synl-20210930

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, 2021


☐			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

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)

(804)

822-3260

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of exchange on which registered
Common Stock, par value $1.00 per share	SYNL	NASDAQ Global Market

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 every Interactive Data File required to be submitted 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 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.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

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 8, 2021 was 9,372,346

Synalloy Corporation

Table of Contents



PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	4
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited)	6
	Condensed Consolidated Statements of Shareholders' Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	10
	Note 1: Basis of Presentation	10
	Note 2: Revenue Recognition	10
	Note 3: Fair Value of Financial Instruments	11
	Note 4: Inventories	13
	Note 5: Property, Plant and Equipment	13
	Note 6: Intangible Assets and Deferred Charges	13
	Note 7: Long-term Debt	14
	Note 8: Leases	15
	Note 9: Shareholders' Equity	16
	Note 10: Exit Activities	16
	Note 11: Earnings (Loss) Per Share	16
	Note 12: Income Taxes	17
	Note 13: Commitments and Contingencies	17
	Note 14: Industry Segments	18
	Note 15: Proxy Contest Costs and Recoveries	18
	Note 16: Related Party Transactions	19
	Note 1 7 : Subsequent Events	20
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32

	Signatures	33

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other applicable federal securities laws. All statements that are not historical facts are forward-looking statements. Forward looking statements can be identified through the use of words such as "estimate," "project," "intend," "expect," "believe," "should," "anticipate," "hope," "optimistic," "plan," "outlook," "should," "could," "may" and similar expressions. 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, including risks relating to the impact and spread of and the government’s response to COVID-19; inability to weather an economic downturn; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased costs; raw material availability; financial stability of the Company’s customers; customer delays or difficulties in the production of products; loss of consumer or investor confidence; employee relations; ability to maintain workforce by hiring trained employees; labor efficiencies; risks associated with acquisitions; environmental issues; negative or unexpected results from tax law changes; inability to comply with covenants and ratios required by the Company’s debt financing arrangements; and other risks detailed from time-to-time in Synalloy Corporation's Securities and Exchange Commission filings, including our Annual Report on Form 10-K, which filings are available from the SEC. Synalloy Corporation assumes no obligation to update any forward-looking information included in this release.

Part I - Financial Information

Item 1. Financial Statements

SYNALLOY CORPORATION

Condensed Consolidated Balance Sheets

(in thousands, except par value and share data)


	(Unaudited)
	September 30, 2021		December 31, 2020
Assets
Current assets
Cash and cash equivalents	$	1,174	$	236
Accounts receivable, net of allowance for credit losses of $108 and $496, respectively	44,096		28,183
Inventories, net	98,334		85,080
Prepaid expenses and other current assets	8,820		13,384

Total current assets	152,424		126,883

Property, plant and equipment, net	29,691		35,096
Right-of-use assets, operating leases, net	30,975		31,769
Goodwill	1,355		1,355
Intangible assets, net	9,385		11,426

Deferred charges, net	327		455

Total assets	$	224,157	$	206,984

Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	34,850	$	19,732
Accounts payable - related parties	2		—
Accrued expenses and other current liabilities	10,144		6,123
Current portion of long-term debt	1,750		875
Current portion of earn-out liability	2,249		3,434
Current portion of operating lease liabilities	1,019		867
Current portion of finance lease liabilities	40		19

Total current liabilities	50,054		31,050

Long-term debt	47,213		60,495
Long-term portion of earn-out liability	—		287
Long-term portion of operating lease liabilities	32,191		32,771
Long-term portion of finance lease liabilities	46		37
Deferred income taxes	1,342		1,957
Other long-term liabilities	84		92
Total non-current liabilities	80,876		95,639
Commitments and contingencies – See Note 13

Shareholders' equity
Common stock, par value $1 per share; authorized 24,000,000 shares; issued 10,300,000 shares	10,300		10,300
Capital in excess of par value	37,037		37,719
Retained earnings	55,014		42,835
	102,351		90,854
Less: cost of common stock in treasury - 970,653 and 1,123,319 shares, respectively	9,124		10,559
Total shareholders' equity	93,227		80,295
Total liabilities and shareholders' equity	$	224,157	$	206,984

Note: The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date. See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net sales	$	86,182	$	59,266	$	239,047	$	200,099
Cost of sales	68,176		54,271		198,219		183,592
Gross profit	18,006		4,995		40,828		16,507
Expenses
Selling, general and administrative	6,948		6,275		21,941		21,088
Acquisition costs and other	201		656		201		803
Proxy contest costs and recoveries	—		207		168		3,105
Earn-out adjustments	160		(146)		1,430		(969)
Asset impairments	—		—		233		6,079
Goodwill impairment	—		10,748		—		10,748
Gain on lease modification	—		(171)		—		(171)
Operating income (loss)	10,697		(12,574)		16,855		(24,176)
Other expense (income)
Interest expense	329		452		1,068		1,703
Loss on extinguishment of debt	—		—		223		—
Change in fair value of interest rate swaps	—		(16)		(2)		65
Other, net	(10)		59		152		(1,244)
Income (loss) before income taxes	10,378		(13,069)		15,414		(24,700)
Income tax provision (benefit)	2,179		(2,530)		3,235		(6,026)




Net income (loss)	$	8,199	$	(10,539)	$	12,179	$	(18,674)















Net income (loss) per common share:
Basic	$	0.88	$	(1.16)	$	1.32	$	(2.06)
Diluted	$	0.87	$	(1.16)	$	1.30	$	(2.06)

Weighted average shares outstanding:
Basic	9,287		9,105		9,237		9,079
Dilutive effect from stock options and grants	116		—		111		—
Diluted	9,403		9,105		9,348		9,079

See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands)


	Nine Months Ended September 30,
	2021		2020
Operating activities
Net income (loss)	$	12,179	$	(18,674)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation expense	5,459		5,752
Amortization expense	2,041		2,324
Amortization of debt issuance costs	71		129
Asset impairments	233		6,079
Goodwill impairment	—		10,748
Loss on extinguishment of debt	223		—
Unrealized gain on equity securities	—		(208)
Deferred income taxes	(615)		(2,116)
Proceeds from business interruption insurance	—		1,040
Loss on sale of equity securities	—		38
Earn-out adjustments	1,430		(969)
Payments on earn-out liabilities in excess of acquisition date fair value	(11)		(292)
(Reduction of) provision for losses on accounts receivable	(388)		53
Provision for losses on inventories	2,286		874
(Gain) loss on disposal of property, plant and equipment	(580)		237
Non-cash lease expense	373		385
Non-cash lease termination loss	5		24
Gain on lease modification	—		(171)
Change in fair value of interest rate swap	(2)		65
Issuance of treasury stock for director fees	58		405
Stock-based compensation expense	695		1,036
Changes in operating assets and liabilities:
Accounts receivable	(15,525)		1,438
Inventories	(15,539)		4,593
Other assets and liabilities	(1,443)		(1,902)
Accounts payable	15,118		(1,636)
Accounts payable - related parties	2		—
Accrued expenses	3,272		681
Accrued income taxes	6,844		(3,963)
Net cash provided by operating activities	16,186		5,970
Investing activities
Purchases of property, plant and equipment	(761)		(2,824)
Proceeds from disposal of property, plant and equipment	1,054		102
Proceeds from sale of equity securities	—		4,430


Net cash provided by investing activities	293		1,708
Financing activities
Borrowings from long-term debt	41,648		—

Payments on long-term debt	(54,056)		(3,000)
Payments on BB&T line of credit	—		(1,210)
Principal payments on finance lease obligations	(31)		(101)
Payments for finance lease terminations	—		(204)
Payments on earn-out liabilities	(2,891)		(2,939)
Payments for termination of interest rate swap	(46)		—
Repurchase of common stock	—		(635)
Payments for deferred financing costs	(165)		(52)
Net cash used in financing activities	(15,541)		(8,141)
Increase (decrease) in cash and cash equivalents	938		(463)
Cash and cash equivalents, beginning of period	236		626
Cash and cash equivalents, end of period	$	1,174	$	163

See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands)


	Nine Months Ended September 30,
Supplemental Disclosure	2021		2020
Cash paid for interest	$	994	$	1,573
Cash paid for income taxes	$	649	$	16

See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statements of Shareholders' Equity (Unaudited)

(in thousands)


	Three Months Ended September 30, 2021

	Common Stock		Capital in Excess of Par Value		Retained Earnings		Cost of Common Stock in Treasury		Total
Balance June 30, 2021	$	10,300	$	37,309	$	46,815	$	(9,693)	$	84,731
Net income	—		—		8,199		—		8,199
Issuance of 60,494 shares of common stock from treasury	—		(511)		—		569		58
Stock-based compensation	—		239		—		—		239
Balance September 30, 2021	$	10,300	$	37,037	$	55,014	$	(9,124)	$	93,227

	Nine Months Ended September 30, 2021

	Common Stock		Capital in Excess of Par Value		Retained Earnings		Cost of Common Stock in Treasury		Total
Balance December 31, 2020	$	10,300	$	37,719	$	42,835	$	(10,559)	$	80,295
Net income	—		—		12,179		—		12,179
Issuance of 152,666 shares of common stock from treasury	—		(1,377)		—		1,435		58
Stock-based compensation	—		695		—		—		695
Balance September 30, 2021	$	10,300	$	37,037	$	55,014	$	(9,124)	$	93,227

See accompanying notes to condensed consolidated financial statements.

Synalloy Corporation

Condensed Consolidated Statements of Shareholders' Equity (Unaudited)

Continued


	Three Months Ended September 30, 2020

	Common Stock		Capital in Excess of Par Value		Retained Earnings		Cost of Common Stock in Treasury		Total
Balance June 30, 2020	$	10,300	$	37,465	$	61,967	$	(11,675)	$	98,057
Net loss	—		—		(10,539)		—		(10,539)

Issuance of 50,652 shares of common stock from treasury	—		(71)		—		476		405
Stock-based compensation	—		270		—		—		270


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

	Nine Months Ended September 30, 2020

	Common Stock		Capital in Excess of Par Value		Retained Earnings		Cost of Common Stock in Treasury		Total
Balance December 31, 2019	$	10,300	$	37,407	$	70,552	$	(11,748)	$	106,511
Net loss	—		—		(18,674)		—		(18,674)
Cumulative adjustment due to adoption of ASC 326	—		—		(450)		—		(450)
Issuance of 126,092 shares of common stock from treasury	—		(779)		—		1,184		405
Stock-based compensation	—		1,036		—		—		1,036
Purchases of common stock	—		—		—		(635)		(635)
Balance September 30, 2020	$	10,300	$	37,664	$	51,428	$	(11,199)	$	88,193

See accompanying notes to condensed consolidated financial statements.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Note 1: Basis of Presentation

Basis of Financial Statement 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.

These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Synalloy Corporation (the "Company") Annual Report on Form 10-K for the year ended December 31, 2020 (the "Annual Report"). The financial results for the interim periods may not be indicative of the financial results for the entire year.

COVID-19 Update

During the three and nine months ended September 30, 2021, aspects of the Company's business continued to be affected by macroeconomic factors related to the COVID-19 pandemic, specifically with production at our plants and within our supply chain. The nature of the situation is dynamic and the full extent of any future impacts of the COVID-19 pandemic on the Company's operational and financial performance is currently uncertain and will depend on many factors outside of the Company's control.

Recently Issued Accounting Standards - Adopted

On September 30, 2020, the Company early adopted ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences as well as adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods.

Recently Issued Accounting Standards - Not Yet Adopted

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

Note 2: Revenue Recognition

Revenues are recognized when control of the promised goods is transferred to our customers or when a service is rendered, in an amount that reflects the consideration we are to receive in exchange for those goods or services.

The following table presents the Company's revenues, disaggregated by product group. Substantially all of the Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time.


	Three Months Ended September 30,			Nine Months Ended September 30,
(in thousands)		2021		2020		2021		2020
Fiberglass and steel liquid storage tanks and separation equipment		$	189	$	538	881		4,994
Heavy wall seamless carbon steel pipe and tube		10,398		5,436		29,347		18,408
Stainless steel pipe and tube		48,331		37,231		134,632		120,265
Galvanized pipe and tube		11,209		3,875		28,578		16,094
Specialty chemicals		16,055		12,186		45,609		40,338
Net sales		$	86,182	$	59,266	$	239,047	$	200,099

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance obligation is based on its stand-alone selling price and revenue is recognized as each performance obligation is satisfied. The Company generally determines stand-alone selling prices based on the prices charged to customers using the adjusted market assessment approach or expected cost plus margin.

Note 3: Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:

Level 1 - Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.

Level 2 - Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

•Quoted prices for similar assets or liabilities in active markets;

•Quoted prices for identical or similar assets or liabilities in non-active markets;

•Inputs other than quoted prices that are observable for the asset or liability; and

•Inputs that are derived principally from or corroborated by other observable market data.

Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using model-based techniques, including option pricing models, discounted cash flow models, probability weighted models, and Monte Carlo simulations.

The Company's financial instruments include cash and cash equivalents, accounts receivable, derivative instruments, accounts payable, earn-out liabilities, a revolving line of credit, a term loan, and equity securities investments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

Level 3: Contingent consideration (earn-out) liabilities

The fair value of contingent consideration ("earn-out") liabilities resulting from the 2017 MUSA-Stainless acquisition, 2018 MUSA-Galvanized acquisition, and 2019 American Stainless acquisition are classified as Level 3. Each quarter-end, the Company re-evaluates its assumptions for all earn-out liabilities and adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are reflected in operating income in the periods in which they are identified. Changes in the fair value of the earn-out liabilities will impact and cause volatility in the Company's operating results. The significant unobservable inputs used in the fair value measurement of the Company's earn-out liabilities are the discount rate, timing of the estimated payouts, and future revenue projections. Significant increases (decreases) in any of those inputs would not have resulted in a material difference in the fair value measurement of the earn-out liabilities for the three and nine months ended September 30, 2021.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents a summary of changes in fair value of the Company's Level 3 earn-out liabilities measured on a recurring basis for the nine months ended September 30, 2021:


(in thousands)	MUSA-Stainless		MUSA-Galvanized		American Stainless		Total
Balance December 31, 2020	$	375	$	941	$	2,405	$	3,721
Earn-out payments during the period	(385)		(780)		(1,737)		(2,902)
Changes in fair value during the period	10		949		471		1,430
Balance September 30, 2021	$	—	$	1,110	$	1,139	$	2,249

For the three and nine months ended September 30, 2021, the Company had no unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value instruments.

Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements

The following table summarizes the significant unobservable inputs in the fair value measurement of our contingent consideration (earn-out) liabilities as of September 30, 2021:

Instrument

Fair Value
September 30, 2021

Principal Valuation Technique

Significant Unobservable Inputs

Range

Weighted
Average

Contingent consideration (earn-out) liabilities

$2,249

Probability Weighted Expected Return

Discount rate

Timing of estimated payouts

2021 - 2022

Future revenue projections

$6.4M - $9.5M

$8.3M

The weighted average discount rate was calculated by applying an equal weighting to each contingent consideration's (earn-out liabilities) discount rate. The weighted average future revenue projection was calculated by applying an equal weighting of probabilities to each forecasted scenario within the valuation models to determine the probability weighted sales applicable to the contingent consideration (earn-out liabilities).

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

During the three months ended September 30, 2021, the Company had no significant measurements of assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition. During the nine months ended September 30, 2021, the Company's only significant measurements of assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition were certain long-lived assets. The Company does not periodically adjust carrying value to fair value of these assets; rather, the carrying value of the asset is reduced to its fair value when the Company determines that impairment has occurred.

During the nine months ended September 30, 2021, the Company determined that technology associated with certain long lived assets within the Specialty Chemicals Segment was obsolete and, as a result, recognized a non-cash, pre-tax asset impairment charge of $0.2 million.

Fair Value of Financial Instruments

For short-term instruments, other than those required to be reported at fair value on a recurring and non-recurring basis and for which additional disclosures are included above, management concluded the historical carrying value is a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization. Therefore, as of September 30, 2021 and December 31, 2020, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, and the Company's revolving line of credit, which is based on a variable interest rate, approximate their fair values.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 4: 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:


(in thousands)	September 30, 2021		December 31, 2020
Raw materials	$	48,633	$	36,349
Work-in-process	23,916		20,520
Finished goods	28,419		28,929
	100,968		85,798
Less: inventory reserves	(2,634)		(718)
Inventories, net	$	98,334	$	85,080

Note 5: Property, Plant and Equipment

Property, plant and equipment consist of the following:


(in thousands)	September 30, 2021		December 31, 2020
Land	$	3	$	3
Leasehold improvements	2,979		2,939
Buildings	—		84
Machinery, fixtures and equipment	99,419		100,352
Construction-in-progress	1,468		2,772
	103,869		106,150
Less: accumulated depreciation and amortization	(74,178)		(71,054)
Property, plant and equipment, net	$	29,691	$	35,096

Note 6: Intangible Assets and Deferred Charges

Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions and are amortized over their estimated useful life using either an accelerated or straight-line method over a period of eight to 15 years.

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


(in thousands)	September 30, 2021		December 31, 2020
Intangible assets, gross	$	30,866	$	30,866
Accumulated amortization of intangible assets	(21,481)		(19,440)
Intangible assets, net	$	9,385	$	11,426

Estimated amortization expense related to intangible assets for the next five years are as follows:


(in thousands)
Remainder of 2021	$	680
2022	2,501
2023	1,050
2024	952
2025	855
2026	758
Thereafter	2,589

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Deferred Charges

Deferred charges represent debt issuance costs and are amortized over their estimated useful lives using the straight-line method over a period of four years.

On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement (the "Credit Agreement") with BMO Harris Bank, N.A ("BMO") providing the Company with a new four-year revolving credit facility and replacing the Company's previous asset based revolving line of credit and term loan with Truist Bank ("Truist"). The Company accounted for this refinance as a debt extinguishment and, as a result, $0.2 million of unamortized debt issuance costs associated with the Company's previously existing bank debt were written off as a loss on extinguishment of debt during the nine months ended September 30, 2021. See Note 7 for additional information on the Company's new Credit Agreement.

The balance of deferred charges subject to amortization are as follows:


(in thousands)	September 30, 2021		December 31, 2020
Deferred charges, gross	$	398	$	792
Accumulated amortization of deferred charges	(71)		(337)
Deferred charges, net	$	327	$	455

Note 7: Long-term Debt

Long-term debt consists of the following:


(in thousands)	September 30, 2021		December 31, 2020
$150 million revolving line of credit, due January 15, 2025	$	47,213	$	—
$100 million revolving line of credit, due December 20, 2021	—		49,037
$20 million term loan, due February 1, 2024	—		11,458
Current portion of long-term debt	1,750		875
Total long-term debt	$	48,963	$	61,370

On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO. The new Credit Agreement provides the Company with a new four-year revolving credit facility with up to $150.0 million of borrowing capacity (the "Facility"). The Facility refinances and replaces the Company's previous $100.0 million asset based revolving line of credit with Truist, which was scheduled to mature on December 20, 2021, and the remaining portion of the Company's five-year $20 million term loan with Truist, which was scheduled to mature on February 1, 2024.

The initial borrowing capacity under the Facility totals $110.0 million consisting of a $105.0 million revolving line of credit and a $5.0 million delayed draw term loan. The revolving line of credit includes a $17.5 million machinery and equipment sub-limit which requires quarterly payments of $0.4 million with a balloon payment due upon maturity of the Facility in January 2025.

Availability under the Credit Agreement is based on eligible accounts receivable, inventory and fixed assets. Amounts outstanding under the revolving line of credit portion of the Facility currently bear interest, at the Company's option, at (a) the Base Rate (as defined in the Credit Agreement) plus 0.50%, or (b) LIBOR plus 1.50%. Amounts outstanding under the delayed draw term loan portion of the Facility bear interest at LIBOR plus 1.65%. The Facility also provides an unused commitment fee based on the daily used portion of the Facility. The weighted average interest rate per annum was 2.26% as of September 30, 2021.

Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries. The Facility contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $7.5 million and (ii) 10% of the revolving credit facility (currently $10.5 million). As of September 30, 2021, the Company was in compliance with all debt covenants.

As of September 30, 2021, the Company had $56.0 million of remaining available capacity under the Facility.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 8: Leases

On August 30, 2021, the Company entered into a thirty-eight month operating lease agreement for office space with an entity affiliated with the Company's Interim President and Chief Executive Officer. Pursuant to the terms of the lease agreement, the Company will pay a base rent in the first year of the agreement beginning October 30, 2021 of $5,364 monthly with an annual increase of 2.5% through the term of the agreement. During the three and nine months ended September 30, 2021, the Company recognized $0.2 million of right-of-use assets in exchange for new operating lease liabilities associated with this lease agreement. See Note 16 for additional information on the Company's related party transactions.

Total Lease Cost

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Operating lease cost	$	1,026	$	1,032	$	3,072	$	3,101
Finance lease cost:
Amortization of right-of-use assets	13		9		33		84
Interest on finance lease liabilities	1		—		2		24
Total lease cost	$	1,040	$	1,041	$	3,107	$	3,209

Reduction in carrying amounts of right-of-use assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line method over the term of the lease including any periods of free rent and are included in selling, general, and administrative expense on the unaudited condensed consolidated statement of operations.

Maturity of Leases

The amounts of undiscounted future minimum lease payments under leases as of September 30, 2021 are as follows:


(in thousands)	Operating		Finance
Remainder of 2021	$	930	$	13
2022	3,731		37
2023	3,766		28
2024	3,607		14
2025	3,626		—
Thereafter	43,548		—
Total undiscounted minimum future lease payments	59,208		92
Imputed interest	25,998		6
Present value of lease liabilities	$	33,210	$	86

Lease Term and Discount Rate


Weighted-average remaining lease term	September 30, 2021		December 31, 2020
Operating leases	14.71 years		15.47 years
Finance leases	2.26 years		2.91 years
Weighted-average discount rate
Operating leases	8.32	%	8.33	%
Finance leases	2.60	%	2.44	%

During the three and nine months ended September 30, 2021, $0.3 million of right-of-use assets were recognized in exchange for new operating lease liabilities.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 9: Shareholders' Equity

Share Repurchase Program

On February 17, 2021, the Board of Directors re-authorized the Company's share repurchase program. The previous share repurchase program had a term of 24 months and terminated on February 21, 2021. The share repurchase program allows for repurchase of up to 790,383 shares of the Company's outstanding common stock over 24 months. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. As of September 30, 2021, the Company has 790,383 shares of its share repurchase authorization remaining.

Shares repurchased for the three and nine months ended September 30, 2021 and 2020 were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Number of shares repurchased	—		—		—		59,617
Average price per share	$	—	$	—	$	—	$	10.65
Total cost of shares repurchased	$	—	$	—	$	—	$	636,940

Note 10: Exit Activities

On February 17, 2021 the Board of Directors authorized the permanent cessation of operations at Palmer and the subleasing of the Palmer facility. The Company expects to permanently cease operations at the facility by December 31, 2021.

The exit of operations at Palmer is not expected to have a material impact on any of the Company's other operating units and costs associated with the exit are not expected to be material.

Note 11: Earnings (Loss) Per Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share data)	2021		2020		2021		2020
Numerator:
Net income (loss)	$	8,199	$	(10,539)	$	12,179	$	(18,674)
Denominator:
Denominator for basic earnings per share - weighted average shares	9,287		9,105		9,237		9,079
Effect of dilutive securities:
Employee stock options and stock grants	116		—		111		—
Denominator for diluted earnings per share - weighted average shares	9,403		9,105		9,348		9,079

Net income (loss) per share:
Basic	$	0.88	$	(1.16)	$	1.32	$	(2.06)
Diluted	$	0.87	$	(1.16)	$	1.30	$	(2.06)

The diluted earnings per share calculations exclude the effect of potentially dilutive shares when the inclusion of those shares in the calculation would have an anti-dilutive effect. The Company had 0.2 million shares of common stock that were anti-dilutive for the three and nine months ended September 30, 2021, respectively. The Company had 0.3 million and 0.2 million shares of common stock that were anti-dilutive for the three and nine months ended September 30, 2020, respectively.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 12: 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 2017 or state examinations for years before 2017. During the first nine months of 2021 and 2020, the Company did not identify nor reserve for any unrecognized tax benefits.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2021			2020			2021			2020
Income tax provision (benefit)	$	2,179		$	(2,530)		$	3,235		$	(6,026)
Effective income tax rate	21.0		%	19.4		%	21.0		%	24.4		%

The three and nine months ended September 30, 2021 effective tax rates approximated the U.S. statutory rate of 21.0%.

The three months ended September 30, 2020 effective tax rate was approximately equal to the U.S. statutory rate of 21.0%. The nine months ended September 30, 2020 effective tax rate was higher than the statutory rate of 21.0% due to discrete tax benefits over the costs associated with our public proxy contest, asset impairments at our Palmer facility, goodwill impairment over our Metals Segment and benefits from our stock compensation plan. Additionally, we recognized estimated tax benefits associated with the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") which was signed into law on March 27, 2020. The CARES Act includes various income and payroll tax provisions, notably enabling the Company to carry back net operating losses and recover taxes paid in prior years.

Note 13: Commitments and 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.

Management is not currently aware of any asserted or unasserted matters which could have a material effect on the financial condition or results of operations of the Company.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 14: Industry Segments

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Net sales
Metals Segment	$	70,127	$	47,079	$	193,438	$	159,761
Specialty Chemicals Segment	16,055		12,187		45,609		40,338
	$	86,182	$	59,266	$	239,047	$	200,099
Operating income (loss)
Metals Segment	$	11,711	$	(11,563)	$	21,793	$	(19,784)
Specialty Chemicals Segment	1,356		1,061		1,999		3,508

Unallocated corporate expenses	2,009		1,526		5,138		5,132
Acquisition costs and other	201		656		201		803
Proxy contest costs and recoveries	—		207		168		3,105
Earn-out adjustments	160		(146)		1,430		(969)
Gain on lease modification	—		(171)		—		(171)
Operating income (loss)	10,697		(12,574)		16,855		(24,176)
Interest expense	329		452		1,068		1,703
Loss on extinguishment of debt	—		—		223		—
Change in fair value of interest rate swap	—		(16)		(2)		65

Other expense (income), net	(10)		59		152		(1,244)

Income (loss) before income taxes	$	10,378	$	(13,069)	$	15,414	$	(24,700)

	As of
(in thousands)	September 30, 2021		December 31, 2020
Identifiable assets
Metals Segment	$	160,170	$	141,799
Specialty Chemicals Segment	29,626		25,039
Corporate	34,361		40,146

	$	224,157	$	206,984