Ascent Industries (ACNT) - 2021 Q4 - Annual Report

Disclosure Regarding Forward-Looking Statements This section cautions readers that the Annual Report on Form 10-K contains forward-looking statements subject to risks and uncertainties, and the Company assumes no obligation to update them Forward-Looking Statements This section identifies forward-looking statements by specific terminology and lists key risk factors that could cause actual results to differ materially from expectations - The report contains forward-looking statements identifiable by words like 'estimate,' 'project,' 'intend,' 'expect,' 'believe,' 'should,' 'anticipate,' 'hope,' 'optimistic,' 'plan,' 'outlook,' 'could,' 'may,' and similar expressions[7] - Key risk factors that could cause actual results to differ include adverse economic conditions (including COVID-19 impact), competitive pressures, raw material costs and availability, financial stability of customers, acquisition risks, environmental issues, tax law changes, and inability to comply with debt covenants[7] Part I Business Overview Synalloy Corporation operates in Metals and Specialty Chemicals segments, focusing on organic growth and strategic acquisitions like DanChem Technologies, Inc - Synalloy Corporation's business is divided into two reportable operating segments: Metals and Specialty Chemicals[9] - The Company completed the acquisition of DanChem Technologies, Inc. on October 22, 2021, for $32.95 million, aiming to accelerate product development, expand process offerings, and increase presence in target end-markets within the Chemicals segment[21] General Business Operations The Metals Segment manufactures pipes, tubes, and tanks, while the Specialty Chemicals Segment produces formulations and offers contract manufacturing services - BRISMET manufactures welded pipe and tube from stainless steel, duplex, and nickel alloys, with capabilities for large diameters and lengths up to 60 feet[12][14] - Palmer of Texas Tanks, Inc. ceased operations as of December 31, 2021, and the Company is divesting its remaining assets[15] - The Specialty Chemicals Segment produces defoamers, surfactants, and lubricating agents, and provides dedicated contract manufacturing services, with a focus on renewable resources[18] Sales Channels and Customer Concentration Both segments use internal and external sales forces, with the Metals Segment having diversified customers and the Specialty Chemicals Segment showing customer concentration - No single customer represented more than 10% of the Metals Segment's revenues in 2021 or 2020[20] - The Specialty Chemicals Segment had one customer that accounted for approximately 15% of its revenues in 2021 and 16% in 2020[20] Mergers, Acquisitions and Dispositions Strategy The Company pursues organic growth and strategic acquisitions, exemplified by the 2021 DanChem acquisition, to expand capabilities and market reach - The Company's strategy includes reinvesting in current business segments for organic growth and completing acquisitions to expand capabilities, product offerings, and geographic footprint[21] - The acquisition of DanChem Technologies, Inc. on October 22, 2021, aimed to accelerate product development, expand process offerings, and increase presence in target end-markets and applications within the Chemicals segment[21] Environmental Policies and Risks The Company expenses environmental costs and records liabilities for probable cleanups, while changes in environmental laws pose unquantifiable risks - Environmental expenditures for existing conditions from past operations are expensed, and liabilities are recorded when assessments/cleanups are probable and estimable[22] - Potential changes in environmental laws and climate change proposals could lead to a material reduction in operating results, but this risk is currently unquantifiable[22] Seasonality Impact The Company's businesses are generally not subject to significant seasonal impacts causing substantial quarterly revenue variations - The Company's businesses and products are generally not subject to seasonal impacts that result in significant variations in revenues from one quarter to another[23] Order Backlogs Both Metals and Specialty Chemicals segments maintain significant order backlogs, which increased from 2020 to 2021 but are not direct indicators of future revenue Backlog of Open Orders (2021 vs. 2020) | Segment / Operation | 2021 ($ millions) | 2020 ($ millions) | | :------------------ | :---------------- | :---------------- | | Welded Pipe & Tube | 91.5 | 40.8 | | Specialty Chemicals | 12.9 | 3.9 | - The backlog of open orders for both segments increased significantly from 2020 to 2021, but it may not be indicative of actual future sales[24] Human Capital Management The Company prioritizes employee safety, talent management, and an inclusive environment, with 707 employees as of December 31, 2021, and a 23% voluntary turnover rate - As of December 31, 2021, the Company had 707 employees, with 638 full-time, and 48% (342 employees) were union-represented[28] - The voluntary turnover rate in 2021 was approximately 23%, with an average employee tenure of about 8 years, attributed to competitive total rewards and development opportunities[29] - The Company is an Equal Opportunity Employer, committed to providing an equitable and inclusive environment[31] Available Information The Company files its reports electronically with the SEC, accessible on www.sec.gov and its corporate website - Synalloy Corporation files its annual reports (Form 10-K), quarterly reports (Form 10-Q), periodic reports (Form 8-K), and proxy materials electronically with the SEC[32] - These filings are available on the SEC's website (www.sec.gov) and the Company's website (www.synalloy.com)[32](index=32&type=chunk) Risk Factors This section details inherent risks, including industry challenges, operational vulnerabilities, regulations, human capital, financial considerations, and general business risks - The demand for Synalloy's products is cyclical, influenced by economic conditions, competition, raw material costs, and trade practices, leading to potential fluctuations in profitability[34][35][36] - The Specialty Chemicals Segment is highly dependent on a limited number of customers, with the top 15 customers accounting for approximately 60% of revenues in 2021, posing a risk if relationships are adversely affected or terminated[37] - Operational risks include reliance on a few key raw material suppliers, volatility in raw material prices, high energy and freight costs, potential disruptions at production facilities, and significant injury liabilities[38][39][40][41][42][43][44] - The Company faces risks from extensive environmental, health, and safety regulations, including potential liabilities for contamination, compliance costs, and third-party claims, which could materially impact financial results[46][47][48][49][50][51] - Financial risks include substantial outstanding indebtedness ($67.9 million as of December 31, 2021), restrictive debt covenants, potential difficulties in obtaining future financing, and risks associated with acquisitions and goodwill impairment[58][60][62][63] - The COVID-19 pandemic has caused and may continue to cause significant impacts on global supply chains, financial markets, labor markets, and the Company's operations and financial performance[67][68][69] Industry and Segment-Specific Risks Profitability is vulnerable to cyclical demand, intense competition, foreign overproduction, and customer concentration in the Specialty Chemicals Segment - Demand for products is cyclical, affected by economic conditions, competitive pricing, product demand, raw material costs, and customer financial stability[34] - Intense domestic competition and foreign overcapacity in the stainless and galvanized steel industry can force lower product pricing, negatively impacting revenues and profitability[35][36] - The Specialty Chemicals Segment's top 15 customers accounted for 60% and 63% of revenues in 2021 and 2020, respectively, with the top customer representing 15% and 16%, indicating significant customer concentration risk[37] Operational and Supply Chain Risks Risks include raw material interruptions, price volatility, limited suppliers, high energy/freight costs, production facility disruptions, and the need for continuous innovation - Any interruption in raw material supply or significant price volatility could adversely affect business and results, especially given reliance on a few key suppliers for some materials[38][39][40] - Operating results are sensitive to the availability and cost of energy and freight, which can increase operating costs and reduce demand if not fully recovered through price increases[42] - Dependence on continuous operation of production facilities, which are subject to equipment failures, industrial hazards, and limited ability to shift specialized production, poses a risk of delays and adverse financial impact[43] Government Regulation Risks Extensive environmental, health, and safety laws expose the Company to liabilities and compliance costs, with future regulations potentially impacting demand and expenses - The Company is subject to numerous environmental protection and health and safety laws, risking civil/criminal fines, enforcement actions, and significant capital expenditures for compliance[46][47][48][50][51] - Regulations related to 'conflict minerals' (tungsten and tantalum) may increase sourcing costs, complicate the supply chain, and potentially damage the Company's reputation[53][54] - Legislative and regulatory initiatives concerning hydraulic fracturing could reduce demand for the Company's pressure vessels and heavy-walled pipe and tube, adversely affecting revenue[52] Human Capital Risks Unionized workforce and the ability to attract/retain key personnel pose risks of labor disruptions, increased costs, and operational challenges - Approximately 48% of the Company's employees are union-represented, and failure to renew collective bargaining agreements could result in labor disruptions and increased costs[55] - The Company's ability to operate and grow depends on attracting and retaining qualified employees, a challenge intensified by competition and the tight labor market, and potential COVID-19 related workforce reductions or quarantines[56][57] Financial and Strategic Risks Risks include substantial indebtedness, restrictive covenants, LIBOR transition, capital access, and acquisition-related challenges like integration and goodwill impairment - As of December 31, 2021, the Company had $67.9 million in total outstanding indebtedness, with customary restrictive covenants that could limit operational flexibility[58] - The phase-out of LIBOR and transition to SOFR for variable interest rates could lead to financial market disruptions or increased borrowing costs[59] - Acquisitions and dispositions involve risks like inaccurate valuation, loss of key personnel, failure to achieve synergies, and goodwill impairment, which could adversely impact financial results[62][63][64] Intellectual Property Risks Competitive effectiveness relies on protecting trade secrets and know-how, with risks of insufficient protection or independent development by others - The Company's ability to compete depends on maintaining the proprietary nature of its intellectual property, largely trade secrets and know-how[65] - Measures like confidentiality agreements may not provide sufficient protection, and others could independently develop similar intellectual property, adversely affecting the business[65][66] General Risk Factors General risks include global health epidemics, intense competition, internal control weaknesses, and cybersecurity incidents impacting operations and financial results - Global public health epidemics, such as COVID-19, can adversely affect business, operations, supply chains, and customer demand, potentially compressing margins[67][68][69] - Significant competition from domestic and foreign sources in price, delivery, service, and product innovation could result in reduced profitability and loss of market share[70] - Weaknesses in internal controls over financial reporting could adversely affect investor confidence, the market price of securities, and potentially lead to investigations by regulatory authorities[71][73] - Cybersecurity risks and incidents, whether deliberate attacks or unintentional events, could disrupt operations, misstate financial data, lead to liabilities, and damage reputation[74] Unresolved Staff Comments There are no unresolved staff comments to report - The Company has no unresolved staff comments[75] Properties The Company operates several major, adequately maintained plants and facilities, mostly leased, supporting both Metals and Specialty Chemicals segments across the US - The Company's major plants and facilities are in adequate condition and can accommodate immediate capacity needs[75] - Substantially all leased plants and facilities are under a Master Lease with Store Master Funding XII, LLC[75] Principal Properties by Segment (2021) | Location | Principal Operations | Square Feet | Land Acres | Leased or Owned | Metals | Specialty Chemicals | | :---------------- | :-------------------------------------------------- | :---------- | :--------- | :-------------- | :----- | :------------------ | | Munhall, PA | Manufacturing stainless steel pipe | 284,000 | 20.0 | Leased | ✔ | | | Bristol, TN | Manufacturing stainless steel pipe | 275,000 | 73.1 | Leased | ✔ | | | Cleveland, TN | Chemical manufacturing and warehousing | 143,000 | 18.8 | Leased | | ✔ | | Fountain Inn, SC | Chemical manufacturing and warehousing | 136,834 | 16.9 | Leased | | ✔ | | Danville, VA | Chemical manufacturing and warehousing | 135,811 | 55.3 | Owned | | ✔ | | Andrews, TX | Liquid storage solutions and separation equipment | 122,662 | 19.6 | Leased | ✔ | | | Troutman, NC | Manufacturing ornamental stainless steel tube | 106,657 | 26.5 | Leased | ✔ | | | Statesville, NC | Manufacturing ornamental stainless steel tube | 83,000 | 26.8 | Leased | ✔ | | | Houston, TX | Cutting facility and storage yard for heavy walled pipe | 29,821 | 10.0 | Leased | ✔ | | | Mineral Ridge, OH | Cutting facility and storage yard for heavy walled pipe | 12,000 | 12.0 | Leased | ✔ | | | Mineral Ridge, OH | Storage yard for heavy walled pipe | — | 4.6 | Leased | ✔ | | Legal Proceedings Information regarding legal proceedings is detailed in Note 15 to the Consolidated Financial Statements - Legal proceedings are discussed in Note 15 to the Consolidated Financial Statements[77] Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[77] Part II Market for Common Equity, Stockholder Matters, and Equity Purchases Synalloy's common stock trades on NASDAQ (SYNL), with 368 shareholders; no dividends were paid, and restricted stock was issued as compensation in 2021 - As of March 28, 2022, the Company had 368 common shareholders of record, and its common stock trades on the NASDAQ Global Market (SYNL)[78] - No dividends were declared or paid in 2021 or 2020 due to restrictions from the Company's credit agreement[78] - In 2021, the Company issued 22,026 shares of restricted stock to non-employee directors and 180,658 shares to management and key employees as compensation, which were unregistered sales[80][81] - The Company did not repurchase any of its securities during the fiscal quarter ended December 31, 2021[82] Unregistered Sales of Equity Securities In 2021, Synalloy issued 22,026 restricted shares to non-employee directors and 180,658 shares to management/employees under private offering exemptions - On May 20, 2021, 22,026 shares of restricted stock were issued to non-employee directors in lieu of $214,000 in annual cash retainer fees[80] - On May 25, 2021, an additional 20,000 shares of restricted stock were issued to the new Chairman of the Board due to increased responsibilities[80] - In 2021, 180,658 shares of common stock were issued to management and key employees under the 2015 Stock Awards Plans[81] Issuer Purchases of Equity Securities Neither Synalloy Corporation nor any affiliated purchaser repurchased any of the Company's securities during Q4 2021 - No repurchases of the Company's securities were made by the Company or any affiliated purchaser during the fiscal quarter ended December 31, 2021[82] [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Synalloy's financial performance, liquidity, and capital resources for 2021 and 2020, covering operational results, non-GAAP measures, and critical accounting policies Consolidated Financial Highlights (2021 vs. 2020) | Metric | 2021 ($ millions) | 2020 ($ millions) | Change ($ millions) | Change (%) | | :---------------------- | :---------------- | :---------------- | :------------------ | :--------- | | Net Sales | 334.7 | 256.0 | 78.7 | 30.7% | | Net Income (Loss) | 20.2 | (27.3) | 47.5 | N/A | | Diluted EPS | 2.14 | (2.98) | 5.12 | N/A | | Operating Cash Flow | 19.1 | 18.0 | 1.1 | 6.1% | | Capital Expenditures | 1.5 | N/A | N/A | N/A | - The acquisition of DanChem Technologies, Inc. contributed $5.7 million in net sales and $0.6 million in operating income to 2021 results[90] - The Company refinanced and expanded its revolving line of credit, ceased operations at the Palmer facility, and divested N845BB Partners, LLC to improve its financial position in 2021[92] Executive Overview In 2021, Synalloy achieved significant growth with consolidated net sales increasing by 30.7% to $334.7 million and net income reaching $20.2 million, driven by higher prices, volumes, and the DanChem acquisition Fiscal 2021 Consolidated Highlights | Metric | 2021 ($ millions) | 2020 ($ millions) | Change ($ millions) | Change (%) | | :---------------------- | :---------------- | :---------------- | :------------------ | :--------- | | Consolidated Net Sales | 334.7 | 256.0 | 78.7 | 30.7% | | Consolidated Net Income | 20.2 | (27.3) | 47.5 | N/A | | Diluted EPS | 2.14 | (2.98) | 5.12 | N/A | | Operating Cash Flow | 19.1 | N/A | N/A | N/A | - Excluding the DanChem acquisition, net sales increased 28.5% ($73.0 million) and net income increased to $19.6 million, with diluted EPS of $2.08[85] - The DanChem acquisition contributed $5.7 million in net sales and $0.6 million in operating income to 2021 results, bolstering chemical operations and expanding into new end-markets[87][88][90] - In response to COVID-19 impacts, the Company refinanced its credit line, ceased operations at the Palmer facility, and divested N845BB Partners, LLC to improve financial position[92] Results of Operations Consolidated net sales increased by 30.7% to $334.7 million in 2021, with gross profit surging by 168.3% to $60.8 million, and operating income improving significantly to $27.4 million Consolidated Operating Results (2021 vs. 2020) | Metric | 2021 ($ millions) | 2020 ($ millions) | Change ($ millions) | Change (%) | | :---------------------- | :---------------- | :---------------- | :------------------ | :--------- | | Net Sales | 334.7 | 256.0 | 78.7 | 30.7% | | Gross Profit | 60.8 | 22.7 | 38.1 | 168.3% | | Gross Profit % of Sales | 18.2% | 8.8% | 9.4 pp | N/A | | SG&A Expense | 30.1 | 28.7 | 1.4 | 4.9% | | Operating Income (Loss) | 27.4 | (31.1) | 58.5 | N/A | - The increase in net sales was primarily driven by a 19.5% increase in average price and a 9.1% increase in pounds shipped[94] - SG&A expense increased by $1.4 million, primarily due to higher incentive bonus expense ($1.3 million) and personnel costs ($1.1 million), partially offset by decreased share-based payment expense ($1.0 million) and gains on asset sales ($0.8 million)[95][96] Metals Segment Performance (2021 vs. 2020) The Metals Segment's net sales increased by 30.7% to $267.2 million in 2021, with operating income significantly improving to $33.6 million due to increased demand and higher prices Metals Segment Operating Results (2021 vs. 2020) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | Change ($ thousands) | Change (%) | | :---------------------- | :----------------- | :----------------- | :------------------- | :--------- | | Net Sales | 267,238 | 204,459 | 62,779 | 30.7% | | Cost of Goods Sold | 215,841 | 189,103 | 26,738 | 14.1% | | Gross Profit | 51,397 | 15,356 | 36,041 | 234.7% | | SG&A Expense | 17,836 | 17,538 | 298 | 1.7% | | Asset Impairment | — | 6,214 | (6,214) | N/A | | Goodwill Impairment | — | 16,203 | (16,203) | N/A | | Operating Income (Loss) | 33,561 | (24,599) | 58,160 | N/A | - Net sales increase was primarily driven by a 15.7% increase in average selling prices and a 12.5% increase in pounds shipped[98] Metals Segment Net Sales Change by Product (2021 vs. 2020) | Product Group | 2021 Change ($ thousands) | Change (%) | Average Selling Price Change (%) | Units Shipped Change (%) | | :------------------------------------------------ | :------------------------ | :--------- | :------------------------------- | :----------------------- | | Fiberglass and steel liquid storage tanks | (4,159) | (75.6)% | (29.7)% | (62.6)% | | Heavy wall seamless carbon steel pipe and tube | 16,869 | 71.3% | 14.7% | 49.3% | | Stainless steel pipe and tube | 31,676 | 20.4% | 14.0% | 5.6% | | Galvanized pipe and tube | 18,393 | 90.6% | 65.9% | 14.9% | | Total Increase | 62,779 | | | | Specialty Chemicals Segment Performance (2021 vs. 2020) The Specialty Chemicals Segment's net sales increased by 30.9% to $67.5 million in 2021, though operating income decreased to $3.7 million due to higher SG&A expenses Specialty Chemicals Segment Operating Results (2021 vs. 2020) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | Change ($ thousands) | Change (%) | | :---------------------- | :----------------- | :----------------- | :------------------- | :--------- | | Net Sales | 67,477 | 51,541 | 15,936 | 30.9% | | Cost of Goods Sold | 57,627 | 43,736 | 13,891 | 31.8% | | Gross Profit | 9,850 | 7,805 | 2,045 | 26.2% | | SG&A Expense | 5,961 | 3,772 | 2,189 | 58.0% | | Asset Impairment | 233 | — | 233 | N/A | | Operating Income | 3,656 | 4,033 | (377) | (9.3)% | - Net sales increased by 30.9% ($15.9 million), driven by a 26.7% increase in average selling prices and a 3.8% increase in pounds shipped[104] - SG&A expense increased by $2.2 million (58.0%), primarily due to higher personnel costs ($1.4 million) and bad debt expense ($0.3 million)[104] Corporate Expenses (2021 vs. 2020) Corporate expenses decreased by $1.1 million to $6.8 million in 2021, primarily due to reductions in personnel costs and share-based compensation, partially offset by increased incentive bonuses - Corporate expenses decreased by $1.1 million to $6.8 million in 2021, down from $7.9 million in 2020[105] - The decrease was primarily driven by a $1.7 million reduction in personnel costs (severance), a $0.8 million decrease in share-based compensation, and a $0.3 million decrease in travel expense[106] - These decreases were partially offset by a $0.6 million increase in incentive bonus expense and an $0.8 million increase in other corporate overheads[106] - Interest expense decreased from $2.1 million in 2020 to $1.5 million in 2021 due to more favorable interest rates from the 2021 debt refinance[107] Non-GAAP Financial Measures The Company uses non-GAAP measures like Adjusted EBITDA, which significantly increased to $44.3 million (13.2% of sales) in 2021, reflecting improved operational performance - Non-GAAP measures like EBITDA and Adjusted EBITDA are used to supplement GAAP financial statements for comparing financial results between periods[108][109] Consolidated EBITDA and Adjusted EBITDA (2021 vs. 2020) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | | :-------------- | :----------------- | :----------------- | | Net Income (Loss)| 20,245 | (27,267) | | EBITDA | 37,323 | (19,212) | | Adjusted EBITDA | 44,308 | 9,247 | | % Sales | 13.2% | 3.6% | Segment Adjusted EBITDA (2021 vs. 2020) | Segment | 2021 Adjusted EBITDA ($ thousands) | 2020 Adjusted EBITDA ($ thousands) | 2021 % of Sales | 2020 % of Sales | | :------------------ | :--------------------------------- | :--------------------------------- | :-------------- | :-------------- | | Metals Segment | 42,963 | 8,047 | 16.1% | 3.9% | | Specialty Chemicals | 6,548 | 5,814 | 9.7% | 11.3% | Liquidity and Capital Resources Synalloy manages liquidity through operating cash flows and credit facilities, refinancing its facility in 2021 and having $39.4 million in remaining availability - Liquidity is managed through operating activities, cash and cash equivalents, and credit facilities, with sufficient sources expected for the next 12 months[115][120] Cash Flows Summary (2021 vs. 2020) | Cash Flow Activity | 2021 ($ thousands) | 2020 ($ thousands) | | :----------------- | :----------------- | :----------------- | | Operating | 19,055 | 17,978 | | Investing | (32,661) | 994 | | Financing | 15,391 | (19,362) | | Net Increase (Decrease) | 1,785 | (390) | - Net cash used in investing activities increased due to the DanChem acquisition ($32.6 million outflow), partially offset by decreased capital expenditures[118] - A new $150.0 million revolving credit facility with BMO Harris Bank N.A. was established in January 2021, replacing previous facilities, with $39.4 million remaining availability as of December 31, 2021[120][121][123] - The Board re-authorized a share repurchase program for up to 790,383 shares in February 2021, but no shares were repurchased in 2021. No dividends were declared or paid in 2021 or 2020[125][126] Other Financial Measures (2021 vs. 2020) | Metric | 2021 | 2020 | | :---------------------- | :------ | :------ | | Current ratio | 3.3 | 4.1 | | Debt to capital | 39% | 43% | | Return on average equity| 21.1% | (29.2)% | Material Cash Requirements from Contractual and Other Obligations As of December 31, 2021, material cash requirements included $70.4 million in debt and $34.8 million in lease obligations, with anticipated capital spending of up to $10.0 million in 2022 - Outstanding debt obligations (revolving credit facility and term loan) totaled $70.4 million as of December 31, 2021, with $2.5 million payable within 12 months[130] - Operating and finance lease obligations amounted to $34.8 million, with $1.3 million payable within 12 months[131] - Capital spending for fiscal 2022 is expected to be up to $10.0 million[131] - The Company has no off-balance sheet arrangements[131] Critical Accounting Policies and Estimates Financial statement preparation requires significant estimates in business combinations, earn-out liabilities, goodwill impairment, and inventory valuation, involving subjective judgments - Business combinations require extensive estimates and judgments to allocate consideration to acquired assets and assumed liabilities based on fair values, impacting future amortization and goodwill[133][134][135] - Earn-out liabilities are estimated using probability-weighted expected return methods, involving judgments on future shipments and prices, with changes in fair value impacting operating results[136][137][138] - Goodwill is evaluated for impairment annually or when circumstances change, using qualitative and quantitative assessments (discounted cash flow and market multiple analyses) that rely on significant management estimates and assumptions[139][140][141][142] - Inventory is valued at the lower of cost or net realizable value, with reserves established for obsolete/unmarketable inventory and estimated shrinkage, based on sales trends, usage, and physical inventory results[143][144][146][147] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Synalloy Corporation is not required to provide disclosures about market risk - The Company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[148] Financial Statements and Supplementary Data This section presents Synalloy's audited consolidated financial statements for 2021 and 2020, including balance sheets, statements of operations, cash flows, and extensive notes - The section includes audited consolidated financial statements for 2021 and 2020, along with reports from independent registered public accounting firms (BDO USA, LLP and KPMG, LLP)[150][153][164] - The financial statements include Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows, and Statements of Shareholders' Equity[150] - Extensive notes to the consolidated financial statements provide details on accounting policies, acquisitions (e.g., DanChem), revenue recognition, fair value measurements, long-term debt, leases, shareholders' equity, share-based payments, income taxes, earnings per share, industry segments, benefit plans, commitments, proxy contest costs, related party transactions, and subsequent events[150] Report of Independent Registered Public Accounting Firm (BDO USA, LLP) BDO USA, LLP issued an unqualified opinion on Synalloy's 2021 consolidated financial statements, highlighting the critical audit matter of fair value determination for the DanChem acquisition - BDO USA, LLP issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2021[153] - A critical audit matter involved the determination of preliminary fair values for customer relationships and machinery, fixtures, and equipment in the DanChem acquisition, due to significant unobservable inputs and assumptions[159][160] - Audit procedures included assessing the reasonableness of assumptions for customer relationships (revenue growth, attrition, WACC) and testing the existence and valuation methodology for machinery, fixtures, and equipment, often with specialized valuation professionals[161] Report of Independent Registered Public Accounting Firm (KPMG, LLP) KPMG, LLP provided an unqualified opinion on Synalloy's 2020 consolidated financial statements, excluding the retrospective EPS adjustment from the 2021 Rights Offering - KPMG, LLP issued an opinion on the consolidated financial statements for the year ended December 31, 2020, before the retrospective application of the 2021 Rights Offering's EPS adjustment[164] - KPMG's opinion on the 2020 financial statements was fair in all material respects, except for the effects of the earnings per share retrospective adjustment, which they did not audit[164][165] Consolidated Balance Sheets Total assets increased to $266.0 million in 2021 from $207.0 million in 2020, driven by higher receivables, inventories, and acquired assets, with shareholders' equity rising to $111.6 million Consolidated Balance Sheet Summary (2021 vs. 2020, in thousands) | Account | 2021 | 2020 |\n| :--------------------------------------- | :-------- | :-------- |\n| Assets: | | |\n| Total current assets | 159,979 | 126,883 |\n| Property, plant and equipment, net | 43,720 | 35,096 |\n| Goodwill | 12,637 | 1,355 |\n| Intangible assets, net | 14,382 | 11,426 |\n| Total assets | 266,002 | 206,984 |\n| Liabilities & Shareholders' Equity: | | |\n| Total current liabilities | 50,489 | 31,050 |\n| Long-term debt | 67,928 | 60,495 |\n| Total liabilities | 154,412 | 126,689 |\n| Total Shareholders' equity | 111,590 | 80,295 | - Cash and cash equivalents increased significantly from $236 thousand in 2020 to $2,021 thousand in 2021[170] - Inventories, net, increased from $85.1 million in 2020 to $103.2 million in 2021[170] Consolidated Statements of Operations Net sales increased by 30.7% to $334.7 million in 2021, resulting in a net income of $20.2 million ($2.14 diluted EPS), a significant turnaround from a $27.3 million net loss in 2020 Consolidated Statements of Operations Summary (2021 vs. 2020, in thousands) | Metric | 2021 | 2020 |\n| :------------------------------------ | :-------- | :-------- |\n| Net sales | 334,715 | 256,000 |\n| Cost of sales | 273,949 | 233,348 |\n| Gross profit | 60,766 | 22,652 |\n| Selling, general and administrative expense | 30,144 | 28,718 |\n| Operating income (loss) | 27,348 | (31,067) |\n| Income (loss) before income taxes | 25,498 | (31,973) |\n| Net income (loss) | 20,245 | (27,267) |\n| Diluted Net income (loss) per common share | 2.14 | (2.98) | - Gross profit margin improved significantly from 8.8% in 2020 to 18.2% in 2021[172] - Operating income saw a substantial positive swing from a loss of $31.1 million in 2020 to an income of $27.3 million in 2021[172] Consolidated Statements of Cash Flows Operating cash flow increased to $19.1 million in 2021, while investing activities used $32.7 million due to the DanChem acquisition, and financing activities provided $15.4 million Consolidated Statements of Cash Flows Summary (2021 vs. 2020, in thousands) | Cash Flow Activity | 2021 | 2020 |\n| :----------------- | :-------- | :-------- |\n| Operating activities | 19,055 | 17,978 |\n| Investing activities | (32,661) | 994 |\n| Financing activities | 15,391 | (19,362) |\n| Net increase (decrease) in cash and cash equivalents | 1,785 | (390) |\n| Cash and cash equivalents at end of year | 2,021 | 236 | - The increase in operating cash flow was driven by higher net earnings, partially offset by changes in accounts receivable and inventory[117] - Investing activities shifted from providing cash in 2020 to using cash in 2021, primarily due to the $32.6 million cash outflow for the DanChem acquisition[118][175] - Financing activities provided cash in 2021 due to increased borrowings from the asset-backed line of credit and proceeds from the Rights Offering[119][175] Consolidated Statements of Shareholders' Equity Total shareholders' equity increased to $111.6 million in 2021, driven by net income and $10.0 million from a Rights Offering, along with share-based compensation Consolidated Statements of Shareholders' Equity Summary (2021 vs. 2020, in thousands) | Account | 2021 | 2020 |\n| :--------------------------------------- | :-------- | :-------- |\n| Balance December 31, 2020 | 80,295 | 106,511 |\n| Net income (loss) | 20,245 | (27,267) |\n| Issuance of common stock - Rights Offering | 10,010 | — |\n| Issuance of common stock from treasury | 132 | 345 |\n| Exercise of stock options | 109 | — |\n| Share-based compensation | 799 | 1,791 |\n| Purchase of common stock | — | (635) |\n| Balance December 31, 2021 | 111,590 | 80,295 | - The Rights Offering in 2021 resulted in the issuance of 785,103 shares of common stock and gross proceeds of approximately $10.0 million[178] - Share-based compensation recognized was $0.8 million in 2021, compared to $1.8 million in 2020[178] Note 1: Summary of Significant Accounting Policies This note details Synalloy's accounting policies for consolidation, estimates, cash, receivables, inventories, property, goodwill, intangibles, revenue, and share-based compensation - The Company's business is divided into Metals and Specialty Chemicals segments, with Palmer operations in the Metals Segment permanently ceased as of December 31, 2021[182] - Accounts receivable allowance for credit losses was $0.2 million in 2021, down from $0.5 million in 2020[186] - Inventory reserves for obsolete/unmarketable inventory increased to $1.1 million in 2021 from $0.2 million in 2020, while reserves for estimated quantity losses decreased to $0.2 million from $0.5 million[190][191] Goodwill Carrying Amount (2021 vs. 2020, in thousands) | Segment | 2021 | 2020 | | :------------------ | :-------- | :-------- | | Chemicals Segment | 12,637 | 1,355 | | Metals Segment | — | — | | Total | 12,637 | 1,355 | - Goodwill impairment charges of $16.2 million were recognized in 2020 for the Welded Pipe & Tube reporting unit within the Metals Segment[198] Estimated Amortization Expense for Intangible Assets (in thousands) | Year | Amount | | :--------- | :----- | | 2022 | 2,884 | | 2023 | 1,433 | | 2024 | 1,336 | | 2025 | 1,238 | | 2026 | 1,141 | | Thereafter | 6,350 | | Total | 14,382 | Note 2: Acquisitions On October 22, 2021, Synalloy acquired DanChem Technologies, Inc. for a preliminary purchase price of $34.1 million, resulting in $11.3 million in goodwill and contributing $5.7 million in net sales to 2021 results - The Company acquired DanChem Technologies, Inc. on October 22, 2021, for a preliminary purchase price of $34.1 million, funded by its revolving credit facility[222] Preliminary Fair Value of DanChem Assets Acquired and Liabilities Assumed (in thousands) | Account | October 22, 2021 | | :--------------------------------------- | :--------------- | | Cash and cash equivalents | 1,533 | | Accounts receivable, net | 5,358 | | Inventories | 1,561 | | Property, plant and equipment | 15,697 | | Intangible assets | 5,750 | | Total identifiable assets acquired | 30,561 | | Total identifiable liabilities assumed | 7,746 | | Net identifiable assets acquired | 22,815 | | Transaction price | 34,097 | | Goodwill | 11,282 | - Goodwill of $11.3 million was recognized, attributable to operational synergies, assembled workforce, and growth opportunities, allocated to the Specialty Chemicals Segment[224] - DanChem contributed $5.7 million in net sales and $0.6 million in operating income from October 22, 2021, to December 31, 2021[227] Note 3: Revenue Recognition Synalloy recognizes revenue upon shipment, disaggregated by product group, with significant contributions from stainless steel pipe, heavy wall carbon steel pipe, and specialty chemicals - Revenue is recognized when control and title of goods/services are transferred to customers upon shipment, net of sales incentives and discounts[231] Revenues Disaggregated by Product Group (2021 vs. 2020, in thousands) | Product Group | 2021 | 2020 |\n| :------------------------------------------------ | :-------- | :-------- |\n| Fiberglass and steel liquid storage tanks | 1,343 | 5,503 |\n| Heavy wall seamless carbon steel pipe and tube | 40,539 | 23,670 |\n| Stainless steel pipe and tube | 186,651 | 154,974 |\n| Galvanized pipe and tube | 38,705 | 20,312 |\n| Specialty chemicals | 67,477 | 51,541 |\n| Net sales | 334,715 | 256,000 | - Shipping costs are treated as fulfillment activities and recorded in both revenue and cost of sales[231] Note 4: Fair Value Measurements This note details fair value measurements, including Level 3 contingent consideration liabilities estimated using probability-weighted methods, and non-recurring asset impairments - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (significant unobservable inputs)[235] - Contingent consideration (earn-out) liabilities are classified as Level 3, with fair value estimated using a probability-weighted expected return method based on management's estimates of pounds to be shipped and future price per unit[238] Changes in Level 3 Earn-Out Liabilities (2021 vs. 2020, in thousands) | Metric | 2021 | 2020 |\n| :------------------------------------ | :-------- | :-------- |\n| Balance December 31, 2020 | 3,721 | 9,154 |\n| Earn-out payments during period | (3,632) | (4,238) |\n| Changes in fair value during the period | 1,872 | (1,195) |\n| Balance December 31, 2021 | 1,961 | 3,721 | - In 2021, a $0.2 million asset impairment charge was recognized for obsolete technology in the Specialty Chemicals Segment. In 2020, $6.2 million in asset impairment charges were recognized for Palmer's inventory and long-lived assets[246][247] - Assets held-for-sale from the Palmer facility (inventory and property, plant & equipment totaling $0.9 million) were classified as Level 2 fair value measurements as of December 31, 2021[248][249] Note 5: Property, Plant and Equipment Net property, plant and equipment totaled $43.7 million in 2021, with machinery, fixtures, and equipment being the largest component, depreciated using the straight-line method Property, Plant and Equipment (2021 vs. 2020, in thousands) | Account | 2021 | 2020 |\n| :------------------------------------- | :-------- | :-------- |\n| Land | 3 | 3 |\n| Leasehold improvements | 4,641 | 2,939 |\n| Buildings | 84 | 84 |\n| Machinery, fixtures and equipment | 110,127 | 100,352 |\n| Construction-in-progress | 1,900 | 2,772 |\n| Total | 117,444 | 106,150 |\n| Less accumulated depreciation and amortization | (73,724) | (71,054) |\n| Property, plant and equipment, net | 43,720| 35,096| - Depreciation expense was $7.5 million in 2021 and $7.6 million in 2020[252] Note 6: Long-term Debt Synalloy refinanced its debt in January 2021 with a new $150.0 million revolving credit facility, resulting in $70.4 million total long-term debt and $39.4 million remaining availability Long-term Debt (2021 vs. 2020, in thousands) | Credit Facilities | 2021 | 2020 |\n| :---------------------------------------------- | :-------- | :-------- |\n| Revolving line of credit, due January 15, 2025 | 65,571 | — |\n| Term loan, due January 15, 2025 | 4,821 | — |\n| Revolving line of credit, due December 20, 2021 | — | 49,037 |\n| Term loan, due February 1, 2024 | — | 12,333 |\n| Total long-term debt | 70,392 | 61,370 |\n| Less: Current portion of long-term debt | (2,464) | (875) |\n| Long-term debt, less current portion | 67,928| 60,495| - The new Credit Agreement with BMO Harris Bank N.A. provides a $150.0 million borrowing capacity, including a $105.0 million revolving line of credit and a $5.0 million delayed draw term loan, maturing in January 2025[254] - Interest payments on all credit facilities were $1.4 million in 2021, down from $2.0 million in 2020[255] - As of December 31, 2021, the Company had $39.4 million of remaining availability under its credit facility and was in compliance with all debt covenants[256] Note 7: Leases The Company's lease portfolio includes operating and finance leases, primarily for real estate, with operating lease liabilities totaling $32.2 million as of December 31, 2021 - Operating lease liabilities related to the master lease agreement with Store Capital totaled $32.2 million, representing 98% of total lease liabilities as of December 31, 2021[257] Operating and Finance Lease Balances (2021 vs. 2020, in thousands) | Account | 2021 | 2020 |\n| :--------------------------------------- | :-------- | :-------- |\n| Right-of-use assets, operating leases | 30,811 | 31,769 |\n| Finance lease assets | 1,640 | 56 |\n| Current portion of operating lease liabilities | 1,104 | 867 |\n| Current portion of finance lease liabilities | 233 | 19 |\n| Non-current portion of operating lease liabilities | 32,059 | 32,771 |\n| Non-current portion of finance lease liabilities | 1,414 | 37 | Total Lease Cost (2021 vs. 2020, in thousands) | Lease Cost Component | 2021 | 2020 |\n| :-------------------------------------- | :-------- | :-------- |\n| Operating lease cost | 4,099 | 4,124 |\n| Finance lease cost (reduction in ROU assets) | 100 | 92 |\n| Finance lease cost (interest) | 11 | 24 |\n| Total lease cost | 4,210 | 4,240 | Lease Term and Discount Rate (2021 vs. 2020) | Metric | 2021 | 2020 |\n| :------------------------------------ | :------------ | :------------ |\n| Weighted-average discount rate (Operating leases) | 8.30% | 8.33% |\n| Weighted-average discount rate (Finance leases) | 2.27% | 2.44% |\n| Weighted-average remaining lease term (Operating leases) | 14.43 years | 15.47 years |\n| Weighted-average remaining lease term (Finance leases) | 7.07 years | 2.91 years | Note 8: Accrued Expenses Accrued expenses increased from $6.1 million in 2020 to $12.4 million in 2021. The primary drivers of this increase were higher accrued salaries, wages, and commissions, and a significant increase in accrued income taxes Accrued Expenses (2021 vs. 2020, in thousands) | Accrued Expense Category | 2021 | 2020 |\n| :--------------------------------- | :-------- | :-------- |\n| Salaries, wages, and commissions | 5,052 | 3,776 |\n| Income taxes | 3,212 | — |\n| Taxes, other than income taxes | 889 | 133 |\n| Advances from customers | 441 | 298 |\n| Insurance | 517 | 702 |\n| Professional fees | 527 | 272 |\n| Warranty reserve | 40 | 233 |\n| Benefit plans | 333 | 238 |\n| Interest rate swap liability | — | 45 |\n| Customer rebate liability | 379 | 168 |\n| Other accrued items | 1,017 | 258 |\n| Total accrued expenses | 12,407| 6,123 | - Accrued income taxes increased from zero in 2020 to $3.2 million in 2021[266] Note 9: Shareholders' Equity Shareholders' equity increased to $111.6 million in 2021. The Board re-authorized a share repurchase program for up to 790,383 shares, but no repurchases occurred in 2021 (compared to 59,617 shares in 2020). A Rights Offering in November 2021 was fully subscribed, issuing 785,103 shares and generating $10.0 million in gross proceeds. No dividends were declared or paid in 2021 or 2020 - The Board re-authorized a share repurchase program for up to 790,383 shares over 24 months, with no shares repurchased in 2021[269][271] - A Rights Offering in November 2021 was fully subscribed, resulting in the issuance of 785,103 shares of common stock and approximately $10.0 million in gross proceeds[272] - No dividends were declared or paid by the Company in 2021 or 2020[273] Note 10: Accounting for Share-Based Payments Synalloy recognized $0.8 million in share-based compensation expense in 2021, granting restricted stock and performance-based awards under various equity incentive plans - Share-based compensation expense was $0.8 million in 2021, compared to $1.8 million in 2020[276] - As of December 31, 2021, 0.9 million shares remained available for grants under active equity Incentive Plans[276] - In 2021, 13,174 stock options were exercised, and compensation cost for options was $0.1 million[279][280] - The 2015 Stock Awards Plan's authorization was increased to 1.5 million shares in 2021. Compensation cost for restricted stock awards was $0.4 million in 2021[287][289] - Performance-based restricted stock awards and inducement awards were granted to executive officers, with vesting tied to EBITDA targets, stock price targets, or service periods[290][291][294][295] - Non-employee directors received 22,026 shares of restricted stock in 2021 in lieu of $214,000 in retainer fees, plus an additional 20,000 shares for the new Chairman[298] Note 11: Income Taxes Net deferred income tax assets totaled $12.7 million in 2021, with a $5.3 million income tax provision and an effective tax rate of 20.6%, influenced by share-based compensation and NOLs Deferred Income Tax Assets and Liabilities (2021 vs. 2020, in thousands) | Account | 2021 | 2020 |\n| :--------------------------------------- | :-------- | :-------- |\n| Total deferred income tax assets | 16,447 | 15,316 |\n| Federal & State valuation allowance | (3,700) | (4,243) |\n| Total net deferred income tax assets | 12,747 | 11,073 |\n| Total deferred income tax liabilities | 15,180 | 13,030 |\n| Deferred income taxes, net | (2,433) | (1,957) | Provision for Income Taxes (2021 vs. 2020, in thousands) | Tax Type | 2021 | 2020 |\n| :--------------- | :-------- | :-------- |\n| Current Federal | 6,786 | (6,024) |\n| Current State | 538 | 23 |\n| Deferred Federal | (1,943) | 1,011 |\n| Deferred State | (128) | 284 |\n| Total | 5,253 | (4,706) | - The effective tax rate for 2021 was 20.6%, lower than the U.S. statutory rate of 21%, primarily due to windfall tax benefits from share-based compensation and valuation allowance releases[305] - The Company had $4.2 million in U.S. Federal net operating loss carryforwards at the end of 2021, acquired from the DanChem acquisition[305] Note 12: Earnings (Loss) Per Share Synalloy reported diluted EPS of $2.14 in 2021, a significant improvement from a $2.98 loss per share in 2020, with prior periods retroactively adjusted for a Rights Offering bonus element Earnings (Loss) Per Share (2021 vs. 2020, in thousands except per share data) | Metric | 2021 | 2020 |\n| :------------------------------------ | :-------- | :-------- |\n| Net earnings (loss) | 20,245 | (27,267) |\n| Basic EPS | 2.17 | (2.98) |\n| Diluted EPS | 2.14 | (2.98) |\n| Weighted average common shares outstanding (Basic) | 9,340 | 9,140 |\n| Weighted average common shares outstanding (Diluted) | 9,456 | 9,140 | - The basic and diluted EPS for prior periods were retroactively adjusted due to a bonus element in the 2021 Rights Offering[309] - Potentially dilutive shares (0.1 million in 2021 and 0.2 million in 2020) were excluded from diluted EPS calculations when anti-dilutive[310] Note 13: Industry Segments The Metals Segment generated $267.2 million in net sales and $33.6 million in operating income in 2021, while Specialty Chemicals had $67.5 million in sales and $3.7 million in operating income - The Company's business is divided into two operating segments: Metals and Specialty Chemicals, with performance evaluated primarily by operating income (loss)[311] Segment Financial Information (2021 vs. 2020, in thousands) | Metric | 2021 Metals | 2020 Metals | 2021 Specialty Chemicals | 2020 Specialty Chemicals | 2021 Total | 2020 Total |\n| :------------------------------------ | :---------- | :---------- | :----------------------- | :----------------------- | :--------- | :--------- |\n| Net sales | 267,238 | 204,459 | 67,477