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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19687
SYNALLOY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 57-0426694
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
Croft Industrial Park, P.O. Box 5627, Spartanburg, South Carolina 29304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 585-3605
Securities registered pursuant Name of each exchange
to Section 12(b) of the Act: on which registered:
None Nasdaq National Market System
Title of Class
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
(Title of Class)
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 periods 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Based on the closing price of February 21, 1997, the aggregate market value of
common stock held by non-affiliates of the registrant was $124.0 million.
The number of common shares outstanding of the registrant's common stock as of
February 21, 1997 was 6,985,917.
Documents Incorporated By Reference
Portions of the proxy statement for the annual shareholders' meeting are
incorporated by reference into Part III
PART I
Item 1 Business
Synalloy Corporation, a Delaware Corporation ("the Company"), 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. On June 3, 1988, the state of incorporation was changed
from South Carolina to Delaware. The Company's executive offices are located
at Croft Industrial Park, Spartanburg, South Carolina.
General
Metals Segment--This segment is comprised of two wholly-owned companies,
Bristol Metals, L.P., located in Bristol, Tennessee, and Whiting Metals, Inc.,
located in Camden, South Carolina.
Bristol manufactures welded pipe, primarily from stainless steel, but also
from other corrosion-resistant metals. Pipe is produced in sizes from one-half
inch to 60 inches in diameter and wall thickness up to three-quarters inch.
Sixteen-inch and smaller pipe is made on equipment that forms and welds the
pipe in a continuous process. Pipe larger than sixteen inches is formed on
presses or rolls and welded on batch welding equipment. Pipe is normally
produced in standard 20-foot lengths. However, Bristol has unusual
capabilities in the production of long length pipe without circumferential
welds. This can reduce installation cost for the customer. Lengths up to 60
feet can be produced in sizes up to sixteen inches in diameter. In larger
sizes Bristol has a unique ability among domestic producers to make 48-foot
lengths in sizes up to 30 inches.
A significant amount of the pipe produced is further processed into piping
systems that conform to engineered drawings furnished by the customers. This
allows the customer to take advantage of the high quality and efficiency of
Bristol's fabrication shops instead of performing all of the welding on the
construction site. The pipe fabricating shops can make one and one-half
diameter cold bends on one-half inch through eight-inch stainless pipe with
thicknesses up through schedule 40. Most of the piping systems are produced
from pipe manufactured by Bristol.
Whiting manufactures Underwriters Laboratories (UL) labeled storage tanks,
ASME code pressure vessels and reactors, and other process equipment. They
have unusual expertise in the manufacture and installation of dimple and
spiral-wound pipe type jackets for heating and cooling of process equipment.
The wide variety of products made by Whiting are all custom designed for the
end-user. Like Bristol, the principal raw material is stainless steel.
In order to establish stronger business relationships, only a few raw material
suppliers are used. Two suppliers furnish more than one-half of total dollar
purchases of raw materials. However, raw materials are readily available from
a number of different sources and the Company anticipates no difficulties in
obtaining its requirements.
This segment's products are used principally by customers requiring materials
that are corrosion-resistant or suitable for high-purity processes. The
largest users are the chemical, petrochemical and pulp and paper industries
with some other important industry users being mining, power generation, waste
water treatment, brewery, food processing, petroleum and pharmaceutical.
Chemicals Segment--This segment is comprised of two operating companies,
Blackman Uhler Chemical Company (BU), a division of the Company, and
Manufacturers Chemicals, L.P. (MC), wholly-owned by the Company. BU has two
plants, one in Augusta, Georgia and one in Spartanburg, South Carolina. Both
locations are fully licensed for chemical manufacture and each maintains a
permitted waste treatment system. MC is located in Cleveland, Tennessee and is
fully licensed for chemical manufacture. This segment's principal businesses
are the manufacture and sale of dyes and pigments to the textile industry, and
specialty chemical products to the textile, chemical, paper and metals
industries.
BU produces dyes in both liquid and powder form, and pigments primarily as a
specially formulated paste. Dyes fix themselves to textile yarns by a
particular reaction or penetration into the yarn fiber, whereas pigments are
normally applied as a surface coating during a printing operation. Dyeing of
textile fabrics in solid colors is primarily accomplished by the use of dyes.
Pigment colors are uniquely suitable for printing of multi-colored patterns.
Raw materials used to manufacture dyes and pigments consist chiefly of organic
intermediates and inorganic chemicals which are purchased from manufacturers
in the United States, Europe and Asia. Currently, raw materials are readily
available and management does not anticipate any difficulty in obtaining
adequate supplies.
In the mid 1980s, management decided to better utilize its excellent
reputation for sales and technical service by expanding its efforts to sell
reactive dyes. These dyes are used for coloring cotton and rayon. The Company
purchases finished and crude products that are either sold as is, or converted
to liquid form for the convenience of customers. These dyes represented about
27 percent of the Chemicals Segment's sales in 1996. The Company has a
distributorship agreement expiring December 31, 1997 with the company
supplying about 90 percent of these products. The supplier has been the
principal source of these products since 1985. Although the Company believes
that this supplier will continue to be a source of these products in the
future, there is no assurance of this. Loss of this supplier would have a
materially adverse short-term effect on the Company's sales and net income.
However, management believes that if the agreement with this supplier is not
continued in the future, other suppliers could be found to replace most of the
products.
In May 1994, BU acquired the sulphur dye business of Southern Dye and Chemical
Company, a manufacturer of sulphur dyes utilizing an environmentally friendly
chemical system. This process results in reduced environmental costs and
shorter processing cycles. Sulphur dyes are used to dye denim, fleece
garments, knits, work clothes, men's casual wear, and a variety of cotton and
cotton-polyester blends.
BU is a producer of specialty chemicals for the chemical, photographic,
pharmaceutical, agricultural and fiber industries. The Company has been
focusing on specialty chemicals as a primary growth area over the past several
years. Facilities and equipment have been added at both plants to provide
toll and custom manufacturing of organic chemicals using reactions that
include nitrations, hydrogenation, diazotizations, methylation and custom
drying. These chemicals are used in a wide array of products including sun
screens, UV absorbers for plastics, Cetane improver for diesel fuel, absorbers
for gaseous pollutants, herbicides and intermediates for dyes and pigments.
On November 25, 1996, with an effective date of October 26, 1996, the Company
purchased Manufacturers Chemicals Corporation and a related Company. On
December 27, 1996, the Company merged and transferred all of Manufacturers
Chemicals' operations into a limited partnership. MC produces defoamers,
surfactants, dye assists, softening agents, polymers and specialty lubricants
for the textile, paper, chemical and metals industries. The Company also
manufactures chelating agents and water treatment chemicals. Manufacturing
capabilities include a wide range of chemical reactions and mixing and
blending applications. MC's products are sold to direct users in a variety of
manufacturing areas, directly to other chemical companies in the form of
intermediates or as finished products for resale, and as contract
manufacturing where the customer provides formula specifications and, in some
cases, raw materials. The addition of MC complements the existing specialty
chemicals area expanding its capacity and capabilities. The Company believes
MC will help achieve its goal of growing specialty chemicals making this area
a larger contributor to sales and profits of the Chemical Segment.
The Chemical Segment maintains eight laboratories for applied research and
quality control which are staffed by approximately 35 employees.
Sales and Distribution
Metals Segment--The Metals Segment utilizes separate sales organizations for
its different product groups. Stainless steel pipe is sold nationwide under
the Brismet trade name through authorized stocking distributors with over 200
warehouse locations throughout the country. In addition, large quantity orders
are shipped directly from Bristol's plant to end-user customers. Producing
sales and providing service to the distributors and end-user customers are two
outside sales employees, six independent manufacturers' representatives, the
manager of inside sales and five inside sales employees. The President also
spends about 50 percent of his time in sales related matters.
Piping systems are sold nationwide under the Bristol Piping Systems trade name
by three outside sales employees and a part-time consultant who is a Bristol
retiree. They are under the direction of the Vice President in charge of
piping systems who spends over half of his time in sales and service to
customers. Specialty process equipment manufactured by Whiting Metals is sold
by one outside sales employee and two manufacturers' representatives under the
direction of Whiting's President who devotes significant time to sales. Piping
systems and process equipment are marketed to engineering firms and
construction companies or directly to project owners. Orders are normally
received as a result of competitive bids submitted in response to inquiries
and bid proposals.
Chemicals Segment--Seven full-time outside sales employees and three
manufacturers' representatives market dyes and pigments to the textile
industry nationwide. In addition, both the President and the product manager
of BU devote a substantial part of their time to sales. Specialty chemicals
are sold directly to various industries nationwide by three full-time outside
sales employees, four manufacturers' representatives and one part-time
consultant. In addition, the President of MC, the product manager of MC, BU's
Vice President of Research and Development and another BU employee devote a
substantial part of their time to sales.
Competition
Metals Segment--Welded stainless steel pipe is the largest sales volume
product of the Metals Segment. Although information is not publicly available
regarding the sales of most other producers of this product, management
believes that the Company is the largest domestic producer of such pipe. This
commodity product is highly competitive with twelve known domestic producers
and imports from many different countries. The largest sales volume among the
specialized products comes from fabricating light-wall stainless piping
systems. Management believes the Company is the largest producer of such
systems. With respect to specialty stainless process equipment, the Company
has an insignificant market share on a national basis and has numerous
competitors some of which may have substantially more resources than does the
Company.
Chemicals Segment--About eight percent of the dye and pigment sales represent
niche products for which the Company is the only producer. Another
approximately one quarter of these sales represent products of which the
Company is an important producer with an estimated 10 to 20 percent market
share. The Company has five percent or less of the market for the remainder of
its dye products. The Company is the sole producer of certain specialty
chemicals manufactured for other companies under processing agreements.
However, the Company's sales of specialty 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 greater
resources than does the Company.
Environmental Matters
Environmental expenditures that relate to an existing condition caused by past
operations and that 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. See "Note H" to Consolidated Financial Statements for
further discussion.
Research and Development Activities
The Company spent approximately $778,000 in 1996, $743,000 in 1995 and
$694,000 in 1994 on research and development programs in its Chemical Segment.
Thirteen individuals, 11 of whom are graduate chemists, are engaged primarily
in research and development of new products and processes, the improvement of
existing products and processes, and the development of new applications for
existing products.
Seasonal Nature of The Business
Many textile plants shut down for vacations in the first or second week of
July. This contributes to a seasonal pattern that normally results in lower
third quarter sales of dyes and pigments when compared to the first and second
quarters. In addition, for the past several years the fourth quarter has
produced less sales of these products than the third quarter. The annual
requirements of certain specialty chemicals are produced over a period of a
few months as requested by the customers. Accordingly, the sales of these
products may vary significantly from one quarter to another. The addition of
MC should make quarterly sales of specialties more consistent. However, in
total, sales and net income in any given quarter may not be representative of
other quarters.
Backlogs
The Chemical 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 commodity pipe sales in the Metals Segment.
However, backlogs are important in the piping systems and process equipment
products because they are produced only after orders are received, generally
as the result of competitive bidding. Order backlogs for these products were
$13,100,000, $10,400,000 and $13,600,000 at the 1996, 1995 and 1994 respective
year ends.
Employee Relations
As of December 28, 1996, the Company had 585 employees. The Company considers
relations with employees to be satisfactory. The number of employees of the
Company represented by unions at the Bristol, Tennessee facility is 233. They
are represented by two locals affiliated with the AFL-CIO and one local
affiliated with the Teamsters. Contracts will expire in February 1999,
December 1999 and March 2000.
Item 2 Properties
The Company operates the major plants and facilities described herein, all of
which are well maintained and in good condition. All facilities throughout the
Company are properly 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. The Company owns all of these plants and facilities.
Location Principal Operations Building
Square Feet Land Acres
Spartanburg, SC Corporate headquarters;
Chemical manufacturing
and warehouse facilities 211,000 60.90
Augusta, GA Chemical manufacturing 52,500 46.00
Bristol, TN Manufacturing of
stainless steel pipe
and piping systems 218,000 73.08
Camden, SC Manufacturing of
stainless steel vessels 16,300 12.26
Cleveland, TN Chemical manufacturing 90,000 7.50
Item 3 Legal Proceedings
For a discussion of legal proceedings, see "Note N" to Consolidated Financial
Statements.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders through the solicitation of
proxies or otherwise.
PART II
Item 1 Market for the Registrant's Common Stock and Related Security
Holder Matters
The Company had 1,581 common shareholders of record at December 28, 1996. The
Company's common stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol SYNC. Future dividend payments are dependent on
earnings, capital requirements and financial conditions. In addition, dividend
payment levels are subject to certain loan agreement limitations (see "Long-
Term Debt"). The prices shown below are the last reported sales prices on The
Nasdaq National Market System.
1996 1995
Dividends Dividends
Quarter High Low Paid High Low Paid
1 21 1/4 14 3/4 .08 15 7/8 11 7/8 .07
2 20 3/4 14 3/4 .08 19 3/8 14 7/8 .07
3 17 1/4 12 .09 26 1/4 18 5/8 .08
4 17 1/2 14 1/2 .09 24 1/2 18 .08
Item 2 Selected Financial Data
(Dollars in thousands except for
per share data) 1996 1995 1994 1993 1992
Operations
Net sales 126,844 147,298 114,519 103,409 101,810
Gross profit 21,108 35,323 20,056 16,043 17,371
Selling, general and
administrative expense 9,086 11,089 8,337 7,556 7,701
Environmental remediation costs - - 2,351 291 170
Operating income 12,022 24,234 9,368 8,196 9,500
Net income 7,686 14,521 5,718 4,825 5,609
Financial Position
Total assets 76,589 80,226 62,432 55,771 50,077
Working capital 34,141 41,098 28,919 26,279 22,619
Long-term debt, less current portion 11,200 12,619 7,911 8,226 5,768
Shareholders' equity 48,274 48,363 36,889 32,815 29,426
Financial Ratios
Current ratio 3.5:1 3.6:1 3.0:1 3.0:1 2.7:1
Gross profit to net sales 17% 24% 18% 16% 17%
Long-term debt to capital 19% 21% 18% 20% 16%
Return on average assets 10% 20% 10% 9% 12%
Return on average equity 16% 34% 16% 16% 21%
Per Share Data
Net income 1.09 1.98 0.78 0.66 0.77
Dividends declared and paid .34 .29 .25 .23 .21
Book value 6.92 6.71 5.12 4.58 4.15
Other Data
Depreciation and amortization 2,700 2,316 1,969 1,737 1,599
Capital expenditures 3,833 6,455 4,214 3,262 2,655
Employees at year end 585 568 528 533 524
Shareholders of record at year end 1,581 1,666 1,740 1,869 2,053
Average shares outstanding 7,058 7,352 7,354 7,346 7,304
Stock Price
Price range of Common Stock
High 21 1/4 26 1/4 13 1/2 20 3/8 17 3/8
Low 12 11 7/8 9 3/8 9 5 5/8
Close 16 1/4 21 1/8 11 7/8 9 1/2 17 3/8
All share and per share information throughout this report has been restated to
reflect three-for-two splits of the Company's common stock on
June 12, 1995 and September 21, 1992.
Item 3 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The current ratio at 1996 year end was 3.5:1 down slightly from the
previous year- end ratio of 3.6:1 and up from the 1994 ratio of 3.0:1.
Working capital decreased $6,957,000 to $34,141,000. The decrease came
from reductions in inventories, primarily in the Metals Segment, of
$9,924,000. Cash flows from operations totaling $18,880,000 were derived
for the most part from the inventory reductions and earnings. The cash
flows were used to purchase 324,000 shares of the Company's common stock
for $5,624,000, partially fund the acquisition of Manufacturers
Chemicals Corporation and a related company for $4,094,000, make capital
expenditures of $3,833,000, and pay dividends of $2,386,000. The Company
expects that cash flows from 1997 operations and available borrowings
will be sufficient to make long-term debt and dividend payments, and
fund estimated capital expenditures of $4,400,000 and normal operating
requirements.
Results of Operations
Metals Segment--The following table summarizes operating results and
backlogs for the three years indicated. Reference should be made to
"Note Q" to Consolidated Financial Statements.
1996 1995 1994
(Amounts in thousands) Amount % Amount % Amount %
Net sales 85,027 100.0 99,455 100.0 64,130 100.0
Cost of goods sold 70,790 83.3 73,032 73.5 53,249 83.0
Gross profit 14,237 16.7 26,423 26.5 10,881 17.0
Selling and administrative
expense 4,540 5.3 6,004 6.0 4,170 6.5
Environmental expense 108 0.2
Operating income 9,697 11.4 20,419 20.5 6,603 10.3
Year-end backlogs
Piping systems and
process equipment 13,100 10,400 13,600
Comparison of 1996 and 1995
Sales and operating income declined 15 and 53 percent, respectively,
from the record levels achieved in 1995. Lower prices accounted for the
sales decline since unit volume was essentially unchanged. After
experiencing an unprecedented surge in pipe prices during the first
three quarters of 1995, the trend reversed and prices declined
precipitously in 1996 back to levels existing before the price
increases. Two factors caused the unusual swings in prices. First was
the pricing trends of flat-rolled stainless steel, the raw material from
which pipe is made. Pipe prices are closely tied to the cost of flat-
rolled stainless steel which experienced similar price fluctuations
during 1995 and 1996. The second factor was an industry-wide
accumulation of inventories in 1995 followed by liquidation of
inventories during 1996. The industry accumulated significant levels
of inventory during 1995 in response to rising prices. However, the
rapid reversal of prices left the industry with excessive inventories
that negatively impacted demand and prices during 1996 as the
inventories were reduced to more normal levels by year end. Despite a
decline in industry-wide shipments, the Company was able to generate a
four percent increase in pipe unit volume sales indicating the
continuation of market share gains the Company has experienced over the
past seven years.
The rapid decline in sales prices experienced in 1996 had a severe
impact on operating income. As flat-rolled stainless steel costs fell,
the average cost of inventories sold was significantly higher than the
average cost of replacement inventories, which also negatively impacted
profitability. This was a reversal of conditions that existed in 1995
when significant profits were generated from rapidly rising prices and
the sale of inventories with a lower average cost than the average cost
to replace those inventories. In addition, production was reduced during
1996 to facilitate the liquidation of inventories creating negative
manufacturing variances that reduced profit margins. The opposite result
was experienced in 1995 as inventories were built and the increased
volume produced lower unit production costs, improving profitability.
Lower profit-based incentives and sales commissions accounted for
the decline in selling and administrative expenses.
Comparison of 1995 and 1994
Sales and operating income achieved record levels in 1995 increasing 55
and 209 percent, respectively. After five consecutive years of lower
prices, 1995 average sales prices increased 37 percent over 1994, and
tonnage sold increased 13 percent. The increase in sales reflect the
Company's success over the past several years in increasing market share
in industries other than the pulp and paper industry where the Company
had historically generated almost one-half of its sales, and its ability
to pass along the increased cost of stainless steel raw material
experienced in 1995. The significant increases in gross profits resulted
from strong stainless pipe markets that led to higher profitability
industry wide, increased volume which produced lower unit production
cost, and rising prices that generated profits from a large inventory.
Higher profit-based incentives and sales commissions accounted for the
increase in selling and administrative expenses. However, these expenses
actually declined as a percent of sales.
For information relative to environmental matters, see "Note H" to
Consolidated Financial Statements.
Chemicals Segment--The following table summarizes operating results for
the three years indicated. Reference should be made to "Note Q" to
Consolidated Financial Statements.
1996 1995 1994
(Amounts in thousands)
Amount % Amount % Amount %
Net sales $41,817 100.0 $47,843 100.0 $50,389 100.0
Cost of goods sold 34,946 83.6 38,943 81.4 41,214 81.8
Gross profit 6,871 16.4 8,900 18.6 9,175 18.2
Selling and administrative
expense 3,183 7.6 3,218 6.7 3,055 6.1
Environmental expense 2,243 4.4
Operating income $ 3,688 8.8 $ 5,682 11.9 $ 3,877 7.7
Comparison of 1996 and 1995
Sales and operating income declined 13 and 35 percent, respectively,
from extremely weak demand for textile dyes and pigments. The Company's
product line is heavily dependent on textile printing activity which was
especially weak in 1996. As a result, dyes and pigment sales declined 24
percent. While sales in 1995 were negatively impacted by falling prices
from competitive pressure, the sales decline in1996 came principally
from reductions in unit volume in most of the product groups. However,
these reductions were primarily from reduced activity by existing
customers experiencing weak demand for their products, and not from a
loss of market share. The decline in dyes and pigments sales was
partially offset by a 34 percent increase in specialty chemical sales.
On October 26, 1996, the Company acquired MC which produces and sells
specialty chemical products to the textile, chemical, paper and metals
industries. Specialty sales, without MC sales for the last two months of
1996, increased 16 percent. The decline in operating profit came
entirely from dyes and pigments as overhead costs reduced profitability
due to lower volumes. Specialty chemicals contributed substantially to
operating income in 1996. MC did not have a material effect on operating
income for the year or fourth quarter of 1996.
Selling and administrative expenses declined slightly as lower profit-
based incentives and sales commissions more than offset the selling and
administrative costs of MC after the acquisition.
Comparison of 1995 and 1994
Sales declined five percent in 1995 as the Company was impacted by very
poor demand for textile dyes and pigments. Dyes and pigments sales
declined nine percent as weak demand for apparel continued a decline
that began in 1993, and competitive pressure drove down prices
throughout the year. However, specialty chemicals increased its
contribution to sales as specialty sales increased 18 percent. Operating
income declined seven percent from last year before deducting the 1994
special environmental charge. This decline came entirely from dyes and
pigments as competitive pricing impacted profits in the dyestuff
industry, and overhead costs deteriorated profitability due to lower
volumes. Specialty chemicals contributed favorably to income making up
36 percent of the total compared to 28 percent in 1994.
Selling and administrative expenses increased slightly primarily from
including the sulphur dye operations, acquired in May 1994, for the full
year in 1995.
Unallocated Income and Expense
Reference should be made to "Note Q" to Consolidated Financial
Statements for the schedule of these items.
Comparison of 1996 and 1995
The decrease in corporate expenses resulted from lower profit-based
incentives. Interest expense declined from reduced borrowings under the
line of credit with a bank. In October 1996 the Company sold 39.4
percent of its investment in Ta Chen, a stainless steel pipe
manufacturing company, for a gain of $666,000 which is included with
other income.
Comparison of 1995 and 1994
The increase in corporate expenses resulted from higher profit-based
incentives. Although the Company executed a new debt agreement that
reduced interest rates, the higher level of borrowings caused interest
expense to increase.
Current Conditions and Outlook
Material costs and selling prices in the Metals Segment continued to
decline in the fourth quarter of 1996 as sales and operating income
declined 28 and 86 percent, respectively. However, unit volume sales
increased eight percent over the fourth quarter of 1995. The fourth
quarter was significantly impacted by inventory losses, declining
selling prices and the recording of inventory market reserves of
$336,000. However, certain stainless steel producers are currently
attempting to raise prices five percent. If this increase holds in the
marketplace, it should lead to higher prices for pipe. The backlog for
piping systems and process equipment was $13,100,000 at year end. This
is up from its recent low of $5,900,000 at the end of the third quarter
of 1996 which should bode well for a good 1997 performance from these
products.
Sales and operating income of the Chemical Segment, without
including MC, increased six and 73 percent, respectively, in the fourth
quarter. The favorable results came from specialty chemicals as several
products were at a high level of production during the quarter. This
condition should continue through the first quarter of 1997, but because
of the uncertainty of customer scheduling of these products, it is
difficult to predict quarterly earnings. The Company is continuing to
focus on expanding the specialty chemicals area and the addition of MC
should enhance sales and earnings of these products. Plans to enter the
market for additional classes of dyes continue, but this is more
difficult given the weak market conditions that exist. The Company has
successfully reduced costs of certain dyes which should make these
products more competitive, and the development of an innovative new
product should impact 1997 sales. In addition, a product manager was
added in November which should strengthen market activities. We believe
these factors should produce an increase in sales and operating income
for 1997. However, since the demand for dyes and pigments continues to
be weak, the outlook for these products remains uncertain.
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995
The statements contained in this Annual Report on Form 10-K that are not
historical facts may be 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, which speak only as of their dates. 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, customer
delays or difficulties in the production of products, and other risks
detailed from time to time in Synalloy's Securities and Exchange
Commission filings. Synalloy Corporation assumes no obligation to update
the information included in this Annual Report on Form 10-K.
Item 4 Financial Statements and Supplementary Data
The Company's consolidated financial statements, related notes, report
of management and report of the independent auditors follow on
subsequent pages of this report.
Consolidated Balance Sheets
December 28,1996, December 30, 1995 and December 31, 1994
1996 1995 1994
Assets
Current assets
Cash and cash equivalents $ 115,828 $ 267,061 $ 20,770
Accounts receivable, less
allowance for doubtful
accounts of $208,000, $356,000
and $181,000, respectively 17,253,534 17,616,246 14,758,847
Inventories
Raw materials 8,357,884 10,574,040 10,252,207
Work-in-process 5,112,695 6,095,136 3,765,329
Finished goods 16,384,891 21,860,833 13,958,918
Total inventories 29,855,470 38,530,009 27,976,454
Deferred income taxes (Note L) 130,000 218,000 514,000
Prepaid expenses and other
current assets 278,276 119,592 167,791
Total current assets 47,633,108 56,750,908 43,437,862
Cash value of life insurance 1,733,801 1,632,029 1,535,131
Investment (Note B) 329,117 543,100 543,100
Property, plant and equipment,
net (Note C) 23,627,889 20,341,645 16,239,584
Deferred charges and other
assets (Note D) 3,265,211 957,891 676,748
Total assets $76,589,126 $80,225,573 $62,432,425
1996 1995 1994
Liabilities and Shareholders
Equity
Current liabilities
Notes payable (Note E) $ 1,500,000 $ 4,740,000 $ 4,455,000
Notes payable to an employee
(Note P) 1,154,805
Accounts payable 6,252,449 4,833,405 5,900,018
Income taxes 332,507 233,977 448,367
Accrued expenses (Note F) 2,492,660 5,082,212 3,024,370
Current portion of environmental
reserves (Note H) 359,294 486,521 356,800
Current portion of long-term
debt (Note G) 1,400,000 276,923 334,615
Total current liabilities 13,491,715 15,653,038 14,519,170
Long-term debt, less current
portion (Note G) 11,200,000 12,619,231 7,910,577
Environmental reserves (Note H) 1,300,100 1,702,800 2,182,200
Deferred compensation (Note I) 1,299,176 1,267,353 554,236
Deferred income taxes (Note L) 1,024,000 620,000 377,000
Contingencies (Notes H and N)
Shareholders equity (Notes G,
J, K and O) Common stock, par
value $1 per share -
authorized 8,000,000 shares;
issued 8,000,000 shares in
1996 and 1995 and 6,000,000
shares in 1994 8,000,000 8,000,000 6,000,000
Capital in excess of par value 81,746 417,030 6,931,064
Retained earnings 49,074,919 43,774,332 31,373,461
57,156,665 52,191,362 44,304,525
Less cost of Common Stock in
treasury: 1,024,983, 789,749
and 1,193,371 shares,
respectively 8,882,530 3,828,211 7,415,283
Total shareholders equity 48,274,135 48,363,151 36,889,242
Total liabilities and
shareholders equity $76,589,126 $80,225,573 $62,432,425
See accompanying notes to consolidated financial statements
Consolidated Statements of Income
December 28,1996, December 30, 1995 and December 31, 1994
1996 1995 1994
Net sales $126,843,835 $147,298,348 $114,519,010
Cost of sales 105,736,099 111,975,698 94,462,625
Gross profit 21,107,736 35,322,650 20,056,385
Selling, general and
administrative expense 9,085,923 11,088,914 8,337,388
Environmental Compliance Costs 2,350,645
Operating income 12,021,813 24,233,736 9,368,352
Other (income) and expense
Gain on sale of investment (665,718)
Interest expense 838,963 911,555 575,645
Other, net (20,533) 27,660 (4,183)
Income before taxes 11,869,101 23,294,521 8,796,890
Provision for income taxes 4,183,000 8,774,000 3,079,000
Net income $ 7,686,101 $ 14,520,521 $ 5,717,890
Net income per common share $1.09 $1.98 $.78
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital in Cost of
Common Excess of Par Retained Common Stock
Stock Value Earnings in Treasury Total
Balance at January 1, 1994 $ 6,000,000 $ 6,918,721 $27,480,017 $(7,583,359) $32,815,379
Net income 5,717,890 5,717,890
Stock options exercised (105,231) 186,083 80,852
Purchase of Common Stock
for treasury (18,007) (18,007)
Capital contribution (Note O) 117,574 117,574
Cash dividends - $.26 per
share (1,824,446) (1,824,446)
Balance at December 31, 1994 6,000,000 6,931,064 31,373,461 (7,415,283) 36,889,242
Net income 14,520,521 14,520,521
Retirement of treasury shares (666,667) (3,893,016) 4,559,683
Three-for-two stock split 2,666,667 (2,666,667)
Stock options exercised (183,264) 296,721 113,457
Contributions to 401(k)/ESOP 228,913 103,230 332,143
Purchase of Common Stock
for treasury (1,372,562) (1,372,562)
Cash dividends - $.30 per
share (2,119,650) (2,119,650)
Balance at December 30, 1995 8,000,000 417,030 43,774,332 (3,828,211) 48,363,151
Net income 7,686,101 7,686,101
Stock options exercised (335,284) 569,292 234,008
Purchase of Common Stock
for treasury (5,623,611) (5,623,611)
Cash dividends - $.34 per
share (2,385,514) (2,385,514)
Balance at December 28, 1996 $ 8,000,000 $ 81,746 $49,074,919 $(8,882,530) $48,274,135
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
December 28,1996, December 30, 1995 and December 31, 1994
1996 1995 1994
Operating activities
Net income $ 7,686,101 $14,520,521 $ 5,717,890
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 2,547,986 2,220,198 1,903,041
Amortization of deferred charges 151,615 95,772 66,169
Deferred compensation 31,823 713,117 (1,851)
Deferred income taxes 492,000 539,000 (507,000)
Provision for losses on accounts receivable (197,920) 175,239 122,184
Loss (gain) on sale of property, plant and equipment 146,022 23,245 48,595
Gain on sale of investment (665,718)
Cash value of life insurance (101,772) (96,898) (90,465)
Environmental reserves (529,927) (349,679) 1,893,598
Changes in operating assets and liabilities:
Accounts receivable 2,276,838 (3,032,638) (1,074,663)
Inventories 9,923,875 (10,553,555) (3,725,916)
Other assets (658,864) (334,874) (15,144)
Accounts payable and accrued expenses (2,313,165) 1,323,372 317,192
Income taxes payable 91,338 (214,390) (38,931)
Net cash provided by operating activities 18,880,232 5,028,430 4,614,699
Investing activities
Purchases of property, plant and equipment (3,832,899) (6,454,565) (4,214,145)
Proceeds from sale of property, plant and equipment 94,975 109,061 44,504
Proceeds from sale of investment 826,248
Acquisition, net of cash and note payable (Note P) (4,093,807)
Intangibles arising from acquisition (350,000)
Proceeds from notes receivable 6,804 6,158 5,575
Net cash (used in) investing activities (6,998,679) (6,339,346) (4,514,066)
Financing activities
Proceeds from revolving lines of credit 45,707,000 69,255,231 33,130,000
Payments on revolving lines of credit (48,947,000) (68,970,231) (31,475,000)
Additions to long-term debt 5,000,000
Principal payments on long-term debt (1,017,669) (349,038) (542,307)
Proceeds from exercised stock options 234,008 113,457 80,852
Purchases of treasury stock (5,623,611) (1,372,562) (18,007)
Dividends paid (2,385,514) (2,119,650) (1,824,446)
Capital contribution (Note O) 117,574
Net cash (used in) provided by financing activities (12,032,786) 1,557,207 (531,334)
(Decrease) increase in cash and cash equivalents (151,233) 246,291 (430,701)
Cash and cash equivalents at beginning of year 267,061 20,770 451,471
Cash and cash equivalents at end of period $ 115,828 $ 267,061 $ 20,770
See accompanying notes to consolidated financial statements
Note A Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which
are wholly-owned. All significant intercompany transactions have been
eliminated.
Use of Estimates. The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Reclassification. For comparative purposes, certain amounts in the 1995
and 1994 financial statements have been reclassified to conform with the
1996 presentation.
Accounting Period. The Company's fiscal year is the 52- or 53-week
period ending the Saturday nearest to December 31. Fiscal years 1996,
1995 and 1994 ended on December 28, 1996, December 30, 1995 and December
31, 1994, respectively. Fiscal years 1996, 1995 and 1994 each included
52 weeks.
Stock Split. On April 28, 1995, the Board of Directors of the Company
declared a three-for-two split of the Company's common stock. This was
paid in the form of a 50 percent stock dividend on June 12, 1995 to
shareholders of record as of May 22, 1995. Accordingly, all share and
per share information throughout the consolidated financial statements
has been restated to reflect this split. The par value for the
additional shares issued was transferred from capital in excess of par
value to common stock.
Inventories. Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method.
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.
Deferred Charges. Intangibles arising from acquisitions represent the
excess of cost over fair value of net assets of businesses acquired. The
excess cost is amortized using the straight-line method over periods of
15 to 40 years. The costs of software licenses are amortized over their
expected useful lives using the straight-line method. Debt expenses are
amortized over the periods of the underlying debt agreements using the
straight-line method.
Net Income Per Common Share. Income per share is computed using the
weighted average shares of common stock and dilutive common stock
equivalents (options) outstanding during the respective periods.
Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash
equivalents.
Concentrations of Credit Risk. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of trade accounts receivables and cash surrender value of
life insurance.
Substantially all of the Company's accounts receivable are due from
companies located throughout the United States. The Company performs
periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Receivables are generally due
within 30 to 45 days.
The cash surrender value of life insurance is maintained with one
insurance company. The Company performs a periodic evaluation of the
relative credit standing of this company as it relates to the insurance
industry.
Research and Development Expense. The Company incurred research and
development expense of approximately $778,000, $743,000 and $694,000 in
the 1996, 1995 and 1994 fiscal years, respectively.
Fair Value of Financial Instruments. The carrying amounts reported in
the balance sheet for cash and cash equivalents, cash surrender value of
life insurance and borrowings under the Company's short-term line of
credit and long-term debt approximate their fair values. The Company has
an investment in a company incorporated in the Republic of China with a
carrying amount of $329,000. The fair value of the investment as quoted
on the Taiwanese stock exchange at December 28, 1996 was $1,772,000. The
company registered its securities on the Taiwanese Stock Exchange in
October 1996 and a portion of the Company's investment was sold. Newly
registered securities, including the remaining securities owned by the
Company, carry a two-year restriction before they can be publicly traded
(see Note B).
Stock Options. The Company accounts for and will continue to account for
stock options under Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees." Applying Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation,"
which was adopted in 1996, would not materially affect net income and
earnings per share for 1996 and 1995.
Impact of Recently Issued Accounting Standards. In March 1995, the
Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FAS 121"), which became effective beginning
in fiscal 1996. The Company adopted FAS 121 in January 1996, and the
effect of adoption was not material as the Company's existing accounting
policies provided for similar accounting treatment.
The Company adopted Statement of Position 96-1 "Environmental
Remediation Liabilities" in January 1996, and the effect of adoption was
not material as the Company's existing accounting policies provided for
similar accounting treatment.
Note B Investment in Ta Chen Stainless Pipe Company
In October 1996 the Company sold 39.4 percent of its investment in Ta
Chen for a gain of $665,718. Ta Chen is a stainless steel pipe
manufacturing company, incorporated in the Republic of China, that has
been operating since 1987. The Company continues to hold a 2.5 percent
ownership interest which is being reflected on the cost method of
accounting.
Note C Property, Plant and Equipment
Property, plant and equipment consist of the following:
1996 1995 1994
Land $ 299,043 $ 246,544 $ 246,544
Land improvements 965,469 689,228 551,967
Buildings 11,613,857 7,770,891 7,672,731
Machinery, fixtures
and equipment 36,506,944 29,138,132 27,344,620
Construction-in-
progress 370,996 4,446,919 579,997
49,756,309 42,291,714 36,395,859
Less accumulated
depreciation 26,128,420 21,950,069 20,156,275
$23,627,889 $20,341,645 $16,239,584
Note D Deferred Charges
Deferred charges consist of the following:
1996 1995 1994
Intangibles arising
from acquisitions $2,758,965 $ 793,406 $ 793,773
Software license
agreements 448,935 642,716 389,477
Debt expense 132,645 153,808 166,981
3,340,545 1,589,930 1,350,231
Less accumulated
amortization 565,263 645,387 692,989
$2,775,282 $944,543 $657,242
Note E Notes Payable
The Company has available a line of credit totaling $9,000,000, of which
$1,500,000 was outstanding at year end. The line expires on July 1, 1997
and bears interest at the bank's overnight cost of funds plus .75
percent (6.13 percent at December 28, 1996). The line has no
compensating balance requirement. Borrowings under the line of credit
are subject to the deed of trust and security agreement outlined in Note
G. Average short-term borrowings outstanding during fiscal 1996, 1995
and 1994 were $2,099,000, $3,900,000 and $7,510,000 with weighted
average interest rates of 6.11 percent, 7.14 percent and 7.14 percent,
respectively.
Note F Accrued Expenses
Accrued expenses consist of the following:
1996 1995 1994
Salaries, wages
and commissions $1,477,986 $3,692,824 $1,864,096
Taxes, other than
income taxes 259,452 220,926 153,458
Insurance 273,792 536,730 537,658
Pension 198,272 193,747 284,446
Customer advances 20,144 195,950
Other accrued items 263,014 242,035 184,712
$2,492,660 $5,082,212 $3,024,370
Note G Long-Term Debt
Long-term debt consists of the following:
1996 1995 1994
Variable percentage
(weekly tax exempt
interest rate)
Economic Development
Revenue Bond payable
in annual installments
of $200,000 through
November 1, 1999.
Interest is paid
quarterly. $ 600,000 $ 800,000 $1,000,000
Unsecured commercial
note payable with
interest payable on
the dates and at
rates provided by
credit agreement,
payable in 20
quarterly
installments of
$600,000, plus
interest through
May 31, 2002. 12,000,000 12,000,000 7,000,000
Variable percentage
(78% of prime rate
adjusted monthly)
Industrial Revenue
Note payable in 52
quarterly installments
of $19,231, plus interest. 96,154 173,077
11.00% Industrial Revenue
Note payable in equal
quarterly installments
of $14,423, plus interest. 72,115
12,600,000 12,896,154 8,245,192
Less current portion 1,400,000 276,923 334,615
$11,200,000 $12,619,231 $7,910,577
On November 16, 1989, $2,000,000 of South Carolina Jobs-Economic
Development Authority Adjustable Mode Industrial Development Revenue
Bonds were issued in connection with a project by the Company. Under the
terms of issuance, the bank provided a letter of credit to support the
payment of the bonds.
On July 1, 1995, the Company refinanced the commercial note payable
borrowing an additional $5,000,000 under a Revolving Credit/Term Loan
Agreement with a due date of May 31, 2002. The revolve period expires on
May 31, 1997, but can be extended at the discretion of the bank. At the
end of the revolve period, the outstanding balance shall be repayable in
equal quarterly payments over the remaining term of the agreement.
Interest is payable quarterly on the unpaid principal amount at the
lower of the bank's prime rate less .25 percent or LIBOR plus .75
percent. The rate at December 28, 1996 was 6.28 percent.
Borrowings are subject to the maintenance of certain financial ratios
and certain other restrictive covenants including limiting the paying of
cash dividends to 50 percent of the net profits of the next preceding
year. The Company made interest payments of $958,000 in 1996, $988,000
in 1995 and $594,000 in 1994. Interest expense of approximately
$116,000, $125,000 and $45,000 was capitalized in 1996, 1995 and 1994,
respectively. The approximate aggregate amount of all long-term debt
maturities for the next five years is as follows: 1997 - $1,400,000;
1998 - $2,600,000; and 1999 - $2,600,000; 2000 - $2,400,000 and 2001 -
$2,400,000.
Note H Environmental Compliance Costs
At December 28, 1996, the Company has accrued $1,659,000 in remediation
costs which, in management's best estimate, will satisfy anticipated
costs of known remediation requirements as outlined below. Expenditures
related to costs currently accrued are not discounted to their present
values and are expected to be made over the next six to eight years. As
a result of the evolving nature of the environmental regulations, the
difficulty in estimating the extent and remedy of environmental
contamination, and the availability and application of technology, the
estimated costs for future environmental compliance and remediation are
subject to uncertainties and it is not possible to predict the amount or
timing of future costs of environmental matters which may subsequently
be determined. Subject to the difficulty in estimating future
environmental costs, the Company believes that the likelihood of
material losses in excess of the amounts recorded is remote.
Prior to 1987, the Company treated hazardous waste at its chemical
facilities. Testing of the groundwater in the areas of the treatment
impoundments at these facilities disclosed the presence of certain
contaminants. In addition, several solid waste management units
("SWMUs") at the plant sites have been identified. During the latter
part of 1994, the Company completed a reevaluation of its remediation
plans including RCRA Facility Investigations which have been submitted
for regulatory approval. As a result, the Company recorded a special
charge of $2,243,000 in the fourth quarter of 1994 to accrue for
estimated future remedial, cleanup and monitoring costs of which
$1,495,000 remains accrued at December 28, 1996.
The Company has identified and evaluated two SWMUs at its plant in
Bristol, Tennessee that revealed residual groundwater contamination. At
January 1, 1994, $253,000 was accrued to cover the estimated costs of
completing these evaluations. In 1994 the Company submitted a Permit
Application for Post Closure Care to the TDEC outlining a plan to
address the areas identified, and received the Permit in the fourth
quarter of 1994. Additional costs of $63,000 were accrued in the fourth
quarter of 1994 and $164,000 remains accrued at December 28, 1996 to
provide for estimated future remedial, cleanup and monitoring costs as
required by the Permit.
The Company has been designated, along with others, as a potentially
responsible party under the Comprehensive Environmental Response,
Compensation, and Liability Act, or comparable state statutes, at three
waste disposal sites. It is impossible to determine the ultimate costs
related to these sites due to several factors such as the unknown
magnitude of possible contamination, the unknown timing and extent of
the corrective actions which may be required, and the determination of
the Company's liability in proportion to other responsible parties.
However, in management's opinion, these environmental matters should not
have a material adverse effect upon the consolidated results of
operations or financial position of the Company.
The Company does not anticipate any insurance recoveries to offset the
environmental remediation costs it has incurred. Due to the uncertainty
regarding court and regulatory decisions, and possible future
legislation or rulings regarding the environment, many insurers will not
cover environmental impairment risks, particularly in the chemical
industry. Hence, the Company has been unable to obtain this coverage at
an affordable price.
Note I Deferred Compensation
In 1995 the Company entered into a deferred compensation agreement with
an officer which allows the officer to defer all or a portion of any
annual incentive payable to the officer. Amounts deferred are payable
upon certain events including retirement, death or termination of the
officer, or a change in control of the Company. Interest will accrue on
amounts deferred, net of estimated income tax benefits deferred by the
Company until payments are made, at rates consistent with other invested
retirement funds held by the Company in accordance with the agreement.
No incentive was deferred in 1996. At December 28, 1996, the amounts
deferred totaled $748,000, including accrued interest earned in 1996 of
$33,000.
The Company has deferred compensation agreements with certain former
officers providing for payments for ten years in the event of pre-
retirement death or the longer of ten years or life beginning at age 65.
The present value of such vested future payments, $551,000 at December
28, 1996, has been accrued.
Note J Shareholders' Rights
On March 24, 1989, the Board of Directors declared a dividend
distribution of one right for each outstanding share to holders of
record at the close of business on April 14, 1989. Each right entitles
the registered holder thereof to purchase from the Company, under
certain circumstances, 4/10 of a share of the Company's common stock at
an initial exercise price of $6.67 per share. The total number of shares
available under these rights is 2,790,007. The exercise price will be
adjusted under certain circumstances. The rights will expire on March
26, 1999. The rights are not currently exercisable and trade together
with the shares associated therewith. These rights, which may have a
potentially dilutive effect, have also been excluded from the earnings
per share computation as preconditions to the exercisability of such
rights have not been satisfied.
Note K Stock Options
A summary of activity in the Company's stock option plans is as follows;
Option Price Outstanding Available
At January 1, 1994 $2.33 to 14.625 195,680 111,000
Authorized 25,000
Granted $17.75 to 18.25 24,000 (24,000)
Exercised $2.33 to 4.29 (29,975)
At December 31, 1994 $2.33 to 18.25 189,705 112,000
Granted 22.25 4,000 (4,000)
Exercised $2.33 to 3.54 (48,500)
Effect of three-for-two
stock split $1.56 to 14.83 76,678 54,000
At December 30, 1995 $1.56 to 14.83 221,883 162,000
Granted 18.88 21,000 (21,000)
Exercised $1.56 to $9.75 (88,875)
At December 28, 1996 $1.56 to $18.88 154,008 141,000
The Company grants to non-employee directors, officers and key employees
options to purchase common stock of the Company under three Plans
adopted in 1983, 1988 and 1994. Options were granted through October 1,
1988 under the 1983 Plan and may be granted through January 28, 1998
under the 1988 Plan and April 29, 2004 under the 1994 Plan at a price
not less than the fair value on the date of grant. Under the 1983 Plan,
all options are presently 100 percent vested and must be exercised
within ten years from the date of the grant. Under the 1988 Plan,
options may be exercised beginning one year after date of grant at a
rate of 20 percent annually on a cumulative basis. Under the 1994 Non-
Employee Directors' Plan, options may be exercised at the date of grant.
At December 28, 1996, 85,008 shares of the options outstanding were
fully exercisable.
Note L Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows at the respective year ends:
(Amount in thousands) 1996 1995 1994
Deferred tax assets:
Allowance for
doubtful accounts $ 74 $ 140 $ 73
Deferred compensation 459 465 204
Inventory capitalization 198 248 256
Accrued group insurance 88 110 141
Environmental reserves 586 803 934
Other 89
Total deferred tax assets 1,494 1,766 1,608
Deferred tax liabilities:
Tax over book depreciation 1,942 1,710 1,384
Prepaid expenses 446 441 54
Other 17 33
Total deferred tax liabilities 2,388 2,168 1,471
Net deferred tax (liabilities) $ (894) $ (402) $ 137
Significant components of the provision for income taxes attributable
to continuing operations are as follows:
1996 1995 1994
Current:
Federal $3,483 $7,337 $3,152
State 208 898 434
Total current 3,691 8,235 3,586
Deferred:
Federal 463 480 (442)
State 29 59 (65)
Total deferred 492 539 (507)
Total $4,183 $8,774 $3,079
The reconciliation of income tax attributable to continuing operations
computed at the U. S. federal statutory tax rates to income tax expense
is:
(Amount in thousands) 1996 1995 1994
Amount % Amount % Amount %
Tax at U.S. Statutory rates $4,054 34.2% $8,153 35.0% $2,991 34.0%
State income taxes, net of
federal tax benefit 156 1.30% 629 2.7% 246 2.8%
Other, net (27) (.3%) (8) (158) (1.8%)
Total 4,183 35.2% 8,774 37.7% 3,079 35.0%
Income tax payments of approximately $3,683,000, $8,449,000 and
$3,625,000 were made in 1996, 1995 and 1994, respectively.
Note M Benefit Plans
The Company has a 401(k) Employee Stock Ownership Plan. Employees may
contribute to the Plan up to 20 percent of their salary with a maximum
of $9,500 for 1996. Contributions by the employees are invested in one
or more funds at the direction of the employee; however, employee
contributions cannot be invested in Company stock.
Contributions by the Company are made primarily in Synalloy stock. The
Company contributes on behalf of each participant who is eligible a
matching contribution equal to a percentage which is determined each
year by the Board of Directors. For 1996 the maximum was three percent.
The matching contribution is allocated on June 30 and December 31 of
each Plan year. The Company has accrued a matching contribution of
approximately $91,000 at December 28, 1996. Matching contributions of
approximately $142,000 were made in July 1996 and $229,000 and $203,000
were made for 1995 and 1994, respectively. The Company may also make a
discretionary contribution, which shall be distributed to all eligible
participants regardless of whether they contribute to the Plan. No
discretionary contributions have been made to the Plan for 1996, 1995 or
1994.
The Company also contributes to union-sponsored retirement plans.
Contributions relating to these plans were approximately $351,000,
$359,000 and $259,000 for the years ended December 28, 1996, December
30, 1995 and December 31, 1994, respectively.
Note N Contingencies
On July 11, 1995, the Company entered into a settlement agreement with
H. B. Zachry ("Zachry") and the United States resolving the action, H.
B. Zachry v. Synalloy Corporation and Bristol Metals, Inc. v. U. S., in
the 37th Judicial District, Bexar County, Texas, arising out of the sale
by Bristol Metals to Zachry of pipe for use at an Air Force base. The
specific terms of the settlement are subject to a confidentiality
agreement; however, the Company's contribution to the settlement, paid
in 1995, was less than the $370,000 originally paid to the Company for
the pipe. The Company is aware of two other claims between the
government and contractors arising out of pipe purchased from Bristol.
The Company is not party to either of these actions nor is it, in the
opinion of the Company's counsel, bound by the terms of those actions.
No separate action has been brought against the Company.
The Company is from time to time subject to various claims, other
possible legal actions for product liability and other damages, and
other matters arising out of the normal conduct of the Company's
business. Management believes that based on present information, it is
unlikely that liability, if any, exists that would have a materially
adverse effect on the consolidated operating results or financial
position of the Company.
Note O Shareholders' Equity
Capital in excess of par value at December 31, 1994 reflects a
contribution of $117,574 received during 1994. The amount represents
profits realized from the purchase and sale of common stock of the
Company by a former director of the Company within a period of less than
six months. The Securities and Exchange Commission requires that such
profits be returned to the issuer of the securities in question,
pursuant to Section 16(b) of the Securities Exchange Act of 1934, as
amended.
Note P Acquisitions
On November 25, 1996, the Company purchased the common stock of
Manufacturers Chemicals Corporation and a related company with an
effective date of October 26, 1996. Located in Cleveland, Tennessee, the
company produces and sells surfactants, defoamers, finishing agents and
other specialty chemicals for the textile, paper, chemical and metals
industries. Manufacturers Chemicals and a related company were acquired
at a cost of $4,811,625, including certain acquisition costs related to
the transaction, plus the assumption of a note to a former shareholder
of $438,375, for a total purchase price of $5,250,000. The $4,811,625
was funded by cash from operations plus the issuance of a note payable
to the former shareholder of $716,430. The two notes to the former
shareholder, who became an employee of the Company at the acquisition
date, bore interest at 6.25 percent and were paid along with interest of
$13,842 on January 3, 1997.
The acquisitions were accounted for by the purchase method of accounting
with the purchase price allocated to the underlying assets based on
their respective fair values at the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired of
approximately $1,966,000 has been included in goodwill and is being
amortized over 15 years. The Company's consolidated financial statements
include the results of the companies from the effective date, October
26, 1996. The acquisitions did not have a material impact on 1996
operations; therefore, no pro forma data has been presented.
Note Q Industry Segments
Synalloy Corporation operates in two principal industry segments: metals
and chemicals. The Chemicals Segment manufactures dyes, pigments and
auxiliaries for the textile industry and a wide variety of specialty
chemicals for the textile, chemical, paper, metals, petroleum and
pharmaceutical industries. The Metals Segment manufactures welded
stainless steel pipe and highly specialized products, most of which are
custom-produced to individual orders, required for corrosive and high-
purity processes used principally by the chemical, petrochemical and
pulp and paper industries. Products include piping systems, fittings,
tanks, pressure vessels and a variety of other components.
Operating profit is total revenue less operating expenses, excluding
interest expense and income taxes. Identifiable assets (all of which are
in the United States) are those assets used in operations by each
segment. Centralized data processing and accounting expenses are
allocated to the Metals Segment and Chemicals Segment based upon
estimates of their percentage of usage. Corporate assets consist
principally of cash, certain investments, and property and equipment. No
single customer or agency (domestic or foreign) accounted for more than
ten percent of revenues in 1996, 1995 or 1994.
The Company has a distributorship agreement expiring December 31, 1997
with the company supplying about 90 percent of the products that
produced over one-fourth of the Chemicals Segment's sales in 1996. The
supplier has been the principal source of these products since 1985.
Although the Company believes that this supplier will continue to be a
source of these products in the future, there is no assurance of this.
Loss of this supplier would have a materially adverse short-term effect
on the Company's sales and net income. However, management believes that
if the agreement with this supplier is not continued in the future,
other suppliers could be found to replace most of the products.
Segment information
(Amounts in thousands) 1996 1995 1994
Net sales
Metals $ 85,027 $ 99,455 $ 64,130
Chemicals 41,817 47,843 50,389
Total net sales $126,844 $147,298 $114,519
Operating income
Metals $ 9,697 $ 20,419 $ 6,603
Chemicals 3,688 5,682 3,877
13,385 26,101 10,480
Less unallocated corporate expense 1,363 1,867 1,112
Operating income 12,022 24,234 9,368
Other expense, net 153 939 571
Income before taxes $ 11,869 $ 23,295 $ 8,797
Identifiable assets
Metals $ 41,172 $ 51,160 $ 33,953
Chemicals 31,875 25,563 25,348
Corporate 3,542 3,503 3,131
$ 76,589 $ 80,226 $ 62,432
Depreciation and amortization
Metals $ 1,331 $ 1,131 $ 966
Chemicals 1,188 1,039 908
Corporate 181 146 95
$ 2,700 $ 2,316 $ 1,969
Capital expenditures
Metals $ 2,519 $ 3,621 $ 2,438
Chemicals 1,299 2,651 1,625
Corporate 15 183 151
$ 3,833 $ 6,455 $ 4,214
Note R Quarterly Results (unaudited)
The following is a summary of quarterly operations for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994.
Net
Income
Per
Net Gross Net Common
(Thousands except Sales Profit Income Share
per share data)
1996
First Quarter $36,659 $7,429 $2,922 $.41
Second Quarter 31,737 5,828 2,119 .30
Third Quarter 29,405 4,059 1,243 .18
Fourth Quarter 29,043 3,792 1,402 .20
1995
First Quarter $34,576 $ 7,175 $2,762 $.38
Second Quarter 41,381 10,799 4,613 .63
Third Quarter 37,858 9,464 3,915 .53
Fourth Quarter 33,483 7,885 3,231 .44
1994
First Quarter $27,332 $4,192 $1,331 $.18
Second Quarter 30,217 5,181 1,899 .26
Third Quarter 29,872 5,069 1,826 .25
Fourth Quarter 27,098 5,614 662 .09
Net income for the fourth quarter of 1996 includes a gain on the sale of
an investment of $431,000, or $.06 per share. See Note B.
The Company recorded a special charge of $2,306,000 for environmental
remediation costs in the fourth quarter of 1994 which reduced net income
by $1,499,000 or $.21 per share. Remediation costs incurred in the
others quarters of 1994 did not materially affect net income. See Note H
for further discussion.
Report of Management
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles and have been audited by
Ernst & Young LLP, Independent Auditors. Management of the Company
assumes responsibility for the accuracy and reliability of the financial
statements. In discharging such responsibility, management has
established certain standards which are subject to continuous review and
are monitored through the Company's financial management. The Board of
Directors pursues its oversight role for the financial statements
through its Audit Committee which consists of outside directors. The
Audit Committee meets on a regular basis with representatives of
management and Ernst & Young LLP.
Report Of Independent Auditors
Shareholders and Board of Directors
Synalloy Corporation
We have audited the accompanying consolidated balance sheets of Synalloy
Corporation as of December 28, 1996, December 30, 1995 and December 31,
1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 28, 1996. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Synalloy Corporation at December 28, 1996, December 30, 1995
and December 31, 1994 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December
28, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
Ernst & Young, LLP
Greenville, South Carolina
February 3, 1997
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
A definitive proxy statement, which will be filed with the Securities
and Exchange Commission pursuant to regulation 14A of the Securities
Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 28, 1996, is incorporated herein by
reference.
Item 10 Directors and Executive Officers of the Registrant
Such information as required by the Securities and Exchange Commission
in Regulation S-K is contained in the Company's definitive Proxy
Statement in connection with its Annual Meeting to be held April 30,
1997.
Item 11 Executive Compensation
The information with respect to executive compensation and transactions
is hereby incorporated by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934.
Item 12 Security Ownership of Certain Beneficial Owners and
Management
The information with respect to security ownership of certain beneficial
owners and management is hereby incorporated by reference from the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934.
Item 13 Certain Relationships and Related Transactions
None
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements: The following consolidated financial
statements of Synalloy Corporation are included in Item 8:
Consolidated Balance Sheets at December 28, 1996, December 30,
1995 and December 31, 1994
Consolidated Statements of Income for the years ended December
28, 1996, December 30, 1995 and December 31, 1994
Consolidated Statements of Shareholders' Equity for the years
ended December 28, 1996, December 30, 1995 and December 31, 1994
Consolidated Statements of Cash Flows for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994
2. Notes to Consolidated Financial Statements
Financial Statements Schedules: The following consolidated
financial statements schedule of Synalloy Corporation is
included in Item 14(d).
Schedule VIII - Valuation and Qualifying Accounts for the years
ended December 28, 1996, December 30, 1995 and December 31, 1994
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
3. Listing of Exhibits:
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 22 - Subsidiaries of the Registrant
(b) Reports on Form 8-K: There were no reports on Form 8-K filed
during the fourth quarter of the 1996 fiscal year.
(c) Exhibits: The response to this portion of Item 14 is submitted in a
separate section of this report.
(d) Financial Statements Schedules: The response to this
portion of Item 14 is submitted as a separate section of
this report.
Schedule VIII Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
Balance at Charged to Balance
Beginning Cost and Deductions at End of
Description of Period Expenses Describe (1) Period
Year ended December 28, 1996
Deducted from asset account:
Allowance for doubtful accounts $356,000 $ 237,000(2) $385,000 $208,000
Year ended December 30, 1995
Deducted from asset account:
Allowance for doubtful accounts $181,000 $1,014,000 $839,000 $356,000
Year ended December 31, 1994
Deducted from asset account:
Allowance for doubtful accounts $ 83,000 $192,000 $94,000 $181,000
(1) Allowances, uncollected accounts and credit balances
written off against reserve, net of recoveries.
(2) Includes $50,000 of allowance from the acquisition of
Manufacturers Chemicals Corporation.
Exhibit 11 Computation of Per Share Earnings
(December 28, 1996, December 30, 1995 1996 1995 1994
and December 31, 1994)
Primary
Average shares outstanding 7,004,249 7,215,947 7,200,035
Net effect of dilutive stock options -
based on the treasury
stock method using the average
market price 53,861 135,991 153,734
Total 7,058,110 7,351,938 7,353,769
Net income $7,686,101 $14,520,521 $5,717,890
Per share amount $1.09 $1.98 $.78
Diluted
Stock options in the aggregate reduce earnings per share
by less than three percent in all years presented;
therefore, diluted per share amounts are not disclosed.
Exhibit 22 Subsidiaries of the Registrant
The Company has five wholly-owned subsidiaries. All subsidiaries are
included in the Company's consolidated financial statements. The
subsidiaries are as follows:
1. Synalloy Metals, Inc., formerly Bristol Metals, Inc., a Tennessee
corporation
2. Whiting Metals, Inc., a South Carolina corporation
3. Manufacturers Soap and Chemical Company, a Tennessee corporation
4. Metchem, Inc., a Delaware corporation
5. Synco International, Inc., a Virgin Islands corporation
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SYNALLOY CORPORATION
Registrant
By /s/ Cheryl C. Carter March 27, 1997
Cheryl C. Carter Date
Corporate Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date
indicated.
By /s/ James G. Lane, Jr. March 27, 1997
James G. Lane, Jr. Date
Chief Executive Officer and
Chairman of the Board
By /s/ Gregory M. Bowie March 27, 1997
Gregory M. Bowie Date
Vice President, Finance
By /s/ Glenn R. Oxner March 27, 1997
Glenn R. Oxner Date
Director
By /s/ Sibyl N. Fishburn March 27, 1997
Sibyl N. Fishburn Date
Director
By /s/ Carroll D. Vinson March 27, 1997
Carroll D. Vinson Date
Director
By /s/ Richard E. Ingram March 27, 1997
Richard E. Ingram Date
Director