 11,199 ) $ 88,193

Nine Months Ended September 30, 2020

Common Stock Capital in Excess of

Par Value Retained Earnings Cost of Common Stock in Treasury Total

Balance at December 31, 2019 $ 10,300 $ 37,407 $ 70,552 $ ( 11,748 ) $ 106,511

Net loss — — ( 18,674 ) — ( 18,674 )

Cumulative adjustment due to adoption of ASC 326 — — ( 450 ) — ( 450 )

Issuance of 126,092 shares of common stock from treasury

— ( 779 ) — 1,184 405

Stock-based compensation — 1,036 — — 1,036

Purchase of common stock — — — ( 635 ) ( 635 )

Balance at June 30, 2020

Balance at September 30, 2020 $ 10,300 $ 37,664 $ 51,428 $ ( 11,199 ) $ 88,193

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

Condensed Consolidated Statement of Shareholders' Equity (Unaudited)

Three Months Ended June 30, 2019

Capital in Excess of

Retained Earnings

Cost of Common Stock in Treasury

Balance at March 31, 2019

Issuance of 29,276 shares of common stock from treasury

Stock-based compensation

Three Months Ended September 30, 2019

Common Stock Capital in Excess of

Par Value Retained Earnings Cost of Common Stock in Treasury Total

Balance at June 30, 2019 $ 10,300 $ 36,565 $ 72,399 $ ( 12,190 ) $ 107,074

Six Months Ended June 30, 2019

Capital in Excess of

Retained Earnings

Cost of Common Stock in Treasury

Net loss — — ( 954 ) — ( 954 )

Stock-based compensation — 908 — — 908

Balance at September 30, 2019 $ 10,300 $ 37,473 $ 71,445 $ ( 12,190 ) $ 107,028

Nine Months Ended September 30, 2019

Common Stock Capital in Excess of

Par Value Retained Earnings Cost of Common Stock in Treasury Total

Balance at December 31, 2018 $ 10,300 $ 36,521 $ 68,965 $ ( 13,302 ) $ 102,484

Net loss — — ( 2,143 ) — ( 2,143 )

Cumulative adjustment due to adoption of ASC 842 — — 4,623 — 4,623

Issuance of 118,430 shares of common stock from treasury

— ( 808 ) — 1,112 304

Stock-based compensation — 1,760 — — 1,760

Balance at June 30, 2019

Balance at September 30, 2019 $ 10,300 $ 37,473 $ 71,445 $ ( 12,190 ) $ 107,028

See accompanying notes to condensed consolidated financial statements.

9 unchanged sentences

The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.

Recently Issued Accounting Standards - Adopted

21 unchanged sentences

The adoption of this standard by the Company did not have a material impact on the unaudited condensed consolidated statement of operations or cash flows.

Recently Issued Accounting Standards - Not Yet Adopted

In December 2019, the FASB issued ASU No.

2019-12 "Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes." This ASU removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods.

This ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group.

The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted.

The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote disclosures.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 unaudited condensed consolidated financial statements or footnote disclosures.

Recently Issued Accounting Standards - Not Yet Adopted

Recent accounting pronouncements pending adoption, other than those stated above, are not expected to have a material impact on the Company.

10 unchanged sentences

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, a revolving line of credit, a term loan, and equity investments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

3 unchanged sentences

Equity securities

During the three and six months ended June 30, 2020 , the Company sold 705,926 shares of its equity securities investments, resulting in a realized gain of $ 31,421 .

For the three and six months ended June 30, 2020 , the Company also recorded net unrealized gains of $ 1.1 million and $ 0.2 million , respectively, on the investments in equity securities held, which is included in "Other expense (income)" on the accompanying unaudited condensed consolidated statements of operations.

The fair value of equity securities held by the Company as of June 30, 2020 and December 31, 2019 was $ 1.8 million and $ 4.3 million , respectively, and is included in “Prepaid expenses and other current assets” on the accompanying condensed consolidated balance sheets.

During the three and nine months ended September 30, 2020, the Company sold 494,074 and 1.2 million shares, respectively, of its equity securities investments, resulting in a realized loss of $ 69,375 and $ 37,954 , respectively.

For the three months ended September 30, 2020, the Company recorded no net unrealized gains or losses on investments in equity securities.

For the nine months ended September 30, 2020, the Company recorded net unrealized gains of $ 0.2 million on the investments in equity securities held, which is included in "Other expense (income)" on the accompanying unaudited condensed consolidated statements of operations.

The Company held no equity securities as of September 30, 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 condensed consolidated balance sheets.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Derivative Instruments

The Company has 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 market inputs.

The fair value of the contract was a liability of $ 0.1 million at June 30, 2020 and an asset of $ 6,088 at December 31, 2019 , respectively.

The fair value of the contract was a liability of $ 0.1 million at September 30, 2020 and an asset of $ 6,088 at December 31, 2019, respectively.

The interest rate swap was priced using discounted cash flow techniques.

1 unchanged sentence

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.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Contingent consideration (earn-out) liabilities

4 unchanged sentences

The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration (earn-out) liabilities are the discount rate, timing of the estimated payouts, and future revenue projections.

Significant increases (decreases) in any of those inputs would not have resulted in a material difference in the fair value measurement of the earn-out liabilities for the three and six months ended June 30, 2020 .

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 the six months ended June 30, 2020 :

(in thousands)

MUSA-Stainless

MUSA-Galvanized

American Stainless

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 the nine months ended September 30, 2020:

(in thousands) MUSA-Stainless MUSA-Galvanized American Stainless Total

Balance at December 31, 2019 $ 2,403 $ 1,782 $ 4,969 $ 9,154

Earn-out payments during the period

( 1,263 ) ( 488 ) ( 1,480 ) ( 3,231 )

Changes in fair value during the period

Balance at June 30, 2020

For the three and six months ended June 30, 2020 , the Company had no unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value instruments.

( 415 ) ( 38 ) ( 516 ) ( 969 )

Balance at September 30, 2020 $ 725 $ 1,256 $ 2,973 $ 4,954

For the three and nine months ended September 30, 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 June 30, 2020 :

June 30, 2020

Principal Valuation Technique

Significant Unobservable Inputs

Contingent consideration (earn-out) liabilities

Probability Weighted Expected Return

Discount rate

The following table summarizes the significant unobservable inputs in the fair value measurement of our contingent consideration (earn-out) liabilities as of September 30, 2020:

Instrument Fair Value

September 30, 2020 Principal Valuation Technique Significant Unobservable Inputs Range Weighted

Contingent consideration (earn-out) liabilities $ 4,954 Probability Weighted Expected Return Discount rate - 5 %

Timing of estimated payouts 2020 - 2022 -

Future revenue projection

$5.8M - 14.3M

Future revenue projections $ 5.5 M - 12.3 M

The weighted average discount rate was calculated by applying an equal weighting to each contingent consideration's (earn-out liabilities) discount rate.

1 unchanged sentence

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

During the three and six months ended June 30, 2020 , the Company's only significant assets or liabilities measured at fair value on a non-recurring basis subsequent to their initial recognition were certain long-lived assets.

During the three and nine months ended September 30, 2020, the Company's only 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.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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.

3 unchanged sentences

The Company classifies these fair value measurements as Level 3.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

During the quarter ended June 30, 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 $ 1.7 million, resulting in asset impairment charges of $ 6.1 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 the third quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment existed.

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.

See Note 5 - Goodwill and Intangible Assets for additional details.

The Company classifies these fair value measurements as Level 3.

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 additional disclosures are included above, management concluded the historical carrying value is a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization.

Therefore, as of June 30, 2020 and December 31, 2019 , the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, the Company's revolving line of credit, which is based on a variable interest rate, and term loan approximate their fair value.

Therefore, as of September 30, 2020 and December 31, 2019, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, the Company's revolving line of credit, which is based on a variable interest rate, and term loan approximate their fair value.

Inventories are stated at the lower of cost or net realizable value.

1 unchanged sentence

The components of inventories are as follows:

(in thousands)

June 30, 2020

December 31, 2019

(in thousands) September 30, 2020 December 31, 2019

Raw materials $ 39,843 $ 42,896

1 unchanged sentence

Finished goods 29,964 38,422

$ 90,587 $ 98,934

Less inventory reserves $ 1,580 $ 748

Inventories, net $ 89,007 $ 98,186

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Property, Plant and Equipment

Property, plant and equipment consist of the following:

(in thousands)

June 30, 2020

December 31, 2019

(in thousands) September 30, 2020 December 31, 2019

Leasehold improvements 2,866 1,921

Buildings 84 214

Machinery, fixtures and equipment 100,097 100,300

Construction-in-progress 2,456 2,999

105,566 105,497

Less accumulated depreciation and amortization 69,235 64,807

Property, plant and equipment, net 36,331 40,690

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Goodwill and Intangible Assets

7 unchanged sentences

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 interim 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 and allocation of that fair value to individual assets and liabilities within 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.

The carrying amounts of goodwill are as follows:

(in thousands) Metals Segment Chemicals Segment

Balance at December 31, 2019 $ 16,203 $ 1,355

Impairment charges ( 10,748 ) —

Balance at September 30, 2020 $ 5,455 $ 1,355

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

During the second quarter of 2020, due to the continued curtailment of operations related to the COVID-19 pandemic and managements 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 accompanying unaudited condensed consolidated statements of operations.

The gross carrying amounts of goodwill are as follows:

(in thousands)

June 30, 2020

December 31, 2019

Metals Segment

Specialty Chemicals Segment

The balance of intangible assets subject to amortization are as follows:

(in thousands)

June 30, 2020

December 31, 2019

(in thousands) September 30, 2020 December 31, 2019

Intangible assets, gross $ 30,866 $ 32,126

3 unchanged sentences

Remainder of 2020 $ 705

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Thereafter 3,347

Long-term Debt

Long-term debt consists of the following:

(in thousands)

June 30, 2020

December 31, 2019

(in thousands) September 30, 2020 December 31, 2019

$ 100 million Revolving line of credit, due December 20, 2021

$20 million Term loan, due January 1, 2024

$ 58,010 $ 59,221

$ 20 million Term loan, due February 1, 2024

$ 13,333 $ 16,333

$ 71,343 $ 75,554

On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase its Line of Credit (the "Line") from $ 80,000,000 to $ 100,000,000 and to create a new 5 -year term loan in the principal amount of $ 20,000,000 (the “Term Loan”).

The Term Loan was used to finance the purchase of substantially all of the assets of American Stainless (see Note 13).

The Term Loan’s maturity date is January 1, 2024 and shall be repaid in 60 consecutive monthly installments.

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.

3 unchanged sentences

Borrowings under the Line are limited to an amount equal to a Borrowing Base calculation that includes eligible accounts receivable and inventory.

As of June 30, 2020 , the Company had $ 7.2 million of remaining available capacity under the Line.

As of September 30, 2020, the Company had $ 7.5 million of remaining available capacity under the Line.

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 quarter.

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.

The amendment is effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020.

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.

Th e amendment is effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020 .

At June 30, 2020 , the Company had a minimum fixed charge coverage ratio of 1.39 and a minimum tangible net worth of $ 67.4 million .

Stock-Based Compensation

Stock-based compensation expense for the three and six months ended June 30, 2020 was $ 0.4 million and $ 0.8 million , respectively.

Stock-based compensation expense for the three and six months ended June 30, 2019 was $ 0.2 million and $ 0.9 million , respectively.

Stock Options

During the three and six months ended June 30, 2020 and June 30, 2019 , no stock options were exercised by officers or employees of the Company.

The Fourth Amendment amended the definition of the fixed charge

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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.

Th e 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, the Company entered into an amendment to its Credit Agreement with its bank subsequent to the end of the third quarter.

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 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.

At September 30, 2020, the Company had a minimum fixed charge coverage ratio of 1.47 and a minimum tangible net worth of $ 67.7 million.

Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended September 30, 2020 was $ 0.3 million and $ 1.0 million, respectively.

Stock-based compensation expense for the three and nine months ended September 30, 2019 was $ 0.9 million and $ 1.8 million, respectively.

Stock Options

During the three and nine months ended September 30, 2020 and September 30, 2019, no stock options were exercised by officers or employees of the Company.

2011 Long-Term Incentive Stock Option Plan

19 unchanged sentences

The Black-Scholes model for this grant was based on a risk-free interest rate of 0.64 percent, an expected life of ten years , an expected volatility of 38.7 percent and a dividend yield of 1.89 percent.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Restricted Stock Awards

18 unchanged sentences

An employee is not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Loss Per Share

The following table sets forth the computation of basic and diluted loss per share:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30, Nine Months Ended September 30,

(in thousands, except per share data) 2020 2019 2020 2019

Net loss ( 10,539 ) ( 954 ) ( 18,674 ) ( 2,143 )

Denominator for basic earnings per share - weighted average shares

9,105 8,995 9,079 8,969

Effect of dilutive securities:

1 unchanged sentence

Denominator for diluted earnings per share - weighted average shares

9,105 8,995 9,079 8,969

Net loss per share:

Basic $ ( 1.16 ) $ ( 0.11 ) $ ( 2.06 ) $ ( 0.24 )

Diluted $ ( 1.16 ) $ ( 0.11 ) $ ( 2.06 ) $ ( 0.24 )

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 0.3 million and 0.2 million shares of common stock that were anti-dilutive for the three and six months ended June 30, 2020 , respectively.

The Company had no shares of common stock that were anti-dilutive for the three and six months ended June 30, 2019 , respectively.

The Company had 0.3 million and 0.2 million shares of common stock that were anti-dilutive for the three and nine months ended September 30, 2020, respectively.

The Company had no shares of common stock that were anti-dilutive for the three and nine months ended September 30, 2019, respectively.

The Company and its subsidiaries are subject to U.S.

1 unchanged sentence

The Company is no longer subject to U.S.

federal or state examinations for years before 2014.

During the first six months of 2020 and 2019, the Company did not identify nor reserve for any unrecognized tax benefits.

federal examinations for years before 2015 or state examinations for years before 2014.

During the first nine months of 2020 and 2019, the Company did not identify nor reserve for any unrecognized tax benefits.

Our income tax provision and overall effective tax rates for the periods presented are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 2019

1 unchanged sentence

Effective income tax rate 19.4 % 10.6 % 24.4 % 23.6 %

The three and six months ended June 30, 2020 effective tax rate were higher than the statutory rate of 21.0% due to discrete tax benefits over the costs associated with our public proxy contest, additional benefits on asset impairment of our Palmer business, and benefits from our stock compensation plan.

The effective tax rate was 19.4 % and 10.6 % for the three months ended September 30, 2020 and 2019, respectively.

The September 30, 2020 effective tax rate was approximately equal to the U.S.

statutory rate of 21.0%.

The September 30, 2019 effective tax rate was lower than the statutory rate of 21.0% due to state taxes, net of the federal benefit, and discrete tax benefits on our stock compensation plan.

The effective tax rate was 24.4 % and 23.6 % for the nine months ended September 30, 2020 and 2019, respectively.

The September 30, 2020 effective tax rate was higher than the statutory rate of 21.0% due to discrete tax benefits over the costs associated with our public proxy contest, asset impairments at our Palmer facility, goodwill impairment over our Metals Segment and benefits from our stock compensation plan.

Additionally, we recognized estimated tax benefits associated with the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") which was signed into law on March 27, 2020.

The CARES Act includes various income and payroll tax provisions, notably enabling the Company to carry back net operating losses and recover taxes paid in prior years.

The three and six months ended June 30, 2019 effective tax rates were higher than the statutory tax rate of 21% due to state taxes, net of federal benefit, and discrete benefits on our stock compensation plans.

The September 30, 2019 effective tax rate was approximately equal to the U.S.

statutory tax rate of 21%.

On September 10, 2020, Store Master Funding XII, LLC, a Delaware limited liability company (“Store”) and the Company's sale-leaseback partner, 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, Synalloy and Store entered into a Third Amended and Restated Master Lease Agreement (the “Master Lease”) to reduce Synalloy’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 Master Lease amendment 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 Master Lease Agreement, 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 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 unaudited condensed consolidated statement of operations.

Synalloy Corporation

2 unchanged sentences

Operating and finance lease amounts included in the unaudited condensed consolidated balance sheet are as follows (in thousands):

Classification

Financial Statement Line Item

June 30, 2020

Right-of-use assets, operating leases

Property, plant and equipment

Current liabilities

Current portion of lease liabilities, operating leases

Current liabilities

Current portion of lease liabilities, finance leases

Non-current liabilities

Non-current portion of lease liabilities, operating leases

Non-current liabilities

Non-current portion of lease liabilities, finance leases

Classification Financial Statement Line Item September 30, 2020

Assets Right-of-use assets, operating leases $ 32,090

Assets Property, plant and equipment 65

Current liabilities Current portion of lease liabilities, operating leases 835

Current liabilities Current portion of lease liabilities, finance leases 26

Non-current liabilities Non-current portion of lease liabilities, operating leases 33,000

Non-current liabilities Non-current portion of lease liabilities, finance leases 41

Total Lease Cost

Individual components of the total lease cost incurred by the Company are as follows:

(in thousands)

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

(in thousands) Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020

Operating lease cost $ 1,032 $ 3,101

6 unchanged sentences

Maturity of Leases

The amounts of undiscounted future minimum lease payments under leases as of June 30, 2020 are as follows:

(in thousands)

The amounts of undiscounted future minimum lease payments under leases as of September 30, 2020 are as follows:

(in thousands) Operating Finance

Remainder of 2020 $ 899 $ 9

2021 3,610 22

2022 3,665 15

2023 3,699 15

Thereafter 47,159 —

Total undiscounted minimum future lease payments 62,581 69

4 unchanged sentences

Lease Term and Discount Rate

Weighted-average remaining lease term

June 30, 2020

Operating Leases

Finance Leases

Weighted-average remaining lease term September 30, 2020

Operating Leases 15.70 years

Finance Leases 2.91 years

Weighted-average discount rate

1 unchanged sentence

Finance Leases 2.56 %

During the three and six months ended June 30, 2020 , no right-of-use assets were recognized in exchange for new operating lease liabilities.

During the three and nine months ended September 30, 2020, no right-of-use assets were recognized in exchange for new operating lease liabilities.

Commitments and Contingencies

5 unchanged sentences

The following table summarizes certain information regarding segments of the Company's operations:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2020 2019 2020 2019

1 unchanged sentence

Specialty Chemicals Segment 12,187 13,519 40,338 41,494

$ 59,266 $ 73,640 $ 200,099 $ 237,222

Operating (loss) income

4 unchanged sentences

Proxy contest costs

207 — 3,105 —

Earn-out adjustments

( 146 ) ( 1,242 ) ( 969 ) ( 1,643 )

Gain on lease modification ( 171 ) — ( 171 ) —

Operating (loss) income ( 12,574 ) 79 ( 24,176 ) 95

3 unchanged sentences

Loss before income taxes $ ( 13,069 ) $ ( 1,066 ) $ ( 24,700 ) $ ( 2,803 )

(in thousands)

June 30, 2020

December 31, 2019

(in thousands) September 30, 2020 December 31, 2019

Identifiable assets

1 unchanged sentence

Specialty Chemicals Segment 25,004 25,428

Corporate 41,737 45,011

$ 224,715 $ 257,197

Acquisition of the Assets and Operations of American Stainless Tubing, Inc.

7 unchanged sentences

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

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

with the Metals Segment current operations.

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 and is expected to be deductible for income tax purposes.

5 unchanged sentences

The following table shows the initial estimate of value and revisions made during 2019:

(in thousands)

Initial estimate

(in thousands) Initial estimate Revisions Final

Inventories $ 5,564 $ — $ 5,564

Accounts receivable 3,534 — 3,534

2 unchanged sentences

Customer list intangible 10,000 ( 496 ) 9,504

Goodwill 7,044 714 7,758

Contingent consideration (earn-out liability) ( 6,148 ) ( 218 ) ( 6,366 )

1 unchanged sentence

Other liabilities ( 97 ) — ( 97 )

$ 21,895 $ — $ 21,895

ASTI's results of operations are reflected in the Company's Condensed Consolidated Statements of Operations as follows:

Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2020 2019 2020 2019

Net sales $ 8,020 $ 8,469 $ 22,920 $ 26,539

Income before taxes $ ( 4,233 ) $ 902 $ ( 2,515 ) $ 2,001

5 unchanged sentences

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 three months ended June 30, 2020 , the Company purchased no shares under the stock repurchase program.

During the six months ended June 30, 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 three and six months ended June 30, 2019 , the Company purchased no shares under the stock repurchase program.

As of June 30, 2020 , the Company has 790,383 shares of its share repurchase authorization remaining.

During the three months ended September 30, 2020, the Company purchased no shares under the stock repurchase program.

During the nine months ended September 30, 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 three and nine months ended September 30, 2019, the Company purchased no shares under the stock repurchase program.

As of September 30, 2020, the Company has 790,383 shares of its share repurchase authorization remaining.

Synalloy Corporation

13 unchanged sentences

Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2020 2019 2020 2019

4 unchanged sentences

Specialty chemicals 12,186 13,519 40,338 41,494

Net sales $ 59,266 $ 73,640 $ 200,099 $ 237,222

Arrangements with Multiple Performance Obligations

6 unchanged sentences

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 three and six months ended June 30, 2020, total costs incurred by the Company relating to the proxy contest were $ 2.7 million and $ 2.9 million , respectively.

During the three and nine months ended September 30, 2020, total costs incurred by the Company relating to the proxy contest were $ 0.2 million and $ 3.1 million, respectively.

Synalloy Corporation

1 unchanged sentence

Subsequent Events

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 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.

The amendment is effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020.

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 amendment is 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, the Company entered into an amendment to its Credit Agreement with its bank subsequent to the end of the third quarter.

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.

On October 27, 2020, the Company announced the retirement of Craig C.

Bram, the Company's President and Chief Executive Officer and member of the Company's Board of Directors, effective November 9, 2020.

On October 27, 2020, the Company announced the appointment of Christopher G.

Hutter, a member of the Company's Board of Directors, as interim President and Chief Executive Officer, effective November 9, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements