10-K 1 synl-20191231x10k.htm 10-K Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
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
synllogoa21.jpg
SYNALLOY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
57-0426694
(State of incorporation)
 
(I.R.S. Employer Identification No.)
4510 Cox Road, Suite 201, Richmond, Virginia, 23060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 822-3260
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Trading Symbol
Name of each exchange on which registered:
Common Stock, $1.00 Par Value
SYNL
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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, a smaller reporting company, or an 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
x
Non-accelerated filer
¨
Smaller reporting company
x
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No x
Based on the closing price as of June 30, 2019, which was the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was $77.0 million.
The number of shares outstanding of the registrant's common stock as of March 4, 2020 was 9,117,657.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2020 annual shareholders' meeting are incorporated by reference into Part III of this Form 10-K.



Synalloy Corporation
Form 10-K
For Period Ended December 31, 2019
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 16
Form 10-K Summary
 
 
 
 
 
 
Signatures


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Forward-Looking Statements
This Annual Report on Form 10-K 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 nickel and oil 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; negative or unexpected results from tax law changes; 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 in Item 1A, Risk Factors, in this Annual Report on Form 10-K and from time-to-time in Synalloy Corporation's Securities and Exchange Commission filings. Synalloy Corporation assumes no obligation to update any forward-looking information included in this Annual Report on Form 10-K.
PART I

Item 1 Business
Synalloy Corporation, a Delaware corporation, was incorporated in 1958 as the successor to a chemical manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. The Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060. Unless indicated otherwise, the terms "Synalloy", "Company," "we" "us," and "our" refer to Synalloy Corporation and its consolidated subsidiaries.
The Company's business is divided into two reportable operating segments, the Metals Segment and the Specialty Chemicals Segment. The Metals Segment operates as three reporting units, all International Organization for Standardization ("ISO") certified manufacturers, including Welded Pipe & Tube Operations, a unit that includes Bristol Metals, LLC ("BRISMET") and American Stainless Tubing, LLC ("ASTI"), which began operations effective January 1, 2019 pursuant to our acquisition of substantially all of the assets of American Stainless Tubing, Inc. ("American Stainless") (see Note 15 to the Consolidated Financial Statements), Palmer of Texas Tanks, Inc. ("Palmer"), and Specialty Pipe & Tube, Inc. ("Specialty"). Welded Pipe & Tube Operations manufactures stainless steel, galvanized, ornamental stainless steel tubing, and other alloy pipe and tube. Palmer manufactures liquid storage solutions and separation equipment. Specialty is a master distributor of seamless carbon pipe and tube. The Metals Segment's markets include the oil and gas, chemical, petrochemical, pulp and paper, mining, power generation (including nuclear), water and waste water treatment, liquid natural gas ("LNG"), brewery, food processing, petroleum, pharmaceutical, automotive & commercial transportation, appliance, architectural, and other heavy industries. The Specialty Chemicals Segment operates as one reporting unit which includes Manufacturers Chemicals, LLC ("MC"), a wholly-owned subsidiary of Manufacturers Soap and Chemical Company ("MS&C"), and CRI Tolling, LLC ("CRI Tolling"). The Specialty Chemicals Segment produces specialty chemicals for the chemical, paper, metals, mining, agricultural, fiber, paint, textile, automotive, petroleum, cosmetics, mattress, furniture, janitorial and other industries. MC manufactures lubricants, surfactants, defoamers, reaction intermediaries and sulfated fats and oils. CRI Tolling provides chemical tolling manufacturing resources to global and regional chemical companies and contracts with other chemical companies to manufacture certain, pre-defined products.
General
Metals Segment – This segment is comprised of four wholly-owned subsidiaries: Synalloy Metals, Inc., which owns 100 percent of the membership interests of BRISMET, located in Bristol, Tennessee and Munhall, Pennsylvania; ASTI, located in Troutman and Statesville, North Carolina; Palmer, located in Andrews, Texas; and Specialty, located in Mineral Ridge, Ohio and Houston, Texas. Two subsidiaries, BRISMET and ASTI, are aggregated as one reporting unit called Welded Pipe and Tube Operations, with Palmer and Specialty making up the segment's other two reporting units.
BRISMET manufactures welded pipe and tube, primarily from stainless steel, duplex, and nickel alloys. Pipe is produced in sizes from 3/8 inch to 120 inches in diameter and wall thickness up to one and one-half inches. Eighteen-inch and smaller diameter pipe is made on equipment that forms and welds the pipe in a continuous process. Pipe larger than 18 inches in diameter is formed on presses or rolls and welded on batch welding equipment. Pipe is normally produced in standard 20-foot lengths. However, BRISMET has unusual capabilities in the production of long length pipe without circumferential welds. This can reduce the installation cost

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for the customer. Lengths up to 60 feet can be produced in sizes up to 18 inches in diameter. In larger sizes, BRISMET has a unique ability among domestic producers to make 48-foot lengths in diameters up to 36 inches. Over the past four years, BRISMET has made substantial capital improvements, installing an energy efficient furnace to anneal pipe quicker while minimizing natural gas usage; system improvements in pickling to maintain the proper chemical composition of the pickling acid; and developing a heavy wall/quick turn welded pipe production shop by adding a 4,000 tonne press along with all necessary ancillary processes. BRISMET's Munhall facility manufactures stainless welded pipe as well as new product offerings in welded tubing in diameters from 5/8 inch to eight inches and gauges from 0.028 inch to 1/4 inch. Additionally, the Munhall facility produces galvanized carbon tubing in custom sizes. Munhall was designed for improved product flow and the latest technology including laser welding and in-line bright annealing.
ASTI is a leading manufacturer of high-end ornamental stainless steel tubing, supplying the automotive, commercial transportation, marine, food services, construction, furniture, healthcare, and other industries. Operating facilities are located in Troutman and Statesville, North Carolina. ASTI combines the use of superior metal quality with in-house capabilities in slitting and welding, along with patented and proprietary finishing capabilities and the highest levels of customer service and technical support to provide the customer with the highest quality ornamental product available in the market. Product range includes ½” OD to 2-1/2” OD up to 5” OD, in a variety of shapes, including squares, rectangles and ellipticals. Refer to Note 15 to the Consolidated Financial Statements for further details.
Palmer is a manufacturer of fiberglass and steel storage tanks for the oil and gas, waste water treatment and municipal water industries. Located in Andrews, Texas, Palmer is ideally located in the heart of a significant oil and gas production territory. Palmer produces made-to-order fiberglass tanks, utilizing a variety of custom mandrels and application specific materials. Its fiberglass tanks range from two feet to 30 feet in diameter at various heights. Most of these tanks are used for oil field waste water capture and are an integral part of the environmental regulatory compliance of the drilling process. Each fiberglass tank is manufactured to American Petroleum Institute Q1 standards to ensure product quality. Palmer's steel storage tank facility enables efficient, environmentally compliant production with designed-in expansion capability to support future growth. Finished steel tanks range in size predominantly from 50 to 1,500 barrels and are used to store extracted oil.
Specialty is a leading master distributor of hot finish, seamless, carbon steel pipe and tubing, with an emphasis on large outside diameters and exceptionally heavy wall thickness. Specialty's products are primarily used for mechanical and high-pressure applications in the oil and gas, capital goods manufacturing, heavy industrial, construction equipment, paper and chemical industries. Operating from facilities located in Mineral Ridge, Ohio and Houston, Texas, Specialty is well-positioned to serve the major industrial and energy regions and successfully reach other target markets across the United States. Specialty performs value-added processing on approximately 80 percent of products shipped, which would include cutting to length, heat treatment, testing, boring and end finishing and typically processes and ships orders in 24 hours or less. Based upon its short lead times, Specialty plays a critical role in the supply chain, supplying long lead-time items to markets that demand fast deliveries, custom lengths, and reliable execution of orders.
In order to maintain strong business relationships, the Metals Segment uses only a few raw material suppliers. Ten suppliers furnish approximately 87 percent of total dollar purchases of raw materials, with one supplier furnishing 34 percent of material purchases. However, the Company does not believe that the loss of this supplier would have a materially adverse effect on the Company as raw materials are readily available from a number of different sources, and the Company anticipates no difficulties in fulfilling its requirements.
Specialty Chemicals Segment – This segment consists of the Company's wholly-owned subsidiary MS&C. MS&C owns 100 percent of the membership interests of MC, which has a production facility in Cleveland, Tennessee. This segment also includes CRI Tolling which is located in Fountain Inn, South Carolina. MC and CRI Tolling are aggregated as one reporting unit and comprise the Specialty Chemicals Segment. Both facilities are fully licensed for chemical manufacture. MC manufactures lubricants, surfactants, defoamers, reaction intermediaries, and sulfated fats and oils. CRI Tolling provides chemical tolling manufacturing resources to global and regional companies and contracts with other chemical companies to manufacture certain pre-defined products.
MC produces over 1,100 specialty formulations and intermediates for use in a wide variety of applications and industries. MC's primary product lines focus on the areas of defoamers, surfactants, and lubricating agents. These three fundamental product lines find their way into a large number of manufacturing businesses. Over the years, the customer list has grown to include end users and chemical companies that supply paper, metal working, surface coatings, water treatment, paint, mining, oil and gas, and janitorial applications. MC's capabilities also include the sulfation of fats and oils. These products are used in a wide variety of applications and represent a renewable resource, animal and vegetable derivatives, as alternatives to more expensive and non-renewable petroleum derivatives.

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MC's strategy has been to focus on industries and markets that have good prospects for sustainability in the U.S. in light of global trends. MC's marketing strategy relies on sales to end users through its own sales force, but it also sells chemical intermediates to other chemical companies and distributors. It also has close working relationships with a significant number of major chemical companies that outsource their production for regional manufacture and distribution to companies like MC. MC has been ISO registered since 1995.
The Specialty Chemicals Segment maintains six laboratories for applied research and quality control which are staffed by eleven employees.
Most raw materials used by the segment are generally available from numerous independent suppliers and approximately 52 percent of total purchases are from its top 10 suppliers. While some raw material needs are met by a sole supplier or only a few suppliers, the Company anticipates no difficulties in fulfilling its raw material requirements.
See Note 13 to the Consolidated Financial Statements, which are included in Item 8 of this Form 10-K, for financial information about the Company's segments.
Sales and Distribution
Metals Segment – The Metals Segment utilizes separate sales organizations for its different product groups. Welded Pipe & Tube Operations include stainless steel pipe and tube, sold worldwide under the BRISMET trade name and ornamental stainless tube, sold under the ASTI trade name in the U.S. and Canadian markets. Producing sales and providing service to the distributors and end-user customers are three outside sales employees, 14 independent manufacturers' representative, and 12 inside sales employees.
Palmer employs three sales professionals that manage the relationship with customers and partnerships to identify and secure new sales. Additionally, the Metals Segment President assists in account relationship management with large customers. Customer feedback and in-field experience generate product enhancements and new product development.
Approximately 80 percent of Specialty's pipe and tube sales are to North American pipe and tube distributors with the remainder comprised of sales to end use customers. In addition to Specialty's President, Specialty utilizes two manufacturers' representatives and seven inside sales employees, whom are located at both locations, to obtain sales orders and service its customers.
There were no customers representing more than 10 percent of the Metals Segment's revenues for 2019, 2018 or 2017.
Specialty Chemicals Segment – Specialty chemicals are sold directly to various industries nationwide by five full-time outside sales employees and eleven manufacturers' representatives. The Specialty Chemicals Segment has one customer that accounted for approximately 16 percent of the segment's revenues for 2019 and 2018, respectively, and 23 percent of the segment's revenues for 2017. In 2018, the concentration of sales to this customer declined as a result of this customer moving production of certain products previously produced and sold by the Specialty Chemicals Segment in-house.
Competition
Metals Segment – Welded Pipe & Tube Operations produce the largest sales volume group of products in the Metals Segment. For stainless steel and galvanized pipe, although information is not publicly available regarding the sales of most other producers of these products, management believes that the Company is one of the largest domestic producers of such pipe. These commodity products are highly competitive with twelve known domestic producers, including the Company, and imports from many different countries. ASTI is a leading manufacturer of high-end ornamental stainless steel tubing, supplying the automotive, commercial transportation, marine, food services, construction, furniture, healthcare and other industries. ASTI combines the use of superior metal quality with in-house capabilities in slitting and welding, along with patented and proprietary finishing capabilities and the highest levels of customer service and technical support to provide customers with the highest quality ornamental product available in the market. There are three known significant U.S. ornamental tubing manufacturers competing in the markets in which ASTI participates.
Due to the size of the tanks produced and shipped to its customers, the majority of Palmer's products is sold within a 300-mile radius from its plant in Andrews, Texas. There are currently 18 tank producers, with similar capabilities, servicing that same area.
Specialty is a leader in the specialized products segment of the pipe and tube market by offering an industry-leading in-stock inventory of a broad range of high quality products, including specialized products with limited availability. Specialty's dual branches have both common and regional-specific products and capabilities. There are four known significant pipe and tube distributors with similar capabilities to Specialty.
Specialty Chemicals Segment – The Company is the sole producer of certain specialty chemicals manufactured for other companies under processing agreements and also produces proprietary specialty chemicals. The Company's sales of specialty

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products are insignificant compared to the overall market for specialty chemicals. The market for most of the products is highly competitive and many competitors have substantially more resources than the Company.
Mergers, Acquisitions and Dispositions
The Company is committed to a long-term strategy of (a) reinvesting capital in our current business segments to foster their organic growth, (b) disposing of underperforming business units, and (c) completing acquisitions that expand our current business segments or establish new manufacturing platforms. Targeted acquisitions are priced to be economically feasible and focus on achieving positive long-term benefits. These acquisitions may be paid for in the form of cash, stock, debt or a combination thereof.
On July 1, 2018, BRISMET acquired Marcegaglia USA, Inc.'s ("MUSA") galvanized tube assets and operations ("MUSA-Galvanized") located in Munhall, PA. The purpose of the transaction was to enhance the Company's on-going business with additional capacity and technological advantages. The transaction was funded through an increase to the Company's credit facility (refer to Note 5 to the Consolidated Financial Statements). The purchase price for the transaction totaled $10.4 million. In connection with the MUSA-Galvanized acquisition, the Company is required to make quarterly earn-out payments for a period of four years following closing, based on actual sales levels of galvanized pipe and tube. The tangible assets purchased and liabilities assumed from MUSA include accounts receivable, inventory, equipment, and accounts payable.
On January 1, 2019, ASTI completed the American Stainless acquisition. The purpose of the transaction was to extend and enhance the Company's on-going business with additional capacity and new technological advantages in the production of stainless ornamental tubing. The purchase price was $21.9 million. American Stainless will also receive quarterly earn-out payments for a period of three years following closing. Synalloy funded the acquisition with a new five-year $20 million term note and a draw against its $100 million asset based line of credit, both with Synalloy’s current lender (see Note 5 to the Consolidated Financial Statements). The tangible assets purchased and liabilities assumed from American Stainless include accounts receivable, inventory, equipment, and accounts payable.
Environmental Matters
Environmental expenditures that relate to an existing condition caused by past operations and do not contribute to future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or cleanups are probable and the costs of these assessments and/or cleanups can be reasonably estimated. Changes to laws and environmental issues, including climate change, are made or proposed with some frequency and some of the proposals, if adopted, might directly or indirectly result in a material reduction in the operating results of one or more of our operating units. We are presently unable to quantify this risk due to such uncertainties.
Seasonal Nature of the Business
With the exception of Palmer and Specialty's Houston location, which primarily serves the oil and gas industry, the Company’s businesses and products are generally not subject to any seasonal impact that results in significant variations in revenues from one quarter to another. Fourth quarter revenue and profit for Palmer and Specialty Houston can be as much as 25 percent below the other three quarters due to vacation schedules for customer field crews working at the drill sites.
Backlogs
The Specialty Chemicals Segment operates primarily on the basis of delivering products soon after orders are received. Accordingly, backlogs are not a factor in this business. The same applies to seamless, carbon steel pipe and tubing sales in the Metals Segment. However, backlogs are important in the Metals Segment's welded pipe & tube and tank manufacturing operations, where both businesses incur significant dollar value of committed orders in advance of production. Its backlog of open orders for welded stainless steel pipe were $35.4 million and $31.2 million and for tanks were $5.8 million and $20.7 million at the end of 2019 and 2018, respectively.
Employee Relations
At December 31, 2019, the Company had 606 employees. The Company considers relations with employees to be strong. The number of employees of the Company represented by unions, located at the Bristol, Tennessee, Mineral Ridge, Ohio, and Munhall, Pennsylvania facilities, is 247, or 41 percent of the Company's employees. They are represented by three locals affiliated with the United Steelworkers. Collective bargaining contracts for the Steelworkers expire in July 2024 (Bristol, TN), June 2020 (Mineral Ridge, OH), and January 2023 (Munhall, PA).

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Financial Information about Geographic Areas
Information about revenues derived from domestic and foreign customers are set forth in Note 13 to the Consolidated Financial Statements.
Available information
The Company electronically files with the Securities and Exchange Commission ("SEC") its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its periodic reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "1934 Act"), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC maintains a site on the Internet, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company also makes its filings available, free of charge, through its Web site, www.synalloy.com, as soon as reasonably practical after the electronic filing of such material with the SEC. The information on the Company's Web site is not incorporated into this Annual Report on Form 10-K or any other filing the Company makes with the SEC.

Item 1A Risk Factors
There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that we believe to be material, but the risks and uncertainties described are not the only risks and uncertainties that could affect our business. Reference should be made to "Forward-Looking Statements" above, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 below.

The cyclical nature of the industries in which our customers operate causes demand for our products to be cyclical, creating uncertainty regarding future profitability. Various changes in general economic conditions affect the industries in which our customers operate. These changes include decreases in the rate of consumption or use of our customers’ products due to economic downturns. Other factors causing fluctuation in our customers’ positions are changes in market demand, capital spending, tariff induced price changes, lower overall pricing due to domestic and international overcapacity, lower priced imports, currency fluctuations, and increases in use or decreases in prices of substitute materials. As a result of these factors, our profitability has been and may in the future be subject to significant fluctuation.

Domestic competition could force lower product pricing and may have an adverse effect on our revenues and profitability. From time-to-time, intense competition and excess manufacturing capacity in the commodity stainless and galvanized steel industry have resulted in reduced selling prices, excluding raw material surcharges, for many of our stainless steel products sold by the Metals Segment. In order to maintain market share, we would have to lower our prices to match the competition. These factors have had and may continue to have an adverse impact on our revenues, operating results and financial condition and may continue to do so in the future.

Our business, financial condition and results of operations could be adversely affected by an increased level of imported products. Our business is susceptible to the import of products from other countries, particularly steel products. Import levels of various products are affected by, among other things, overall world-wide demand, lower cost of production in other countries, the trade practices of foreign governments, government subsidies to foreign producers, the strengthening of the U.S. dollar and governmentally imposed trade restrictions in the United States. Although imports from certain countries have been curtailed by anti-dumping duties, imported products from other countries could significantly reduce prices. Increased imports of certain products, whether illegal dumping or legal imports, could reduce demand for our products in the future and adversely affect our business, financial position, results of operations or cash flows.


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The Specialty Chemicals Segment uses significant quantities of a variety of specialty and commodity chemicals in its manufacturing processes, which are subject to price and availability fluctuations that may have an adverse impact on our financial performance. The raw materials we use are generally available from numerous independent suppliers. However, some of our raw material needs are met by a sole supplier or only a few suppliers. If any supplier that we rely on for raw materials ceases or limits production, we may incur significant additional costs, including capital costs, in order to find alternate, reliable raw material suppliers. We may also experience significant production delays while locating new supply sources, which could result in our failure to timely deliver products to our customers. Purchase prices and availability of these critical raw materials are subject to volatility. Some of the raw materials used by the Specialty Chemicals Segment are derived from petrochemical-based feedstock, such as crude oil and natural gas, which have been subject to historical periods of rapid and significant movements in price. These fluctuations in price could be aggravated by factors beyond our control such as political instability, and supply and demand factors, including Organization of the Petroleum Exporting Countries ("OPEC") production quotas and increased global demand for petroleum-based products. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, at prices and other terms acceptable, or at all. If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. We attempt to pass changes in the prices of raw materials along to our customers. However, we cannot always do so, and any limitation on our ability to pass through any price increases could have an adverse effect on our financial performance. Any significant variations in the cost and availability of our specialty and commodity materials may negatively affect our business, financial condition or results of operations, specifically for the Specialty Chemicals Segment.

We rely on a small number of suppliers for our raw materials and any interruption in our supply chain could affect our operations. In order to foster strong business relationships, the Metals Segment uses only a few raw material suppliers. During the year ended December 31, 2019, 10 suppliers furnished approximately 87 percent of our total dollar purchases of raw materials, with one supplier providing 34 percent. However, these raw materials are available from a number of sources, and the Company anticipates no difficulties in fulfilling its raw materials requirements for the Metals Segment. Raw materials used by the Specialty Chemicals Segment are generally available from numerous independent suppliers and approximately 52 percent of total purchases were made from our top 10 suppliers during the year ended December 31, 2019. Although some raw material needs are met by a single supplier or only a few suppliers, the Company anticipates no difficulties in fulfilling its raw material requirements for the Specialty Chemicals Segment. While the Company believes that raw materials for both segments are readily available from numerous sources, the loss of one or more key suppliers in either segment, or any other material change in our current supply channels, could have an adverse effect on the Company’s ability to meet the demand for its products, which could impact our operations, revenues and financial results.

A substantial portion of our overall sales is dependent upon a limited number of customers, and the loss of one or more of such customers would have a material adverse effect on our business, results of operation and profitability. The products of the Specialty Chemicals Segment are sold to various industries nationwide. The Specialty Chemicals Segment has one customer that accounted for approximately 16 percent of revenues for 2019 and 2018, respectively, and 23 percent of revenues for 2017. The concentration of sales to this customer declined as a result of this customer moving production of certain products previously produced and sold by the Specialty Chemicals Segment in house. The loss of this customer would have a material adverse effect on the revenues of the Specialty Chemicals Segment of the Company.

There were no customers representing more than 10 percent of the Metals Segment's revenues in 2019, 2018, or 2017. Palmer and Specialty, which are a part of the Metals Segment, sell much of their products to the oil and gas industry. Any change in this industry, or any change in this industry’s demand for their products, would have a material adverse effect on the profits of the Metals Segment and the Company.

Our operating results are sensitive to the availability and cost of energy and freight, which are important in the manufacture and transport of our products. Our operating costs increase when energy or freight costs rise. During periods of increasing energy and freight costs, we might not be able to fully recover our operating cost increases through price increases without reducing demand for our products. In addition, we are dependent on third party freight carriers to transport many of our products, all of which are dependent on fuel to transport our products. The prices for and availability of electricity, natural gas, oil, diesel fuel and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair the ability to manufacture products for customers and may result in the decline of freight carrier capacity in our geographic markets, or make freight carriers unavailable. Further, increases in energy or freight costs that cannot be passed on to customers, or changes in costs relative to energy and freight costs paid by competitors, has adversely affected, and may continue to adversely affect, our profitability.


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Oil prices are extremely volatile. A substantial or extended decline in the price of oil could adversely affect our financial condition and results of operations. Prices for oil can fluctuate widely. Our Palmer and Specialty (Houston, Texas) units' revenues are highly dependent on our customers adding oil well drilling and pumping locations. Should oil prices decline such that drilling becomes unprofitable for our customers, such customers will likely cap many of their current wells and cease or curtail expansion. This will decrease the demand for our tanks and pipe and tube and adversely affect the results of our operations.
Significant changes in nickel prices could have an impact on the sales of the Metals Segment. The Metals Segment uses nickel in a number of its products. Nickel prices are currently at a relatively low level, which reduces our manufacturing costs for certain products. When nickel prices increase, many of our customers increase their orders in an attempt to avoid future price increases, resulting in increased sales for the Metals Segment. Conversely, when nickel prices decrease, many of our customers wait to place orders in an attempt to take advantage of subsequent price decreases, resulting in reduced sales for the Metals Segment. On average, the Metals Segment turns its inventory of commodity pipe every six months, but the nickel surcharge on sales of commodity pipe is established on a monthly basis. The difference, if any, between the price of nickel on the date of purchase of the raw material and the price, as established by the surcharge, on the date of sale has the potential to create an inventory price change gain or loss. If the price of nickel steadily increases over time the Metals Segment is the beneficiary of the increase in nickel price in the form of metal price change gains. We will incur inventory price losses in the future if nickel prices decrease. Any material changes in the cost of nickel could impact our sales and result in fluctuations in the profits of the Metals Segment.
We encounter significant competition in all areas of our businesses and may be unable to compete effectively, which could result in reduced profitability and loss of market share. We actively compete with companies producing the same or similar products and, in some instances, with companies producing different products designed for the same uses. We encounter competition from both domestic and foreign sources in price, delivery, service, performance, product innovation and product recognition and quality, depending on the product involved. For some of our products, our competitors are larger and have greater financial resources than we do. As a result, these competitors may be better able to withstand a change in conditions within the industries in which we operate, a change in the prices of raw materials or a change in the economy as a whole. Our competitors can be expected to continue to develop and introduce new and enhanced products and more efficient production capabilities, which could cause a decline in market acceptance of our products. Current and future consolidation among our competitors and customers also may cause a loss of market share as well as put downward pressure on pricing. Our competitors could cause a reduction in the prices for some of our products as a result of intensified price competition. Competitive pressures can also result in the loss of major customers. If we cannot compete successfully, our business, financial condition and profitability could be adversely affected.
Our lengthy sales cycle for the Specialty Chemicals Segment makes it difficult to predict quarterly revenue levels and operating results. Purchasing the products of the Specialty Chemicals Segment is a major commitment on the part of our customers. Before a potential customer determines to purchase products from the Specialty Chemicals Segment, the Company must produce test product material so that the potential customer is satisfied that we can manufacture a product to their specifications. The production of such test materials is a time-consuming process. Accordingly, the sales process for products in the Specialty Chemicals Segment is a lengthy process that requires a considerable investment of time and resources on our part. As a result, the timing of our revenues is difficult to predict, and the delay of an order could cause our revenues to fall below our expectations and those of the public market analysts and investors.
Our operations expose us to the risk of environmental, health and safety liabilities and obligations, which could have a material adverse effect on our financial condition, results of operations or cash flows. We are subject to numerous federal, state and local environmental protection and health and safety laws governing, among other things:
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the generation, use, storage, treatment, transportation, disposal and management of hazardous substances and wastes;
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emissions or discharges of pollutants or other substances into the environment;
•
investigation and remediation of, and damages resulting from, releases of hazardous substances; and
•
the health and safety of our employees.
Under certain environmental laws, we can be held strictly liable for hazardous substance contamination of any real property we have ever owned, operated or used as a disposal site. We are also required to maintain various environmental permits and licenses, many of which require periodic modification and renewal. Our operations entail the risk of violations of those laws and regulations, and we cannot assure you that we have been or will be at all times in compliance with all of these requirements. In addition, these requirements and their enforcement may become more stringent in the future.
We have incurred, and expect to continue to incur, additional capital expenditures in addition to ordinary costs to comply with applicable environmental laws, such as those governing air emissions and wastewater discharges. Our failure to comply with applicable environmental laws and permit requirements could result in civil and/or criminal fines or penalties, enforcement actions, and regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures such as the installation of

8




pollution control equipment, which could have a material adverse effect on our financial condition, results of operations or cash flows.
We are currently, and may in the future be, required to investigate, remediate or otherwise address contamination at our current or former facilities. Many of our current and former facilities have a history of industrial usage for which additional investigation, remediation or other obligations could arise in the future and that could materially adversely affect our business, financial condition, results of operations or cash flows. In addition, we are currently, and could in the future be, responsible for costs to address contamination identified at any real property we used as a disposal site.
Although we cannot predict the ultimate cost of compliance with any of the requirements described above, the costs could be material. Non-compliance could subject us to material liabilities, such as government fines, third-party lawsuits or the suspension of non-compliant operations. We also may be required to make significant site or operational modifications at substantial cost. Future developments also could restrict or eliminate the use of or require us to make modifications to our products, which could have a significant negative impact on our results of operations and cash flows. At any given time, we are involved in claims, litigation, administrative proceedings and investigations of various types involving potential environmental liabilities, including cleanup costs associated with hazardous waste disposal sites at our facilities. We cannot assure you that the resolution of these environmental matters will not have a material adverse effect on our results of operations or cash flows. The ultimate costs and timing of environmental liabilities are difficult to predict. Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. We could incur significant costs, including cleanup costs, civil or criminal fines and sanctions and third-party claims, as a result of past or future violations of, or liabilities under, environmental laws.
We could be subject to third party claims for property damage, personal injury, nuisance or otherwise as a result of violations of, or liabilities under, environmental, health or safety laws in connection with releases of hazardous or other materials at any current or former facility. We could also be subject to environmental indemnification claims in connection with assets and businesses that we have acquired or divested.
There can be no assurance that any future capital and operating expenditures to maintain compliance with environmental laws, as well as costs to address contamination or environmental claims, will not exceed any current estimates or adversely affect our financial condition and results of operations. In addition, any unanticipated liabilities or obligations arising, for example, out of discovery of previously unknown conditions or changes in laws or regulations, could have an adverse effect on our business, financial condition, results of operations or cash flows.
We are dependent upon the continued operation of our production facilities, which are subject to a number of hazards. In both of our business segments, but especially in the Specialty Chemicals Segment, our production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unscheduled downtime and environmental hazards which could result in liability for workplace injuries and fatalities. In addition, some of our production capabilities are highly specialized, which limits our ability to shift production to another facility in the event of an incident at a particular facility. If a production facility, or a critical portion of a production facility, were temporarily shut down, we likely would incur higher costs for alternate sources of supply for our products. We cannot assure you that we will not experience these types of incidents in the future or that these incidents will not result in production delays, failure to timely fulfill customer orders or otherwise have a material adverse effect on our business, financial condition or results of operations.
Certain of our employees in the Metals Segment are covered by collective bargaining agreements, and the failure to renew these agreements could result in labor disruptions and increased labor costs. As of December 31, 2019, we had 247 employees represented by unions at our Bristol, Tennessee, Mineral Ridge, Ohio, and Munhall, Pennsylvania facilities, which is 41 percent of the aggregate number of Company employees. These employees are represented by three local unions affiliated with the United Steelworkers (the “Steelworkers Union"). The collective bargaining contracts for the Steelworkers Unions will expire in July 2024 (Bristol, TN), June 2020 (Mineral Ridge, OH), and January 2023 (Munhall, PA). Although we believe that our present labor relations are strong, our failure to renew these agreements on reasonable terms as the current agreements expire could result in labor disruptions and increased labor costs, which could adversely affect our financial performance.

9




Our current capital structure includes indebtedness, which is secured by all or substantially all of our assets and which contains restrictive covenants that may prevent us from obtaining adequate working capital, making acquisitions or capital improvements. Our existing credit facility contains restrictive covenants that limit our ability to, among other things, borrow money or guarantee the debts of others, use assets as security in other transactions, make investments or other restricted payments or distributions, change our business or enter into new lines of business, and sell or acquire assets or merge with or into other companies. In addition, our credit facility requires us to meet a minimum fixed charge coverage ratio which could limit our ability to plan for or react to market conditions or meet extraordinary capital needs and could otherwise restrict our financing activities. Our ability to comply with the covenants and other terms of our credit facility will depend on our future operating performance. If we fail to comply with such covenants and terms, we will be in default and the maturity of any then outstanding related debt could be accelerated and become immediately due and payable. In addition, in the event of such a default, our lender may refuse to advance additional funds, demand immediate repayment of our outstanding indebtedness, and elect to foreclose on our assets that secure the credit facility.
There were no events of default under our credit facility at December 31, 2019. Although we believe we will remain in compliance with these covenants in the foreseeable future and that our relationship with our lender is strong, there is no assurance our lender would consent to an amendment or waiver in the event of noncompliance; or that such consent would not be conditioned upon the receipt of a cash payment, revised principal payout terms, increased interest rates or restrictions in the expansion of the credit facility for the foreseeable future, or that our lender would not exercise rights that would be available to them, including, among other things, demanding payment of outstanding borrowings. In addition, our ability to obtain additional capital or alternative borrowing arrangements at reasonable rates may be adversely affected. All or any of these adverse events would further limit our flexibility in planning for, or reacting to, downturns in our business.
We may need new or additional financing in the future to expand our business or refinance existing indebtedness, and our inability to obtain capital on satisfactory terms or at all may have an adverse impact on our operations and our financial results. If we are unable to access capital on satisfactory terms and conditions, we may not be able to expand our business or meet our payment requirements under our existing credit facility. Our ability to obtain new or additional financing will depend on a variety of factors, many of which are beyond our control. We may not be able to obtain new or additional financing because we may have substantial debt, our current receivable and inventory balances do not support additional debt availability or because we may not have sufficient cash flows to service or repay our existing or future debt. In addition, depending on market conditions and our financial performance, equity financing may not be available on satisfactory terms or at all. If we are unable to access capital on satisfactory terms and conditions, this could have an adverse impact on our operations and our financial results.
Our existing property and liability insurance coverages contain exclusions and limitations on coverage. We maintain various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles and higher premiums, primarily from the operations of the Specialty Chemicals Segment. As a result, our existing coverage may not be sufficient to cover any losses we may incur and in the future our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations or cash flows.
We may not be able to make the operational and product changes necessary to continue to be an effective competitor. We must continue to enhance our existing products and to develop and manufacture new products with improved capabilities in order to continue to be an effective competitor in our business markets. In addition, we must anticipate and respond to changes in industry standards that affect our products and the needs of our customers. We also must continue to make improvements in our productivity in order to maintain our competitive position. When we invest in new technologies, processes or production capabilities, we face risks related to construction delays, cost over-runs and unanticipated technical difficulties.
The success of any new or enhanced products will depend on a number of factors, such as technological innovations, increased manufacturing and material costs, customer acceptance and the performance and quality of the new or enhanced products. As we introduce new products or refine existing products, we cannot predict the level of market acceptance or the amount of market share these new or enhanced products may achieve. Moreover, we may experience delays in the introduction of new or enhanced products. Any manufacturing delays or problems with new or enhanced product launches will adversely affect our operating results. In addition, the introduction of new products could result in a decrease in revenues from existing products. Also, we may need more capital for product development and enhancement than is available to us, which could adversely affect our business, financial condition or results of operations. We sell our products in industries that are affected by technological changes, new product introductions and changing industry standards. If we do not respond by developing new products or enhancing existing products on a timely basis, our products will become obsolete over time and our revenues, cash flows, profitability and competitive position will suffer.

10




In addition, if we fail to accurately predict future customer needs and preferences, we may invest heavily in the development of new or enhanced products that do not result in significant sales and revenue. Even if we successfully innovate in the development of new and enhanced products, we may incur substantial costs in doing so, and our profitability may suffer. Our products must be kept current to meet the needs of our customers. To remain competitive, we must develop new and innovative products on an on-going basis. If we fail to make innovations, or the market does not accept our new or enhanced products, our sales and results could suffer.
Our inability to anticipate and respond to changes in industry standards and the needs of our customers, or to utilize changing technologies in responding to those changes, could have a material adverse effect on our business and our results of operations.
Our strategy of using acquisitions and dispositions to position our businesses may not always be successful, which may have a material adverse impact on our financial results and profitability. We have historically utilized acquisitions and dispositions in an effort to strategically position our businesses and improve our ability to compete. We plan to continue to do this by seeking specialty niches, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic fit of our existing business units. We consider acquisitions, joint ventures and other business combination opportunities as well as possible business unit dispositions. From time-to-time, management holds discussions with management of other companies to explore such opportunities. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; significant transaction costs that were not identified during due diligence; our ability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction; impairments of goodwill; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. The amount and type of consideration and deal charges paid could have a short-term dilutive effect on the Company's earnings per share. However, such transactions are anticipated to provide long-term economic benefit to the Company. If acquisition opportunities are not available or if one or more acquisitions are not successfully integrated into our operations, this could have a material adverse impact on our financial results and profitability.
The loss of key members of our management team, or difficulty attracting and retaining experienced technical personnel, could reduce our competitiveness and have an adverse effect on our business and results of operations. The successful implementation of our strategies and handling of other issues integral to our future success will depend, in part, on our experienced management team. The loss of key members of our management team could have an adverse effect on our business. Although we have entered into employment agreements with key members of our management team including Craig C. Bram, President and Chief Executive Officer, Dennis M. Loughran, Senior Vice President and Chief Financial Officer, Sally M. Cunningham, Vice President of Corporate Administration, James G. Gibson, General Manager and President of Specialty Chemicals Segment, Steven J. Baroff, President and General Manager of Specialty, K. Dianne Beck, Vice President of Specialty, Christopher D. Sitka, Vice President of Specialty, Kevin Van Zandt, Vice President of Bristol Metals-Munhall, Maria Haughton Roberson, President of ASTI, and Rex Haughton, Vice President-Operations of ASTI, employees may resign from the Company at any time and seek employment elsewhere, subject to certain non-competition and confidentiality restrictions. Additionally, if we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be harmed. 
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of such activities could result in delays or eliminate new wells from being started, thus reducing the demand for our fiberglass and steel storage tanks, pressure vessels and heavy walled pipe and tube. Hydraulic fracturing (“fracking”) is currently an essential and common practice to extract oil from dense subsurface rock formations and this lower cost extraction method is a significant driving force behind the surge of oil exploration and drilling in several locations in the United States. However, the Environmental Protection Agency, U.S. Congress and state legislatures have considered adopting legislation to provide additional regulations and disclosures surrounding this process. In the event that new legal restrictions surrounding the fracking process are adopted in the areas in which our customers operate, we may see a dramatic decrease in Palmer's and Specialty - Texas' profitability which could have an adverse impact on our financial results.
Our allowance for doubtful accounts may not be adequate to cover actual losses. An allowance for doubtful accounts in maintained for estimated losses resulting from the inability of our customers to make required payments. This allowance may not be adequate to cover actual losses, and future provisions for losses could materially and adversely affect our operating results. The allowance for doubtful accounts is based on an evaluation of the outstanding receivables and existing economic conditions. The amount of future losses is susceptible to changes in economic, operating and other outside forces and conditions, all of which are beyond our control, and these losses may exceed current estimates. Although management believes that the allowance for doubtful accounts is adequate to cover current estimated losses, management cannot make assurances that we will not further increase the allowance for doubtful accounts based on subsequent events and economic conditions. A significant increase in the allowance for doubtful accounts could adversely affect our earnings.

11




We depend on third parties to distribute certain of our products and because we have no control over such third parties we are subject to adverse changes in such parties’ operations or interruptions of service, each of which may have an adverse effect on our operations. We use third parties over which we have only limited control to distribute certain of our products. Our dependency on these third party distributors has increased as our business has grown. Because we rely on these third parties to provide distribution services, any change in our ability to access these third party distribution services could have an adverse impact on our revenues and put us at a competitive disadvantage with our competitors.
Freight costs for products produced in our Palmer facility restrict our sales area for this facility. The freight and other distribution costs for products sold from our Palmer facility are extremely high. As a result, the market area for these products is restricted, which limits the geographic market for Palmer’s tanks and the ability to significantly increase revenues derived from sales of products from the Palmer facility.
New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers. On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These regulations require companies to conduct annual due diligence and disclose whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. Tungsten and tantalum are designated as conflict minerals under the Dodd-Frank Act. These metals are used to varying degrees in our welding materials and are also present in specialty alloy products. These new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products. In addition, we could incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who could require that all of the components of our products are conflict mineral-free.
Our inability to sufficiently or completely protect our intellectual property rights could adversely affect our business, prospects, financial condition and results of operations. Our ability to compete effectively in both of our business segments will depend on our ability to maintain the proprietary nature of the intellectual property used in our businesses. These intellectual property rights consist largely of trade-secrets and know-how. We rely on a combination of trade secrets and non-disclosure and other contractual agreements and technical measures to protect our rights in our intellectual property. We also depend upon confidentiality agreements with our officers, directors, employees, consultants and subcontractors, as well as collaborative partners, to maintain the proprietary nature of our intellectual property. These measures may not afford us sufficient or complete protection, and others may independently develop intellectual property similar to ours, otherwise avoid our confidentiality agreements or produce technology that would adversely affect our business, prospects, financial condition and results of operations.
Our internal controls over financial reporting could fail to prevent or detect misstatements. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Any failure to maintain effective internal controls or to timely effect any necessary improvement in our internal controls and disclosure controls could, among other things, result in losses from fraud or error, harm our reputation or cause investors to lose confidence in our reported financial information, all of which could have a material adverse effect on our financial condition, results of operations and cash flows.
Cyber security risks and cyber incidents could adversely affect our business and disrupt operations. Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting customer or investor confidence.
Loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs could adversely affect our sales and earnings. Our business depends on maintaining an immediately available supply of various products to meet customer demand. Many of our relationships with key product suppliers are longstanding, but are terminable by either party. The loss of key supplier authorizations, or a substantial decrease in the availability of their products, could put us at a competitive disadvantage and have a material adverse effect on our business. Supply interruptions could arise from raw material shortages, inadequate manufacturing capacity or utilization to meet demand, financial problems, tariffs and other regulations affecting trade between the U.S. and other countries, labor disputes or weather conditions affecting suppliers' production, transportation disruptions or other reasons beyond our control.

12




In addition, as a master distributor, we face the risk of key product suppliers changing their relationships with distributors generally, or Specialty in particular, in a manner that adversely impacts us. For example, key suppliers could change the following: the prices we must pay for their products relative to other distributors or relative to competing products; the geographic or product line breadth of distributor authorizations; supplier purchasing incentive or other support programs; or product purchase or stock expectations.
The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in response to declining customer demand. Certain of our product and raw material suppliers have historically offered to their customers and distributors, including us, incentives for purchasing their products. In addition to market or customer account-specific incentives, certain suppliers pay incentives to the customer or distributor for attaining specific purchase volumes during the program period. In some cases, in order to earn incentives, we must achieve year-over-year growth in purchases with the supplier. When the demand for our products declines, we may be less willing to add inventory to take advantage of certain incentive programs, thereby potentially adversely impacting our profitability.
We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined. As of December 31, 2019, we had outstanding bank debt of approximately 75.6 million that was indexed to the London Interbank Offered Rate (“LIBOR”). On July 27, 2017, the Financial Conduct Authority (the “FCA”) announced its intention to phase out LIBOR rates by the end of 2021. It is not possible to predict the further effect of the rules of the FCA, any changes in the methods by which LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United Kingdom, the European Union or elsewhere. Any such developments may cause LIBOR to perform differently than in the past or cease to exist. In addition, any other legal or regulatory changes made by the FCA, ICE Benchmark Administration Limited, the European Money Markets Institute (formerly Euribor-EBF), the European Commission or any other successor governance or oversight body, or future changes adopted by such body, in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination, and, in certain situations, could result in LIBOR no longer being determined and published. If a published U.S. dollar LIBOR rate is unavailable after 2021, the interest rates on our debt which is indexed to LIBOR will be determined using various alternative methods, any of which may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on such debt if U.S. dollar LIBOR was available in its current form. Further, the same costs and risks that may lead to the discontinuation or unavailability of U.S. dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine. Any of these proposals or consequences could have a material adverse effect on our financing costs.
Item 1B Unresolved Staff Comments
None.

13




Item 2 Properties
The Company operates the major plants and facilities listed below, all of which are in adequate condition for their current usage. All facilities throughout the Company are believed to be adequately insured. The buildings are of various types of construction including brick, steel, concrete, concrete block and sheet metal. All have adequate transportation facilities for both raw materials and finished products. In September 2016, the Company sold its real estate properties previously owned in Tennessee, South Carolina, Texas and Ohio to Store Master Funding XII, LLC ("Store Funding") and concurrently leased back these real properties; see Note 10 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
On February 28, 2017, BRISMET purchased certain stainless steel pipe and tube assets of MUSA in Munhall, PA ("MUSA-Stainless"). As part of this acquisition, BRISMET entered into a 15-month lease with the sellers for the current manufacturing facility. The lease was amended to extend the term of the lease to May 31, 2023. On July 1, 2018, BRISMET completed the MUSA-Galvanized acquisition. In connection with this acquisition, the Company entered into an Amended and Restated Master Lease Agreement (the “Master Lease”) on June 29, 2018, pursuant to which the Company will lease the Munhall, PA facility, purchased by Store Funding from MUSA for the remainder of the initial term of 20 years set forth in the Master Lease. 
On January 1, 2019, ASTI completed the American Stainless acquisition. In connection with the acquisition, the Company and Store Funding entered into a second Amended and Restated Master Lease, pursuant to which the Company will lease the properties purchased by Store Funding from American Stainless on January 1, 2019, for the remainder of the initial term of 20 years set forth in the Master Lease.
A parcel of land in Mineral Ridge, OH used for inventory storage, the corporate headquarters located in Richmond, VA, and the former shared service center located in Spartanburg, SC continue to be leased by the Company from other parties.
Location
 
Principal Operations
 
Building Square Feet
 
Land Acres
Munhall, PA
 
Manufacturing stainless steel pipe
 
284,000
 
20.0
Bristol, TN
 
Manufacturing stainless steel pipe
 
275,000
 
73.1
Cleveland, TN
 
Chemical manufacturing and warehousing facilities
 
143,000
 
18.8
Fountain Inn, SC
 
Chemical manufacturing and warehousing facilities
 
136,834
 
16.9
Andrews, TX
 
Manufacturing liquid storage solutions and separation equipment
 
122,662
 
19.6
Troutman, NC
 
Manufacturing ornamental stainless steel tubing
 
106,657
 
26.5
Statesville, NC
 
Manufacturing ornamental stainless steel tubing
 
83,000
 
26.8
Houston, TX
 
Cutting facility and storage yard for heavy walled pipe
 
29,821
 
10.0
Mineral Ridge, OH
 
Cutting facility and storage yard for heavy walled pipe
 
12,000
 
12.0
Mineral Ridge, OH
 
Storage yard for heavy walled pipe
 
—
 
4.6
Richmond, VA
 
Corporate headquarters 
 
5,911
 
—
Spartanburg, SC
 
Former office space for corporate employees and shared service center (1)
 
4,858
 
—
Augusta, GA
 
None (2)
 
—
 
46.0
(1)
Property leased by Company; office was closed in 2018 and all furniture and equipment have been removed.
(2)
Property owned by Company; plant was closed in 2001 and all structures and manufacturing equipment have been removed.

Item 3 Legal Proceedings 
For a discussion of legal proceedings, see Note 11 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Item 4 Mine Safety Disclosures
Not applicable.

14




PART II

Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company had 409 common shareholders of record at March 4, 2020. The Company's common stock trades on the Nasdaq Global Market under the trading symbol SYNL. The Company's credit agreement restricts the payment of dividends indirectly through a minimum fixed charge coverage covenant. No dividends were declared or paid in 2019. The Company paid a $0.25 cash dividend on December 12, 2018 and a $0.13 cash dividend on November 6, 2017. The prices shown below are the high and low sales prices for the common stock for each full quarterly period in the last two fiscal years as quoted on the NASDAQ Global Market.
 
 
2019
 
2018
Quarter
 
High
 
Low
 
High
 
Low
1st
 
$
16.80

 
$
12.45

 
$
15.50

 
$
12.11

2nd
 
19.65

 
14.00

 
21.35

 
13.63

3rd
 
17.17

 
16.25

 
24.80

 
19.20

4th
 
16.02

 
11.45

 
23.01

 
12.60

The information required by Item 201(d) of Regulation S-K is set forth in Part III, Item 12 of this Annual Report on Form 10-K.
chart-2e6c4bab89a858a6aa3a12.jpg
*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
 
Source: Russell Investment Group



15




Comparison of 5 Year Cumulative Total Return Graph
 
 
12/14
 
12/15
 
12/16
 
12/17
 
12/18
 
12/19
Synalloy Corporation
 
$
100.00

 
$
40.62

 
$
64.65

 
$
79.82

 
$
100.34

 
$
78.09

Russell 2000
 
100.00

 
95.59

 
115.95

 
132.94

 
118.30

 
148.49

NASDAQ Non-Financial
 
100.00

 
100.93

 
104.49

 
135.77

 
127.88

 
173.66

This graph and related information shall not be deemed to be “filed” with the Securities and Exchange Commission or “soliciting material” or subject to Regulation 14A, or the liabilities of Section 18 of the 1934 Act, except to the extent the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933 or the 1934 Act. 
Unregistered Sales of Equity Securities
Pursuant to the compensation arrangement with directors discussed under Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in this Form 10-K, on May 16, 2019, the Company issued an aggregate of 15,909 shares of restricted stock to non-employee directors in lieu of $304,000 of their annual cash retainer fees. Issuance of these shares was not registered under the Securities Act of 1933 based on the exemption provided by Section 4(a)(2) thereof because no public offering was involved.
The Company also issued 146,956 shares of common stock in 2019 to management and key employees that vested pursuant to the 2005 and 2015 Stock Awards Plans. Issuance of these shares was not registered under the Securities Act of 1933 based on the exemption provided by Section 4(a)(2) thereof because no public offering was involved.
Issuer Purchases of Equity Securities

Neither the Company, nor any affiliated purchaser (as defined in Rule 10b-18(a)(3) of the 1934 Act) on behalf of the Company repurchased any of the Company's securities during the year ended December 31, 2019.

16




Item 6. Selected Financial Data

The selected financial data presented below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements (including the related notes thereto) contained elsewhere in this report.
 
 
 
(Dollar amounts in thousands, except per share data)
2019
 
2018
 
2017
 
2016
 
2015
Operations
 
 
 
 
 
 
 
 
 
Net sales
$
305,168

 
$
280,841

 
$
201,148

 
$
138,566

 
$
175,460

Gross profit
30,773

 
51,237

 
28,081

 
16,904

 
25,319

Selling, general & administrative expense
32,627

 
27,691

 
24,875

 
22,673

 
21,938

Goodwill impairment
—

 
—

 
—

 
—

 
17,158

Operating (loss) income
(1,708
)
 
21,237

 
2,057

 
(8,246
)
 
(13,031
)
Net (loss) income - continuing operations
(3,036
)
 
13,097

 
1,341

 
(6,994
)
 
(10,269
)
Net (loss) - discontinued operations
—

 
—

 
—

 
(99
)
 
(1,251
)
Net (loss) income
(3,036
)
 
13,097

 
1,341

 
(7,093
)
 
(11,520
)
Financial Position
 
 
 
 
 
 
 
 
 
Total assets
257,197

 
228,399

 
159,874

 
138,638

 
149,043

Working capital
106,537

 
130,233

 
74,396

 
64,868

 
58,310

Long-term debt, less current portion
71,554

 
76,405

 
25,914

 
8,804

 
23,410

Shareholders' equity
106,511

 
102,484

 
89,700

 
88,593

 
95,154

Financial Ratios
 
 
 
 
 
 
 
 
 
Current ratio
3.6:1

 
4.5:1

 
3.2:1

 
3.0:1

 
3.2:1

Gross profit to net sales
10
 %
 
18
%
 
14
%
 
12
 %
 
14
 %
Long-term debt to capital
41
 %
 
43
%
 
22
%
 
9
 %
 
20
 %
Return on average assets
(1
)%
 
7
%
 
1
%
 
(4
)%
 
(6
)%
Return on average equity
(3
)%
 
14
%
 
2
%
 
(7
)%
 
(10
)%
Per Share Data (Loss)/Income) – Diluted) 
 
 
 
 
 
 
 
 
 
Net (loss) income - continuing operations
$
(0.34
)
 
$
1.48

 
$
0.15

 
$
(0.81
)
 
$
(1.18
)
Net (loss) - discontinued operations
—

 
—

 
—

 
(0.01
)
 
(0.14
)
Net (loss) income
(0.34
)
 
1.48

 
0.15

 
(0.82
)
 
(1.32
)
Dividends declared and paid
—

 
0.25

 
0.13

 
—

 
0.30

Book value
11.86

 
11.54

 
10.28

 
10.22

 
11.02

Other Data
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
11,064

 
$
8,775

 
$
7,738

 
$
6,695

 
$
6,634

Capital expenditures
4,537

 
7,355

 
5,279

 
3,044

 
10,905

Employees at year end
606

 
607

 
533

 
412

 
411

Shareholders of record at year end
410

 
442

 
488

 
527

 
540

Average shares outstanding - diluted
8,983

 
8,878

 
8,728

 
8,650

 
8,710

Stock Price
 
 
 
 
 
 
 
 
 
Price range of common stock
 
 
 
 
 
 
 
 
 
High
$
19.65

 
$
24.80

 
$
15.30

 
$
11.70

 
$
18.49

Low
11.45

 
12.11

 
9.75

 
6.42

 
6.20

Close
12.91

 
16.59

 
13.40

 
10.95

 
6.88



17




Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.
Inventory Adjustments and Reserves
At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below our cost. This would indicate that an adjustment would be required.
During the years ended December 31, 2019 and December 31, 2018, adjustments of $0.2 million and $0.1 million, respectively, to inventory cost were required by our storage tank facility as lower demand for oil and gas products caused the net realizable value to fall below inventory cost for certain tanks.
Stainless steel, both in its raw material (coil or plate) or finished goods (pipe) state is purchased/sold using a base price plus an additional surcharge which is dependent on current nickel prices. As raw materials are purchased, it is priced to the Company based upon the surcharge at that date. When the selling price of the finished pipe is set for the customer, approximately three months later, the then-current nickel surcharge is used to determine the proper selling prices. A lower of cost or net realizable value ("LCNRV") adjustment is recorded when the Company's inventory cost, based upon a historical nickel price, is greater than the current selling price of that product due to a reduction in the nickel surcharge. During the years ended December 31, 2019 and December 31, 2018, no material LCNRV adjustments were required by our Metals Segment.
The Company establishes inventory reserves for:
•
Estimated obsolete or unmarketable inventory. As of December 31, 2019 and December 31, 2018, the Company identified inventory items with no sales or expected sales activity for finished goods or no usage for raw materials for a certain period of time. For those inventory items that are not currently being marketed and unable to be sold, a reserve was established for 100 percent of the inventory cost less any estimated scrap proceeds. The Company reserved $0.3 million at December 31, 2019 and December 31, 2018, respectively.
•
Estimated quantity losses. The Company performs an annual physical inventory during the fourth quarter each year. For those facilities that complete their physical inventory before the end of December, a reserve is established for the potential quantity losses that could occur subsequent to their physical. This reserve is based upon the most recent physical inventory results. At December 31, 2019 and December 31, 2018, the Company had $0.4 million reserved for expected physical inventory quantity losses.
Impairment of Long-Lived Assets
The Company continually reviews the recoverability of the carrying value of long-lived assets. Long-lived assets are reviewed for impairment when events or changes in circumstances, also referred to as "triggering events", indicate that the carrying value of a long-lived asset or group of assets (the "Assets") may no longer be recoverable. Triggering events include: a significant decline in the market price of the Assets; a significant adverse change in the operating use or physical condition of the Assets; a significant adverse change in legal factors or in the business climate impacting the Assets' value, including regulatory issues such as environmental actions; the generation by the Assets of historical cash flow losses combined with projected future cash flow losses; or the expectation that the Assets will be sold or disposed of significantly before the end of the useful life of the Assets.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations in accordance with GAAP. 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.

18




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.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is tested for impairment at the reporting unit level, annually in the fourth quarter and whenever circumstances indicate that the carrying value may not be recoverable. The evaluation of impairment involves using either a step zero qualitative approach or a quantitative approach, if required, as outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350. The step zero approach allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If an entity cannot make this determination, then the quantitative approach will be followed. The quantitative approach involves a comparison of the fair value of the reporting unit in which the goodwill is recorded to its carrying amount. If the reporting unit's fair value exceeds its carrying value, no impairment loss is recognized. However, if the reporting unit's carrying value exceeds its fair value, an impairment charge equal to the difference in the carrying value of the goodwill and reporting unit's fair value is recorded.
When the quantitative approach is used, in making our determination of fair value of the reporting unit, we rely on the discounted cash flow method. This method uses projections of cash flows from the reporting unit. This approach requires significant judgments including the Company's projected net cash flows, the weighted average cost of capital used to discount the cash flows and terminal value assumptions. We derive these assumptions used in the testing from several sources. Many of these assumptions are derived from our internal budgets, which would include existing sales data based on current product lines and assumed production levels, manufacturing costs and product pricing. We believe that our internal forecasts are consistent with those that would be used by a potential buyer in valuing our reporting units. The Company performed the quantitative analysis during the fourth quarter of 2019 which resulted in no impairment of the goodwill recognized of $1.4 million for the Specialty Chemicals Segment or the goodwill recognized of $16.2 million for the Metals Segment for the year ended December 31, 2019.
Earn-Out Liabilities
In connection with the American Stainless acquisition on January 1, 2019, the Company is required to make quarterly earn-out payments to American Stainless for a period of three years following closing. Pursuant to the asset purchase agreement between ASTI and American Stainless, earn-out payments will equate to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period. In determining the appropriate discount rate to apply to the contingent payments, the risk associated with the functional form of the earn-out, and the credit risk associated with the payment of the earn-out were all considered. The fair value of the contingent consideration was estimated by applying the probability weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income
In connection with the MUSA-Galvanized acquisition on July 1, 2018, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube. The fair value of the contingent consideration was estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income.
In connection with the MUSA-Stainless acquisition on February 28, 2017, the Company is required to make quarterly earn-out payments to MUSA for a period of 4 years following closing, based on actual sales levels of stainless steel pipe and tube (outside diameter of 10 inches or less). The fair value of the contingent consideration was estimated by applying the Monte Carlo simulation approach using management's estimates of pounds shipped and future price per unit. Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income.
Liquidity and Capital Resources
The Company had cash flows generated by operating activities during 2019 that totaled $28.6 million; cash flows used in operating activities in 2018 totaled $21.2 million, a year-over-year increase of $49.9 million. The significant components of those results are as follows:
•
Net loss for 2019 was $3.0 million. Add backs for non-cash items include a) depreciation and amortization expense of $11.1 million and b) stock-based compensation expense of $2.1 million, while outflows for non-cash items include c) the earn-out adjustments of $0.7 million, and d) all other non-cash items of $0.8 million. The prior year amount includes net income of $13.1 million, plus add backs for non-cash items of a) depreciation and amortization of $8.8 million, b

19




) the earn-out adjustment of $1.4 million and c) an unrealized loss on investments in equity securities of $2.6 million.
•
Accounts receivable generated $9.7 million of cash from operations during 2019 as days outstanding decreased 10 days in 2019, decreasing from 52 days at the end of 2018 to 42 days at the end of 2019.
•
Inventory generated $20.0 million of cash from operations as inventory levels decreased in 2019. The year-over-year decrease was primarily related to efforts to balance inventory with projected business level. Inventory turns decreased 15% from 1.90 turns at December 31, 2018, calculated on a three-month average basis, to 1.62 turns at December 31, 2019.
•
Accounts payable used $5.3 million of cash from operations in 2019, excluding the American Stainless acquisition date payable, as increased levels of business activity, which would normally increase the accounts payable balance, were offset by a return to a more normalized accounts payable days outstanding of approximately 31 days at December 31, 2019 compared to 57 days at December 31, 2018.
•
Other operating assets and liabilities used $4.2 million of cash from operations in 2019.
In 2019, the Company's current assets decreased $20.4 million while current liabilities increased $3.3 million, from the year ended 2018 amounts, which caused working capital for 2019 to decrease by $23.7 million to $106.5 million from the 2018 total of $130.2 million. The current ratio for the year ended December 31, 2019, decreased to 3.6:1compared to the 2018 year-end ratio of 4.5:1.
The Company used cash from investing activities during 2019 of $25.7 million. The American Stainless acquisition during the first quarter 2019 used $21.9 million and the Company incurred capital asset purchases of $4.5 million. The Company used cash from financing activities during 2019 of $4.5 million as the Company borrowed funds during 2019 for the aforementioned acquisition and capital purchases partially offset by repayments of the line of credit.
On October 30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of its asset-based line of credit (the "Line") by $20 million to a maximum of $65 million and extended the maturity date. Interest under the Credit Agreement is calculated using the One Month LIBOR Rate (as defined in the Credit Agreement), plus a pre-defined spread. Borrowings under the Credit Agreement are limited to an amount equal to a Borrowing Base calculation (as defined in the Credit Agreement) that includes eligible accounts receivable and inventory.
On June 29, 2018, the Company amended its Credit Agreement with its bank to increase the limit of the Line by $15 million to a maximum of $80 million. As a result of the amendment, the interest rate on the Line is now calculated using One Month LIBOR plus a spread of 1.65 percent. None of the other provisions of the Credit Agreement were changed as a result of this amendment.
On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase the Line from $80 million to $100 million and to create a new 5-year term loan in the principal amount of $20 million (the “Term Loan”). The Term Loan was used to finance the American Stainless acquisition (see Note 15 to the Consolidated Financial Statements).
The Company determined that each refinancing should be accounted for as a debt modification. The Company incurred lender and third party costs associated with the debt restructuring that were capitalized on the balance sheet while certain other third party costs were expensed.
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. In the Credit Agreement, the Company's bank agreed to release its liens on the real estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 10.
Covenants under the amended Credit Agreement include maintaining a minimum fixed charge coverage ratio, maintaining a minimum tangible net worth, and a limitation on the Company’s maximum amount of capital expenditures per year. At December 31, 2019, the Company was in compliance with all debt covenants. The Company believes that its current liquidity position is sufficient to meet its needs going forward.
Results of Operations
Comparison of 2019 to 2018 – Consolidated
For the full-year 2019, net loss totaled $3.0 million, or $0.34 per diluted loss per share. This compared to full-year 2018 net income of $13.1 million, or $1.48 diluted earnings per share. For the fourth quarter of 2019 the Company recorded a net loss of $0.9 million, or $0.10 diluted loss per share. This compares to net income of $0.5 million, or $0.06 diluted earnings per share for fourth quarter of 2018.

20




The full-year and fourth quarter of 2019 were positively impacted by mark-to-market valuation gains on investments in equity securities totaling $1.9 million and $1.7 million, respectively, compared to a valuation losses of $2.6 million for the full year of 2018 and $2.1 million in the fourth quarter of 2018, respectively. The full-year and fourth quarter 2019 operating results include an operating profit of $3.0 million and $0.7 million, respectively, due to ASTI's operations which were acquired in the first quarter of 2019. The full-year and fourth quarter 2018 operating results include an operating profit of $65,000 and $96,000, respectively, due to Munhall-Galvanized's operations which were acquired in the third quarter of 2018.
Full-year 2019 consolidated gross profit decreased 40 percent to $30.8 million, or 10 percent of sales, compared to $51.2 million, or 18 percent of sales, in 2018. For the fourth quarter of 2019, consolidated gross profit was $7.0 million, a decrease of 32 percent from the fourth quarter of 2018 of $10.3 million. Consolidated gross profit was 10 percent of sales for the fourth quarter of 2019 and 14 percent of sales for the same period of 2018. The decreases in dollars and in percentage of sales were attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2019 to 2018 below.
Consolidated selling, general and administrative expense for 2019 increased by $4.9 million to $32.6 million, or 11 percent of sales, compared to $27.7 million, or 10 percent of sales for 2018. These costs increased $0.4 million during the fourth quarter of 2019 to $7.7 million compared to $7.3 million for the same period of 2018 and were 11 percent of sales for the fourth quarter of 2019 compared to 10 percent of sales for the fourth quarter of 2018. The most significant dollar increase for both the full year and fourth quarter of 2019 when compared to the same periods of 2018 resulted from higher personnel costs due to annual merit increases and growth-related staffing increases ($1.6 million higher for the full year and $0.4 million higher for the fourth quarter); an increase in stock compensation expense related to the vesting of shares under the Company's Long-Term Incentive Program ($1.3 million higher for the full year and $0.1 million higher for the fourth quarter); and an increase in amortization expense ($1.1 million higher for the full year and $0.3 million higher for the fourth quarter). The inclusion of ASTI's selling, general and administrative expenses added $4.0 million for the year and $0.9 million for the fourth quarter. Because the American Stainless acquisition occurred in January of 2019, none of ASTI's selling, general, and administrative expenses were included in the prior year. The remainder of the increase for the year resulted primarily from:
•
Sales commissions related to higher sales ($0.7 million higher for the full year and $40,000 higher for the fourth quarter)
•
Higher professional fees related to work performed for the American Stainless acquisition ($0.5 million higher for the full year);
In addition, the Company incurred $1.9 million for one-time acquisition costs associated with the 2019 American Stainless acquisition, compared to $1.2 million of acquisition costs in 2018. These costs were $0.2 million and $0.3 million for the fourth quarters of 2019 and 2018, respectively. These items are discussed in greater detail in the respective sections below.
Comparison of 2018 to 2017 – Consolidated
For the full-year 2018, net income totaled $13.1 million, or $1.48 per diluted earnings per share. This compared to full-year 2017 net income of $1.3 million, or $0.15 diluted earnings per share. For the fourth quarter of 2018 the Company recorded net income of $0.5 million, or $0.06 diluted earnings per share. This compares to net income of $1.0 million, or $0.11 diluted earnings per share for fourth quarter of 2017.
The full-year and fourth quarter of 2018 were negatively impacted by mark-to-market valuation losses on investments in equity securities totaling $2.6 million and $2.1 million, respectively, compared to a valuation gain of $0.3 million for the full year of 2017 and no such gain or loss in the fourth quarter of 2017. The full-year and fourth quarter 2018 operating results include an operating profit of $65,000 and $96,000, respectively, due to Munhall-Galvanized's operations which were acquired in the third quarter 2018.
Full-year 2018 consolidated gross profit increased 82 percent to $51.2 million, or 18 percent of sales, compared to $28.1 million, or 14 percent of sales, in 2017. For the fourth quarter of 2018, consolidated gross profit was $10.3 million, an increase of 34 percent from the fourth quarter of 2017 of $7.7 million. Consolidated gross profit was 14 percent of sales for the fourth quarter of 2018 and 15 percent of sales for same period of 2017. The increases in dollars and in percentage of sales were attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2018 to 2017 below.
Consolidated selling, general and administrative expense for 2018 increased by $2.8 million to $27.7 million, or 10 percent of sales, compared to $24.9 million, or 12 percent of sales for 2017. These costs increased $1.3 million during the fourth quarter of 2018 to $7.3 million compared to $6.0 million for the same period of 2017 and were 10 percent of sales for the fourth quarter of 2018 compared to 11 percent of sales for the fourth quarter of 2017. The most significant dollar increase for both the full year and fourth quarter of 2018 when compared to the same periods of 2017 resulted from higher incentive based bonuses, increases of $2.0 million and $0.5 million, respectively. The inclusion of Munhall-Galvanized's selling, general and administrative expenses for the second half and fourth quarter of 2018, added $0.3 million and $0.2 million, respectively. Because the MUSA-Galvanized

21




acquisition occurred in July of 2018, none of Munhall-Galvanized's selling, general, and administrative expenses were included in the prior year. The Company also incurred lower lease expense of $0.4 million related to the inclusion of the Munhall facility into the Master Lease with Store Funding (see Note 10 to the Consolidated Financial Statements). The remainder of the increase for the year resulted primarily from:
•
Higher personnel costs due to annual merit increases and growth-related staffing increases ($0.8 million higher for the full year and $0.3 million higher for the fourth quarter);
•
Sales commissions related to higher sales ($0.2 million higher for the full year and $0.2 million higher for the fourth quarter)
In addition, the Company incurred $1.2 million for one-time acquisition costs associated with the 2018 MUSA-Galvanized acquisition and 2019 American Stainless acquisition, compared to $0.8 million of acquisition costs in 2017. These costs were $0.3 million and $13,000 for the fourth quarters of 2018 and 2017, respectively. These items will be discussed in greater detail in the respective sections below.
Metals Segment
The following table summarizes operating results from continuing operations for the three years indicated. Reference should be made to Note 13 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
 
2019
 
2018
 
2017
(in thousands)
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
251,078

 
100.0
%
 
$
222,242

 
100.0
 %
 
$
152,957

 
100.0
 %
Cost of goods sold
226,852

 
90.4
%
 
178,766

 
80.4
 %
 
133,452

 
87.2
 %
Gross profit
24,226

 
9.6
%
 
43,476

 
19.6
 %
 
19,505

 
12.8
 %
Selling, general and administrative expense
20,534

 
8.2
%
 
15,932

 
7.2
 %
 
14,080

 
9.2
 %
(Gain) loss on sale-leaseback
—

 
—
%
 
(240
)
 
(0.1
)%
 
(240
)
 
(0.2
)%
Operating income (loss)
$
3,692

 
1.5
%
 
$
27,784

 
12.5
 %
 
$
5,664

 
3.7
 %
 
Comparison of 2019 to 2018 - Metals Segment
The Metals Segment's net sales totaled $251.1 million for the full year of 2019, an increase of 13 percent compared to the same period of 2018. Net sales for the fourth quarter of 2019 totaled $55.4 million, a decrease of seven percent compared to the fourth quarter 2018 net sales of $59.4 million. Excluding net sales for ASTI (for the twelve months ended December 31, 2019) and Munhall-Galvanized (for the first six months of 2019), full-year 2019 sales decreased eight percent compared to the same period of 2018 and fourth quarter 2019 sales decreased 20 percent compared to the same period for 2018, primarily related to a 60% decline in storage tank and vessel sales, loss of value added Heavy Wall volume due to the disclosed outage starting in May 2019, as well as nickel and alloy related pricing declines compared to prior year.
Welded Pipe & Tube Operations net sales from continuing operations increased 21 percent and two percent for the full-year and fourth quarter of 2019, respectively, when compared to the same periods of the prior year. Excluding ASTI (for the twelve months ended December 31, 2019) and Munhall-Galvanized (for the first six months of 2019), net sales would have decreased nine percent and 16 percent for the full year and fourth quarter of 2019, respectively. The total sales increase for the year resulted from a 49 percent increase in unit volumes partially offset by a 18 percent decrease in average selling price. For the fourth quarter, unit volumes increased 17 percent while the average selling price decreased 12 percent for 2019 compared to 2018. The lower average selling price for the full-year was significantly impacted by the incremental sales of Munhall-Galvanized, as sales of that more commodity galvanized pipe and tube had an unfavorable effect on average selling prices. Excluding the impact of Munhall-Galvanized, the average selling price of stainless steel pipe and tube decreased 5 percent for the full year of 2019 compared to the full year of 2018, primarily due to declines in nickel and other alloy related surcharges that impacted realized sales prices.
Seamless heavy-wall carbon steel pipe and tube sales decreased six percent and five percent for the full-year and fourth quarter, respectively, of 2019 compared to the same periods of 2018. The full year sales decrease was comprised of a three percent decrease in unit volumes combined with a three percent decrease in average selling price. For the fourth quarter, unit volumes increased seven percent while average selling prices decreased 11 percent. Lower pricing was primarily due to product mix and lessening impact of tariff pricing supports in the market, but was also impacted by the overhang of excessive distributor inventories, slowing market demand and reduced mill pricing.
Storage tank sales decreased nine percent and 60 percent for the full-year and fourth quarter, respectively, of 2019 when compared to the same periods for the prior year. The full-year decrease was comprised of a 22.5 percent increase in the average selling price,

22




offset by a 25 percent decline in the number of tanks sold. As of December 31, 2019, backlog for storage tanks totaled $5.8 million, a decrease of 72 percent over levels as of December 31, 2018. For the fourth quarter, the storage tank sales decrease resulted from a 59 percent decrease in the number of tanks sold combined with a 3.5 percent increase in average selling price. The decrease in both sales levels and backlog is attributable to a significant retrenchment in completion of wells in the Permian Basin during the fourth quarter, as well as stagnant oil prices that are down 20.1 percent from early in the fourth quarter of 2018 and have seen no significant rebound in 2019.
The Metals Segment's operating income decreased $24.1 million to $3.7 million for the full-year 2019 compared to operating income of $27.8 million for 2018. Fourth quarter 2019 operating income decreased $4.1 million to $0.6 million compared to operating income of $4.7 million for the fourth quarter of 2018. Current year operating results were affected by the following factors:
•
The addition of ASTI operations as noted above. The full-year 2019 and fourth quarter of 2019 operating results includes $3.0 million and $0.7 million, respectively, for ASTI operations. These amounts do not reflect the earn-out adjustment for the year since that expense is not included in the Metals Segment's operating results.

•
Nickel prices and resulting surcharges for 304 and 316 alloys experienced significant increases and decreases during 2019, with the net result being significant margin reduction as inventories bought at higher surcharge levels were sold during declining pricing periods. As a result, the full year of 2019 generated a net unfavorable operating impact of $6.4 million related to metal pricing, compared to a period of significantly more favorable indexed nickel prices overall in 2018, which generated metal pricing gains of $5.0 million.

•
Year over year changes in volume, pricing and product mix in welded pipe and tube, as noted above, combined for a $13.4 million decline in operating profit margins in 2019 compared to 2018.

•
Operating income from seamless carbon pipe and tube showed a decline of $2.4 million related to lower volume and pricing noted above.
Selling, general and administrative expense increased $4.6 million, or 29 percent, for the full-year 2019 when compared to 2018. This expense category was 8 percent of sales for 2019 and 7 percent of sales for 2018. For the fourth quarter, selling, general and administrative expense was $5.1 million (9 percent of sales) in 2019, an increase of $1.0 million from $4.1 million (7 percent of sales) for the same period of 2018. The dollar increase for both the year and fourth quarter of 2019 when compared to the same periods of 2018 were impacted by the inclusion of ASTI's selling, general and administrative expenses. Because the American Stainless acquisition occurred in January of 2019, none of ASTI's selling, general and administrative expenses were included in the prior year. This accounted for $4.0 million and $0.9 million of the full-year and fourth quarter increase in selling, general and administrative costs for 2019. The remaining changes in selling, general and administrative expense resulted from:
•
Allocated administrative costs (higher by $1.3 million and $0.2 million for the full-year and fourth quarter, respectively);
•
Lower incentive bonus expense on a full-year basis by $1.2 million;
•
Compensation expenses primarily related to merit increases (higher by $0.2 million on a full-year basis); and
•
Lower amortization expense (lower by $60,000 and $25,000 for the full-year and fourth quarter, respectively)
Comparison of 2018 to 2017 - Metals Segment
The Metals Segment's net sales totaled $222.2 million for the full year of 2018, an increase of 45 percent compared to the same period of 2017. Net sales for the fourth quarter of 2018 totaled $59.4 million, an increase of 44 percent compared to the fourth quarter 2017 net sales of $41.1 million. Excluding Munhall-Galvanized, acquired in the third quarter of 2018, full-year 2018 sales increased 38 percent compared to the same period of 2017 and fourth quarter 2018 sales were 31 percent greater than the same period for 2017.
Stainless and galvanized steel pipe net sales from continuing operations increased 58 percent and 61 percent for the full-year and fourth quarter of 2018, respectively, when compared to the same periods of the prior year. Excluding Munhall-Galvanized, net sales would have increased 46 percent and 41 percent for the full year and fourth quarter of 2018, respectively. The total sales increase for the year resulted from a 60 percent increase in unit volumes partially offset by a two percent decrease in average selling price. For the fourth quarter, unit volumes increased 72 percent while the average selling price decreased six percent for 2018 compared to 2017. The lower average selling price for the full-year and fourth quarter resulted from the incremental sales of Munhall-Galvanized, as their sales of more commodity galvanized pipe and tube had an unfavorable effect on average selling

23




prices. Excluding the impact of Munhall-Galvanized, the average selling price of stainless steel pipe and tube increased 19 percent and 29 percent for the full year and fourth quarter of 2018, respectively, compared to the same periods of 2017.
Seamless heavy-wall carbon steel pipe and tube sales increased 29 percent and 23 percent for the full-year and fourth quarter, respectively, of 2018 compared to the same periods of 2017. The full year sales increase was comprised of a six percent increase in unit volumes combined with a 21 percent increase in average selling price. For the fourth quarter, unit volumes decreased four percent while average selling prices increased 26 percent. Heavier demand in 2018, primarily related to stable demand in the oil and gas sector, improvements in demand in the general industrial sector, as well as tariff induced price increases, drove the sales increase.
Storage tank sales increased 15 percent and two percent for the full-year and fourth quarter, respectively, of 2018 when compared to the same periods for the prior year. The full-year increase was comprised of a 25 percent increase in the average selling price, offset by a 15 percent decline in the number of tanks sold. With a significant portion of the average price increase related to an increase in both size and complexity of tanks being purchased, the decline in units sold relates primarily to throughput capabilities rather than any decline in overall demand. As of December 31, 2018, backlog for storage tanks totaled $20.7 million, an improvement of 20 percent over levels as of December 31, 2017. For the fourth quarter, the storage tank sales increase resulted from a 28 percent decrease in the number of tanks sold combined with a 44 percent increase in average selling price. The results highlight strong demand and activity in the Permian Basis and other Palmer delivery areas, even as West Texas Intermediate ("WTI") pricing and other economic indicators have shown some variability during 2018.
The Metals Segment's operating income increased $22.1 million to $27.8 million for the full-year 2018 compared to operating income of $5.7 million for 2017. Fourth quarter 2018 operating income increased $1.7 million to $4.7 million compared to operating income of $3.0 million for the fourth quarter of 2017. Current year operating results were affected by the following factors:
•
The addition of Munhall-Galvanized operations as noted above. The full-year 2018 and fourth quarter of 2018 operating results includes $65,000 and $95,000, respectively, for Munhall-Galvanized operations. These amounts do not reflect the earn-out adjustment for the year since that expense is not included in the Metals Segment's operating results.

•
Nickel prices and resulting surcharges for 304 and 316 alloys ended the fourth quarter of 2018 lower than the previous quarter, with surcharges for both alloys decreasing by $0.11 and $0.13 per pound, respectively; average nickel prices for the quarter generated a net unfavorable operating impact of $0.2 million related to metal pricing, compared to an unfavorable net impact of $1.0 million for the fourth quarter of 2017. The current quarter’s metal price change loss brought the full year metal price change gain to $5.0 million, compared to the full year 2017 metal price change loss of $2.6 million.

•
Year over year changes in volume, pricing and product mix, as noted above, combined for a 53 percent improvement in gross profit margins in 2018 compared to 2017.

•
Operating income from seamless carbon pipe and tube showed a significant 246 percent improvement over the prior year.
Selling, general and administrative expense increased $1.9 million, or 13 percent, for the full-year 2018 when compared to 2017. This expense category was seven percent of sales for 2018 and nine percent of sales for 2017. For the fourth quarter, selling, general and administrative expense was $4.1 million (seven percent of sales) in 2018, an increase of $0.7 million from $3.4 million (eight percent of sales) for the same period of 2017. The dollar increase for both the year and fourth quarter of 2018 when compared to the same periods of 2017 were impacted by the inclusion of Munhall-Galvanized's selling, general and administrative expenses. Because the MUSA-Galvanized acquisition occurred in July of 2018, none of Munhall-Galvanized's selling, general and administrative expenses were included in the prior year. This accounted for $0.3 million and $0.2 million of the full-year and fourth quarter increase in selling, general and administrative costs for 2018. The remaining changes in selling, general and administrative expense resulted from:
•
Higher incentive bonus expense ($1.2 million higher and $0.2 million higher for the full-year and fourth quarter, respectively);
•
Lower lease expenses related to the inclusion of the Munhall facility into the Master Lease with Store Funding ($0.4 million lower for the full year - see Note 10 to the Consolidated Financial Statements);
•
Allocated administrative costs (higher by $0.4 million and $96,000 for the full-year and fourth quarter, respectively);

24




•
Compensation expenses primarily related to merit increases and higher direct sales headcount (higher by $0.7 million and $0.3 million for the full-year and fourth quarter, respectively), which were offset by lower commissions on a full year basis by $0.3 million;
•
Higher travel costs (higher by $0.2 million and $67,000 for the full-year and fourth quarter, respectively);
•
Higher bad debt expense (higher by $0.2 million and $0.2 million for full-year and fourth quarter, respectively); and
•
Lower amortization expense (lower by $63,000 and $10,000 for the full-year and fourth quarter, respectively)
Specialty Chemicals Segment
The following tables summarize operating results for the three years indicated. Reference should be made to Note 13 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
 
2019
 
2018
 
2017
(in thousands)
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
54,090

 
100.0
%
 
$
58,599

 
100.0
 %
 
$
48,191

 
100.0
 %
Cost of goods sold
46,983

 
86.9
%
 
50,393

 
86.0
 %
 
39,217

 
81.4
 %
Gross profit
7,107

 
13.1
%
 
8,206

 
14.0
 %
 
8,974

 
18.6
 %
Selling, general and administrative expense
4,296

 
7.9
%
 
4,327

 
7.4
 %
 
4,679

 
9.7
 %
(Gain) loss on sale-leaseback
—

 
—
%
 
(95
)
 
(0.2
)%
 
(95
)
 
(0.2
)%
Operating income
$
2,811

 
5.2
%
 
$
3,974

 
6.8
 %
 
$
4,390

 
9.1
 %
 

Comparison of 2019 to 2018 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment decreased by 8 percent, or $4.5 million, to $54.1 million for 2019 compared to $58.6 million in 2018. For the fourth quarter of 2019, sales were $12.6 million, representing a 5.5 percent decrease from $13.3 million for the same quarter of 2018. For the full year, overall shipped pounds were up three percent on stable volume for contract manufactured products and an eight percent increase in tolled products. For the fourth quarter of 2019, pounds shipped decreased four percent. Overall selling prices decreased 10 percent and one percent for the full-year and fourth quarter, respectively, of 2019 compared to the same periods of 2018. Net sales were unfavorably impacted during the full year of 2019 from non-repeat of $2.4 million in opportunistic 2018 asphalt related sales, lower pass-through pricing on lower cost raw materials of $0.8 million, lower conversion revenue of approximately $0.6 million on higher levels of tolled versus full priced product sales, and $0.7 million in lower fourth quarter 2019 sales related to retrenchment in purchases to manage year-end working capital.
The Specialty Chemicals Segment's operating income for the full-year of 2019 decreased 29 percent to $2.8 million. The fourth quarter of 2019 decreased 35 percent from the prior year quarter to $0.4 million. During 2019, gross profit margin held relatively steady to previous 2018 levels, at 13 percent versus 14 percent, respectively. Lower profit in 2019 is primarily related to lost contribution of approximately $0.9 million on lost asphalt and other sales noted above, as well as a $0.3 million benefit in 2018 from a legal claim settlement that did not repeat in 2019.
Selling, general and administrative expense decreased $30,584 or 0.7 percent, to $4.30 million in 2019 when compared to 2018 expense of $4.33 million, which represented 8 percent of sales and 7 percent of sales, respectively. For the fourth quarter, selling, general and administrative expense was $1.0 million (8 percent of sales) in 2019, a decrease of $0.1 million when compared to $1.1 million (8 percent of sales) for the same period of 2018. 
The full-year decreases in selling, general and administrative expenses resulted from:
•
Lower sales commissions ($0.3 million and $0.1 million lower for the full-year and fourth quarter, respectively);
•
Lower incentive based bonuses ($0.1 million and $38,500 lower for the full-year and fourth quarter, respectively);
The full-year decreases were offset by:
•
Higher wages and benefits ($62,000 and $13,000 higher for the full-year and fourth quarter, respectively); and
•
Higher professional fees and allocated expenses ($0.3 million and $56,000 higher for the full-year and fourth quarter, respectively).

25




Comparison of 2018 to 2017 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment increased by 22 percent or $10.4 million to $58.6 million for 2018 compared to $48.2 million in 2017. For the fourth quarter of 2018, sales were $13.3 million, representing a 14 percent increase from $11.7 million for the same quarter of 2017. Pounds shipped during the full-year decreased by one percent for 2018 compared to 2017. For the fourth quarter of 2018, pounds shipped increased eight percent. Overall selling prices increased 23 percent and six percent for the full-year and fourth quarter, respectively, of 2018 compared to the same periods of 2017. Net sales were favorably impacted during the full year and fourth quarter of 2018 from the initial ramp up of seven significant customers, a new fire retardant and new asphalt additive customers at our subsidiary, CRI Tolling (a one-time sourcing not planned to repeat in 2019), two new oil and gas customers and two new pulp/paper customers at our subsidiary, MC, and a new product launch from an existing customer at MC.
The Specialty Chemicals Segment's operating income for the full-year of 2018 decreased nine percent to $4.0 million. The fourth quarter of 2018 increased 10 percent from the prior year quarter to $0.6 million. While the fourth quarter showed modest improvement, the full second-half 2018 operating income results outperformed the prior year second-half by $0.3 million, or 15 percent. During the second half of 2018, margins were realigned as new higher margin products were added to the portfolio. However, that strong second-half performance could not overcome a first-half shortfall of $0.7 million, or 26 percent, compared to the prior year , yielding a net decline on both a dollar basis and operating margin percent basis for the full-year.
Selling, general and administrative expense decreased $0.4 million or seven percent, to $4.3 million in 2018 when compared to 2017 expense of $4.7 million, which represented seven percent of sales and ten percent of sales, respectively. For the fourth quarter, selling, general and administrative expense was $1.1 million (eight percent of sales) in 2018, an increase of $0.2 million when compared to $0.9 million (seven percent of sales) for the same period of 2017. 
The full-year decreases in selling, general and administrative expenses resulted from:
•
Lower wages and benefits in 2018 ($0.2 million and $38,000 lower for the full-year and fourth quarter, respectively);
•
Lower professional fees and allocated expenses ($0.4 million and $0.1 million lower for the full-year and fourth quarter, respectively);
•
Lower bad debt expenses ($0.2 million and $15,000 lower for the full-year and fourth quarter, respectively); and
•
A $0.3 million gain related to a legal settlement in 2018;
The full-year decreases were offset by:
•
Higher sales commissions ($0.5 million and $0.2 million higher for the full-year and fourth quarter, respectively); and
•
Higher incentive based bonuses ($0.3 million and $0.2 million higher for the full-year and fourth quarter, respectively).
Comparison of 2019 to 2018 - Corporate
Corporate expenses increased $0.5 million to $8.4 million, or three percent of sales, in 2019 up from $7.9 million, three percent of sales, in 2018. The full-year increase resulted primarily from:
•
Three year Long-Term Incentive Plan performance shares were accrued in the current year, at a cost of $0.7 million;
•
Professional fees increased by $0.5 million from the prior year resulting from higher audit and banking fees in the current year;
The full-year increases were partially offset by:
•
Lower unallocated acquisition costs of $0.7 million related to the American Stainless acquisition, which transaction closed on January 1, 2019.
Interest expense was $3.8 million and $2.2 million for the full-years of 2019 and 2018, respectively. The increase was primarily related to higher average debt outstanding in the full year of 2019, as additional borrowings were primarily related to funds borrowed related to the January 1 American Stainless acquisition, offset during the year by almost $17 million in net inventory and other working capital reductions.
Comparison of 2018 to 2017 - Corporate
Corporate expenses increased $1.4 million to $7.9 million, or three percent of sales, in 2018 up from $6.5 million, three percent of sales, in 2017. The full-year increase resulted primarily from:

26




•
Performance based bonuses increased $0.5 million from the prior year. Pre-defined Adjusted EBITDA targets were achieved in both 2018 and 2017;
•
Acquisition costs increased $0.4 million from the prior year due to the MUSA-Galvanized acquisition in the third quarter of 2018 (see Note 15 to the Consolidated Financial Statements), as well as fourth quarter costs incurred due to the American Stainless acquisition, which transaction closed on January 1, 2019 (see Note 15 to the Consolidated Financial Statements); and
•
Personnel costs were $0.3 million higher as a result of normal annual rate increases;
Interest expense was $2.2 million and $1.0 million for the full-years of 2018 and 2017, respectively. The increase was primarily related to higher average debt outstanding in the fourth quarter and full year of 2018, as additional borrowings were primarily related to acquisitions and to support working capital requirements associated with increased business activity.
Contractual Obligations and Other Commitments:
As of December 31, 2019, the Company's contractual obligations and other commitments were as follows:
 
 
 
Payment Obligations for the Year Ended
(in thousands)
Total
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
Obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Revolving credit facility
$
59,221

 
$
—

 
$
59,221

 
$
—

 
$
—

 
$
—

 
$
—

Term loans
16,333

 
4,000

 
4,000

 
4,000

 
4,000

 
333

 
—

Interest on bank debt
7,775

 
3,798

 
3,651

 
234

 
86

 
6

 
—

Finance lease
603

 
275

 
316

 
12

 
—

 
—

 
—

Operating leases
66,622

 
3,562

 
3,635

 
3,673

 
3,563

 
3,635

 
48,554

Total
$
150,554

 
$
11,635

 
$
70,823

 
$
7,919

 
$
7,649

 
$
3,974

 
$
48,554


Current Conditions and Outlook

The Company has limited visibility on the direction of the manufacturing economy in 2020. Trade with China remains an issue as does the outcome of the Presidential election. Capital spending is under pressure, particularly in the energy markets. We do not expect a recession in 2020, but we do anticipate a period of flat to softening demand across our more industrial focused markets. With this backdrop, over the last 60 days of 2019, we initiated a cost cutting program across the entire Company. In addition to the work done at our vessel storage business in the fourth quarter, the Company implemented over $6 million in annual cost savings, which will be fully realized in 2020. The cost reductions cover everything from personnel, raw materials, other manufacturing costs and professional services.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from adverse changes in interest rates and nickel prices.
Changes in United States interest rates affect the interest earned on the Company's cash and cash equivalents as well as interest paid on its indebtedness. Except as described below, the Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. The Company is exposed to changes in interest rates primarily as a result of its borrowing activities used to maintain liquidity and fund business operations.

Fair value of the Company's debt obligations at December 31, 2019, which approximated the recorded value, consisted of:

•
$59.2 million under a revolving line of credit with an availability of $13.4 million, expiring on December 20, 2021 with a variable interest rate of 3.50 percent.
•
$16.3 million under a term loan, expiring January 1, 2024 with a variable interest rate of 3.69 percent.
•
An interest rate swap contract with a notional amount of $6.0 million which fixes the term loan interest rate at 3.74 percent. The fair value of the interest rate swap contract was an asset to the Company of $6,088.
The Company occasionally hedges its nickel exposure to provide coverage against extreme downside product pricing exposure related to the content of nickel alloy contained in purchased stainless steel inventory. The sales price of stainless steel product

27




(containing nickel alloy) is subject to a variable pricing component for alloys (nickel, chrome, molybdenum and iron) contained in the product. At December 31, 2019, the Company had no such hedge contracts in place.


28




Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management has excluded the ASTI facilities operations (acquired in the American Stainless acquisition) from its assessment of internal control over financial reporting as of December 31, 2019 because this material acquisition closed in the first quarter of 2019. Total assets of $26.8 million and total revenue of $34.5 million associated with the ASTI facility represent approximately 14 percent of the related financial statement amounts of the Metals Segment as of, and for the year ended, December 31, 2019.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019 using the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in the Internal Control-Integrated Framework (COSO 2013). Based on that evaluation, management believes the Company's internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2019, has been audited by KPMG LLP, an independent registered public accounting firm, which also audited the Company's Consolidated Financial Statements for the year ended December 31, 2019. KPMG LLP's report on the Company's internal control over financial reporting is set forth below.

Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting that occurred during the Company's fourth quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company believes that its disclosure controls and procedures were operating effectively as of December 31, 2019.

29




Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Synalloy Corporation and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2019, and the related notes and financial statement Schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 6, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases effective January 1, 2019, due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Richmond Virginia
March 6, 2020


30




Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:

Opinion on Internal Control Over Financial Reporting
We have audited Synalloy Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement Schedule II (collectively, the consolidated financial statements), and our report dated March 6, 2020 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired American Stainless Tubing, Inc. (American Stainless) during 2019, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, American Stainless' internal control over financial reporting associated with total assets of $26.8 million and total revenues of $34.5 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of American Stainless.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

31




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP

Richmond, Virginia
March 6, 2020

32




Item 8 Financial Statements and Supplementary Data
Index to Financial Statements



33
SYNALLOY CORPORATION
Consolidated Balance Sheets
As of December 31, 2019 and 2018
(in thousands, except par value and share data)

 
2019
 
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
626

 
$
2,220

Accounts receivable, net
35,074

 
41,065

Inventories, net
 
 
 
Raw materials
42,643

 
59,779

Work-in-process
17,354

 
21,034

Finished goods
38,189

 
33,389

Total inventories, net
98,186

 
114,202

Prepaid expenses and other current assets
13,229

 
9,983

Total current assets
147,115

 
167,470

 
 
 
 
Property, plant and equipment, net
40,690

 
40,925

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

 
—

Goodwill
17,558

 
9,800

Intangible assets, net
15,714

 
9,696

Deferred charges, net and other non-current assets
348

 
508

 
 
 
 
Total assets
$
257,197

 
$
228,399

 
 
 
 
Liabilities and Shareholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
21,150

 
$
25,074

Accrued expenses
11,613

 
12,163

Current portion of long-term debt
4,000

 
—

Current portion of operating lease liabilities
3,562

 
—

Current portion of finance lease liabilities
253

 
—

Total current liabilities
40,578

 
37,237

 
 
 
 
Long-term debt
71,554

 
76,405

Long-term portion of earn-out liability
3,578

 
4,704

Long-term portion of operating lease liabilities
33,723


—

Long-term portion of finance lease liabilities
336

 
—

Long-term deferred sale-leaseback gain
—

 
5,599

Deferred income taxes
790

 
253

Other long-term liabilities
127

 
1,717

 
 
 
 
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
37,407

 
36,521

Retained earnings
70,552

 
68,965

Accumulated other comprehensive loss
—

 
—

 
118,259

 
115,786

Less cost of common stock in treasury - 1,257,784 and 1,424,279 shares, respectively
11,748

 
13,302

Total shareholders' equity
106,511

 
102,484

Commitments and contingencies – see Note 11

 

 
 
 
 
Total liabilities and shareholders' equity
$
257,197

 
$
228,399

 See accompanying notes to consolidated financial statements.
 
2019
 
2018
 
2017
Net sales
$
305,168

 
$
280,841

 
$
201,148

 
 
 
 
 
 
Cost of sales
274,395

 
229,604

 
173,067

 
 
 
 
 
 
Gross profit
30,773

 
51,237

 
28,081

 
 
 
 
 
 
Selling, general and administrative expense
32,627

 
27,691

 
24,875

Acquisition related costs
601

 
1,212

 
795

Earn-out adjustments
(747
)
 
1,431

 
688

Gain on sale-leaseback
—

 
(334
)
 
(334
)
Operating (loss) income
(1,708
)
 
21,237

 
2,057

Other (income) and expense
 

 


 
 

Interest expense
3,818

 
2,211

 
985

Change in fair value of interest rate swap
141

 
(20
)
 
(96
)
Other, net
(1,904
)
 
2,573

 
(310
)
(Loss) Income before income taxes
(3,763
)
 
16,473

 
1,478

   (Benefit from) provision for income taxes
(727
)
 
3,376

 
137

Net (loss) income
(3,036
)
 
13,097

 
1,341

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
Unrealized gains on available for sale securities, net
—

 
—

 
355

Reclassification adjustment for gains included in net income, net
—

 
—

 
(366
)
Comprehensive (loss) income
$
(3,036
)
 
$
13,097

 
$
1,330

 
 
 
 
 
 
Net (loss) income per common share:
 
 
 
 
 
Basic
$
(0.34
)
 
$
1.49

 
$
0.15

Diluted
$
(0.34
)
 
$
1.48

 
$
0.15

 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
Basic
8,983

 
8,806

 
8,705

Diluted
8,983

 
8,878

 
8,728

See accompanying notes to consolidated financial statements.



34
SYNALLOY CORPORATION
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2019, 2018 and 2017
(in thousands, except share and per share data)



 
Common Stock
 
Capital in Excess of
Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Cost of Common Stock in Treasury
 
Total
Balance at December 31, 2016
$
10,300

 
$
34,714

 
$
57,937

 
$
—

 
$
(14,358
)
 
$
88,593

 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
1,341

 
—

 
—

 
1,341

Other comprehensive loss
—

 
—

 
—

 
(11
)
 
—

 
(11
)
Payment of dividends, $0.13 per share
—

 
—

 
(1,149
)
 
—

 
—

 
(1,149
)
Stock options exercised for 5,389 shares, net
—

 
68

 
—

 
—

 
(68
)
 
—

Issuance of 58,532 shares of common stock from the treasury
—

 
(227
)
 
—

 
—

 
515

 
288

Stock-based compensation expense
—

 
638

 
—

 
—

 
—

 
638

Balance at December 31, 2017
$
10,300

 
$
35,193

 
$
58,129

 
$
(11
)
 
$
(13,911
)
 
$
89,700

 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
13,097

 
—

 
—

 
13,097

Cumulative adjustment due to adoption of ASU 2016-01
—

 
—

 
(11
)
 
11

 
—

 
—

Payment of dividends, $0.25 per share
—

 
—

 
(2,250
)
 
—

 
—

 
(2,250
)
Issuance of 66,632 shares of common stock from the treasury
—

 
(317
)
 
—

 
—

 
593

 
276

Stock options exercised for 31,488 shares, net
—

 
247

 
—

 
—

 
(396
)
 
(149
)
Stock-based compensation expense
—

 
827

 
—

 
—

 
—

 
827

Issuance of 44,378 shares in connection with at-the-market offering
—

 
571

 
—

 
—

 
412

 
983

Balance at December 31, 2018
$
10,300

 
$
36,521

 
$
68,965

 
$
—

 
$
(13,302
)
 
$
102,484

 
 
 
 
 
 
 
 
 
 
 
 
Net loss
—

 
—

 
(3,036
)
 
—

 
—

 
(3,036
)
Cumulative-effect adjustment related to ASU 2016-02, net of tax
—

 


 
4,623

 
—

 


 
4,623

Issuance of 162,869 shares of common stock from the treasury
—

 
(1,217
)
 
—

 
—

 
1,521

 
304

Stock options exercised for 3,628 shares, net
—

 
12

 
—

 
—

 
33

 
45

Stock-based compensation expense
—

 
2,091

 
—

 
—

 
—

 
2,091

Balance at December 31, 2019
$
10,300

 
$
37,407

 
$
70,552

 
$
—

 
$
(11,748
)
 
$
106,511

See accompanying notes to consolidated financial statements.


35
SYNALLOY CORPORATION
Consolidated Statement of Cash Flows
For the years ended December 31, 2019, 2018 and 2017
(in thousands)

 
2019
 
2018
 
2017
Operating activities
 
 
 
 
 
Net (loss) income
$
(3,036
)
 
$
13,097

 
$
1,341

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

 
 

 
 

Depreciation expense
7,578

 
6,412

 
5,295

Amortization expense
3,486

 
2,363

 
2,443

Amortization of debt issuance costs
160

 
132

 
60

Unrealized (gain) loss on equity securities
(1,547
)
 
2,573

 
—

Deferred income taxes
(773
)
 
(383
)
 
(1,037
)
Gain on sale of available for sale securities
(326
)
 
—

 
(310
)
Earn-out adjustments
(747
)
 
1,431

 
688

Payments of earn-out liabilities in excess of acquisition date fair value
(448
)
 
(194
)
 
—

(Reduction of) provision for losses on accounts receivable
(171
)
 
240

 
202

Provision for losses on inventories
1,617

 
1,828

 
1,196

(Gain) loss on sale of property, plant and equipment
(50
)
 
(18
)
 
25

Amortization of deferred gain on sale-leaseback
—

 
(334
)
 
(334
)
Noncash lease expense
560

 
445

 
397

Change in fair value of interest rate swap
(141
)
 
(20
)
 
(96
)
Issuance of treasury stock for director fees
304

 
276

 
288

Stock-based compensation expense
2,091

 
827

 
638

Changes in operating assets and liabilities:
 

 
 

 
 

Accounts receivable
9,696

 
(10,413
)
 
(10,877
)
Inventories
19,962

 
(41,157
)
 
(7,088
)
Other assets and liabilities
179

 
(1,524
)
 
11,230

Accounts payable
(5,323
)
 
(234
)
 
7,572

Accrued expenses
(3,317
)
 
2,093

 
(9,424
)
Accrued income taxes
(1,114
)
 
1,339

 
26

Net cash provided by (used in) operating activities
28,640

 
(21,221
)
 
2,235

Investing activities
 

 
 

 
 

Purchases of property, plant and equipment
(4,537
)
 
(7,355
)
 
(5,279
)
Proceeds from sale of property, plant and equipment
189

 
—

 
73

Purchases of equity securities
(544
)
 
(4,970
)
 
(4,383
)
Proceeds from sale of available for sale securities
1,092

 
—

 
4,142

Acquisition of the stainless pipe and tube assets of Marcegaglia USA, Inc. ("MUSA")
—

 
—

 
(11,953
)
Acquisition of the galvanized pipe and tube assets of MUSA
—

 
(10,378
)
 
—

Acquisition of ASTI
(21,895
)
 
—

 
—

Net cash (used in) provided by investing activities
(25,695
)
 
(22,703
)
 
(17,400
)
Financing activities
 

 
 

 
 

(Repayments) borrowings from line of credit
(17,185
)
 
50,492

 
17,109

Borrowings from term loan
20,000

 
—

 
—

Net proceeds from at-the-market offering
—

 
983

 
—

Payments on long-term debt
(3,666
)
 
—

 
—

Principal payments on finance lease obligations
(106
)
 
(337
)
 
(125
)
Payments on earn-out liabilities
(3,627
)
 
(2,261
)
 
(518
)
Payments of debt issuance costs
—

 
(383
)
 
(200
)
Proceeds from exercised stock options
45

 
142

 
—

Dividends paid
—

 
(2,215
)
 
(1,149
)
Tax withholdings related to net share settlements of exercised stock options

—

 
(291
)
 
—

Net cash (used in) provided by financing activities
(4,539
)
 
46,130

 
15,117

(Decrease) increase in cash and cash equivalents
(1,594
)
 
2,206

 
(48
)
Cash and cash equivalents at beginning of year
2,220

 
14

 
62

Cash and cash equivalents at end of year
$
626

 
$
2,220

 
$
14

See accompanying notes to consolidated financial statements.



36
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements


Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Description of Business
Synalloy Corporation (the "Company") was incorporated in Delaware in 1958 as the successor to a chemical manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. The Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060.
The Company's business is divided into two reportable operating segments, the Metals Segment and the Specialty Chemicals Segment. As of December 31, 2019, the Metals Segment operated as three reportable units including Welded Pipe & Tube Operations, a unit that includes Bristol Metals, LLC ("BRISMET") and American Stainless Tubing, LLC ("ASTI"), which began operations effective January 1, 2019 pursuant to our acquisition of substantially all of the assets of American Stainless Tubing, Inc. ("American Stainless") (see Note 15 to the Consolidated Financial Statements), Palmer of Texas Tanks, Inc. ("Palmer"), and Specialty Pipe & Tube, Inc. ("Specialty"). Welded Pipe & Tube Operations manufactures stainless steel, galvanized, ornamental stainless steel tubing, and other alloy pipe and tube, Palmer manufactures liquid storage solutions and separation equipment and Specialty is a master distributor of seamless carbon pipe and tube. The Specialty Chemicals Segment operates as one reportable unit and is comprised of MC and CRI Tolling, and produces specialty chemicals.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. The Metals Segment is comprised of four subsidiaries: Synalloy Metals, Inc. which owns 100 percent of BRISMET, located in Bristol, Tennessee and Munhall, Pennsylvania; ASTI, located in Troutman and Statesville, North Carolina; Palmer, located in Andrews, Texas and Specialty, located in Mineral Ridge, Ohio and Houston, Texas. The Specialty Chemicals Segment consists of two subsidiaries: MS&C which owns 100 percent of MC, located in Cleveland, Tennessee and CRI Tolling, located in Fountain Inn, South Carolina. All significant intercompany transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 
Accounts Receivable
Accounts receivable from the sale of products are recorded at net realizable value and the Company generally grants credit to customers on an unsecured basis. Substantially all of the Company's accounts receivable are due from companies located throughout the United States. The Company provides an allowance for doubtful accounts for projected uncollectable amounts. The allowance is based upon a review of outstanding receivables, historical collection information and existing economic conditions. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 to 60 days. Delinquent receivables are written off based on individual credit evaluations and specific circumstances of the customer.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods.
Inventory cost is adjusted when its recorded cost is below net realizable value. At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below cost. This would indicate that an adjustment would be required.
In addition, the Company establishes inventory reserves for:
•
Estimated obsolete or unmarketable inventory. The Company identified inventory items with no sales activity for finished goods or no usage for raw materials for a certain period of time. For those inventory items not currently being marketed and unable to be sold, a reserve was established for 100 percent of the inventory cost less any estimated scrap proceeds. The Company reserved $0.3 million at December 31, 2019 and December 31, 2018, respectively.
•
Estimated quantity losses. The Company performs an annual physical count of inventory during the fourth quarter each year. For those facilities that complete their physical inventory counts before the end of December, a reserve is established for the potential quantity losses that could occur subsequent to their physical inventory. This reserve is based upon the

37


SYNALLOY CORPORATION
Notes to Consolidated Financial Statements


most recent physical inventory results. At December 31, 2019 and December 31, 2018, the Company had $0.4 million reserved for physical inventory quantity losses.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful life of the assets. Leasehold improvements are depreciated over the shorter of their useful lives or the remaining non-cancellable lease term, buildings are depreciated over a range of 10 years to 40 years, and machinery, fixtures and equipment are depreciated over a range of three years to 20 years. The costs of software licenses are amortized over five years using the straight-line method. The Company continually reviews the recoverability of the carrying value of long-lived assets. The Company also reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. When the future undiscounted cash flows of the operation to which the assets relate do not exceed the carrying value of the asset, the assets are written down to fair value.
Business Combinations
Acquisitions are 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 acquired, if any, and liabilities assumed.
Goodwill, Intangible Assets and Deferred Charges
Goodwill, arising from the excess of purchase price over fair value of net assets of businesses acquired, is not amortized but is reviewed annually, at the reporting unit level, in the fourth quarter for impairment and whenever events or circumstances indicate that the carrying value may not be recoverable. No goodwill impairment was identified as a result of the testing procedures performed for the years ended December 31, 2019 and December 31, 2018.
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions. Deferred charges represent other intangible assets and debt issuance costs. Intangible assets are amortized over their estimated useful lives using either an accelerated or straight-line method. Deferred charges are amortized over their estimated useful lives using the straight-line method. Deferred charges are amortized over a period ranging from three to 10 years and intangible assets are amortized over a period ranging from eight to 15 years. The weighted average amortization period for the customer relationships is approximately thirteen years.
Deferred charges and intangible assets totaled $32.6 million and $23.2 million at December 31, 2019 and December 31, 2018, respectively. Accumulated amortization of deferred charges and intangible assets as of December 31, 2019 and December 31, 2018 totaled $16.6 million and $13.0 million, respectively.
Estimated amortization expense for the next five fiscal years based on existing intangible assets, excluding deferred charges is as follows:
(in thousands)
 
2020
3,238

2021
3,051

2022
2,741

2023
1,200

2024
1,043

Thereafter
4,442

The Company recorded amortization expense of $3.5 million for 2019 and $2.4 million for 2018 and 2017, respectively, which excludes amortization expense of debt issuance costs, which is reflected in the consolidated financial statements as interest expense.

38


SYNALLOY CORPORATION
Notes to Consolidated Financial Statements


Earn-Out Liability
In connection with the MUSA-Stainless acquisition on February 28, 2017, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of stainless steel pipe and tube (outside diameter of 10 inches or less). The fair value of the contingent consideration was estimated by applying the Monte Carlo simulation approach using management's estimates of pounds shipped and future price per unit. Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income.
In connection with the MUSA-Galvanized acquisition on July 1, 2018, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube. The fair value of the contingent consideration was estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income.
In connection with the American Stainless acquisition on January 1, 2019, the Company is required to make quarterly earn-out payments to American Stainless for a period of three years following closing. Pursuant to the asset purchase agreement between ASTI and American Stainless, earn-out payments will equate to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period. In determining the appropriate discount rate to apply to the contingent payments, the risk associated with the functional form of the earn-out, and the credit risk associated with the payment of the earn-out were all considered. The fair value of the contingent consideration was estimated by applying the probability weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Substantially all of the Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time. Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance obligation is based on its standalone selling price and revenue is recognized as each performance obligation is satisfied. The Company generally determines standalone selling prices based on the prices charged to customers using the adjusted market assessment approach or expected cost plus margin. Deferred revenues are recorded when cash payments are received in advance of satisfying the performance obligation, including amounts which are refundable.
Shipping Costs
Shipping costs of approximately $10.9 million, $9.8 million and $7.5 million in 2019, 2018 and 2017, respectively, are recorded in cost of goods sold.
Research and Development Expenses
The Company incurred research and development expense of approximately $0.6 million, $0.5 million and $0.6 million in 2019, 2018 and 2017, respectively.
Stock-Based compensation 
Share-based payments to employees, including grants of employee stock options, are recognized in the Consolidated Statements of Operations as compensation expense (based on their estimated fair values at grant date) generally over the vesting period of the awards using the straight-line method. Any forfeitures of stock-based awards are recorded as they occur. See Note 7 for disclosures related to stock-based compensation.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing accounts and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.

39


SYNALLOY CORPORATION
Notes to Consolidated Financial Statements


Additionally, the Company maintains reserves for uncertain tax provisions, if necessary.
Earnings Per Share of Common Stock
Earnings per share of common stock are computed based on the weighted average number of basic and diluted shares outstanding during each period.
Fair Market Value
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 consolidated financial statements. 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 in 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.
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 December 31, 2019 and December 31, 2018 relate to the purchase price allocation relating to the 2019 American Stainless, 2018 MUSA-Galvanized, and 2017 MUSA-Stainless acquisitions, earn-out liabilities, estimating the fair value of the reporting units in testing goodwill for impairment, estimating the fair value of the interest rate swap, and providing disclosures of the fair values of financial instruments.
Leases
The Company determines whether an arrangement is a lease at contract inception. For leases in which the Company is the lessee, the Company recognizes a right-of-use asset and corresponding lease liability on the accompanying Consolidated Balance Sheets equal to the present value of the fixed lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets. Lease liabilities represent an obligation to make lease payments arising from a lease while right-of-use assets represent a right to use an underlying asset during the lease term. As the Company's leases generally do not have a readily determinable implicit rate, the Company uses its incremental borrowing rate to determine the present value of fixed lease payments based on information available at the lease commencement date.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions, primarily for testing goodwill for impairment, determining balances for the earn-out liabilities, estimating fair value of identifiable assets acquired and liabilities assumed as a result of business acquisitions and for establishing reserves on accounts receivable, inventories and environmental issues, that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable.
Recent accounting pronouncements
Recently Issued Accounting Standards - Adopted
In February 2016, the FASB issued ASU No. 2016-02 "Leases (Topic 842)", as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard as of January 1, 2019 on a modified retrospective basis, which does not require comparative periods to be restated. The Company elected the package of practical expedients permitted under the transition guidance which

40


SYNALLOY CORPORATION
Notes to Consolidated Financial Statements


allowed us to carry-forward our historical lease classification, our assessment on whether a contract contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. The Company did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company also elected to combine lease and non-lease components and elected the short-term lease recognition exemption for all leases that qualified. On adoption, we recognized additional operating lease liabilities of $33.1 million based on the present value of the remaining minimum rental payments as of January 1, 2019. We additionally recognized corresponding right-of-use assets for operating leases totaling $32.2 million. On January 1, 2019, the Company also recorded cumulative-effect increases to equity and deferred tax assets totaling $4.6 million and $1.3 million, respectively, related to a deferred gain for a sale leaseback transaction that occurred in 2016 and was being amortized into earnings under the prior accounting. The adoption of this standard did not have a material impact on the consolidated statement of operations or cash flows for the year ended December  31, 2019. See Note 10 for further information related to the Company's leases.

In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)." Topic 606 supersedes the revenue recognition requirements in Topic 605 "Revenue Recognition (Topic 605)," and requires entities 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 Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. The adoption of this standard did not have a material effect on the Company's consolidated financial statements. See Note 17 for further details.

Recently Issued Accounting Standards - Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The updated guidance amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions, and reasonable and supportable forecasts rather than the incurred loss model which reflects losses that are probable. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this new standard to have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment." The updated guidance eliminated step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to a reporting unit with a zero or negative carrying amount of net assets should be disclosed. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this new standard to have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company does not expect the adoption of this new standard to have a material impact on the consolidated financial statements or footnote disclosures.

In December 2019, the FASB issued ASU No. 2018-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation, and calculating income taxes in interim periods. This ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new standard will have on its condensed consolidated financial statements and footnote disclosures.


41


SYNALLOY CORPORATION
Notes to Consolidated Financial Statements


Note 2: 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 (an 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, revolving line of credit and equity 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 1: Equity securities
The fair value of equity securities held by the Company as of December 31, 2019 and December 31, 2018 was $4.3 million and $2.9 million, respectively, and is included in "Prepaid expenses and other current assets" on the accompanying Consolidated Balance Sheets.
Level 2: Derivative instruments
The Company had 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 inputs. The fair value of the interest swap contract entered into on August 21, 2012 was an asset of $6,088 and $0.1 million at December 31, 2019 and December 31, 2018