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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 JANUARY 3, 1998
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 incorporation (I.R.S. Employer
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 to Section 12(b) Name of each exchange
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 27, 1998, the aggregate market
value of common stock held by non-affiliates of the registrant was $95.4
million.
The number of common shares outstanding of the registrant's common stock
as of February 27, 1998 was 6,813,929.
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.
In 1997 Bristol began producing carbon piping systems from pipe purchased
outside since Bristol does not manufacture carbon pipe. The Company
entered the carbon pipe fabrication business in order to provide
customers this additional product and to enhance the stainless
fabrication business by quoting inquiries that require both types of
piping systems.
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 fibers 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 sup-
plies.
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 26 percent of the Chemicals Segment's sales in
1997. The Company has a distributorship agreement expiring December 31,
1998 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 37 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, five 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 four 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 two
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 four
full-time outside sales employees, five manufacturers' representatives
and one part-time consultant. In addition, the President, product manager
and another employee of MC and BU's Vice President of Research and
Development 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 eleven 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 seven percent of the dye and pigment sales
represent niche products for which the Company is the only producer.
Another approximately 20 percent 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 for further discussion.
Research and Development Activities
The Company spent approximately $833,000 in 1997, $778,000 in 1996 and
$743,000 in 1995 on research and development programs in its Chemical
Segment. Thirteen individuals, 12 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 has made 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 $10,600,000, $13,100,000 and $10,400,000
at the 1997, 1996 and 1995 respective year ends.
Employee Relations
As of January 3, 1998, the Company had 663 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 310. 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. Except as noted, the Company owns all of
these plants and facilities.
Location Principal Operations Building Land Acres
Spartanburg, SC Corporate headquarters; Chemical 211,000 60.90
manufacturing and warehouse
facilities
Augusta, GA Chemical Manufacturing 52,500 46.00
Bristol, TN (1) Manufacturing of stainless steel 236,000 73.08
pipe and stainless steel and
carbon piping systems
Camden, SC Manufacturing of stainless steel 16,300 12.26
Cleveland, TN Chemical Manufacturing 90,000 7.50
(1) Includes one plant which the Company leases on a two-year lease,
expiring April 1999, and the main plant of Bristol.
ITEM 3: LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note N.
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 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company had 1,491 common shareholders of record at January 3, 1998.
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 (Note G). The prices shown below are the last
reported sales prices on The Nasdaq National Market System.
1997 1996
Dividends Dividends
Quarter High Low Paid High Low Paid
1 18 3/4 15 1/4 $.09 21 1/4 14 3/4 $.08
2 18 3/8 13 3/4 .09 20 3/4 14 3/4 .08
3 18 3/4 14 3/4 .09 17 1/4 12 .09
4 17 1/2 14 3/8 .10 17 1/2 14 1/2 .09
ITEM 6: SELECTED FINANCIAL DATA
Selected Financial Data
(Dollars in thousands except for
per share data) 1997 1996 1995 1994 1993
Operations
Net sales $126,741 $126,844 $147,298 $114,519 $103,409
Gross profit 19,715 21,108 35,323 20,056 16,043
Selling, general and
administrative expense 9,972 9,086 11,089 8,337 7,556
Environmental remediation costs - - 2,351 291
Operating income 9,744 12,022 24,234 9,368 8,196
Net income 5,841 7,686 14,521 5,718 4,825
Financial Position
Total assets 73,383 76,589 80,226 62,432 55,771
Working capital 35,499 34,141 41,098 28,919 26,279
Long-term debt, less current portion 10,200 11,200 12,619 7,911 8,226
Shareholders' equity 50,042 48,274 48,363 36,889 32,815
Financial Ratios
Current ratio 4.7:1 3.5:1 3.6:1 3.0:1 3.0:1
Gross profit to net sales 16% 17% 24% 18% 16%
Long-term debt to capital 17% 19% 21% 18% 20%
Return on average assets 8% 10% 20% 10% 9%
Return on average equity 12% 16% 34% 16% 16%
Per Share Data
Net income - diluted $ .83 $ 1.09 $ 1.98 $ .78 $ .66
Dividends declared and paid .37 .34 .29 .25 .23
Book value 7.27 6.92 6.71 5.12 4.58
Other Data
Depreciation and amortization 3,485 2,700 2,316 1,969 1,737
Capital expenditures 2,854 3,833 6,455 4,214 3,262
Employees at year end 663 585 568 528 533
Shareholders of record at year end 1,491 1,581 1,666 1,740 1,869
Average shares outstanding - diluted 7,007 7,058 7,352 7,354 7,346
Stock Price
Price range of Common Stock
High 18 3/4 21 1/4 26 1/4 13 1/2 20 3/8
Low 13 3/4 12 11 7/8 9 3/8 9
Close 15 3/16 16 1/4 21 1/8 11 7/8 9 1/2
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 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The current ratio at 1997 year end was 4.7:1 up from the previous year end
ratios of 3.5:1 and 3.6:1 in 1996 and 1995, respectively. Working capital
increased $1,358,000 to $35,499,000. Cash flows from operations of
$13,230,000 were derived primarily from earnings and depreciation, plus
reductions in accounts receivable and inventory totaling $4,449,000. The
cash flows were used to repay notes payable and long-term debt totaling
$4,855,000, make capital expenditures of $2,854,000, purchase 105,000 shares
of the Company's Common Stock for $1,589,000, and pay dividends of $2,576,000.
The Company expects that cash flows from 1998 operations and available
borrowings will be sufficient to make long-term debt and dividend payments,
and fund estimated capital expenditures of $5,000,000 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.
Results of Operation
Metals Segment
1997 1996 1995
(Amounts in thousands) Amount % Amount % Amount %
Net sales $71,192 100.0 $85,027 100.0 $99,455 100.0
Cost of goods sold 61,340 86.2 70,790 83.3 73,032 73.5
------- ------- ------- ------- ------- -------
Gross profit 9,852 13.8 14,237 16.7 26,423 26.5
Selling and
administrative expense 4,218 5.9 4,540 5.3 6,004 6.0
------- ------- ------- ------- ------- -------
Operating income $ 5,634 7.9 $ 9,697 11.4 $20,419 20.5
Year-end backlogs
Piping systems and
process equipment $10,600 $13,100 $10,400
Comparison of 1997 and 1996
Sales and operating income declined 17 and 43 percent, respectively, from
1996. These percentages as well as others in this report are after giving
effect to the extra production days from having 53 weeks included in the 1997
fiscal year. The dollar decline in sales for 1997 was the result of an 18
percent decrease in average selling prices verses 1996. Unit volume was
actually up slightly in 1997. After experiencing an unprecedented surge in
pipe prices during 1995, the trend reversed and prices declined precipitously
in 1996 back to levels existing before the price increases. A primary factor
contributing to the decline in prices 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 pricing fluctuations over the past three years.
The bulk of the decrease in operating income occurred in the first quarter of
the year when market dynamics were completely different from the first quarter
of 1996. During the first quarter of 1996, the price declines in stainless
steel pipe prices had just begun and profits were still good. By the first
quarter of 1997, prices were down 28 percent from a year earlier and profits
were at extremely low levels. Exacerbating the big decline in first quarter
1997 profits from stainless pipe was a loss from piping systems and process
equipment compared to good profitability in the first quarter of 1996. The
loss from these products was primarily due to low production levels caused by
customer stretch-outs in delivery dates.
Lower profit-based incentives accounted for the decline in selling and
administrative expenses.
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 unprece-
dented 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 which 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 replace-
ment inventories, which also negatively impacted profitability. This was a
reversal of conditions that existed in 1995 when significant profits were gen-
erated 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.
Chemicals Segment--The following table summarizes operating results for the
three years indicated. Reference should be made to Note Q.
1997 1996 1995
(Amounts in thousands) Amount % Amount % Amount %
Net sales $55,549 100.0 $41,817 100.0 $47,843 100.0
Cost of goods sold 45,686 82.2 34,946 83.6 38,943 81.4
------- ------- ------- ------- ------- -------
Gross profit 9,863 17.8 6,871 16.4 8,900 18.6
Selling and adminis-
trative expense 4,643 8.4 3,183 7.6 3,218 6.7
------- ------- ------- ------- ------- -------
Operating income $ 5,220 9.4 $ 3,688 8.8 $ 5,682 11.9
Comparison of 1997 to 1996
Sales and operating income increased 31 and 40 percent, respectively, aided by
the acquisition of MC. The prolonged decline in textile dyes and pigments
sales ended in the first quarter of 1997 with each of the subsequent quarters
showing improvement over the prior year quarter. The increased sales in these
three quarters of about 10 percent led to a five percent increase for the
year. The improvement resulted from increases in unit volumes in several of
the product groups offset somewhat by falling prices from competitive pressure
experienced throughout all of the textile dyes and pigments product lines.
The acquisition of MC propelled specialty chemicals to 44 percent of total
Chemicals Segment sales for 1997. Specialty chemicals sales, without MC's
sales for 1997, increased insignificantly over last year.
Essentially all of the growth in the Chemical Segment's operating income was
produced by specialty chemicals, as profits from textile dyes and pigments
experienced only a moderate gain. The competitive pressure on selling prices
continued to impair profitability throughout 1997 in textile dyes and
pigments. The significant increase in specialty chemicals profits came from
increased volume from projects, creating improved manufacturing variances that
resulted in better profit margins, and the addition of MC.
Selling and administrative expenses increased 44 percent from including
expenses of MC for a full year in 1997 versus two months in 1996, and from
additional selling expenses related to the addition of a BU product manager in
November of 1996.
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 administra-
tive costs of MC after the acquisition.
Unallocated Income and Expense
Reference should be made to Note Q for the schedule of these items.
Comparison of 1997 and 1996
The decrease in corporate expenses resulted from lower profit-based incen-
tives. Interest expense declined from reduced borrowings under the line of
credit with a bank and a $2,000,000 reduction in long-term debt paid in June
1997.
Comparison of 1996 and 1995
The decrease in corporate expenses resulted from lower profit-based incen-
tives. 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.
Current Conditions and Outlook
Metals Segment operating income in the fourth quarter surged upward 119
percent to $1,568,000 from the depressed year earlier level when rapidly
decreasing sales prices led to significant inventory losses. Sales were up 3
percent to $19,014,000 with much higher volume in piping systems and process
equipment offsetting lower sales of stainless pipe. This change in product
mix resulted in higher average selling prices which more than offset an 8
percent decline in overall unit volumes. Pipe unit volume sales were down
about 15 percent compared to both the fourth quarter of last year and this
year's third quarter. Management believes the decline was primarily the
result of distributors' desire to reduce inventories in an environment of weak
prices. The continued downward trend in material costs and selling prices
coupled with the decrease in pipe unit volume experienced in the fourth
quarter of 1997, make the outlook for the Metals Segment uncertain. The
backlog for piping systems and process equipment was $10,600,000 at year end
compared to 1996 and 1995 year end amounts of $13,100,000 and $10,400,000,
respectively.
The Chemicals Segment performed well in the fourth quarter with operating
income up 30 percent to $1,789,000 on an 18 percent increase in sales to
$14,248,000. The sales increase resulted from an additional month's sales in
1997 from MC, as well as increases in both textile dyes and pigments and chem-
ical specialties. Profits from dyes and pigments increased modestly while
chemical specialties provided the bulk of the income growth. Over the past
two years, the Company has successfully reduced costs of certain dyes which
makes these products more competitive. As a result there has been an increase
in unit volumes for these dyes. However, there continues to be significant
competitive pressure on dyes and pigments prices and overall demand continues
to be weak. The addition of MC has enhanced sales and earnings of the
specialty chemicals area as the Company is continuing to focus on expanding
these products. Several specialty chemicals products have operated at a high
level of production over the past two years, but because of the uncertainty of
customer scheduling of these products, it is difficult to predict future
production levels and their impact on quarterly earnings.
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 his-
torical 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.
Year 2000 Compliance
The Company has assessed the potential impact of the year 2000 on its key
financial, operations and information systems. Management does not believe
that the Company will encounter significant systems problems related to the
year 2000. The financial impact of making required systems changes is not
expected to be material to the Company's financial position, results of opera-
tions or cash flows. Management expects that system changes for year 2000 com-
pliance will be completed during fiscal 1998.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, related notes, report of man-
agement and report of the independent auditors follow on subsequent pages of
this report.
Consolidated Statements of Income
January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
------ ------ ------
Net sales $126,740,641 $126,843,835 $147,298,348
Cost of sales 107,025,237 105,736,099 111,975,698
------------ ------------ ------------
Gross profit 19,715,404 21,107,736 35,322,650
Selling, general and
administrative expense 9,971,869 9,085,923 11,088,914
------------ ------------ ------------
Operating income 9,743,535 12,021,813 24,233,736
Other (income) and expense
Gain on sale of investment (665,718)
Interest expense 741,340 838,963 911,555
Other, net (28,565) (20,533) 27,660
------------ ------------ ------------
Income before taxes 9,030,760 11,869,101 23,294,521
Provision for income taxes 3,190,000 4,183,000 8,774,000
------------ ------------ ------------
Net income $ 5,840,760 $ 7,686,101 $ 14,520,521
============ ============ ============
Net income per common share
Basic $ 0.84 $ 1.10 $ 2.01
====== ====== ======
Diluted $ 0.83 $ 1.09 $ 1.98
====== ====== ======
See accompanying notes to financial statements.
Consolidated Balance Sheets
January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
------ ------ ------
Assets
Current assets
Cash and cash equivalents $ 1,602,543 $ 115,828 $ 267,061
Accounts receivable, less allowance
for doubtful accounts of $219,000,
$208,000 and $356,000, respectively 15,201,783 17,253,534 17,616,246
Inventories
Raw materials 7,368,212 8,357,884 10,574,040
Work-in-process 4,791,379 5,112,695 6,095,136
Finished goods 15,287,431 16,384,891 21,860,833
----------- ----------- -----------
Total inventories 27,447,022 29,855,470 38,530,009
Deferred income taxes (Note L) 177,000 130,000 218,000
Prepaid expenses and other
current assets 633,709 278,276 119,592
----------- ----------- -----------
Total current assets 45,062,057 47,633,108 56,750,908
Cash value of life insurance 1,842,384 1,733,801 1,632,029
Investment (Note B) 329,117 329,117 543,100
Property, plant and
equipment, net (Note C) 23,112,324 23,627,889 20,341,645
Deferred charges, net and
other assets (Note D) 3,037,470 3,265,211 957,891
----------- ----------- -----------
Total assets $73,383,352 $76,589,126 $80,225,573
=========== =========== ===========
Consolidated Balance Sheets
January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
------ ------ ------
Liabilities and Shareholders' Equity
Current liabilities
Notes payable (Note E) $ - $ 1,500,000 $ 4,740,000
Accounts payable 5,544,789 6,252,449 4,833,405
Income taxes 310,992 332,507 233,977
Accrued expenses (Note F) 3,018,850 2,492,660 5,082,212
Current portion of environmental
reserves (Note H) 487,980 359,294 486,521
Current portion of long-term
debt (Note G) 200,000 1,400,000 276,923
Notes payable to an employee (Note P) 1,154,805
----------- ----------- -----------
Total current liabilities 9,562,611 13,491,715 15,653,038
Long-term debt, less current
portion (Note G) 10,200,000 11,200,000 12,619,231
Environmental reserves (Note H) 782,700 1,300,100 1,702,800
Deferred compensation (Note I) 1,323,388 1,299,176 1,267,353
Deferred income taxes (Note L) 1,473,000 1,024,000 620,000
Contingencies (Notes H and N)
Shareholders' equity (Notes G, J, & K)
Common stock, par value $1 per
share - authorized and
issued 8,000,000 shares 8,000,000 8,000,000 8,000,000
Capital in excess of par value 33,475 81,746 417,030
Retained earnings 52,339,857 49,074,919 43,774,332
----------- ----------- -----------
60,373,332 57,156,665 52,191,362
Less cost of Common Stock in
treasury: 1,114,179, 1,024,983
and 789,749 shares, respectively 10,331,679 8,882,530 3,828,211
----------- ----------- -----------
Total shareholders' equity 50,041,653 48,274,135 48,363,151
----------- ----------- -----------
Total liabilities and
shareholders' equity $73,383,352 $76,589,126 $80,225,573
=========== =========== ===========
See accompanying notes to financial statements.
Consolidated Statements of Shareholders' Equity
Capital in Cost of Common
Excess of Par Retained Stock in
Common Stock Value Earnings Treasury Total
------------ ------------- ----------- -------------- -----------
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 share (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 - $.29 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
Net income 5,840,760 5,840,760
Stock options exercised (48,271) 139,479 91,208
Purchase of Common Stock
for treasury (1,588,628) (1,588,628)
Cash dividends - $.37 per
share (2,575,822) (2,575,822)
----------- ----------- ----------- ----------- -----------
Balance at January 3, 1998 $ 8,000,000 $ 33,475 $52,339,857 $(10,331,679) $50,041,653
=========== =========== =========== ============ ===========
See accompanying notes to financial statements.
Consolidated Statements of Cash Flows
January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
------ ------ ------
Operating activities
Net income $ 5,840,760 $ 7,686,101 $14,520,521
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation expense 3,221,069 2,547,986 2,220,198
Amortization of deferred charges 263,791 151,615 95,772
Deferred compensation 24,212 31,823 713,117
Deferred income taxes 402,000 492,000 539,000
Provision for losses on accounts
receivable 11,067 (197,920) 175,239
Loss on sale of property, plant
and equipment 117,586 146,022 23,245
Cash value of life insurance (108,583) (101,772) (96,898)
Environmental reserves (388,714) (529,927) (349,679)
Gain on sale of investment - (665,718) -
Changes in operating assets
and liabilities:
Accounts receivable 2,040,684 2,276,838 (3,032,638)
Inventories 2,408,448 9,923,875 (10,553,555)
Other assets (398,998) (658,864) (334,874)
Accounts payable and
accrued expenses (181,470) (2,313,165) 1,323,372
Income taxes payable (21,515) 91,338 (214,390)
----------- ----------- -----------
Net cash provided by
operating activities 13,230,337 18,880,232 5,028,430
Investing activities
Purchases of property, plant
and equipment (2,853,799) (3,832,899) (6,454,565)
Proceeds from sale of property,
plant and equipment 30,709 94,975 109,061
Proceeds from sale of investment - 826,248 -
Acquisition, net of cash and
note payable (Note P) - (4,093,807) -
Proceeds from notes receivable 7,515 6,804 6,158
----------- ----------- -----------
Net cash (used in)
investing activities (2,815,575) (6,998,679) (6,339,346)
Financing activities
Proceeds from revolving lines
of credit 13,145,000 45,707,000 69,255,231
Payments on revolving lines
of credit (14,645,000) (48,947,000) (68,970,231)
Principal payments on
long-term debt (2,200,000) (1,017,669) (349,038)
Payment of notes payable to
an employee (1,154,805) - -
Additions to long-term debt - - 5,000,000
Proceeds from exercised
stock options 91,208 234,008 113,457
Purchases of treasury stock (1,588,628) (5,623,611) (1,372,562)
Dividends paid (2,575,822) (2,385,514) (2,119,650)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (8,928,047) (12,032,786) 1,557,207
----------- ----------- -----------
Increase (Decrease) in cash
and cash equivalents 1,486,715 (151,233) 246,291
Cash and cash equivalents at
beginning of year 115,828 267,061 20,770
----------- ----------- -----------
Cash and cash equivalents at
end of period $ 1,602,543 $ 115,828 $ 267,061
=========== =========== ===========
See accompanying notes to 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.
Accounting Period. The Company's fiscal year is the 52- or 53-week period end-
ing the Saturday nearest to December 31. Fiscal year 1997 ended on January 3,
1998 and included 53 weeks. Fiscal years 1996 and 1995 ended on December 28,
1996 and December 30, 1995, respectively and each included 52 weeks.
Revenue Recognition. Revenue from product sales is recognized at the time own-
ership of goods transfers to the customer and the earnings process is
complete.
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. In 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share. Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options. Diluted earnings per share
is very similar to the previously reported primary earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
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 $833,000, $778,000 and $743,000 in the
1997, 1996 and 1995 fiscal years, respectively.
Fair Value of Financial Instruments. The carrying amounts reported in the bal-
ance sheet for cash and cash equivalents, cash surrender value of life insur-
ance 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 January 3, 1998 was $1,057,000. 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." See Note K.
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 pretax 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 1.6 percent ownership interest which is
being reflected on the cost method of accounting due to restrictions on trad-
ing.
NOTE C: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
1997 1996 1995
Land $ 299,043 $ 299,043 $ 246,544
Land improvements 1,006,675 965,469 689,228
Buildings 12,103,534 11,613,857 7,770,891
Machinery, fixtures
and equipment 36,876,635 36,506,944 29,138,132
Construction-in-
progress 614,620 370,996 4,446,919
---------- ---------- ----------
50,900,507 49,756,309 42,291,714
Less accumulated
depreciation 27,788,183 26,128,420 21,950,069
---------- ---------- ----------
$23,112,324 $23,627,889 $20,341,645
NOTE D: DEFERRED CHARGES
Deferred charges consist of the following:
1997 1996 1995
Intangibles arising
from acquisitions $2,758,965 $2,758,965 $ 793,406
Software license
agreements 448,935 448,935 642,716
Debt expense 117,116 132,645 153,808
---------- ---------- -----------
3,325,016 3,340,545 1,589,930
Less accumulated
amortization 803,359 565,263 645,387
---------- ---------- -----------
$2,521,657 $2,775,282 $ 944,543
NOTE E: NOTES PAYABLE
The Company has available a line of credit totaling $9,000,000, of which none
was outstanding at year end. The line expires on July 1, 1998 and bears inter-
est at the bank's overnight cost of funds plus .75 percent (6.65 percent at
January 3, 1998). The line has no compensating balance requirement. Borrowings
under the line of credit are subject to the deed of trust and security agree-
ment outlined in Note G. Average short-term borrowings outstanding during fis-
cal 1997, 1996 and 1995 were $261,000, $2,099,000 and $3,900,000 with weighted
average interest rates of 6.11 percent, 6.11 percent and 7.14 percent, respec-
tively.
NOTE F: ACCRUED EXPENSES
Accrued expenses consist of the following:
1997 1996 1995
Salaries, wages
and commissions $ 895,526 $1,477,986 $3,692,824
Taxes, other than
income taxes 361,040 259,452 220,926
Insurance 213,465 273,792 536,730
Pension 158,063 198,272 193,747
Customer advances 887,498 20,144 195,950
Other accrued items 503,258 263,014 242,035
---------- ---------- ----------
$3,018,850 $2,492,660 $5,082,212
NOTE G: LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996 1995
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. $ 400,000 $ 600,000 $ 800,000
Unsecured commercial
note payable with
interest payable on
the dates and at
rates provided by
credit agreement,
as amended 10,000,000 12,000,000 12,000,000
Other 96,154
----------- ----------- -----------
10,400,000 12,600,000 12,896,154
Less current portion 200,000 1,400,000 276,923
----------- ----------- -----------
$10,200,000 $11,200,000 $12,619,231
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.
On July 31, 1997, the Company entered into an agreement to amend the Revolving
Credit/Term Loan Agreement and prepaid $800,000, reducing the balance owed to
$10,000,000. The amendment converts the debt from a five-year term loan, pay-
able in equal quarterly installments, to a $10,000,000 revolving line of
credit expiring five years from the date of the Agreement. Interest is payable
quarterly on the outstanding balance at the lower of the bank's prime rate
less .25 percent or LIBOR plus .60 percent. The rate at January 3, 1998 was
6.518 percent.
Borrowings are subject to the maintenance of certain financial ratios and cer-
tain other restrictive covenants including limiting the paying of cash divi-
dends to 50 percent of the net profits of the next preceding year. The Company
made interest payments of $764,000 in 1997, $958,000 in 1996 and $988,000 in
1995. Interest expense of approximately $116,000, and $125,000 was capitalized
in 1996 and 1995, respectively. The approximate aggregate amount of all long-
term debt maturities for the next five years is as follows: 1998 - $200,000;
and 1999 - $200,000; and 2002 - $10,000,000.
NOTE H: ENVIRONMENTAL COMPLIANCE COSTS
At January 3, 1998, the Company has accrued $1,271,000 in remediation costs
which, in management's best estimate, will satisfy anticipated costs of known
remediation requirements as outlined below. Expenditures related to costs cur-
rently accrued are not discounted to their present values and are expected to
be made over the next five to seven 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 reme-
diation are subject to uncertainties and it is not possible to predict the
amount or timing of future costs of environmental matters which may subse-
quently be determined. Subject to the difficulty in estimating future environ-
mental 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, sev-
eral solid waste management units ("SWMUs") at the plant sites have been iden-
tified. 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 $1,145,000
remains accrued at January 3, 1998.
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 Clo-
sure 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 $126,000 remains accrued at
January 3, 1998 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 responsi-
ble 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 1997 and 1996.
At January 3, 1998, the amounts deferred totaled $774,000, including accrued
interest earned in 1997 of $26,000.
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, $549,000 at January 3, 1998, 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 2,754,328. 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:
Weighted Average
Option Price Outstanding Available
At December 31, 1994 $ 8.34 189,705 112,000
Granted $22.25 4,000 (4,000)
Exercised $ 2.48 (48,500)
Effect of three-for-
two stock split $ 7.02 76,678 54,000
------- -------- -------
At December 30, 1995 $ 7.02 221,883 162,000
Granted $18.88 21,000 (21,000)
Exercised $ 2.63 (88,875)
------ -------- --------
At December 28, 1996 $11.17 154,008 141,000
Granted $15.13 100,500 (100,500)
Exercised $ 5.74 (15,900)
------ -------- --------
At January 3, 1998 $13.20 238,608 40,500
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 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 January 3, 1998, 102,108 shares of the options
outstanding were fully exercisable. Exercise prices for options outstanding as
of January 3, 1998 ranged from $1.56 to $18.88.
The Company has elected to apply the provisions of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees," (APB No. 25) in the
computation of compensation expense. Under APB No. 25's intrinsic value
method, compensation expense is determined by computing the excess of the
market price of the shares over the exercise price on the measurement date.
For the Company's options, the intrinsic value on the measurement date (or
grant date) is zero, and no compensation expense is recognized. Financial
Accounting Standards Board No. 123 (FASB No. 123) requires the Company to
disclose pro forma net income and income per share as if a fair value based
accounting method had been used in the computation of compensation expense.
The fair value of the options computed under FASB No. 123 would be recognized
over the vesting period of the options. The fair value for the Company's
options granted subsequent to December 31, 1994 was estimated at the time the
options were granted using the Black Scholes option pricing model with the
following weighted-average assumptions for 1997, 1996 and 1995, respectively:
risk-free interest rate of five percent; dividend yield of two percent;
volatility factors of the expected market price of the Company's Common Shares
of .0487, .507 and .507; and an expected life of the option of seven years.
The weighted average fair value on the date of grant in 1997, 1996 and 1995
was $6.99, $8.97 and $7.05, respectively. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The following is the
pro forma information for the years ended January 3, 1998, December 28, 1996
and December 30, 1995:
1997 1996 1995
Pro forma net income $5,750,000 $7,664,000 $14,517,000
Pro forma diluted
earnings per share $.82 $1.09 $1.97
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) 1997 1996 1995
Deferred tax assets:
Allowance for doubtful accounts $ 77 $ 74 $ 140
Deferred compensation 467 459 465
Inventory capitalization 194 198 248
Accrued group insurance 53 88 110
Environmental reserves 449 586 803
Other 98 89
------- ------- -------
Total deferred tax assets 1,338 1,494 1,766
Deferred tax liabilities:
Tax over book depreciation 2,216 1,942 1,710
Prepaid expenses 418 446 441
Other 17
------- ------- -------
Total deferred tax liabilities 2,634 2,388 2,168
------- ------- -------
Net deferred tax (liabilities) assets $(1,296) $ (894) $ (402)
Significant components of the provision for income taxes attributable
to continuing operations are as follows:
1997 1996 1995
Current:
Federal $2,632 $3,483 $7,337
State 156 208 898
------- ------- -------
Total current 2,788 3,691 8,235
Deferred:
Federal 379 463 480
State 23 29 59
------- ------- -------
Total deferred 402 492 539
------- ------- -------
Total $3,190 $4,183 $8,774
The reconciliation of income tax attributable to continuing operations com-
puted at the U. S. federal statutory tax rates to income tax expense is:
(Amount in thousands) 1997 1996 1995
Amount % Amount % Amount %
Tax at U.S. Statutory rates $3,070 34.0 $4,054 34.2 $8,153 35.0
State income taxes, net of
federal tax benefit 119 1.3 156 1.3 629 2.7
Other, net 1 (27) (0.3) (8)
------ ------ ------ ------ ------ ------
Total $3,190 35.3 $4,183 35.2 $8,774 37.7
Income tax payments of approximately $2,756,000, $3,683,000 and $8,449,000
were made in 1997, 1996 and 1995, respectively.
NOTE M: BENEFIT PLANS
The Company has a 401(k) Employee Stock Ownership Plan covering all non-union
employees. Employees may contribute to the Plan up to 20 percent of their sal-
ary with a maximum of $9,500 for 1997. 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 contribu-
tion equal to a percentage which is determined each year by the Board of
Directors. For 1997 the maximum was four percent. The matching contribution is
allocated on June 30 and December 31 of each Plan year. Matching contributions
of approximately $294,000, $233,000 and 229,000 were made for 1997, 1996 and
1995, 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 1997, 1996 or 1995.
The Company also contributes to union-sponsored retirement plans. Contribu-
tions relating to these plans were approximately $428,000, $351,000 and
$359,000 for the years ended January 3, 1998, December 28, 1996 and December
30, 1995, respectively.
NOTE N: CONTINGENCIES
The Company is from time to time subject to various claims, other possible
legal actions for product liability and other damages, and other matters aris-
ing 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 operat-
ing results or financial position of the Company.
NOTE O: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
1997 1996 1995
Numerator:
Net income $5,840,760 $7,686,101 $14,520,521
Denominator:
Denominator for basic earnings
per share-weighted average
shares 6,959,628 7,004,249 7,215,947
Effect of dilutive securities:
Employee stock options 47,088 53,861 135,991
--------- --------- ---------
Denominator for diluted
earnings per share 7,006,716 7,058,110 7,351,938
Basic earnings per share $.84 $1.10 $2.01
Diluted earnings per share $.83 $1.09 $1.98
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 sur-
factants, defoamers, finishing agents and other specialty chemicals for the
textile, paper, chemical and metals industries. Manufacturers Chemicals and
the 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, petro-
chemical and pulp and paper industries. Products include piping systems, fit-
tings, 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 1997, 1996 or 1995.
The Company has a distributorship agreement expiring December 31, 1998 with
the company supplying about 90 percent of the products that produced over one-
fourth of the Chemicals Segment's sales in 1997. 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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for financial statements for fiscal years beginning after December
15, 1997, and therefore the Company will adopt the new requirements
retroactively in 1998. Management has not completed its review of Statement
131, but does not anticipate that the adoption of this statement will have a
significant effect on the Company's reported segments.
Segment information
(Amounts in thousands) 1997 1996 1995
Net sales
Metals $ 71,192 $ 85,027 $ 99,455
Chemicals 55,549 41,817 47,843
---------- ---------- ----------
Total net sales $126,741 $126,844 $147,298
========== ========== ==========
Operating income
Metals $ 5,634 $ 9,697 $ 20,419
Chemicals 5,220 3,688 5,682
---------- ---------- ----------
10,854 13,385 26,101
Less unallocated corporate expense 1,110 1,363 1,867
---------- ---------- ----------
Operating income 9,744 12,022 24,234
Other expense, net 713 153 939
---------- ---------- ----------
Income before taxes $ 9,031 $ 11,869 $ 23,295
========== ========== ==========
Identifiable assets
Metals $ 37,838 $ 41,172 $ 51,160
Chemicals 30,211 31,875 25,563
Corporate 5,334 3,542 3,503
---------- ---------- ----------
$ 73,383 $ 76,589 $ 80,226
========== ========== ==========
Depreciation and amortization
Metals $ 1,504 $ 1,331 $ 1,131
Chemicals 1,807 1,188 1,039
Corporate 174 181 146
---------- ---------- ----------
$ 3,485 $ 2,700 $ 2,316
========== ========== ==========
Capital expenditures
Metals $ 1,163 $ 2,519 $ 3,621
Chemicals 1,653 1,299 2,651
Corporate 38 15 183
---------- ---------- ----------
$ 2,854 $ 3,833 $ 6,455
========== ========== ==========
NOTE R: QUARTERLY RESULTS (UNAUDITED)
The following is a summary of quarterly operations for the years ended January
3, 1998, December 28, 1996 and December 30, 1995.
Net Income Per
Net Gross Net Common Share
(Thousands except Sales Profit Income Diluted Basic
per share data)
1997
First Quarter $30,903 $ 4,246 $1,011 $.14 $.14
Second Quarter 31,205 4,832 1,386 .20 .20
Third Quarter 31,371 4,875 1,543 .22 .22
Fourth Quarter 33,262 5,762 1,901 .27 .28
1996
First Quarter $36,659 $ 7,429 $2,922 $.41 $.41
Second Quarter 31,737 5,828 2,119 .30 .30
Third Quarter 29,405 4,059 1,243 .18 .18
Fourth Quarter 29,043 3,792 1,402 .20 .20
1995
First Quarter $34,576 $ 7,175 $2,762 $.38 $.38
Second Quarter 41,381 10,799 4,613 .63 .64
Third Quarter 37,858 9,464 3,915 .53 .54
Fourth Quarter 33,483 7,885 3,231 .44 .45
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.
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 January 3, 1998, December 28, 1996 and December 30, 1995,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended January 3, 1998.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Synalloy Corporation at January 3, 1998, December 28, 1996 and December 30,
1995 and the consolidated results of its operations and its cash flows for
each of the three years in the period ended January 3, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young, LLP
Greenville, South Carolina
February 6, 1998
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINAN-
CIAL 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 Janu-
ary 3, 1998, 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 Reg-
ulation S-K is contained in the Company's definitive Proxy Statement in
connection with its Annual Meeting to be held April 30, 1998.
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
PART IV
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 Statements of Income for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995
Consolidated Balance Sheets at January 3, 1998,
December 28, 1996 and December 30, 1995
Consolidated Statements of Shareholders' Equity for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995
Consolidated Statements of Cash Flows for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995
Notes to Consolidated Financial Statements
2. Financial Statements Schedules: The following consolidated financial
statements schedule of Synalloy Corporation is included in Item 14(d).
Schedule II - Valuation and Qualifying Accounts for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995
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 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 1997 fiscal year.
c. Exhibits: The response to this portion of Item 14 is submitted in a sepa-
rate 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 II: VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Balance at Charged to Deductions Balance
Beginning Cost and Describe at End of
Description of Period Expenses (1) Period
Year ended January 3, 1988
Deducted from asset account:
Allowance for doubtful accounts $208,000 $ 279,000 $268,000 $219,000
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
(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 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:
Synalloy Metals, Inc., formerly Bristol Metals, Inc., a Tennessee corporation
Whiting Metals, Inc., a South Carolina corporation
Manufacturers Soap and Chemical Company, a Tennessee corporation
Metchem, Inc., a Delaware corporation
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, 1998
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 Regis-
trant and in the capacities and on the date indicated.
By /s/ James G. Lane, Jr. March 27, 1998
James G. Lane, Jr. Date
Chief Executive Officer and
Chairman of the Board
By /s/ Gregory M. Bowie March 27, 1998
Gregory M. Bowie Date
Vice President, Finance
By /s/ Glenn R. Oxner March 27, 1998
Glenn R. Oxner Date
Director
By /s/ Sibyl N. Fishburn March 27, 1998
Sibyl N. Fishburn Date
Director
By /s/ Carroll D. Vinson March 27, 1998
Carroll D. Vinson Date
Director
By /s/ Richard E. Ingram March 27, 1998
Richard E. Ingram Date
Director