UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from _____ to _____

COMMISSION FILE NUMBER 0-19687
synalloylogorgba04a08.jpg
Synalloy Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
57-0426694
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
4510 Cox Road, Suite 201, Richmond, Virginia
 
23060
(Address of principal executive offices)
 
(Zip Code)
 
(864) 585-3605
 
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated Filer ¨
Accelerated filer x
Non-accelerated filer ¨ (Do not check if smaller reporting company)              
Smaller reporting company ¨
Emerging growth company ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ¨  No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No x
The number of shares outstanding of the registrant's common stock as of November 3, 2017 was 8,728,498.


1



Synalloy Corporation
Index
 
 
 
PART I
FINANCIAL INFORMATION
 
Financial Statements
 
 
Condensed consolidated balance sheets - September 30, 2017 and December 31, 2016
 
 
Condensed consolidated statements of operations - Three-month and nine-month periods ended September 30, 2017 and September 30, 2016
 
 
Condensed consolidated statements of cash flows - Nine-month periods ended September 30, 2017 and September 30, 2016
 
 
Notes to condensed consolidated financial statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
 
 
OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
Signatures and Certifications


2


PART I
Item 1. FINANCIAL STATEMENTS
Synalloy Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
 
Sep 30, 2017
 
Dec 31, 2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
15,410

 
$
62,873

Accounts receivable, less allowance for doubtful accounts
 
 
 
    of $236,000 and $82,000, respectively
30,312,586

 
18,028,946

Inventories, net
70,506,055

 
60,799,509

Prepaid expenses and other current assets
9,048,905

 
7,272,569

Indemnified contingencies - see Note 11
—

 
11,339,888

Total current assets
109,882,956

 
97,503,785

 
 
 
 
Property, plant and equipment, net of accumulated
 
 
 
    depreciation of $49,135,440 and $45,219,309 respectively
34,967,728

 
27,324,092

Goodwill
6,003,525

 
1,354,730

Intangible assets, net of accumulated amortization
 
 
 
    of $9,885,902 and $8,148,162, respectively
11,490,767

 
12,308,838

Deferred charges, net and other non-current assets
88,689

 
146,618

Total assets
$
162,433,665

 
$
138,638,063

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
24,769,264

 
$
16,684,508

Accrued expenses
9,779,911

 
16,087,434

Total current liabilities
34,549,175

 
32,771,942

 
 
 
 
Long-term debt
26,722,960

 
8,804,206

Deferred income taxes
1,576,515

 
1,609,492

Long-term deferred gain, sale-leaseback
6,016,918

 
6,267,623

Long-term portion of earn-out liability
3,119,856

 
—

Other long-term liabilities
756,806

 
592,245

 
 
 
 
Shareholders' equity
 
 
 
Common stock, par value $1 per share - authorized 24,000,000 shares; issued 10,300,000 shares
10,300,000

 
10,300,000

Capital in excess of par value
35,069,410

 
34,714,206

Retained earnings
58,261,200

 
57,936,533

 
103,630,610

 
102,950,739

Less cost of common stock in treasury: 1,583,107 and 1,630,690 shares, respectively
13,939,175

 
14,358,184

Total shareholders' equity
89,691,435

 
88,592,555

Commitments and contingencies – See Note 11

 

Total liabilities and shareholders' equity
$
162,433,665

 
$
138,638,063

 


Note: The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date.

See accompanying notes to condensed consolidated financial statements.
3



Synalloy Corporation
Condensed Consolidated Statements of Operations
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
Sep 30, 2017
 
Sep 30, 2016
 
Sep 30, 2017
 
Sep 30, 2016
Net sales
$
54,595,924

 
$
34,297,231

 
$
148,310,548

 
$
105,515,911

 
 
 
 
 
 
 
 
Cost of sales
49,759,304

 
29,792,812

 
127,892,423

 
92,295,722

 
 
 
 
 
 
 
 
Gross profit
4,836,620

 
4,504,419

 
20,418,125

 
13,220,189

 
 
 
 
 
 
 
 
Selling, general and administrative expense
6,587,791

 
5,814,655

 
18,925,593

 
17,041,216

Acquisition related costs
37,402

 
1,034

 
782,397

 
76,091

(Gain) loss on sale-leaseback
(83,568
)
 
2,455,347

 
(250,705
)
 
2,455,347

Operating (loss) income
(1,705,005
)
 
(3,766,617
)
 
960,840

 
(6,352,465
)
Other expense (income)
 
 
 
 
 
 
 
Interest expense
279,598

 
272,987

 
715,131

 
822,426

Change in fair value of interest rate swaps
(8,497
)
 
(115,328
)
 
(33,000
)
 
276,512

Earn-out adjustment
62,804

 
—

 
145,200

 
—

Other, net
(316,158
)
 
—

 
(316,158
)
 
—

 
 
 
 
 
 
 
 
(Loss) income from continuing operations before income taxes
(1,722,752
)
 
(3,924,276
)
 
449,667

 
(7,451,403
)
(Benefit from) provision for income taxes
(516,000
)
 
(1,316,000
)
 
125,000

 
(1,893,000
)
 
 
 
 
 
 
 
 
Net (loss) income from continuing operations
(1,206,752
)
 
(2,608,276
)
 
324,667

 
(5,558,403
)
Net loss from discontinued operations, net of tax
—

 
—

 
—

 
(99,334
)
Net (loss) income
$
(1,206,752
)
 
$
(2,608,276
)
 
$
324,667

 
$
(5,657,737
)
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Unrealized gains on available for sale securities, net of tax
—

 
—

 
366,346

 
—

Reclassification adjustment for gains included in
 
 
 
 
 
 
 
net income, net of tax
(366,346
)
 
—

 
(366,346
)
 
—

Other comprehensive loss
(366,346
)
 
—

 
—

 
—

Comprehensive (loss) income
$
(1,573,098
)
 
$
(2,608,276
)
 
$
324,667

 
$
(5,657,737
)
 
 
 
 
 
 
 
 
Net (loss) income per common share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.14
)
 
$
(0.30
)
 
$
0.04

 
$
(0.64
)
Diluted
$
(0.14
)
 
$
(0.30
)
 
$
0.04

 
$
(0.64
)
 
 
 
 
 
 
 
 
Net loss per common share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
—

 
$
—

 
$
—

 
$
(0.01
)
Diluted
$
—

 
$
—

 
$
—

 
$
(0.01
)
 
 
 
 
 
 
 
 
Net (loss) income per common share:
 
 
 
 
 
 
 
Basic
$
(0.14
)
 
$
(0.30
)
 
$
0.04

 
$
(0.65
)
Diluted
$
(0.14
)
 
$
(0.30
)
 
$
0.04

 
$
(0.65
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
8,716,893

 
8,658,361

 
8,696,884

 
8,644,437

Dilutive effect from stock options and grants
—

 
—

 
17,030

 
—

Diluted
8,716,893

 
8,658,361

 
8,713,914

 
8,644,437


See accompanying notes to condensed consolidated financial statements.
4


Synalloy Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
 
Sep 30, 2017
 
Sep 30, 2016
Operating activities
 
 
 
Net income (loss)
$
324,667

 
$
(5,657,737
)
Loss from discontinued operations, net of tax
—

 
99,334

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation expense
3,916,131

 
3,322,115

Amortization expense
1,827,171

 
1,844,840

Amortization of debt issuance costs
40,829

 
58,681

Deferred income taxes
(32,978
)
 
(1,124,386
)
Gain on sale of available for sale securities
(310,043
)
 
—

Provision for (reduction) of losses on accounts receivable
192,892

 
(51,531
)
Provision for losses on inventories
500,338

 
460,726

Gain on sale of property, plant and equipment
2,279

 
2,294,917

Amortization of deferred gain on sale-leaseback
(250,705
)
 
—

Straight line lease cost on sale-leaseback
304,898

 
—

Change in cash value of life insurance
—

 
1,502

Change in fair value of interest rate swaps
(33,000
)
 
276,512

Issuance of treasury stock for director fees
287,475

 
330,000

Employee stock option and grant compensation
486,740

 
291,262

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(12,476,532
)
 
(2,130,955
)
Inventories
(4,772,884
)
 
4,198,000

Other assets and liabilities, net
10,179,835

 
(932,324
)
Accounts payable
8,084,756

 
770,428

Accrued expenses
(7,900,999
)
 
(142,533
)
Accrued income taxes
(2,392,073
)
 
(1,605,714
)
Net cash (used in) provided by continuing operating activities
(2,021,203
)
 
2,303,137

Net cash used in discontinued operating activities
—

 
(3,943,137
)
Net cash used in operating activities
(2,021,203
)
 
(1,640,000
)
Investing activities
 

 
 

Purchases of property, plant and equipment
(3,692,571
)
 
(2,115,577
)
Proceeds from sale of property, plant and equipment
1,048

 
22,215,362

Purchases of available for sale securities
(3,831,521
)
 
—

Proceeds from sale of available for sale securities
4,141,564

 
—

Acquisition of the stainless pipe and tube assets of Marcegaglia USA, Inc.
(11,953,513
)
 
—

Proceeds from life insurance policies
—

 
1,502,283

Net cash (used in) provided by investing activities
(15,334,993
)
 
21,602,068

Financing activities
 

 
 

Net borrowings from line of credit
17,918,754

 
6,566,157

Payments on long-term debt
—

 
(26,068,228
)
Payments on capital lease obligation
(91,565
)
 
(49,288
)
Settlement of CRI interest rate swap
—

 
(290,427
)
Payments on earn-out liability to MUSA sellers
(518,456
)
 
—

Purchase of common stock
—

 
(253,889
)
Net cash provided by (used in) financing activities
17,308,733

 
(20,095,675
)
Decrease in cash and cash equivalents
(47,463
)
 
(133,607
)
Cash and cash equivalents at beginning of period
62,873

 
391,424

Cash and cash equivalents at end of period
$
15,410

 
$
257,817

 
 
 
 
Supplemental disclosure


 
 
Cash paid during the year for:
 
 
 
  Interest
$
617,606

 
$
711,916

  Income taxes
$
2,557,121

 
$
916,015


See accompanying notes to condensed consolidated financial statements.
5
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017


Unless indicated otherwise, the terms "Company," "we," "us," and "our" refer to Synalloy Corporation and its consolidated subsidiaries.

NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included as required by Regulation S-X, Rule 10-01. Operating results for the three and nine-month periods ended September 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2016.

NOTE 2--RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)", which changes the criteria for recognizing revenue. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard requires a five-step process for recognizing revenue including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies a performance obligation. Two transition methods are available for implementing the requirements of ASU 2014-09: retrospectively for each prior reporting period presented or retrospectively with the cumulative effect of initial application recognized at the date of initial application. The FASB has issued several amendments to the standard, which are intended to promote a more consistent application of the principles outlined in the standard. The new standard is effective for the Company for annual periods in fiscal years beginning after December 15, 2017. The company will adopt the new guidance in the first quarter of 2018. The Company is currently assessing the impact the new standard will have on the consolidated financial statements as well as its business processes, internal controls, and accounting policies. As part of its assessment, the Company is reviewing its contract portfolio and identifying which attributes of its contracts are impacted by ASU 2014-09. Based on the preliminary assessment performed as of September 30, 2017, the company does not believe the standard will have a material impact on consolidated financial statements, other than for the disclosures required by the standard, as a result of the Company being a manufacturer that records revenue at a single point in time when control is transferred. The Company also has no significant long-term sales contracts, which would require revenue be recognized over a period of time in excess of one year. In addition, based on initial results of the preliminary assessment performed as of September 30, 2017, the company plans to apply the standard with the cumulative effect of initial application recognized at the date of initial application.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability of lease recognition and disclosure. The update establishes a right of use ("ROU") model which requires lessees to recognize lease contracts with a term greater than one year on the balance sheet as ROU assets and lease liabilities. Leases will be classified as either financing or operating which will determine expense classification and recognition. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and must be applied using the modified retrospective approach. Early adoption is permitted. While the Company expects ASU 2016-02 to add material ROU assets and lease liabilities to the consolidated balance sheets related to its current land and building operating leases, it is evaluating other effects that the new standard will have on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting (Topic 718)." The amendments in this updated guidance include changes to simplify the Codification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows and was effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company implemented this standard on January 1, 2017 and it did not have a material effect on the Company's consolidated financial statements.

6
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017. The Company does not believe its implementation will have a material effect on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment," which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. The Company elected to early adopt the provisions of this ASU in the quarterly period ending March 31, 2017. The implementation of this ASU did not have a material effect on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting," which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017. The Company does not believe its implementation will have a material effect on the Company's consolidated financial statements.

NOTE 3--INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods. The components of inventories are as follows:
 
Sep 30, 2017
 
Dec 31, 2016
Raw materials
$
36,226,019

 
$
31,973,073

Work-in-process
9,574,418

 
9,897,857

Finished goods
24,705,618

 
18,928,579

 
$
70,506,055

 
$
60,799,509


NOTE 4--INTANGIBLE ASSETS AND DEFERRED CHARGES
Deferred charges and intangible assets totaled $21,700,496 at September 30, 2017 and $20,708,496 at December 31, 2016. Accumulated amortization of deferred charges and intangible assets totaled $10,121,040 at September 30, 2017 and $8,253,040 at December 31, 2016. Estimated amortization expense for the next five years is: remainder of 2017 - $629,558; 2018 - $2,344,404; 2019 - $2,155,832; 2020 - $1,997,565; 2021 - $1,899,298; and thereafter - $2,552,799.

NOTE 5--STOCK OPTIONS AND RESTRICTED STOCK

During the first nine months of 2017, no stock options were exercised by officers and employees of the Company. Stock compensation expense for the three and nine-month periods ended September 30, 2017 was $156,502 and $486,740, respectively, while stock compensation expense for the three and nine-month periods ended September 30, 2016 was $102,004 and $291,262, respectively.


7
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017

On February 8, 2017, the Compensation & Long-Term Incentive Committee (the "Committee") of the Company's Board of Directors approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where 44,686 shares with a market price of $12.30 per share were granted under the Plan. In connection with the stock awards amendment detailed in the following paragraph, these stock awards vest in 33 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. 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.

Effective May 1, 2017, the Company's Board of Directors approved the First Amendment to the 2015 Stock Awards Plan. The amendment grants the Committee the authority to establish and amend vesting schedules for stock awards made pursuant to the 2015 Stock Awards Plan. On May 9, 2017, the Committee approved the amendment of the vesting schedules for the May 5, 2016 and February 8, 2017 stock grants reducing the vesting period from five years to three years.
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. For the nine months ended September 30, 2017 and September 30, 2016 the Company had weighted average shares of common stock, in the form of stock grants and options, of 144,064 and 311,537, respectively, which were not included in the diluted earnings per share calculation as their effect was anti-dilutive.

NOTE 6--INCOME TAXES
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 2014 or state income tax examinations for years before 2012.
The effective tax rate was 30 percent and 28 percent for the three and nine-month periods ended September 30, 2017, respectively. The 2017 effective tax rate was lower than the statutory rate of 34 percent primarily due to state tax expense and other permanent differences, mainly the manufacturer's exemption. The effective tax rate was 34 percent and 25 percent for the three and nine- month periods ended September 30, 2016, respectively. The nine-month effective tax rate was lower than the 34 percent statutory rate primarily due to state tax expense and a one-time permanent difference relating to cash surrender proceeds on certain life insurance policies reducing the amount of tax benefit of the pre-tax loss for that period.


8
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017

NOTE 7--SEGMENT INFORMATION

The following table summarizes certain information regarding segments of the Company's operations:
 
Three Months Ended
 
Nine Months Ended
 
Sep 30, 2017
 
Sep 30, 2016
 
Sep 30, 2017
 
Sep 30, 2016
Net sales
 
 
 
 
 
 
 
Metals Segment
$
43,022,833

 
$
22,290,752

 
$
111,821,115

 
$
68,331,389

Specialty Chemicals Segment
11,573,091

 
12,006,479

 
36,489,433

 
37,184,522

 
$
54,595,924

 
$
34,297,231

 
$
148,310,548

 
$
105,515,911

Operating (loss) income
 
 
 
 
 
 
 
Metals Segment
$
(1,323,801
)
 
$
(1,013,669
)
 
$
2,479,963

 
$
(3,434,725
)
Gain (loss) on sale-leaseback
59,901

 
(2,226,037
)
 
179,703

 
(2,226,037
)
Total Metals segment
(1,263,900
)
 
(3,239,706
)
 
2,659,666

 
(5,660,762
)
 
 
 
 
 
 
 
 
Specialty Chemicals Segment
1,126,994

 
1,417,116

 
3,725,030

 
3,949,453

Gain (loss) on sale-leaseback
23,667

 
(229,309
)
 
71,002

 
(229,309
)
Total Specialty Chemicals segment
1,150,661

 
1,187,807

 
3,796,032

 
3,720,144

 
 
 
 
 
 
 
 
Unallocated straight line lease cost
101,633

 
—

 
304,898

 
—

Unallocated corporate expenses
1,452,731

 
1,713,684

 
4,407,563

 
4,335,756

Acquisition related costs
37,402

 
1,034

 
782,397

 
76,091

Operating (loss) income
(1,705,005
)
 
(3,766,617
)
 
960,840

 
(6,352,465
)
Interest expense
279,598

 
272,987

 
715,131

 
822,426

Change in fair value of interest rate swaps
(8,497
)
 
(115,328
)
 
(33,000
)
 
276,512

Earn-out adjustment
62,804

 
—

 
145,200

 
—

Other income, net
(316,158
)
 
—

 
(316,158
)
 
—

(Loss) income from continuing operations
 
 
 
 
 
 
 
before income taxes
$
(1,722,752
)
 
$
(3,924,276
)
 
$
449,667

 
$
(7,451,403
)
 
 
 
 
 
 
 
 
 
As of
 
 
 
Sep 30, 2017
 
Dec 31, 2016
 
 
 
 
Identifiable assets
 
 
 
 
 
 
 
Metals Segment
$
130,500,181

 
$
109,689,477

 
 
 
 
Specialty Chemicals Segment
25,957,147

 
22,907,672

 
 
 
 
Corporate
5,976,337

 
6,040,914

 
 
 
 
 
$
162,433,665

 
$
138,638,063

 
 
 
 
Goodwill
 
 
 
 
 
 
 
Metals Segment
$
4,648,795

 
$
—

 
 
 
 
Specialty Chemicals Segment
1,354,730

 
1,354,730

 
 
 
 
 
$
6,003,525

 
$
1,354,730

 
 
 
 


9
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017

NOTE 8--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company makes estimates of fair value in accounting for certain transactions, in testing and measuring impairment and in providing disclosures of fair value in its condensed consolidated financial instruments. The Company determines the fair values of its financial instruments for disclosure purposes by maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. Fair value disclosures for assets and liabilities are grouped into three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are less active.
Level 3 - Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.
As of September 30, 2017 and December 31, 2016, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable and borrowings under the Company's bank debt, which are based on variable interest rates, approximate their fair value.
During the third quarter of 2017, the Company sold all of its shares of Level 1 available for sales securities. Proceeds from the sale totaled $4,141,564 which resulted in a realized gain of $310,043 which is included in other income on the accompanying condensed consolidated statements of operations. As a result of the sale, unrealized gains, net of tax, of $366,346 were reclassified out of accumulated other comprehensive income ("AOCI") with the realized gain on sale included in earnings which reduced the balance of AOCI to zero at September 30, 2017. The Company used the average cost method to determine the realized gain or loss for each transaction.
Estimates of fair value using levels 2 and 3 may require judgments as to the timing and amount of cash flows, discount rates, and other factors requiring significant judgment, and the outcomes may vary widely depending on the selection of these assumptions. The Company's most significant fair value estimates as of September 30, 2017 and December 31, 2016 relate to the purchase price allocation relating to the acquisition of the stainless steel operations of Marcegaglia USA, Inc. ("MUSA"), contingent consideration liability, testing goodwill for impairment, the interest rate swap, the nickel forward option contracts and disclosures of the fair values of financial 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 an asset of $64,285 and $31,285 at September 30, 2017 and December 31, 2016, respectively. The interest rate swap was priced using discounted cash flow techniques which are corroborated by using non-binding market prices. Changes in its fair value were recorded to other income (expense) with corresponding offsetting entries to long-term 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. The fair value of this interest rate swap contract approximates its carrying value.
To manage the impact on earnings of fluctuating nickel prices, the Company enters into six-month forward option contracts, which are classified as Level 2. At September 30, 2017, the Company had contracts in place with notional quantities totaling approximately 2,100,000 pounds with strike prices ranging from $3.49 to $4.57 per pound. At December 31, 2016, the Company had contracts in place with notional quantities totaling approximately 340,000 pounds with strike prices ranging from $3.92 to $5.30 per pound. The fair value of the option contracts were an asset of $172,030 and $87,283 at September 30, 2017 and December 31, 2016, respectively. The fair value of the contracts was priced using discounted cash flows techniques based on forward curves and volatility levels by asset class determined on the basis of observable market inputs, when available. Changes in their fair value were recorded to cost of goods sold with corresponding offsetting entries to other current assets. The fair value of the forward option contracts approximates their carrying value.
The fair value of contingent consideration liabilities ("earn-out") resulting from the MUSA acquisition discussed in Note 9 is classified as Level 3. The fair value was estimated by applying the Monte Carlo Simulation approach using management's projection

10
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017

of pounds shipped and price per unit. Each quarter-end the Company re-evaluates its assumptions and adjusts to the estimated present value of the expected payments to be made.
The following table presents a summary of changes in fair value of the Company's Level 3 liability during the period:
 
 
Level 3 Inputs
Balance at December 31, 2016
 
$
—

Fair value of the earn-out liability from the MUSA acquisition
 
4,663,783

Earn-out payments to MUSA sellers
 
(518,456
)
Change in fair value during the period
 
145,200

Balance at September 30, 2017
 
$
4,290,527

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 in the nine-month period ended September 30, 2017 or year ended December 31, 2016. During the first nine months of 2017, there have been no changes in the fair value methodologies used by the Company.

NOTE 9--ACQUISITIONS
Acquisition of the Stainless Pipe and Tube Assets of Marcegaglia USA, Inc.
On December 9, 2016, the Company's subsidiary Bristol Metals, LLC ("BRISMET"), entered into a definitive agreement to acquire the stainless steel pipe and tube assets of MUSA located in Munhall, PA (the "Bristol Metals-Munhall") to enhance its on-going business with additional capacity and technological advantages. The transaction closed on February 28, 2017 and was funded through an increase to the Company's current credit facility (See Note 10). The purchase price for the transaction, which excludes real estate and certain other assets, totaled $14,953,513. The assets purchased from MUSA include inventory, production and maintenance supplies and equipment. In accordance with the agreement, on December 9, 2016, BRISMET entered into an escrow agreement and deposited $3,000,000 into the escrow fund. The deposit was remitted to MUSA at the close of the transaction and was reflected as a credit against the purchase price.
The transaction was 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, if any, acquired and liabilities assumed. Since the acquisition closed on February 28, 2017, the allocation of the consideration transferred in the 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 twelve months after the closing date of the acquisition ("measurement period").
MUSA will receive quarterly earn-out payments for a period of four years following closing. Aggregate earn-out payments will be at least $3,000,000, with no maximum. Actual payouts will equate to three percent of BRISMET’s incremental revenue, if any, from the amount of small diameter stainless steel pipe and tube (outside diameter of ten inches or less) sold. At February 28, 2017, the acquisition date, the Company forecasted earn out payments to be $4,063,204, which was discounted to a present value of $3,604,330 using a discount rate applicable to future revenue of five percent. In determining the appropriate discount rate to apply to the contingent payments, the risk associated with the functional form of the earn-out, the credit risk associated with the payment of the earn-out and the methodology to quantify the earn-out were all considered. The fair value of the contingent consideration was estimated by applying the Monte Carlo Simulation approach using management's estimates of pounds shipped.
In the second quarter of 2017, Management adjusted the selling price used in the earn-out calculation associated with the MUSA Stainless Acquisition. Since this adjustment was determined within the measurement period, the beginning earn-out liability and goodwill were increased by $1,059,453. Goodwill related to Bristol Metals-Munhall increased from $3,589,342 to $4,648,795 and the fair value on contingent consideration was increased from $3,604,330 to $4,663,783.

11
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017

The total purchase price was allocated to BRISMET's Munhall facility's net tangible and identifiable intangible assets based on their estimated fair values as of February 28, 2017. The finalization of these allocations is subject to change based on the results of the final review and acceptance of the independent appraiser’s valuation report, which is expected to be completed within the measurement period. The fair value assigned to the customer list intangible will be amortized on an accelerated basis over 15 years. The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets and liabilities is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining MUSA's laser mill capabilities acquired as part of Bristol Metals-Munhall with BRISMET's 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.

The following table shows the initial estimate of value as reported at March 31, 2017 and revisions made during the second quarter of 2017:
 
Initial
 
Revised
 
estimate
Revisions
estimate
Inventories
$
5,434,000

$
—

$
5,434,000

Other current assets - production and maintenance supplies
1,548,701

—

1,548,701

Equipment
7,576,733

—

7,576,733

Customer list intangible
992,000

—

992,000

Goodwill
3,589,342

1,059,453

4,648,795

Contingent consideration
(3,604,330
)
(1,059,453
)
(4,663,783
)
Other liabilities assumed
(582,933
)
—

(582,933
)
 
$
14,953,513

$
—

$
14,953,513

Bristol Metals-Munhall's results of operations since acquisition are reflected in the Company's consolidated statements of operations. The amount of Bristol Metals-Munhall's revenues and pre-tax loss included in the consolidated statements of operations for the three months ended September 30, 2017 was $8,675,104 and $621,881, respectively. For the nine-month period ended September 30, 2017, Bristol Metals-Munhall's revenues and pre-tax loss were $17,087,030 and $259,801, respectively. The following unaudited pro-forma information is provided to present a summary of the combined results of the Company's operations with Bristol Metals-Munhall as if the acquisition had occurred on January 1, 2016. The unaudited pro-forma financial information is for information purposes only and is not necessarily indicative of what the results would have been had the acquisition been completed on the date indicated above. The three months ended September 30, 2017 are not presented as those results already include Bristol Metal-Munhall's results.

12
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017

Pro-Forma (Unaudited)
 
 
 
Three Months Ended
 
 
 
Sep 30, 2016
Pro-forma revenues


 
$
40,172,000

Pro-forma net loss


 
(3,573,000
)
Loss per share:
 
 
 
   Basic


 
$
(0.41
)
   Diluted


 
$
(0.41
)
 
 
 
 
 
Nine Months Ended
 
Sep 30, 2017
 
Sep 30, 2016
Pro-forma revenues
$
153,235,000

 
$
122,117,000

Pro-forma net income (loss)
368,000

 
(7,347,000
)
Earnings (loss) per share:
 
 
 
   Basic
$
0.04

 
$
(0.85
)
   Diluted
$
0.04

 
$
(0.85
)
The pro-forma calculation excludes non-recurring acquisition costs of $698,587 which were incurred by the Company during 2017. The stainless steel operations of MUSA's historical financial results were adjusted for both years to eliminate interest expense charged by the prior owner. Pro-forma net income was reduced for both years for the amount of amortization on MUSA's customer list intangible and an estimated amount of interest expense associated with the additional line of credit borrowings.

NOTE 10--LONG-TERM DEBT
Pursuant to the Credit Agreement in place with the Company's bank, the Company is subject to certain covenants including maintaining a minimum fixed charge coverage ratio and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs. At September 30, 2017, the Company was in compliance with all debt covenants.

NOTE 11--CONTINGENCIES
The Company is from time-to-time subject to various claims, possible legal actions for product liability and other damages, and other matters arising out of the normal conduct of the Company's business.  
In January 2014, a Metals Segment customer filed suit against Palmer and Synalloy and another unrelated defendant in Texas state court alleging breach of warranty, among other claims. The plaintiff’s claim for damages did not state a dollar amount. This matter arose out of products manufactured and sold by Palmer prior to Synalloy’s acquisition of all of Palmer's outstanding stock in August 2012. In August and September 2016, the parties to the lawsuit tried the matter in a bench trial in the District Court of Harris County, Texas, 333rd Judicial District (the “Court”). On December 31, 2016 (but made available to the parties to the lawsuit on January 3, 2017), the Court entered final judgment in favor of the Plaintiff and Synalloy and against Palmer. The Court ordered Palmer to pay the plaintiff approximately $8,600,000 in damages, plus pre- and post-judgment interest, and approximately $1,040,000 in attorneys’ fees. The Court ruled Synalloy had no liability to the plaintiff. At December 31, 2016, the Company recorded $11,000,000 in accrued expenses and current assets to reflect the legal liability and corresponding indemnified receivable due from the former shareholders of Palmer. Palmer filed a motion for a new trial with the Court at the end of January 2017, which the court denied. On June 30, 2017, the plaintiff entered into settlement agreements with Palmer/Synalloy and the former shareholders of Palmer, respectively, pursuant to which, the parties agreed to settle and release the judgment in full. On August 31, 2017, the former shareholders of Palmer satisfied the financial conditions specified in their settlement agreement with the plaintiff, and the plaintiff filed a Release of Final Judgment with the Court. Because the former shareholders of Palmer were contractually bound, pursuant to the Stock Purchase Agreement by and among Synalloy and the former shareholders dated August

13
Synalloy Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 30, 2017

10, 2012, to hold harmless and indemnify Synalloy and Palmer from any and all costs and damages, including the judgment described above and all associated attorneys' fees, arising out of this matter, neither Synalloy nor Palmer contributed to the payments required by the settlement agreements. The legal liability and corresponding indemnified receivable due from the former shareholders of Palmer were reduced to zero at August 31, 2017.
On March 11, 2016, in a suit filed by a Metals Segment customer against Synalloy Fabrication, LLC (discontinued operation), the United States District Court of Maryland (Baltimore Division) granted summary judgment regarding liability in favor of the plaintiff by ruling that an enforceable contract existed between the parties and the Company breached the agreement. As a result of this ruling, the remaining issue in the case was the amount of the plaintiff's damages. Consequently, the Company increased the facility closing liability to a level of $3,000,000 for the estimated costs associated with this claim for the year ended December 31, 2015. In June 2016, the matter was settled for damages totaling $3,100,000. As a result, the Company increased the facility closing liability and made a payment of $2,500,000 in June 2016. The remaining balance of $600,000 was paid in September 2016. The amount required to adjust the facility closing reserve as a result of the settlement is included in discontinued operations on the accompanying consolidated statements of operations.
Other than the matters discussed in this note, management is not currently aware of any other asserted or unasserted matters which could have a material effect on the financial condition or results of operations of the Company.

NOTE 12-- SALE LEASEBACK TRANSACTION
Rent expense for the sale-leaseback transaction entered into on September 30, 2016 totaled $574,633 and $1,723,898 for the three and nine-month periods ended September 30, 2017, respectively. Rent expense began in October 2016 and therefore no rent expense was recognized for the three and nine-month periods ended September 30, 2016. The amount of future minimum lease payments under the sale-leaseback transaction are as follows: remainder of 2017 - $482,460; 2018 - $1,939,489; 2019 - $1,978,279; 2020 -$2,017,845; 2021 -$2,058,201; and thereafter - $35,602,349. In accordance with the agreement, the amount of future lease payments as of September 30, 2017 includes a rent escalator equal to two percent.
Losses on the sale-leaseback transaction of $2,455,347 were recognized and reflected in the accompanying condensed statement of operations for the three and nine-month periods ended September 30, 2016. In addition, transaction closing costs of $102,000 were included in "Selling, general, and administrative expense" on the condensed statement of operations for the third quarter and nine months ended September 30, 2016. The deferred gain recognized on the sale-leaseback transaction is amortized on the straight-line method over the life of the lease of 20 years. Deferred gain amortization began in October 2016 and totaled $83,568 and $250,705 for the three and nine-month periods ended September 30, 2017. The current portion of the deferred gain of $334,273 is included in "Accrued expenses" and the long-term portion of the deferred gain of $6,016,918 is included in "Long-term portion of deferred gain on sale-leaseback" in the accompanying condensed consolidated balance sheets.

NOTE 13--SUBSEQUENT EVENTS
On October 4, 2017, the Company declared a $0.13 cash dividend. The dividend totaling approximately $1,100,000 was paid on November 6, 2017.
On October 30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of the asset-based revolving line of credit by $20,000,000 to a maximum of $65,000,000 and extended the maturity date to October 30, 2020. None of the other provisions of the Credit Agreement were changed as a result of this amendment.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is management's discussion of certain significant factors that affected the Company during the three and nine-month periods ended September 30, 2017.
Consolidated net sales for the third quarter of 2017 were $54,596,000, an increase of $20,299,000 or 59 percent when compared to net sales for the third quarter of 2016 of $34,297,000. Net sales for the first nine months of 2017 were $148,311,000, an increase of $42,795,000 or 41 percent when compared to the same period of the prior year. For the third quarter of 2017, the Company recorded net loss from continuing operations of $1,207,000, or $0.14 per share, compared to a net loss from continuing operations of $2,608,000 or $0.30 loss per share for the same quarter in the prior year. For the first nine months of 2017, net income from

14


continuing operations was $325,000, or $0.04 per share. This compares to a net loss from continuing operations of $5,658,000, or $0.64 loss per share for the first nine months of 2016.
The third quarter and first nine-month periods of 2017 include financial results in the Company's Metals Segment related to the acquisition of Bristol Metals-Munhall, which closed on February 28, 2017, including net sales of $8,675,000 and $17,087,000, respectively, operating losses of $622,000 and $260,000 , respectively, and pretax acquisition transaction related charges totaling $186,000 and $1,188,000 respectively.

Metals Segment
Metals Segment net sales for the third quarter of 2017 totaled $43,023,000, an increase of $20,732,000 or 93 percent from the third quarter of 2016. Excluding Bristol Metals-Munhall, third quarter net sales were up 54 percent over the same period last year. Sales for the first nine months of 2017 were $111,821,000, an increase of $43,490,000 or 64 percent from 2016. Excluding Bristol Metals-Munhall, year to date net sales were up 39 percent. Each product line in the Metals Segment showed positive sales growth, including sequential quarterly gains, and gains against the prior year’s quarter and on a year to date basis. Sales of seamless carbon pipe were up 84 percent over last year’s third quarter and up 74 percent year to date. Sales were affected during the third quarter and first nine months of 2017 due to third quarter shipments and order activity across the businesses in the Metals Segment showing improvement over the first and second quarters and are summarized as follows:
 
Sales Increase (decrease) from prior year period
 
$
%
Average selling price
Units
shipped
Third quarter
 
 
 
 
Storage tank and vessel
$
3,116,000

68.7%
31.0%
37.7%
Seamless carbon steel pipe and tube
3,049,000

84.2%
13.8%
70.4%
Stainless steel pipe  (1)
14,567,000

103.0%
(27.4)%
130.4%
   Total third quarter change
$
20,732,000

 
 
 
        (1) Excluding Bristol Metals - Munhall
5,892,000

41.7%
(4.4)%
46.1%
 
 
 
 
 
First nine months
 
 
 
 
Storage tank and vessel
$
5,770,000

40.6%
27.9%
12.7%
Seamless carbon steel pipe and tube
8,011,000

74.4%
4.5%
69.9%
Stainless steel pipe(2)
29,709,000

68.5%
(6.2)%
74.7%
   Total first nine months change
$
43,490,000

 
 
 
        (2) Excluding Bristol Metals - Munhall
12,622,000

29.1%
5.6%
23.5%

The Metals Segment's operating loss from continuing operations improved $1,976,000 to a loss of $1,264,000 for the third quarter of 2017 compared to a loss of $3,240,000 for the third quarter of 2016. For the first nine months of 2017, operating income from continuing operations for the Metals Segment increased $8,321,000 to an operating profit of $2,660,000 compared to a loss of $5,661,000 for the same period of 2016. Current year operating results were affected by the following factors:
a)
The addition of Bristol Metals-Munhall operations as noted above.
b)
Nickel prices and resulting surcharges for 304 and 316 alloys experienced a sharp decline in the third quarter when compared to the first half of 2017. Surcharges for both alloys declined by $.13 per pound in the third quarter, generating Metals Segment inventory price changes losses of $1,978,000, up from the prior year’s inventory price changes losses of $1,255,000. The current quarter’s inventory price changes losses more than offset the first six months’ inventory price changes gains of $719,000, resulting in a year to date inventory price changes loss totaling $1,259,000.
c)
Margins in the stainless steel business continued to be negatively impacted during 2017. Special alloy sales were at historically low levels due to a lower incidence of project work in the downstream energy markets. While special alloy shipments as a percentage of total sales at the Bristol facility improved marginally, the decline in shipments of larger diameter pipe (14 inches and up) offset any improvement in alloy mix.

15


d)
Operating income from both seamless carbon pipe and tube and storage tanks and vessels continued to show solid improvement over the prior year.
e)
A $2,229,000 charge in the third quarter 2016 associated with the book loss on three Metal Segment properties sold as part of the sale-leaseback transaction closed in 2016 with no comparable loss recognized in 2017.

Specialty Chemicals Segment
Net sales for the Specialty Chemicals Segment in the third quarter of 2017 were $11,573,000, representing a $433,000 or four percent decrease from the same quarter of 2016. Net sales for the first nine months of 2017 were $36,489,000, down $696,000 or two percent from 2016 results. The third quarter sales decrease was comprised of a two percent decrease in pounds sold and a two percent decrease in average selling price when compared to the same period of the prior year. For the first nine months, pounds sold decreased four percent and average selling price increased two percent. Net sales were negatively impacted during the third quarter and first nine months of 2017 by:
a) The loss of a single customer in the second half of 2016 that reduced sales in the first half of 2017 by $2,100,000. There was no impact from this customer loss in the third quarter of this year.
b) The ramp up of our new fire retardant customer at CRI Tolling has not gone as quickly as we had earlier projected. Shipments did commence in the second half of the third quarter and will continue to build into the fourth quarter of this year and the first quarter of 2018. Our agreement calls for an annual volume of 3 million pounds, the run rate, which we now expect to achieve in the first quarter of next year.
c) We experienced some delays in receipt of raw materials coming out of the Houston area following Hurricane Harvey.
Operating income for the Specialty Chemicals Segment for the third quarter of 2017 decreased $37,000 from the third quarter of 2016 to $1,151,000. Operating income for the Specialty Chemicals Segment for the first nine months of 2017 amounted to $3,796,000, a $76,000 or two percent increase from the same period for 2016. Operating income in the third quarter and year to date was negatively impacted by an increase to the allowance for doubtful accounts of $227,000 for one customer that became financially unstable during the quarter combined with higher legal fees of $81,000. The decrease in operating income was partially offset by a $229,000 charge in the third quarter 2016 associated with the book loss on two Specialty Chemicals Segment properties sold as part of the sale-leaseback transaction closed in 2016 with no comparable loss recognized in 2017.

Other Items
Consolidated selling, general and administrative expenses increased 13 percent to $6,588,000, or 12.1 percent of sales, from $5,815,000, 17.0 percent of sales, for the third quarter of 2017 compared to the third quarter of 2016. For the first nine months of 2017, consolidated selling, general and administrative expenses were $18,926,000, or 12.8 percent of sales, an increase of eleven percent from $17,041,000, or 16.2 percent of sales, for the first nine months of 2016. Approximately $411,000 and $783,000 of the increases arose from including Bristol Metals-Munhall's selling, general and administrative expenses in the third quarter and first nine months of 2017, respectively, with no comparable costs for 2016. The remainder of the change for both periods resulted from higher incentive based bonuses (up $233,000 for the quarter and $1,008,000 for the first nine months), increased sales commissions and wages (up $193,000 for the quarter and $337,000 for the first nine months) and an increase to the allowance for doubtful accounts (up $256,000 for the quarter and $224,000 for the first nine months) partially offset by lower professional fees (down $101,000 for the quarter and $220,000 for the first nine months), shelf registration costs (down $5,000 for the quarter and $145,000 for the first nine months) and lower travel expenses (down $30,000 for the quarter and $125,000 for the first nine months).
Acquisition costs for the third quarter of 2017 of $186,000 (mainly in the Metals Segment cost of sales) and $1,188,000 for the first nine months of 2017 ($782,000 in unallocated SG&A and $406,000 in Metals Segment cost of sales), resulted from costs associated with the Bristol Metals-Munhall acquisition.
Interest expense was $279,000 and $273,000 for the third quarter of 2017 and 2016, respectively. For the first nine months, interest expense decreased to $715,000 for 2017 from $822,000 for 2016.
Due to a higher projected sales of small diameter stainless-steel pipe and tube (outside diameter of ten inches or less) for the remainder of the measurement period, the earn-out liability resulting from the acquisition of Bristol Metals-Munhall was increased by $63,000 and $145,000 for the third quarter and first nine months of 2017.

16


The Company purchased 225,000 shares of a potential acquisition target for $3,832,000 during the second quarter of 2017. During the third quarter of 2017, acquisition discussions were stopped and the Company sold all of their holdings, realizing a $310,000 gain on the investment. As a result of the sale, unrealized gains, net of tax, of $366,000 were reclassified out of accumulated other comprehensive income ("AOCI") with the realized gain on sale included in other income which reduced the balance of AOCI to zero at September 30, 2017. The Company used the average cost method to determine the realized gain or loss for each transaction.
The effective tax rate was 30 percent and 28 percent for the three-month and nine-month periods ended September 30, 2017, respectively. The 2017 effective tax rate was lower than the statutory rate of 34 percent primarily due to state tax expense and other permanent differences, mainly the manufacturer's exemption. The effective tax rate was 34 percent and 25 percent for the three-month and nine-month periods ended September 30, 2016, respectively. The nine-month 2016 effective tax rate was lower than the 34 percent statutory rate primarily due to state tax expense and a one-time permanent difference reducing the amount of tax benefit of the pre-tax loss for that period.
The Company's cash balance decreased $48,000 to $15,000 as of September 30, 2017 compared to $63,000 at December 31, 2016. Fluctuations during the period were comprised of the following:
a)
On February 28, 2017, the Company completed the acquisition of Bristol Metals-Munhall for $11,954,000. This excludes a $3,000,000 deposit made in the prior year;
b)
Net accounts receivable increased $12,284,000 at September 30, 2017 when compared to the prior year end, which resulted from a 59 percent increase in sales for the last two months of the third quarter 2017 compared to the last two months of the fourth quarter 2016. Also, days sales outstanding, calculated using a three-month average basis, decreased by 2 days to 49 days outstanding at the end of the third quarter 2017 from 51 days outstanding at the end of 2016;
c)
Net inventories, excluding the $5,434,000 of inventory obtained in the Bristol Metals-Munhall acquisition, increased $4,272,000 at September 30, 2017 as compared to year-end 2016. The increase resulted from building Bristol Metals-Munhall inventory from acquisition levels (up $8,110,000), increased inventory for storage tanks to support higher sales activity (up $2,899,000) along with higher Specialty Chemicals inventory (up $2,714,000) due to raw material inventory required for the fire retardant product line along with raw material price increases. These increases were partially offset by lower heavy wall pipe and tube inventory (down $4,643,000) resulting from higher sales levels and lower stainless steel pipe inventory (down $4,808,000) resulting from purchases for a large sales order being made during the fourth quarter of 2016 that was shipped early 2017 combined with lower nickel surcharges in 2017. Inventory turns increased from 1.90 turns at December 31, 2016, calculated on a three-month average basis, to 2.79 turns at September 30, 2017;
d)
Accounts payable increased $8,084,000 as of September 30, 2017 from the prior year-end. The significant portion of the increase was for Bristol Metals-Munhall (up $6,716,000) as inventory is being purchased to support sales projections. Payable days outstanding remained at approximately 60 days at the end of the third quarter of 2017 and at December 31, 2016; and
e)
Capital expenditures for the first nine months of 2017 were $3,693,000.
The Company drew $17,919,000 against its line of credit during the first nine months of 2017 and had $26,723,000 of borrowings outstanding as of September 30, 2017. Covenants under the Credit Agreement include maintaining a minimum fixed charge coverage ratio and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs. The Company was in compliance with all covenants as of September 30, 2017.
At December 31, 2016, the Company recorded $11,000,000 in accrued expenses and current assets to reflect the legal liability and corresponding indemnified receivable due from the former shareholders of Palmer. On June 30, 2017, the plaintiff entered into settlement agreements with Palmer/Synalloy and the former shareholders of Palmer, respectively. On August 31, 2017, the former shareholders of Palmer satisfied the financial conditions specified in their settlement agreement with the plaintiff, and the plaintiff filed a Release of Final Judgment with the Court. Because of indemnification terms included in the Stock Purchase Agreement between Synalloy and the former owners of Palmer, neither Synalloy or Palmer contributed to the payments required by the settlement agreements. As a result of the filed Release of Final Judgment the legal liability and corresponding indemnified receivable due from the former shareholders of Palmer were reduced to zero at August 31, 2017.
Outlook
The Metals Segment should benefit from higher nickel and WTI prices, improving order activity, and solid backlog. The fire retardant business along with several smaller product additions should provide incremental gains for the Specialty Chemicals Segment over the next several quarters. As previously reported, the Board of Directors has declared a $.13 per share dividend,

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which will be paid on November 6, 2017. We have started our planning activities for 2018 and will provide some guidance later this year. We remain optimistic that our end markets continue to improve and that the Company is well positioned for growth in 2018.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This quarterly report includes and incorporates by reference "forward-looking statements" within the meaning of the federal securities laws. All statements that are not historical facts are "forward-looking statements." The words "estimate," "project," "intend," "expect," "believe," "should," "anticipate," "hope," "optimistic," "plan," "outlook," "should," "could," "may" and similar expressions identify forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, including without limitation those identified below, which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements. The following factors could cause actual results to differ materially from historical results or those anticipated: adverse economic conditions; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased costs; raw materials availability; employee relations; ability to maintain workforce by hiring trained employees; labor efficiencies; customer delays or difficulties in the production of products; new fracking regulations; a prolonged decrease in oil and nickel prices; unforeseen delays in completing the integrations of acquisitions; risks associated with mergers, acquisitions, dispositions and other expansion activities; financial stability of our customers; environmental issues; unavailability of debt financing on acceptable terms and exposure to increased market interest rate risk; inability to comply with covenants and ratios required by our debt financing arrangements; ability to weather an economic downturn; loss of consumer or investor confidence and other risks detailed from time-to-time in the Company's Securities and Exchange Commission filings. The Company assumes no obligation to update the information included in this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risks
Information about the Company's exposure to market risk was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on March 14, 2017. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.

Item 4. Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or 240.15d-15(b) of the Company's disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that that such controls and procedures, as of the end of the period covered by this quarterly report, were effective.

Changes in Internal Control over Financial Reporting
The Company's management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, identified no change in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's control over financial reporting. Management has excluded the Munhall facility's operations (acquired in the MUSA Stainless acquisition) from its assessment of internal control over financial reporting as of September 30, 2017 because this material acquisition closed in the first quarter of 2017. Total assets and total revenue associated with the Munhall facility represent approximately 21 percent, or $33.5 million and twelve percent, or $17.1 million, respectively, of the related consolidated financial statement amounts of the Metals Segment as of, and for the quarter ended, September 30, 2017.

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PART II

Item 1. Legal Proceedings
It is not unusual for us and our subsidiaries to be involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business involving, among other things, product liability, commercial, employment, workers' compensation, and environmental matters. We establish reserves in a manner that is consistent with accounting principles generally accepted in the United States for costs associated with such matters when a liability is probable and those costs are capable of being reasonably estimated. We cannot predict with any certainty the outcome of these unresolved legal actions or the range of possible loss or recovery. Based on current information, however, we believe that the eventual outcome of these unresolved legal actions, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or cash flows. There were no material changes in our Legal Proceedings, as discussed in Part I, Item 3 in the Company's Form 10-K for the period ending December 31, 2016, other than those discussed in Note 11 in Part I, Item 1 of this quarterly report.

Item 1A. Risk Factors
There were no material changes in our assessment of risk factors as discussed in Part I, Item 1A in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Period
 
(a)
Total number of shares (or units) purchased
 
(b)
Average price paid per share (or unit)
 
(c)
Total number of shares (or units) purchased as part of publicly announced plans or programs
 
(d)
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
Jan 1, 2017 - Mar 31, 2017
 
—

 
$
—

 
—

 
870,100

Apr 1, 2017 - June 30, 2017
 
—

 
$
—

 
—

 
870,100

Jul 1, 2017 - Aug 31, 2017
 
—

 
$
—

 
—

 
870,100

Total
 
—

 
 
 
—

 
 
The Stock Repurchase Plan was approved by the Company's Board of Directors on August 31, 2015 authorizing the Company's Chief Executive Officer or the Chief Financial Officer to repurchase shares of the Company's stock on the open market, provided however, that the number of shares of common stock repurchased pursuant to the resolutions adopted by the Board do not exceed 1,000,000 shares and no shares shall be repurchased at a price in excess of $10.99 per share or during an insider trading "closed window" period. There is no guarantee on the exact number of shares that will be purchased by the Company and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. The Stock Repurchase Plan will expire on August 31, 2017.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
None.

Item 5. Other Information
None.


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Item 6. Exhibits
Exhibit No.  
 
 
 
 
Description
 
 
 
 
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase
*
 
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed "furnished" and not "filed."


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
SYNALLOY CORPORATION
(Registrant)
 
 
 
 
 
 
Date: November 7, 2017
By:
/s/ Craig C. Bram               
 
 
Craig C. Bram
 
 
President and Chief Executive Officer
 
 
(principal executive officer)
 
 
 
Date: November 7, 2017
By:
/s/ Dennis M. Loughran      
 
 
Dennis M. Loughran
 
 
Senior Vice President and Chief Financial Officer
 
 
(principal financial officer)
 
 
 
Date: November 7, 2017
By:
/s/ Richard D. Sieradzki                   
 
 
Richard D. Sieradzki
 
 
Chief Accounting Officer
 
 
(principal accounting officer)





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