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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-09 compared with 2020-03-06 · 52 added, 55 removed, 26 unchanged (80% of the section changed)

Item 7A Quantitative and Qualitative Disclosures about Market Risk

Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risks from adverse changes in interest rates and nickel prices.

2 unchanged sentences

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 at December 31, 2019 , which approximated the recorded value, consisted of:

$59.2 million under a revolving line of credit with an availability of $13.4 million , expiring on December 20, 2021 with a variable interest rate of 3.50 percent.

$16.3 million under a term loan, expiring January 1, 2024 with a variable interest rate of 3.69 percent.

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;

• 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 an asset to the Company of $6,088 .

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.

At December 31, 2019 , the Company had no such hedge contracts in place.

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, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934.

The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Management has excluded the ASTI facilities operations (acquired in the American Stainless acquisition) from its assessment of internal control over financial reporting as of December 31, 2019 because this material acquisition closed in the first quarter of 2019.

Total assets of $26.8 million and total revenue of $34.5 million associated with the ASTI facility represent approximately 14 percent of the related financial statement amounts of the Metals Segment as of, and for the year ended, December 31, 2019.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Projections of any evaluation of effectiveness to future periods are subject to the 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 the Company's internal control over financial reporting as of December 31, 2019 using the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in the Internal Control-Integrated Framework (COSO 2013).

Based on that evaluation, management believes the Company's internal control over financial reporting was effective as of December 31, 2019 .

The effectiveness of the Company's internal control over financial reporting as of December 31, 2019 , has been audited by KPMG LLP, an independent registered public accounting firm, which also audited the Company's Consolidated Financial Statements for the year ended December 31, 2019 .

KPMG LLP's report on the Company's internal control over financial reporting is set forth below.

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

There was no change in the Company's internal control over financial reporting that occurred during the Company's fourth quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

The Company believes that its disclosure controls and procedures were operating effectively as of December 31, 2019 .

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;

• 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

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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, 2019 and 2018 , the related consolidated statements of operations and comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2019 , 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, 2019 and 2018 , and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019 , in conformity with U.S.

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.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 6, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases effective January 1, 2019, due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 842, Leases .

Basis for Opinion

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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 PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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.

1 unchanged sentence

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.

2 unchanged sentences

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.

We have served as the Company’s auditor since 2015.

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March 9, 2021

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Synalloy Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited Synalloy Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018 , and the related consolidated statements of operations and comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019 , and the related notes and financial statement Schedule II (collectively, the consolidated financial statements), and our report dated March 6, 2020 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired American Stainless Tubing, Inc.

(American Stainless) during 2019, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019 , American Stainless' internal control over financial reporting associated with total assets of $26.8 million and total revenues of $34.5 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019 .

Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of American Stainless.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Richmond, Virginia

March 6, 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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk