Exhibit 99.3

SYNALLOY CORPORATION
UNAUDITED PRO FORMA FINANCIAL INFORMATION

INTRODUCTION

On August 21, 2012, Synalloy Corporation and subsidiaries (the “Company”) completed the purchase of all of the outstanding shares of capital stock of Lee-Var, Inc., a Texas corporation doing business as Palmer of Texas (“Palmer”).  Palmer is a manufacturer of liquid storage solutions and separation equipment for the petroleum, municipal water, wastewater, chemical and food industries.

The unaudited pro forma condensed combined consolidated balance sheet as of June 30, 2012 combines the historical consolidated balance sheet of the Company and the historical consolidated balance sheet of Palmer to illustrate the estimated effect of the acquisition on the Company’s financial statements as if it had occurred on June 30, 2012. The unaudited pro forma condensed combined consolidated statements of operations combines the historical consolidated statements of operations of the Company for the six months ended June 30, 2012 and July 2, 2011 and the year ended December 31, 2011 with the historical statements of operations of Palmer for the six months ended June 30, 2012 and 2011 and for the fiscal year ended September 30, 2011. The unaudited pro forma condensed combined consolidated financial statements are based on certain estimates and assumptions made with respect to the combined operations of the Company and Palmer, which we believe are reasonable. The unaudited pro forma condensed combined consolidated statements of operations are presented for illustrative purposes only and do not purport to be indicative of the results of operations of the Company or Palmer that actually would have been achieved had the acquisition of Palmer been completed on the assumed dates, or to project the Company’s results of operations for any future date or period. The unaudited pro forma condensed combined consolidated statements of operations give pro forma effect to the acquisition as if it had occurred on the first day of the financial period presented.

The transaction is being accounted for using the acquisition method of accounting for business combinations in accordance with generally accepted accounting principles in the United States. Under this method, the total consideration transferred to consummate the acquisition is being 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. Accordingly, the allocation of the consideration transferred in the unaudited pro forma condensed combined consolidated financial statements is preliminary and will be adjusted upon completion of the final valuation of the assets acquired and liabilities assumed. Such adjustments could be significant. The final valuation is expected to be completed as soon as practicable but no later than 12 months after the closing date of the acquisition, and is expected to result in the identification of additional intangible assets. The unaudited condensed combined consolidated pro forma statements of operations do not include the costs that the Company may incur to integrate Palmer, and these costs may be material.

The historical consolidated financial statements of the Company have been adjusted in the unaudited pro forma condensed combined consolidated financial statements to give effect to pro forma events that are (i) directly attributable to the acquisition, (ii) factually supportable, and (iii) expected to continually impact the combined results of the Company and Palmer. The unaudited pro forma condensed combined consolidated financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined consolidated financial statements. In addition, the condensed combined consolidated financial statements were derived from, and should be read in conjunction with, the information for the six months ended July 30, 2012 and July 2, 2011 included in the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2012 and the annual report on Form 10-K for the year ended December 31, 2011.

The historical condensed combined financial information regarding Palmer that is included in this report has been prepared by, and is the responsibility of the Company. In addition, we are in the process of reviewing Palmer’s financial statement classifications for conformity with the Company’s classifications. As a result of this review, it may be necessary to make additional reclassifications to the consolidated information on a prospective basis.
 
 
 
1

 
 
The statements contained in these notes that are not historical facts are forward-looking statements that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as our expectations for future sales results or future expense changes compared with previous periods, are only predictions. These forward-looking statements may be generally identified by the use of forward-looking words and phrases such as “will,” “intends,” “may,” “believes,” “anticipates,” “should” and “expects,” and are based on our current expectations or beliefs concerning future events that involve risks and uncertainties. Actual events or results may differ materially as a result of risks and uncertainties as described in “Item 1A. Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the six months ended June 30, 2012 and the annual report on Form 10-K for the year ended December 31, 2011, other risks referenced in our Securities and Exchange Commission filings, or other unanticipated risks. We disclaim any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

 

 
 
2

 

 
 
 
Synalloy Corporation and Subsidiaries
             
Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet
       
                 
   
Synalloy
 
Palmer
 
Pro Forma
   
June 30,
 
June 30,
       
   
2012
 
2012
 
Adjustments
 
Total
Assets
             
Current assets
             
Cash and cash equivalents
 $          121,923
 
 $          95,929
 
 $               -
 
 $   217,852
Accounts receivable, less allowance
             
 
for doubtful accounts
29,533,598
 
6,592,414
 
  -
 
 36,126,012
Inventories
             
 
Raw materials
15,352,715
 
1,143,328
 
-
 
16,496,043
 
Work-in-process
13,088,841
 
1,339,640
 
  -
 
14,428,481
 
Finished goods
18,511,360
 
2,347,866
 
 -
 
 20,859,226
Total inventories
46,952,916
 
4,830,834
 
 -
 
51,783,750
                 
Deferred income taxes
2,565,077
 
119,680
 
 -
 
2,684,757
Indemnification asset
-
 
-
 
1,235,893
(16)
1,235,893
Prepaid expenses and other current assets
2,328,586
 
99,131
 
300,000
 (1)
2,727,717
Total current assets
81,502,100
 
11,737,988
 
1,535,893
 
94,775,981
                 
Cash value of life insurance
2,546,660
 
 -
 
 -
 
2,546,660
Property, plant & equipment, net
18,592,822
 
4,754,907
 
2,659,870
 (2)
26,007,599
Goodwill
2,354,730
 
-
 
24,421,628
 (4)
26,776,358
Deferred charges, net and other non-current assets
 105,099
 
-
 
-
 
105,099
                 
Total assets
$   105,101,411
 
$   16,492,895
 
$28,617,391
 
$150,211,697
                 
Liabilities and shareholders' equity
             
Current liabilities
             
Accounts payable
 $   16,049,627
 
 $    1,831,477
 
 $               -
 
 $ 17,881,104
Accrued expenses
5,432,211
 
2,232,485
 
       800,000
(15)
8,464,696
Federal income tax payable
 -
 
 987,935
 
-
 
987,935
Current portion of long-term debt
-
 
600,434
 
(576,468)
(7)
23,966
Current portion of contingent consideration
-
 
         -
 
2,500,000
(8)
2,500,000
Current portion of environmental reserves
              150,923
 
  -
 
  -
 
150,923
Total current liabilities
             21,632,761
 
                  5,652,331
 
         2,723,532
 
           30,008,624
                 
Long-term debt
               8,863,640
 
2,600,807
 
22,500,000
(9)
37,997,702
           
 6,591,597
(10)
 
           
(2,558,342)
(7)
 
Long-term contingent consideration
                        -
 
                    -
 
5,652,031
(8)
5,652,031
Environmental reserves
              502,000
 
                     -
 
               -
 
502,000
Deferred compensation
               288,388
 
                  -
 
                  -
 
        288,388
Deferred income taxes
            2,557,662
 
      1,113,415
 
      834,915
(11)
     4,505,992
                 
Shareholders' equity
             
Common stock
           8,000,000
 
         200,000
 
   (200,000)
(12)
 8,000,000
Preferred stock
                         -
 
 200,000
 
(200,000)
(12)
            -
Capital in excess of par value
            1,196,502
 
                    -
 
               -
 
   1,196,502
Retained earnings
         76,625,607
 
      6,891,842
 
(6,891,842)
(12)
76,625,607
Less cost of common stock in treasury
      (14,565,149)
 
 (165,500)
 
165,500
(12)
 (14,565,149)
Total shareholders' equity
          71,256,960
 
     7,126,342
 
(7,126,342)
 
   71,256,960
Commitments and contingencies
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 $    105,101,411
 
 $  16,492,895
 
$28,617,391
 
$150,211,697
 
 
See accompanying notes to unaudited proforma condensed combined consolidated financial statements.
 
 
3

 
Synalloy Corporation and Subsidiaries
                       
Unaudited Pro Forma Condensed Combined Consolidated Statements of Operations
           
                             
                             
                             
   
For the Six Months Ended
 
   
Synalloy
   
Palmer
                 
   
June 30,
   
June 30,
   
Pro Forma
           
   
2012
   
2012
   
Adjustments
       
Pro Forma
 
                             
Net sales
  $ 94,250,210     $ 18,230,975     $ -         $ 112,481,185  
                                     
Cost of goods sold
    83,897,819       14,730,933       81,202   (3 )     98,709,954  
                                     
Gross profit
    10,352,391       3,500,042       (81,202 )         13,771,231  
                                     
Selling and administrative expense
    6,695,060       1,484,244       -           8,179,304  
                                     
Operating income
    3,657,331       2,015,798       (81,202 )         5,591,927  
                                     
Other (income) and expense
                                   
Interest expense
    92,023       73,808       (73,808 ) (13 )     655,301  
                      478,078   (5 )        
                      85,200   (8 )        
Other, net
    (135,148 )     56,597       -           (78,551 )
                                     
Income before income taxes
    3,700,456       1,885,393       (570,672 )         5,015,177  
                                     
Provision for income taxes
    1,273,000       704,575       (196,311 ) (6 )     1,781,264  
                                     
Net income
  $ 2,427,456     $ 1,180,818     $ (374,361 ) (14 )   $ 3,233,913  
                                     
                                     
Net income per common share:
                                   
Basic
  $ 0.38                         $ 0.51  
Diluted
  $ 0.38                         $ 0.51  
                                     
Weighted average shares outstanding:
                             
Basic
    6,335,667                           6,335,667  
     Dilutive effect from stock                                    
        options and grants     51,043                           51,043  
Diluted
    6,386,710                          
6,386,710
 
 
 
See accompanying notes to unaudited proforma condensed combined consolidated financial statements.

 

 
 
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Synalloy Corporation and Subsidiaries
                       
Unaudited Pro Forma Condensed Combined Consolidated Statements of Operations
           
                             
                             
   
For the Six Months Ended
 
   
Synalloy
   
Palmer
                 
   
             July 2,
   
June 30,
   
Pro Forma
           
   
2011
   
2011
   
Adjustments
       
Pro Forma
 
                             
Net sales
  $ 84,141,104     $ 14,859,181     $ -         $ 99,000,285  
                                     
Cost of goods sold
    71,463,995       10,770,140       81,202   (3 )     82,315,337  
                                     
Gross profit
    12,677,109       4,089,041       (81,202 )         16,684,948  
                                     
Selling and administrative expense
    6,043,386       1,230,712       -           7,274,098  
                                     
Operating income
    6,633,723       2,858,329       (81,202 )         9,410,851  
                                     
Other (income) and expense
                                   
Interest expense
    56,391       73,198       (73,198 ) (13 )     619,669  
                      478,078   (5 )        
                      85,200   (8 )        
Other, net
    (30 )     (120,706 )     -           (120,736 )
                                     
Income before income taxes
    6,577,362       2,905,837       (571,282 )         8,911,917  
                                     
Provision for income taxes
    2,368,000       951,719       (205,662 ) (6 )     3,114,057  
                                     
Net income
  $ 4,209,362     $ 1,954,118     $ (365,620 ) (14 )   $ 5,797,860  
                                     
                                     
Net income per common share:
                                   
Basic
  $ 0.67                         $ 0.92  
Diluted
  $ 0.66                         $ 0.91  
                                     
Weighted average shares outstanding:
                             
Basic
    6,303,420                           6,303,420  
      Dilutive effect from stock                                    
         options and grants     44,464                           44,464  
Diluted
    6,347,884                           6,347,884  
 
 
See accompanying notes to unaudited proforma condensed combined consolidated financial statements.

 

 
 
5

 

 

 
Synalloy Corporation and Subsidiaries
                       
Unaudited Pro Forma Condensed Combined Consolidated Statements of Operations
           
                             
                             
                             
   
For the Years Ended
 
   
Synalloy
   
Palmer
                 
   
December 31,
   
September 30,
   
Pro Forma
           
   
2011
   
2011
   
Adjustments
       
Pro Forma
 
                             
Net sales
  $ 170,575,298     $ 28,679,666     $ -         $ 199,254,964  
                                     
Cost of goods sold
    149,485,455       21,595,594       162,404   (3 )     171,243,453  
                                     
Gross profit
    21,089,843       7,084,072       (162,404 )         28,011,511  
                                     
Selling and administrative expense
    12,284,478       3,147,014       -           15,431,492  
                                     
Operating income
    8,805,365       3,937,058       (162,404 )         12,580,019  
                                     
Other (income) and expense
                                   
Interest expense
    140,784       146,439       (146,439 ) (13 )     1,267,340  
                      956,156   (5 )        
                      170,400   (8 )        
Other, net
    (85,579 )     (68,450 )     -           (154,029 )
                                     
Income before income taxes
    8,750,160       3,859,069       (1,142,521 )         11,466,708  
                                     
Provision for income taxes
    2,953,000       1,379,946       (385,030 ) (6 )     3,947,916  
                                     
Net income
  $ 5,797,160     $ 2,479,123     $ (757,491 ) (14 )   $ 7,518,792  
                                     
                                     
Net income per common share:
                                   
Basic
  $ 0.92                         $ 1.19  
Diluted
  $ 0.91                         $ 1.18  
                                     
Weighted average shares outstanding:
                                   
Basic
    6,313,418                           6,313,418  
     Dilutive effect from stock                                    
        options and grants     48,670                           48,670  
Diluted
    6,362,088                           6,362,088  
 
 
See accompanying notes to unaudited proforma condensed combined consolidated financial statements.
 

 

 
6

 
 

 
SYNALLOY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
 
The purchase price for the acquisition was $25,575,000. The preliminary adjustment for working capital at closing increased the purchase price to $28,054,000. The closing price will be adjusted after closing based on actual working capital levels. In addition, the amount of maintenance capital expenditures over the 18-month period following closing, and the final cost of a production expansion capital project currently underway could also cause a purchase price adjustment. Currently, the Company does not expect to realize any material purchase price adjustments for these two items. The sellers will also have the ability to receive earn-out payments ranging from $2,500,000 to $10,500,000 if the business unit achieves targeted levels of EBITDA over a three year period following closing; and the Company will have the ability to claw-back portions of the purchase price over a two year period following closing if EBITDA falls below baseline levels.

A summary of sources and uses of proceeds for the acquisition is as follows:

Sources of Funds:
     
Proceeds of revolving loan
 
$
6,591,597
 
Proceeds of term loan
   
22,500,000
 
Total sources of funds
 
$
29,091,597
 
         
Uses of Funds:
       
Acquisition of Palmer common and preferred stock
 
$
25,575,000
 
Cash paid at closing for preliminary working capital adjustment
   
2,479,467
 
Cash paid to escrow agent for retention and termination of
       
     employment agreement for the Controller
   
450,000
 
Cash paid for portion of seller’s investment banker
   
500,000
 
Other transaction costs
   
87,130
 
Total uses of funds
 
$
29,091,597
 

The purchase price for the Palmer acquisition was funded through an increase in the Company’s current credit facility and a new term loan with the Company’s bank.

The allocation of the consideration transferred to acquire Palmer is preliminary. We are in the process of evaluating Palmer’s financial statement classifications for conformity with the Company’s classifications. As a result of this review, it may be necessary to make additional reclassifications to the consolidated information of Palmer on a prospective basis.

The total consideration transferred is allocated to Palmer’s net tangible and identifiable intangible assets based on their fair value as of August 21, 2012 for purposes of the pro forma condensed combined consolidated financial statements. These amounts are subject to change based on the results of the final valuations of assets acquired and liabilities assumed, which are expected to be completed within the 12 months following the acquisition. The excess of the consideration transferred over the net tangible and intangible identifiable assets is reflected as goodwill. The preliminary allocation of the total consideration paid to the fair value of the assets acquired and liabilities assumed as of August 21, 2012 is as follows:



 
7

 

SYNALLOY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS

 
Cash and cash equivalents
 
$
1,389,054
 
Accounts receivable, net
   
5,789,745
 
Inventories, net
   
5,538,652
 
Prepaid expenses
   
1,611,804
 
Fixed assets, net
   
7,459,562
 
Goodwill
   
22,288,126
 
Contingent consideration
   
(8,152,031
 )
Other liabilities assumed
   
(6,833,315
 )
   
$
29,091,597
 

Pro Forma Adjustments and Assumptions

 
(1)
Represents prepayment to escrow fund related to an employment agreement which requires a retention bonus be paid after one year of service after consummation of the transaction.

 
(2)
Represents the estimated fair value adjustment to the carrying value of Palmer's property, plant, and equipment in purchase accounting.

 
(3)
Represents adjustment to Palmer’s depreciation expense based on the fair value adjustments using estimated useful lives of property plant, and equipment following the straight-line method of depreciation for financial reporting purposes.

 
(4)
Represents the excess of the amount paid for Palmer over the fair value of assets acquired and liabilities assumed (goodwill). This amount is subject to change based on the results of the final valuations of assets acquired and liabilities assumed, which are expected to be completed within the 12 months following the acquisition.

 
(5)
Represents interest expense incurred on additional borrowings provided by a term note obtained in the amount of $22,500,000 and additional funding obtained on the Company’s revolving credit facility based on the Company’s borrowing rates at time of acquisition.

 
(6)
 
(7)
 
(8)
 
 
 
(9)
 
(10)
 
(11)
 
(12)
 
(13)
 
(14)
 
(15)
Represents adjustment of income tax expense for effect of pre-tax purchase accounting adjustments.
 
Represents repayment of Palmer long term debt, including current maturities, at time of acquisition.
 
Represents recognition of contingent consideration recorded at estimated fair value based on the present value of the contingent consideration assumed to be paid based on the projected performance of Palmer over the three years after the acquisition. The present value was determined using the Company’s borrowing rate at time of acquisition. Adjustments to interest expense are made to the pro forma statements of income representing the amortization of the discount.
 
Represents additional borrowings provided by a ten-year term note at consummation of acquisition.
 
Represents a draw on the Company’s current line of credit at consummation of acquisition.
 
Represents deferred tax liabilities related to acquired assets and liabilities with differing financial reporting and income tax basis.
 
Represents elimination of Palmer’s historical shareholders' equity account balances in purchase accounting.
 
Represents elimination of Palmer’s interest expense on notes payable of Palmer that are assumed to be repaid upon closing.
 
Represents impact on net operations as a result of pro forma adjustments recognized.
 
Represents direct acquisition costs that are expected to be incurred in connection with the acquisition.
 
 
(16)
 
Represents recognition of indemnification asset for various contingent liabilities that have been recorded by Palmer and that are indemnified by the seller.

 
 
8

 

SYNALLOY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
 
Commitments and Contingencies

Pursuant to the Stock Purchase Agreement, the Company entered into a three-year employment agreement with the current President of Palmer and a one-year employment agreement with the current Controller of Palmer. These amounts will be recognized as compensation expense over the periods of the agreements. Representative compensation expense for these executives is already included in the historical financial statements of Palmer.

 

 
9