ASCENT INDUSTRIES CO. - Annual Report: 2006 (Form 10-K)
Table
of Contents
|
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
||||
|
|
Form
10-K
|
|
||
|
X ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
FOR
THE FISCAL YEAR ENDED DECEMBER 30, 2006
|
||||
|
|
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
(State
of incorporation)
|
|
57-0426694
(I.R.S.
Employer Identification No.)
|
||
|
Croft
Industrial Park, P.O. Box 5627, Spartanburg, South
Carolina 29302
(Address of principal executive offices) (Zip Code) |
||||
|
Registrant's
telephone number, including area code: (864) 585-3605
|
||||
|
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $1.00 Par
Value
(Title
of Class)
|
|
Name
of each exchange on which registered:
NASDAQ
Global
Market
|
||
|
Securities
registered pursuant to Section 12(g) of the Act:
|
||||
|
None
|
||||
|
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act. Yes __ No X
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yes __ No X
Indicate
by check mark whether the registrant (1) has filed all reports required
to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days. Yes X
No_
|
||||
|
Indicate
by check mark 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. [ ]
|
||||
|
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of
the
Exchange Act.
Large
accelerated Filer __ Accelerated filer __
Non-accelerated filer X
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Act). Yes __ No X
|
||||
|
Based
on the closing price as of July 1, 2006, which was the last business
day
of the registrant's most recently completed second fiscal quarter,
the
aggregate market value of the common stock held by non-affiliates
of the
registrant was $68.6 million. Based on the closing price of February
23,
2007, the aggregate market value of common stock held by non-affiliates
of
the registrant was $144.9 million. The registrant did not have any
non-voting common equity outstanding at either date.
|
||||
|
The
number of shares outstanding of the registrant's common stock as
of
February 23, 2007 was 6,181,258.
|
||||
|
Documents
Incorporated By Reference
|
||||
|
Portions
of the proxy statement for the 2007 annual shareholders' meeting
are
incorporated by reference into Part III of this Form 10-K.
|
||||
Forward-Looking
Statements
This
Annual Report on Form 10-K includes and incorporates by reference
"forward-looking statements" within the meaning of the securities laws. All
statements that are not historical facts are "forward-looking statements."
The
words "estimate," "project," "intend," "expect," "believe," "anticipate," "plan"
and similar expressions identify forward-looking statements. The forward-looking
statements are subject to certain risks and uncertainties, including without
limitation those identified below, which could cause actual results to differ
materially from historical results or those anticipated. Readers are cautioned
not to place undue reliance on these forward-looking statements. The following
factors could cause actual results to differ materially from historical results
or those anticipated: adverse economic conditions, the impact of competitive
products and pricing, product demand and acceptance risks, raw material and
other increased costs, raw materials availability, customer delays or
difficulties in the production of products, environmental issues, unavailability
of debt financing on acceptable terms and exposure to increased market interest
rate risk, inability to comply with covenants and ratios required by our debt
financing arrangements and other risks detailed from time-to-time in Synalloy's
Securities and Exchange Commission filings. Synalloy Corporation assumes no
obligation to update any forward-looking information included in this Annual
Report on Form 10-K.
PART
I
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.
The
Company’s business is divided into two segments, the Metals Segment and the
Specialty Chemicals Segment. The Metals Segment, operating as Bristol Metals,
LLC (“Bristol”), manufactures pipe and piping systems from stainless steel and
other alloys for the chemical, petrochemical, pulp and paper, mining, power
generation (including nuclear), waste water treatment, liquid natural gas,
brewery, food processing, petroleum, pharmaceutical and other industries. The
Specialty Chemicals Segment is comprised of four operating companies: Blackman
Uhler Specialties, LLC (“BU Specialties”), Organic Pigments, LLC (“OP”) and SFR,
LLC (“SFR”), all located in Spartanburg, South Carolina, and Manufacturers
Chemicals, LLC (“MC”), located in Cleveland, Tennessee and Dalton, Georgia. The
Specialty Chemicals Segment produces specialty chemicals, pigments and dyes
for
the carpet, chemical, paper, metals, photographic, pharmaceutical, agricultural,
fiber, paint, textile, automotive, petroleum, cosmetics, mattress, furniture
and
other industries.
General
Metals
Segment -
This
Segment is comprised of a wholly-owned subsidiary, Synalloy Metals, Inc. which
owns 100 percent of Bristol Metals, LLC, located in Bristol,
Tennessee.
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
112
inches in diameter and wall thickness up to one 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 36 inches. In 2004 Bristol added the ability to x-ray pipe in real time
mode along with updated material handling equipment, and during 2006 completed
an expansion of its x-ray facilities which allows simultaneous use of real
time
and film examination. These additions have significantly increased the
efficiency of x-raying pipe. In 2005 Bristol also expanded its capabilities
for
forming large pipe on its existing batch equipment giving Bristol the capability
to produce 36-inch
diameter pipe in 48-foot lengths and with increased wall thickness of up to
one
inch. Also included in the expansion was the addition of a shear that has the
capacity of shearing stainless steel plate up to one-inch thick. Bristol
completed a plant expansion in 2006 that allows the manufacture of pipe up
to 42
inches in diameter utilizing more readily available raw materials at lower
costs
along with automated hydro-testing equipment for pipe
up
to 72
inches, and began another expansion to be completed in 2007 which will provide
improved product handling and additional space for planned equipment additions.
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 shop rather than performing all of the welding at the construction
site. The pipe fabricating shop can make one and one-half diameter cold bends
on
one-half inch through eight-inch stainless pipe with thicknesses up through
schedule 40S. Most piping systems are produced from pipe manufactured by
Bristol.
Bristol
also has the capability of producing carbon and chrome alloy piping systems
from
pipe purchased from outside suppliers since Bristol does not manufacture carbon
or chrome alloy pipe. Carbon and chrome alloy pipe fabrication enhances the
stainless fabrication business by allowing Bristol to quote inquiries utilizing
any of these three material types.
In
order
to establish stronger business relationships, only a few raw material suppliers
are used. Five suppliers furnish more than two-thirds 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, pulp and paper and liquid natural gas ("LNG")
industries with some other important industry users being mining, power
generation (including nuclear), waste water treatment, brewery, food processing,
petroleum, pharmaceutical and alternative fuels.
Specialty
Chemicals Segment -
This
Segment includes four operating companies all wholly-owned subsidiaries of
the
Company. BU Specialties, OP, and SFR, LLC operate out of a plant in Spartanburg,
South Carolina which is fully licensed for chemical manufacture and maintains
a
permitted waste treatment system. Manufacturers Soap and Chemical Company,
which
owns 100 percent of MC is located in Cleveland, Tennessee and Dalton, Georgia
and is fully licensed for chemical manufacture. The
Segment produces specialty chemicals, pigments and dyes for the carpet,
chemical, paper, metals, photographic, pharmaceutical, agricultural, fiber,
paint, textile, automotive, petroleum, cosmetics, mattress, furniture and other
industries.
MC,
purchased by the Company in 1996, produces over 500 specialty formulations
and
intermediates for use in a wide variety of applications and industries. MC’s
primary product lines focus on the areas of defoamers, surfactants and
lubricating agents. Over 20 years ago, MC began diversifying its marketing
efforts and expanding beyond traditional textile chemical markets. These three
fundamental product lines find their way into a large number of manufacturing
businesses. Over the years, the customer list has grown to include end users
and
chemical companies that supply paper, metal working, surface coatings, water
treatment, mining and janitorial applications. MC’s strategy has been to focus
on industries and markets that have good prospects for sustainability in the
U.S. in light of global trends. MC’s marketing strategy relies on sales to end
users through its own sales force, but it also sells chemical intermediates
to
other chemical companies and distributors. It also has close working
relationships with a significant number of major chemical companies that
outsource their production for regional manufacture and distribution to
companies like MC. MC has been ISO registered since 1995.
MC
has
utilized acquisitions to help further expand its markets. An acquisition in
2000
enabled the Company to enter into the sulfation of fats and oils. These products
are used in a wide variety of applications and represent a renewable resource,
animal and vegetable derivatives, as alternatives to more expensive and
non-renewable petroleum derivatives. In 2001 MC acquired the assets of a Dalton,
Georgia based company that serves the carpet and rug markets and also focuses
on
processing aids for wire drawing. MC Dalton blends and sells specialty dyestuffs
and resells heavy chemicals and specialty chemicals, manufactured in MC’s
Cleveland plant, to its markets out of its leased warehousing facility. The
Dalton site also contains a shade matching laboratory and sales offices for
the
group.
BU
Specialties’ business activities involve contract production and toll
manufacturing for a number of domestic and international chemical companies.
It
also produces a small but growing number of finished products and intermediates
that are marketed by MC and by a marketing representative recently assigned
to
building proprietary sales. This location has also focused on markets that
are
believed to be long-term outlets for its production and capacity. BU Specialties
carries out high temperature condensation and sulfates as does MC, but also
hydrogenates, methylates, distills, epoxidizes, grinds and spray dries chemicals
to its customers’ specifications. The location also is registered for FIFRA
regulated agricultural products and it hammermills, dry
blends
and has excellent control for exothermic reactions. Both the MC and BU
Specialties sites have extensive chemical storage and blending capabilities.
BU
Specialties has produced products that are used in oil refining, automotive
applications, cosmetics, agriculture and the paper industry. Like MC, it is
focusing primarily on raw materials and product lines that will rely on
renewable vegetable sourced chemicals for future growth and expansions of its
business.
During
the first quarter of 2006, OP’s operations were relocated to Spartanburg from
Greensboro, North Carolina. OP’s production equipment, laboratories, sales
office and warehousing were relocated into available areas of the Spartanburg
plant, and the Greensboro plant site was sold. The improved utilization of
facilities in Spartanburg and the ability for BU Specialties and OP to share
certain services brings economies to both business units. OP sells aqueous
pigment dispersions that have traditionally been used by the textile industry.
While certain textile business continues to contribute a significant portion
of
OP’s revenues, it, too, is continuing to diversify into stable markets that are
believed to be sustainable in the future. These include applications for
printing inks, graphic arts, paints, industrial coatings, flexographic printing,
plastic and agriculture. The dispersions are produced from organic intermediates
and inorganic chemicals, sourced domestically, as well as from Asia and Europe.
Redundant sources exist for most of the Company’s pigments bases. OP is known
for its higher solid and finer particle size dispersions that are especially
suited for non-textile applications.
In
2003
Synalloy Corporation entered into a Joint Development Agreement with the Felters
Group of Spartanburg, South Carolina to pursue the fire retardant market as
it
relates to mattress and bedding, upholstery, appliance and transportation
applications. Since that time, chemical formulations have been developed for
application on a variety of substrates and the Felters Group has directed sales
and marketing efforts toward these target markets. Products have been promoted
under the Felters Sleep Safe ™ brand name.
In
the
fourth quarter of 2006, SFR was established to oversee the product development,
production, quality assurance and technical servicing of the Segment’s fire
retardant products for promotion by the Felters Group. It is anticipated that
during 2007 a significant demand will develop for these products as the U.S.
Consumer Safety Commission Standards for fire retardant properties of mattresses
go into effect on July 1, 2007. The products will be produced at both the MC
and
BU Specialties locations. In addition, certain intumescent formulations will
be
produced by a subcontractor to support the anticipated demand. This business
is
currently being supported by one chemist, the V.P. of Operations of MC and
one
full-time sales employee.
The
Specialty Chemicals Segment maintains seven laboratories for applied research
and quality control which are staffed by 25 employees.
Most
raw
materials used by the Segment are generally available from numerous independent
suppliers while some raw material needs are met by a sole supplier or only
a few
suppliers. However, the Company anticipates no difficulties in obtaining its
requirements.
Please
see Note P to the Consolidated Financial Statements, which are included in
Item
8 of this Form 10-K, for financial information about the Company's
Segments.
Sales
and Distribution
Metals
Segment -
The
Metals Segment utilizes separate sales organizations for its different product
groups. Stainless steel pipe is sold nationwide under the Brismet trade name
through authorized stocking distributors at 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 the Vice President of Sales, two outside
sales employees, six independent manufacturers' representatives and nine inside
sales employees. The Metals Segment had one domestic customer (Hughes Supply,
Inc.) that accounted for approximately 15, 11 and 20 percent of the Metals
Segment’s revenues in 2006, 2005 and 2004, respectively, and approximately ten
and 13 percent of consolidated revenues in 2006 and 2004, respectively. The
Segment also had one domestic customer that accounted for approximately 14
percent of the Segment’s revenues in 2006, and less than ten percent for 2005
and 2004. Loss of either of these customers’ revenues would have a material
adverse effect on both the Metals Segment and the Company.
Piping
systems are sold nationwide under the Bristol Piping Systems trade name by
three
outside sales employees. They are under the direction of the President of
Bristol who spends a substantial amount of his time in sales and service to
customers. Piping systems 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.
Specialty
Chemicals Segment -
Specialty chemicals are sold directly to various industries nationwide by eight
full-time outside sales employees and five manufacturers' representatives.
In
the fourth quarter of 2005, the Segment hired an employee to manage the sales
and manufacturing operations of BU Specialties bringing over 30 years of
experience in the chemical industry. In addition, the President and other
members of the management team of MC devote a substantial part of their time
to
sales. The Specialty Chemicals Segment had one domestic customer that accounted
for approximately 13 percent of the Segment’s revenues in 2006 and 2005,
respectively, and less than ten percent for 2004. The Segment also had one
domestic customer that accounted for approximately 13 percent of the Segment’s
revenues in 2006, and less than ten percent for 2005 and 2004. Loss of either
of
these customers’ revenues would have a material adverse effect on the Specialty
Chemicals Segment.
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 one of the
largest domestic producers of such pipe. This commodity product is highly
competitive with eight known domestic producers and imports from many different
countries. The largest sales volume among the specialized products comes from
fabricating stainless, nickel alloys and chrome alloys piping systems.
Management believes the Company is one of the largest producers of such systems.
There is also significant competition in the piping systems markets with nine
known domestic suppliers with similar capabilities as Bristol, along with many
other smaller suppliers.
Specialty
Chemicals Segment -
The
Company is the sole producer of certain specialty chemicals manufactured for
other companies under processing agreements and also produces proprietary
specialty chemicals. The Company's sales of specialty 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. The market for pigments and dyes is
highly competitive and the Company has less than ten percent of the market
for
its products.
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
G to Consolidated Financial Statements, which are included in Item 8 of this
Form 10-K, for further discussion.
Research
and Development Activities
The
Company spent approximately $312,000 in 2006, $566,000 in 2005, and $551,000
in
2004 on research and development activities expensed in its Specialty Chemicals
Segment. Nine individuals, all 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
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.
Backlogs
The
Specialty Chemicals Segment operates primarily on the basis of delivering
products soon after orders are received. Accordingly, backlogs are not a factor
in these businesses. The same applies to commodity pipe sales in the Metals
Segment. However, backlogs are important in the piping systems products because
they are produced only after orders are received, generally as the result of
competitive bidding. Order backlogs for these products were $54,900,000 at
the
end of 2006, 80 percent of which should be completed in 2007, and $20,100,000
and $11,500,000 at the 2005 and 2004 respective year ends.
Employee
Relations
As
of
December 30, 2006, the Company had 437 employees. The Company considers
relations with employees to be satisfactory. The number of employees of the
Company represented by unions, all located at the Bristol, Tennessee facility,
is 232. They are represented by two locals affiliated with the AFL-CIO and
one
local affiliated with the Teamsters. Collective bargaining contracts will expire
in February 2009, December 2009 and March 2010.
Financial
Information about Geographic Areas
Information
about revenues derived from domestic and foreign customers is set forth in
Note
P to the Consolidated Financial Statements.
Item
1A Risk Factors
There
are
inherent risks and uncertainties associated with our business that could
adversely affect our operating performance and financial condition. Set forth
below are descriptions of those risks and uncertainties that we believe to
be
material, but the risks and uncertainties described are not the only risks
and
uncertainties that could affect our business. Reference should be made to
“Forward-looking Statements” above, and “Management's Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7 below.
The
cyclical nature of the industries in which our customers operate causes demand
for our products to be cyclical, creating uncertainty regarding future
profitability.
Various
changes in general economic conditions affect the industries in which our
customers operate. These changes include decreases in the rate of consumption
or
use of our customers’ products due to economic downturns. Other factors causing
fluctuation in our customers’ positions are changes in market demand, capital
spending, lower overall pricing due to domestic and international overcapacity,
lower priced imports, currency fluctuations, and increases in use or decreases
in prices of substitute materials. As a result of these factors, our
profitability has been and may in the future be subject to significant
fluctuation.
Product
pricing and raw material costs are subject to volatility, both of which may
have
an adverse effect on our revenues.
From
time-to-time, intense competition and excess manufacturing capacity in the
commodity stainless steel industry have resulted in reduced prices, excluding
raw material surcharges, for many of our stainless steel products sold by the
Metals Segment. These factors have had and may have an adverse impact on our
revenues, operating results and financial condition. Although inflationary
trends in recent years have been moderate, during the same period stainless
steel raw material costs, including surcharges on stainless steel, have been
volatile. While we are able to mitigate some of the adverse impact of rising
raw
material costs, such as passing through surcharges to customers, rapid increases
in raw material costs may adversely affect our results of operations. Surcharges
on stainless steel are also subject to rapid declines which can result in
similar declines in selling prices causing a possible marketability problem
on
the related inventory as well as negatively impacting revenues and
profitability. While there has been ample availability of raw materials, there
continues to be a significant consolidation of stainless steel suppliers
throughout the world which could have an impact on the cost and availability
of
stainless steel in the future. The ability to implement price increases is
dependent on market conditions, economic factors, raw material costs, including
surcharges on stainless steel, availability of raw materials, competitive
factors, operating costs and other factors, some of which are beyond our
control. In addition, to the extent that we have quoted prices to customers
and
accepted customer orders for products prior to purchasing necessary raw
materials, or have existing contracts, we may be unable to raise the price
of
products to cover all or part of the increased cost of the raw materials.
The
Specialty Chemicals Segment uses significant quantities of a variety of
specialty and commodity chemicals in its manufacturing processes which are
subject to price and availability fluctuations. Any significant variations
in
the cost and availability of our specialty and commodity materials may
negatively affect our business, financial condition or results of operations.
The raw materials we use are generally available from numerous independent
suppliers. However, some of our raw material needs are met by a sole supplier
or
only a few suppliers. If any supplier that we rely on for raw materials ceases
or limits production, we may incur significant additional costs, including
capital costs, in order to find alternate, reliable raw material suppliers.
We
may also experience significant production delays while locating new supply
sources. Purchase prices and availability of these critical raw materials are
subject to volatility. Some of the raw materials used by this Segment are
derived from petrochemical-based feedstocks, such as crude oil and natural
gas,
which have been subject to historical periods of rapid and significant movements
in price. These fluctuations in price could be aggravated by factors beyond
our
control
such as political instability, and supply and demand factors, including OPEC
production quotas and increased global demand for petroleum-based products.
At
any given time we may be unable to obtain an adequate supply of these critical
raw materials on a timely basis, on price and other terms acceptable, or at
all.
If suppliers increase the price of critical raw materials, we may not have
alternative sources of supply. We selectively pass changes in the prices of
raw
materials to our customers from time-to-time. However, we cannot always do
so,
and any limitation on our ability to pass through any price increases could
affect our financial performance.
We
rely
upon third parties for our supply of energy resources consumed in the
manufacture of our products in both of our Segments. The prices for and
availability of electricity, natural gas, oil and other energy resources are
subject to volatile market conditions. These market conditions often are
affected by political and economic factors beyond our control. Disruptions
in
the supply of energy resources could temporarily impair the ability to
manufacture products for customers. Further, increases in energy costs that
cannot be passed on to customers, or changes in costs relative to energy costs
paid by competitors, has and may continue to adversely affect our profitability.
We
encounter significant competition in all areas of our businesses and may be
unable to compete effectively which could result in reduced profitability and
loss of market share.
We
actively compete with companies producing the same or similar products and,
in
some instances, with companies producing different products designed for the
same uses. We encounter competition from both domestic and foreign sources
in
price, delivery, service, performance, product innovation and product
recognition and quality, depending on the product involved. For some of our
products, our competitors are larger and have greater financial resources and
less debt than we do. As a result, these competitors may be better able to
withstand a change in conditions within the industries in which we operate,
a
change in the prices of raw materials or a change in the economy as a whole.
Our
competitors can be expected to continue to develop and introduce new and
enhanced products and more efficient production capabilities, which could cause
a decline in market acceptance of our products. Current and future consolidation
among our competitors and customers also may cause a loss of market share as
well as put downward pressure on pricing. Our competitors could cause a
reduction in the prices for some of our products as a result of intensified
price competition. Competitive pressures can also result in the loss of major
customers. If we cannot compete successfully, our business, financial condition
and consolidated results of operations could be adversely affected.
The
applicability of numerous environmental laws to our manufacturing facilities
could cause us to incur material costs and liabilities.
We are
subject to federal, state, and local environmental, safety and health laws
and
regulations concerning, among other things, emissions to the air, discharges
to
land and water and the generation, handling, treatment and disposal of hazardous
waste and other materials. Under certain environmental laws, we can be held
strictly liable for hazardous substance contamination of any real property
we
have ever owned, operated or used as a disposal site. We are also required
to
maintain various environmental permits and licenses, many of which require
periodic modification and renewal. Our operations entail the risk of violations
of those laws and regulations, and we cannot assure you that we have been or
will be at all times in compliance with all of these requirements. In addition,
these requirements and their enforcement may become more stringent in the
future. Although we cannot predict the ultimate cost of compliance with any
such
requirements, the costs could be material. Non-compliance could subject us
to
material liabilities, such as government fines, third-party lawsuits or the
suspension of non-compliant operations. We also may be required to make
significant site or operational modifications at substantial cost. Future
developments also could restrict or eliminate the use of or require us to make
modifications to our products, which could have a significant negative impact
on
our results of operations and cash flows. At any given time, we are involved
in
claims, litigation, administrative proceedings and investigations of various
types involving potential environmental liabilities, including cleanup costs
associated with hazardous waste disposal sites at our facilities. We cannot
assure you that the resolution of these environmental matters will not have
a
material adverse effect on our results of operations or cash flows. The ultimate
costs and timing of environmental liabilities are difficult to predict.
Liability under environmental laws relating to contaminated sites can be imposed
retroactively and on a joint and several basis. We could incur significant
costs, including cleanup costs, civil or criminal fines and sanctions and
third-party claims, as a result of past or future violations of, or liabilities
under, environmental laws. For additional information related to environmental
matters, see Note G to the Consolidated Financial Statements.
We
are dependent upon the continued safe operation of our production facilities
which are subject to a number of hazards.
In our
Specialty Chemicals Segment, these production facilities are subject to hazards
associated with the manufacture, handling, storage and transportation of
chemical materials and products, including leaks and
ruptures,
explosions, fires, inclement weather and natural disasters, unscheduled downtime
and environmental hazards which could result in liability for workplace injuries
and fatalities. In addition, some of our production facilities are highly
specialized, which limits our ability to shift production to other facilities
in
the event of an incident at a particular facility. If a production facility,
or
a critical portion of a production facility, were temporarily shut down, we
likely would incur higher costs for alternate sources of supply for our
products. We cannot assure you that we will not experience these types of
incidents in the future or that these incidents will not result in production
delays or otherwise have a material adverse effect on our business, financial
condition or results of operations.
Certain
of our employees in the Metals Segment are covered by collective bargaining
agreements, and the failure to renew these agreements could result in labor
disruptions and increased labor costs.
We have
232 employees represented by unions at the Bristol, Tennessee facility which
is
53 percent of our total employees. They are represented by two locals affiliated
with the AFL-CIO and one local affiliated with the Teamsters. Collective
bargaining contracts will expire in February 2009, December 2009 and March
2010.
Although we believe that our present labor relations are satisfactory, our
failure to renew these agreements on reasonable terms as the current agreements
expire could result in labor disruptions and increased labor costs, which could
adversely affect our financial performance.
The
limits imposed on us by the restrictive covenants contained in our credit
facilities could prevent us from obtaining adequate working capital, making
acquisitions or capital improvements, or cause us to lose access to our
facilities.
Our
existing credit facilities contain restrictive covenants that limit our ability
to, among other things, borrow money or guarantee the debts of others, use
assets as security in other transactions, make investments or other restricted
payments or distributions, change our business or enter into new lines of
business, and sell or acquire assets or merge with or into other companies.
In
addition, our credit facilities require us to meet financial ratios which could
limit our ability to plan for or react to market conditions or meet
extraordinary capital needs and could otherwise restrict our financing
activities. Our ability to comply with the covenants and other terms of our
credit facilities will depend on our future operating performance. If we fail
to
comply with such covenants and terms, we will be in default and the maturity
of
the related debt could be accelerated and become immediately due and payable.
We
may be required to obtain waivers from our lender in order to maintain
compliance under our credit facilities, including waivers with respect to our
compliance with certain financial covenants. If we are unable to obtain any
necessary waivers and the debt under our credit facilities is accelerated,
our
financial condition would be adversely affected.
We
may
not have access to capital in the future. We may need new or additional
financing in the future to expand our business or refinance existing
indebtedness. If we are unable to access capital on satisfactory terms and
conditions, we may not be able to expand our business or meet our payment
requirements under our existing credit facilities. Our ability to obtain new
or
additional financing will depend on a variety of factors, many of which are
beyond our control. We may not be able to obtain new or additional financing
because we may have substantial debt or because we may not have sufficient
cash
flow to service or repay our existing or future debt. In addition, depending
on
market conditions and our financial performance, equity financing may not be
available on satisfactory terms or at all.
Our
existing property and liability insurance coverages contain exclusions and
limitations on coverage. We
have
maintained various forms of insurance, including insurance covering claims
related to our properties and risks associated with our operations. From
time-to-time, in connection with renewals of insurance, we have experienced
additional exclusions and limitations on coverage, larger self-insured
retentions and deductibles and higher premiums, primarily from our Specialty
Chemicals operations. As a result, in the future our insurance coverage may
not
cover claims to the extent that it has in the past and the costs that we incur
to procure insurance may increase significantly, either of which could have
an
adverse effect on our results of operations.
We
believe that we must continue to enhance our existing products and to develop
and manufacture new products with improved capabilities in order to continue
to
be a market leader.
We also
believe that we must continue to make improvements in our productivity in order
to maintain our competitive position. When we invest in new technologies,
processes, or production capabilities, we face risks related to construction
delays, cost over-runs and unanticipated technical difficulties. Our inability
to anticipate, respond to or utilize changing technologies could have a material
adverse effect on our business and our consolidated results of operations.
Our
strategy of using acquisitions and dispositions to position our businesses
may
not always be successful.
We have
historically utilized acquisitions and dispositions in an effort to
strategically position our businesses and
improve
our ability to compete. We plan to continue to do this by seeking specialty
niches, acquiring businesses complementary to existing strengths and continually
evaluating the performance and strategic fit of our existing business units.
We
consider acquisition, joint ventures, and other business combination
opportunities as well as possible business unit dispositions. From time-to-time,
management holds discussions with management of other companies to explore
such
opportunities. As a result, the relative makeup of the businesses comprising
our
Company is subject to change. Acquisitions, joint ventures, and other business
combinations involve various inherent risks, such as: assessing accurately
the
value, strengths, weaknesses, contingent and other liabilities and potential
profitability of acquisition or other transaction candidates; the potential
loss
of key personnel of an acquired business; our ability to achieve identified
financial and operating synergies anticipated to result from an acquisition
or
other transaction; and unanticipated changes in business and economic conditions
affecting an acquisition or other transaction.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements.
Also,
projections of any evaluation of effectiveness to future periods are subject
to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Item
1B Unresolved Staff Comments
Not
applicable.
Item
2 Properties
The
Company operates the major plants and facilities listed below, all of which
are
in adequate condition for their current usage. All facilities throughout the
Company are adequately insured. The buildings are of various types of
construction including brick, steel, concrete, concrete block and sheet metal.
All have adequate transportation facilities for both raw materials and finished
products. The Company owns all of these plants and facilities, except the dye
blending and warehouse facilities located in Dalton, Ga.
|
Location
|
Principal
Operations
|
Building
Square Feet
|
Land
Acres
|
|
Spartanburg,
SC
|
Corporate
headquarters; Chemical manufacturing and warehouse
facilities
|
211,000
|
60.9
|
|
Cleveland,
TN
|
Chemical
manufacturing
|
90,000
|
8.6
|
|
Bristol,
TN
|
Manufacturing
of stainless steel pipe and stainless steel piping systems
|
218,000
|
73.1
|
|
Dalton,
GA
|
Dye
blending and warehouse facilities (1)
|
32,000
|
2.0
|
|
Augusta,
GA
|
Chemical
manufacturing (2)
|
5,000
|
46.0
|
(1)
Leased
facility.
(2)
Plant
was closed in 2001 and all manufacturing equipment has been
removed.
Item
3 Legal Proceedings
For
a
discussion of legal proceedings, see Notes G and N to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
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 Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
The
Company had 895 common shareholders of record at March 8, 2007. The Company's
common stock trades on the NASDAQ Global Market under the trading symbol SYNL.
On December 13, 2005, the Company entered into a new credit agreement which
allows the payment of dividends replacing the prior facility which prohibited
their payment. No dividends were paid in 2005 or 2006. On February 8, 2007,
the
Company's Board of Directors voted to pay a $.15 cash dividend which was paid
on
March 15, 2007. The prices shown below are the high and low sales prices for
the
common stock for each full quarterly period in the last two fiscal years as
quoted on the NASDAQ Global Market.
|
2006
|
2005
|
||||||||||||
|
Quarter
|
High
|
Low
|
High
|
Low
|
|||||||||
|
1st
|
$
|
15.00
|
$
|
10.38
|
$
|
10.57
|
$
|
9.10
|
|||||
|
2nd
|
15.13
|
11.40
|
12.34
|
9.43
|
|||||||||
|
3rd
|
15.40
|
12.39
|
11.64
|
9.27
|
|||||||||
|
4th
|
18.90
|
13.36
|
11.25
|
9.20
|
|||||||||
The
information required by Item 201(d) of Regulation S-K is set forth under Part
III, Item 12 of this Form 10-K.
Pursuant
to the compensation arrangement with directors discussed under Item 12 "Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters" in this Form 10-K, on April 27, 2006, the Company issued to each of
its
directors, except Ron Braam, 1,201 shares of its common stock (an aggregate
of
6,005 shares). During the fourth quarter ended December 30, 2006, the Registrant
issued shares of common stock to the following classes of persons upon the
exercise of options issued pursuant to the Registrant's 1988 Stock Option Plan
and 1994 Non-Employee Directors’ Plan. Issuance of these shares was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933 because
the
issuance did not involve a public offering.
|
Date
Issued
|
Class
of Purchasers
|
Number
of Shares Issued
|
Aggregate
Exercise Price
|
|||||||
|
12/6/2006
|
Directors
|
12,750
|
$
|
94,163
|
||||||
|
12,750
|
$
|
94,163
|
||||||||
|
Issuer
Purchases of Equity Securities
|
Total
Number
|
Maximum
Number
|
|||||||||||
|
of
Shares
|
of
Shares
|
||||||||||||
|
Purchased
as
|
that
may yet be
|
||||||||||||
|
Average
|
Part
of Publically
|
Purchased
Under
|
|||||||||||
|
Year
Ended 2006
|
Total
Number
|
Price
Paid
|
Announced
|
the
Plans
|
|||||||||
|
For
the Period
|
of
Shares (1)
|
per
Share (1)
|
Plans
or Programs
|
or
Programs
|
|||||||||
|
10-1
to 10-28
|
-
|
-
|
-
|
-
|
|||||||||
|
10-29
to 11-25
|
-
|
-
|
-
|
-
|
|||||||||
|
11-26
to 12-30
|
5,234
|
$
|
17.99
|
-
|
-
|
||||||||
|
Total
|
5,234
|
$
|
17.99
|
-
|
-
|
||||||||
|
(1)
This column reflects the surrender of previously owned shares of
common
stock to pay the exercise price in connection
|
|||||||||||||
|
with
the exercise of stock options.
|
|||||||||||||
Item
6 Selected Financial Data
(Dollar
amounts in thousands except for per share data)
|
Selected
Financial Data and Other Financial Information
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Operations
|
||||||||||||||||
|
Net
sales
|
$
|
152,047
|
$
|
131,408
|
$
|
101,602
|
$
|
80,408
|
$
|
74,351
|
||||||
|
Gross
profit
|
22,724
|
16,781
|
13,976
|
8,389
|
6,174
|
|||||||||||
|
Selling,
general & administrative expense
|
10,562
|
10,369
|
9,432
|
8,177
|
8,001
|
|||||||||||
|
Asset
impairment & environmental costs
|
-
|
-
|
-
|
490
|
481
|
|||||||||||
|
Operating
income (loss)
|
12,757
|
6,412
|
4,544
|
(278
|
)
|
(2,308
|
)
|
|||||||||
|
Net
income (loss) continuing operations
|
7,608
|
5,147
|
2,274
|
(580
|
)
|
(1,633
|
)
|
|||||||||
|
Net
loss discontinued operations
|
-
|
(51
|
)
|
(1,100
|
)
|
(840
|
)
|
(2,975
|
)
|
|||||||
|
Net
income (loss)
|
7,608
|
5,096
|
1,174
|
(1,421
|
)
|
(4,843
|
)
|
|||||||||
|
Financial
Position
|
||||||||||||||||
|
Total
assets
|
89,357
|
70,982
|
71,202
|
64,925
|
59,966
|
|||||||||||
|
Working
capital
|
46,384
|
28,664
|
35,088
|
28,706
|
20,060
|
|||||||||||
|
Long-term
debt, less current portion
|
17,731
|
8,091
|
21,205
|
18,761
|
10,000
|
|||||||||||
|
Shareholders'
equity
|
47,127
|
39,296
|
33,930
|
32,556
|
33,874
|
|||||||||||
|
Financial
Ratios
|
||||||||||||||||
|
Current
ratio
|
3.4
|
2.5
|
3.8
|
3.5
|
2.5
|
|||||||||||
|
Gross
profit to net sales
|
15
|
%
|
13
|
%
|
14
|
%
|
10
|
%
|
8
|
%
|
||||||
|
Long-term
debt to capital
|
27
|
%
|
17
|
%
|
38
|
%
|
37
|
%
|
23
|
%
|
||||||
|
Return
on average assets
|
9
|
%
|
7
|
%
|
3
|
%
|
-
|
-
|
||||||||
|
Return
on average equity
|
18
|
%
|
14
|
%
|
7
|
%
|
-
|
-
|
||||||||
|
Per
Share Data (income/(loss) - diluted)
|
||||||||||||||||
|
Net
income (loss) continuing operations
|
$
|
1.22
|
$
|
.84
|
$
|
.37
|
$
|
(.10
|
)
|
$
|
(.27
|
)
|
||||
|
Net
loss discontinued operations
|
-
|
(.01
|
)
|
(.18
|
)
|
(.14
|
)
|
(.50
|
)
|
|||||||
|
Net
income (loss)
|
1.22
|
.83
|
.19
|
(.24
|
)
|
(.81
|
)
|
|||||||||
|
Book
value
|
7.68
|
6.43
|
5.64
|
5.44
|
5.68
|
|||||||||||
|
Other
Data
|
||||||||||||||||
|
Depreciation
and amortization
|
$
|
2,672
|
$
|
2,862
|
$
|
3,068
|
$
|
2,976
|
$
|
2,981
|
||||||
|
Capital
expenditures
|
$
|
3,092
|
$
|
3,246
|
$
|
2,313
|
$
|
1,325
|
$
|
2,035
|
||||||
|
Employees
at year end
|
437
|
434
|
442
|
470
|
406
|
|||||||||||
|
Shareholders
of record at year end
|
897
|
935
|
1,009
|
1,039
|
1,082
|
|||||||||||
|
Average
shares outstanding - diluted
|
6,234
|
6,139
|
6,142
|
5,997
|
5,964
|
|||||||||||
|
Stock
Price
|
||||||||||||||||
|
Price
range of common stock
|
||||||||||||||||
|
High
|
$
|
18.90
|
$
|
12.34
|
$
|
10.75
|
$
|
8.54
|
$
|
5.05
|
||||||
|
Low
|
10.38
|
9.10
|
6.52
|
3.96
|
1.69
|
|||||||||||
|
Close
|
18.54
|
10.46
|
9.90
|
6.92
|
4.13
|
|||||||||||
Item
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Critical
Accounting Policies and Estimates
Management's
Discussion and Analysis of Financial Condition and Results of Operations
discusses the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and the disclosure of contingent assets and liabilities at the
date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments based on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
value
of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in the
preparation of the Company's consolidated financial statements.
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If
the
financial condition of any of the customers of the Company were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
The
Company writes down its inventory for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory
and
the estimated market value based upon assumptions about future demand and
current market conditions. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
As
noted
in Note G to the Consolidated Financial Statements included in Item 8 of this
Form 10-K, the Company has accrued $842,000 in environmental remediation costs
which, in management's best estimate, are expected to satisfy anticipated costs
of known remediation requirements as outlined in Note G. However, as a result
of
the evolving nature of the environmental regulations, the difficulty in
estimating the extent and necessary remediation 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. Changes in
information known to management or in applicable regulations may require the
Company to record additional remediation reserves.
As
noted
in Notes B and S to the Consolidated Financial Statements included in Item
8 of
this Form 10-K, the Company recorded asset impairment charges under SFAS 144
in
2004 including a $581,000 charge in 2004 as part of the loss recognized for
discontinued operations. Based on assessments performed in 2006 on the
continuing assets of the Company, which indicated no write-downs were deemed
necessary, the Company believes that it is unlikely that these types of
impairment charges will continue to occur with respect to its existing assets.
However, if business conditions at any of the plant sites were to deteriorate
to
an extent where cash flows and other impairment measurements indicated values
for the related long-lived assets were less than the carrying values of those
assets, additional impairment charges could be necessary.
Liquidity
and Capital Resources
Cash
flows used in operations during 2006 totaled $7,842,000. This compares to cash
flows provided by operations during 2005 of $15,425,000, of which $11,443,000
was provided by continuing operations and $3,982,000 was provided by
discontinued operations. As a result, cash flows from 2006 continuing operations
decreased $19,285,000 from the 2005 amount. After declining $1,868,000 in 2005,
the Company’s inventories increased $17,063,000 from 2005 year end to 2006 year
end. Almost all of the increase was in the Metals Segment primarily as a result
of the significant increase in cost from stainless steel surcharges discussed
below coupled with the need to maintain higher inventory levels to accommodate
the higher demand for its products and the desire to keep large inventories
in a
rising price environment. The inventory on hand at 2006 year end is carried
on
the books at costs substantially lower than current prices. The inventory
decline in 2005 was primarily the result of the Metals Segment completing a
planned reduction of inventory units which resulted in the net reduction in
inventory dollars at 2005 year end. Accounts receivable increased $881,000
in
2006 compared to increasing $7,825,000 in 2005. The increases resulted primarily
from the significant improvement in sales experienced in both 2006, up 16
percent, and 2005, up 29 percent, over prior year amounts, as both operating
Segments responded to rising raw material and operating costs with higher
selling prices, coupled with selling more unit volumes. Accounts payable
increased $584,000 in 2006 compared to an increase of $3,105,000 in 2005. Both
increases resulted primarily from increases in the costs of raw materials
discussed above combined with the timing of the receipt of and payment for
stainless steel raw materials by the Metals Segment in 2006 compared to 2005.
The year-to-year reduction in cash flows also resulted from the receipt of
$4,483,000 at the end of 2005 from the anti-dumping settlement, of which
$1,866,000 was paid out in January 2006, discussed in the Results of Operations
below. Also contributing to the year-to-year reduction in cash flows was
$3,982,000 of cash flows provided by discontinued operations in 2005 which
were
derived from declines in accounts receivable and inventories offset by a
decrease in accounts payable. The cash flows were generated from the
liquidation of net assets related to
the sale
of the Company’s dye business at the end of 2004 as discussed in the
Discontinued Operations discussion below. Cash flows were positively impacted
in
2006 by net income from continuing operations of $10,280,000 before depreciation
and amortization expense of $2,672,000 compared to $8,009,000
generated
in 2005. The net effect of the items described above was to increase current
assets by $18,555,000, which also caused working capital for 2006 to increase
by
$17,720,000 to $46,384,000 from the amount in 2005. The current ratio for the
year ended December 30, 2006, also increased to 3.4:1 from the 2005 year-end
ratio of 2.5:1.
The
Company utilized its line of credit facility to fund its working capital needs
and fund capital expenditures of $3,092,000 as borrowings increased $9,641,000
in 2006. The Company expects that cash flows from 2007 operations and available
borrowings will be sufficient to make debt payments, fund estimated capital
expenditures of $5,600,000 and normal operating requirements, and pay a dividend
of $.15 per share on March 15, 2007 for a cash payment of $927,000. On December
13, 2005, the Company entered into a Credit Agreement with a lender to provide
a
$27,000,000 line of credit that expires on December 31, 2010, and refinanced
the
Company’s existing bank indebtedness. The Agreement provides for a revolving
line of credit of $20,000,000, which includes a $5,000,000 sub-limit for
swing-line loans that requires additional pre-approval by the bank, and a
five-year $7,000,000 term loan requiring equal quarterly payments of $117,000
with a balloon payment at the expiration date. Borrowings under the revolving
line of credit are limited to an amount equal to a borrowing base calculation
that includes eligible accounts receivable, inventories, and cash surrender
value of the Company’s life insurance as defined in the Agreement. As of
December 30, 2006, the amount available for borrowing was $15,000,000, of which
$11,665,000 was borrowed, leaving $3,335,000 of availability. Borrowings under
the Credit Agreement are collateralized by substantially all of the assets
of
the Company. At December 30, 2006, the Company was in compliance with its debt
covenants which include, among others, maintaining certain EBITDA, fixed charge
and tangible net worth ratios and amounts. As a result of normal operations
and
planned reductions of inventories in the first quarter of 2007, the Company
reduced its long term debt by approximately 40 percent from the 2006 year end
balance.
Results
of Operations
Comparison
of 2006 to 2005
The
Company generated net income of $7,608,000, or $1.22 per share, on a 16 percent
increase in net sales to $152,047,000. This compares to net income of
$5,096,000, or $.83 per share, on a 29 percent increase in net sales to
$131,408,000 in 2005. For the fourth quarter of 2006, the Company had net income
of $3,003,000, or $.48 per share, on a 12 percent increase in net sales to
$40,059,000, compared to net income for the fourth quarter of 2005 of
$2,081,000, or $.34 per share, on a 45 percent increase in net sales to
$35,922,000. The improvement in net earnings before the special items discussed
below was even more impressive. Included in net earnings for the fiscal year
ending December 30, 2006, was an after tax gain from the sale of property and
plant, net of relocation costs, of $378,000, or $.06 per share which was
recorded in the first nine months. Included in the fourth quarter 2005 results
is a one time pre-tax gain of $2,542,000 from the settlement of an anti-dumping
lawsuit against certain foreign importers of stainless steel, partially offset
by an $840,000 pre-tax loss from the write-off of an investment in a Chinese
pigment plant and a $300,000 pre-tax environmental charge, resulting in an
increase to net earnings of $994,000, or $.16 per share for the year and fourth
quarter of 2005. In 2005, the Company also recorded a net loss from discontinued
operations of $51,000, or $.01 per share, for the year and none for the
quarter.
Consolidated
gross profits increased 35 percent or $5,943,000 to $22,724,000 in 2006 compared
to 2005, and as a percent of sales increased two percent to 15 percent of sales
in 2006 compared to 2005. Most of the increase in dollars and increase in
percentage of sales came from the Metals Segment as discussed in the Segment
comparisons below. Consolidated selling, general and administrative expense
for
2006 increased by $193,000 compared to 2005, but declined as a percent of sales
to seven percent in 2006 compared to eight percent in 2005. The dollar increase
came primarily from a combination of profit incentives offset by the recording
in 2005 of environmental charges discussed in Comparison of Corporate Expenses
below.
Consolidated
operating results for 2006 were impacted by the completion of the relocation
of
Organic Pigments’ operations from Greensboro, NC to Spartanburg in the first
quarter of 2006. A $213,000 loss was recorded for the move in the first quarter
of 2006. The Greensboro plant was sold in August of 2006 for a sales price
of
$811,000 and a pre-tax gain of $596,000 was recorded in the third quarter of
2006.
Consolidated
operating results for 2005 were significantly impacted by several transactions
that were recorded during the fourth quarter of 2005. In December of 2005,
the
Company, along with several other domestic stainless steel pipe producers,
received funds from the settlement of an anti-dumping duty order against a
foreign producer and importer of stainless steel pipe issued under the Continued
Dumping and Subsidy Offset Act. The order covered the period from June 22,
1992
to November 30, 1994. As a result the Company recorded a gain of
$2,542,000.
The Company’s OP subsidiary has an $840,000 note receivable from an affiliated
company in which OP owns 45 percent. The affiliated company has as its primary
asset a minority investment in a Chinese pigment plant under a joint venture
agreement that expires in 2008 from which OP purchases some of its raw
materials. The joint venture had been profitable since 1998, but reported an
operating loss for 2005 and indicated that market and operating conditions
were
not expected to improve and anticipated incurring losses going forward. Based
on
the current and anticipated operating losses of the joint venture and other
factors the Company was able to ascertain, the likelihood that the affiliated
company would be able to repay the note receivable became unlikely. The
receivable was written off at December 31, 2005 and the $840,000 loss was
included in other expense. Included in unallocated corporate expense is a
$300,000 environmental accrual recorded at year end to provide for remediation
of ground contamination at the Company’s Augusta, Georgia plant which was closed
in 2001. Reference should be made to Notes B and G to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
Comparison
of 2005 to 2004
The
Company generated net income from continuing operations of $5,147,000, or $.84
per share, on a 29 percent increase in net sales to $131,408,000. This compares
to net income from continuing operations of $2,274,000, or $.37 per share,
on a
26 percent increase in net sales to $101,602,000 in 2004. For the fourth quarter
of 2005, the Company had net income from continuing operations of $2,081,000,
or
$.34 per share, on a 46 percent increase in net sales to $35,922,000, compared
to net income for the fourth quarter of 2004 of $714,000, or $.12 per share,
on
a 12 percent increase in net sales to $24,530,000. The Company recorded a net
loss from discontinued operations of $51,000, or $.01 per share, for both the
year and first six months of 2005, compared to net losses of $1,100,000, or
$.18
per share, and $673,000, or $.11 per share, for the year and fourth quarter
of
2004, respectively. As a result, the Company had net income of $5,096,000,
or
$.83 per share, compared to net income of $1,174,000, or $.19 per share, for
2004 and net income of $2,081,000, or $.34 per share, for the fourth quarter
of
2005 compared to net income of $40,000, or $.01 per share, for the fourth
quarter of 2004.
Consolidated
gross profits increased by $2,805,000 in 2005 compared to 2004, however as
a
percent of sales they declined one percent to 13 percent of sales in 2005
compared to 2004. Substantially all of the increase in profits came from the
Metals Segment and the decline as a percentage of sales came from the
Specialties Chemicals Segment as discussed in the Segment comparisons below.
Consolidated selling, general and administrative expense for 2005 increased
$937,000 to $10,369,000 compared to 2004, but declined as a percent of sales
to
eight percent in 2005 compared to nine percent in 2004. The dollar increase
came
primarily from a combination of profit incentives paid in the Metals Segment,
increased general insurance expense, and an increase in unallocated corporate
expenses and the recording of environmental charges discussed in Comparison
of
Corporate Expenses below.
Consolidated
operating results for 2005 were significantly impacted by the transactions
recorded during the fourth quarter of 2005 discussed above under “Comparison of
2006 to 2005.”
Metals
Segment-The
following table summarizes operating results and backlogs for the three years
indicated. Reference should be made to Note P to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
|
2006
|
2005
|
2004
|
||||||||||
|
(Amount
in thousands)
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||
|
Net
Sales
|
$102,822
|
100.0%
|
$
86,053
|
100.0%
|
$
63,958
|
100.0%
|
||||||
|
Cost
of goods sold
|
86,712
|
84.3%
|
74,744
|
86.9%
|
55,343
|
86.5%
|
||||||
|
Gross
profit
|
16,110
|
15.7%
|
11,309
|
13.1%
|
8,615
|
13.5%
|
||||||
|
Selling
and administrative
|
||||||||||||
|
expense
|
4,498
|
4.4%
|
4,494
|
5.2%
|
4,038
|
6.3%
|
||||||
|
Operating
income
|
$
11,612
|
11.3%
|
$
6,815
|
7.9%
|
$
4,577
|
7.2%
|
||||||
|
Year-end
backlogs -
|
||||||||||||
|
Piping
systems
|
$
54,900
|
$
20,100
|
$
11,500
|
|||||||||
Comparison
of 2006 to 2005 - Metals Segment
The
Metals Segment produced strong sales growth of 20 percent for the year and
18
percent for the fourth quarter of 2006 compared to the same periods a year
earlier. The increase for the year resulted from a combination of 18 percent
higher unit volumes and a two percent increase in average selling prices. The
increase
for
the
quarter resulted from a 21 percent increase in average selling prices partially
offset by a two percent decline in unit volumes. The Segment achieved a surge
in
gross profits of 43 percent for 2006 and 112 percent in the fourth quarter
compared to the same periods last year. The increase in unit volumes for the
year resulted partly from an increase in commodity pipe sales resulting from
recapturing market share beginning in the last quarter of 2005. However, the
largest portion of the increase was from much higher production of piping
systems for energy and water treatment customers. The slight decline in fourth
quarter 2006 unit volumes as compared with fourth quarter 2005 resulted from
an
unusually high level of commodity pipe sales in the fourth quarter of 2005
that
resulted from the aggressive program to recapture market share mentioned above.
The modest increase in selling prices for the year resulted from a more robust
increase in prices mostly offset by the change in product mix. The significant
increase in fourth quarter selling prices reflects the higher costs of stainless
steel, including surcharges, in the fourth quarter of 2006 compared to 2005’s
fourth quarter, coupled with a change in product mix. Surcharges are assessed
each month by the stainless steel producers to cover the change in their costs
of certain raw materials. The Company, in turn, passes on the surcharge in
the
sales prices charged to its customers. Under the Company’s first-in-first-out
inventory method, cost of goods sold is charged for the surcharges that were
in
effect three or more months prior to the month of sale. Accordingly, if
surcharges are in an upward trend, reported profits will benefit. Conversely,
when surcharges go down, profits are reduced. During the third and fourth
quarters of 2006, surcharges were significantly higher than they were in the
first six months with an accompanying significant benefit to profits. The fourth
quarter of 2005 also benefited from surcharges, but to a much lesser extent
than
2006. The significant increase in gross profits for 2006 resulted from a much
improved operating level in piping systems plus the good unit volume increase
in
pipe sales, partially offset by a lower surcharge benefit. The significant
increase in gross profit for the fourth quarter came from the increase in
selling prices and the significant benefit from rising surcharges.
The
improvement in sales and operating income reflects management’s successful
efforts to penetrate new markets for piping systems as well as pipe sales.
The
energy industry, including LNG and ethanol projects, together with waste water
treatment provided a small percentage of the Segment’s sales prior to 2005.
Although the Segment has benefited from regaining market share in commodity
pipe, these new sources generated much of the improvement in 2006 results.
With
these new industry segments comprising about 80 percent of the piping systems
backlog, management believes that it has differentiated the Segment from its
domestic competitors by having unique manufacturing capabilities that give
the
Segment a competitive advantage in pursuing non-commodity pipe sales as well
as
piping systems projects.
Selling
and administrative expense increased only $4,000, or .1 percent in 2006 when
compared to 2005, and as a result declined to four percent of sales in 2006
compared to five percent of sales in 2005. As a result of all of the factors
listed above, the Segment experienced significant sales and profit improvement
for the year compared to 2005, with operating income increasing 70 percent
for
the year and 185 percent in the fourth quarter of 2006 compared to the same
periods last year.
Comparison
of 2005 to 2004 - Metals Segment
The
Metals Segment accomplished noteworthy sales growth of 35 percent for the year
and 53 percent for the fourth quarter of 2005 compared to a year earlier. The
increases resulted from a combination of 33 percent and three percent higher
average selling prices and one percent and 49 percent higher unit volumes for
the year and fourth quarter, respectively. Gross profit for the Segment improved
$2,694,000, or 31 percent, and remained basically unchanged as a percent of
sales at 13.5 percent for 2005 compared to 13.8 percent in 2004. In the fourth
quarter of 2005 compared to 2004, gross profit increased $216,000 or nine
percent, but decreased 4.5 percent of sales to 11.3 percent from the fourth
quarter of 2004. During the first six months of 2005, surcharges paid on
stainless steel raw materials increased steadily and the Segment was able to
increase selling prices to pass on the increased costs. Because of the steadily
increasing raw material costs and selling prices experienced throughout 2004
and
the first half of 2005, the Segment generated higher profits from selling lower
cost inventories. However, because raw material costs and selling prices
stabilized in the second half of 2005, the profits realized from this source
in
the third and fourth quarters of 2005 were substantially less than profits
realized in 2004 as well as the first two quarters of 2005. The significant
increase in unit volume experienced in the fourth quarter came primarily from
commodity pipe sales as management focused on improving its market share of
commodity pipe. This change in product mix to a higher level of commodity pipe
also contributed to the lower margins experienced in the fourth quarter of
2005.
Sales of higher margin specialty alloy pipe improved steadily throughout 2005
as
unit volumes increased over the same quarter of the prior year for six
consecutive quarters starting in the third quarter of 2004. In addition, piping
systems benefited from its strong backlog as sales and profitability increased
each quarter in 2005 compared to the preceding quarter.
Selling
and administrative expense increased $456,000, or 11 percent in 2005 when
compared to 2004, but declined to five percent of sales in 2005 compared to
seven percent of sales in 2004. The increase in dollars came primarily from
increases in profit based incentives, sales commissions from increased sales,
and an increase in general insurance expense. As a result of all of the factors
listed above, the Segment experienced significant sales and profit improvement
for 2005 compared to 2004, as the Segment achieved a 49 percent increase in
operating income for 2005 and a seven percent increase in the fourth quarter
compared to the same periods in 2004.
Specialty
Chemicals Segment-The
following tables summarize operating results for the three years indicated.
Reference should be made to Note P to the Consolidated Financial Statements
included in Item 8 of this Form 10-K.
|
2006
|
2005
|
2004
|
||||||||||
|
(Amount
in thousands)
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||
|
Net
sales
|
$
49,225
|
100.0%
|
$
45,355
|
100.0%
|
$
37,644
|
100.0%
|
||||||
|
Cost
of goods sold
|
42,641
|
87.6%
|
39,883
|
87.9%
|
32,283
|
85.8%
|
||||||
|
Gross
profit
|
6,614
|
13.4%
|
5,472
|
12.1%
|
5,361
|
14.2%
|
||||||
|
Selling
and administrative
|
||||||||||||
|
Expense
|
3,970
|
8.1%
|
3,833
|
8.5%
|
3,822
|
10.1%
|
||||||
|
Operating
income
|
$
2,644
|
5.3%
|
$
1,639
|
3.6%
|
$
1,539
|
4.1%
|
||||||
Comparison
of 2006 to 2005 - Specialty Chemicals Segment
The
Specialty Chemicals Segment sales increased nine percent for the year ended
2006
and gross profit increased a more dramatic 21 percent to $6,614,000 compared
to
$5,472,000 for 2005, and increased to 13 percent of sales for the year compared
to 12 percent a year ago. A modest sales decline of three percent in the fourth
quarter of 2006 was overshadowed by a 27 percent increase in gross profits
to
$1,483,000 for the quarter compared to $1,166,000 for the same period of 2005.
The
increase in revenues for the year resulted primarily from adding several new
products during the first three quarters of 2006, a significant increase in
demand for one of our contract manufacturing products, and increased selling
prices to pass on higher energy related costs. The minor decline in fourth
quarter revenues resulted from the normal fluctuation in demand from
quarter-to-quarter. The Segment completed the relocation of its pigment
operations from Greensboro, NC to Spartanburg, SC at the end of the first
quarter of 2006 and benefited from the improved efficiency resulting from the
consolidation of the two operations throughout the rest of the year. The
combination of the cost savings from the relocation and increase in revenues
produced the profit improvement for the year. The significant improvement in
profit experienced in the fourth quarter resulted from the cost savings in
2006
and the impact on the fourth quarter of 2005 earnings at
the
Spartanburg plant related to costs of developing new products and upgrading
of
the staff in expectation of higher production levels in 2006.
Selling
and administrative expense increased $137,000 or four percent in 2006 compared
to 2005, but declined as
a
percent of sales to eight percent in 2006 compared to nine percent in 2005.
The
dollar increase resulted primarily from profit based incentives. As
a
result of the factors discussed above, operating income increased 61 percent
to
$2,644,000 compared to $1,639,000 for 2005. In the fourth quarter of 2006
operating income increased 135 percent to $622,000 for the quarter compared
to
$265,000 for the same period of 2005.
Comparison
of 2005 to 2004 - Specialty Chemicals Segment
The
Specialty Chemicals Segment produced strong sales growth of 20 percent and
33
percent for the year and fourth quarter of 2005, respectively. Gross profit
for
the Segment improved $111,000, or two percent, but decreased as a percent of
sales two percent to 12 percent from 2004’s percentage. In the fourth quarter of
2005 compared to 2004, gross profit increased $191,000 or 20 percent, and
decreased as a percent of sales one percent to 10 percent from the fourth
quarter of 2004. The Segment experienced favorable business conditions
throughout 2005 as demand for its products remained strong. The profit
improvement for the year did not keep pace with the sales growth because of
increased raw material and operating costs resulting primarily from the increase
in crude oil prices negatively impacting oil-based raw material costs and
utility and transportation costs. Although the Segment implemented selling
price
increases throughout the year, it was unable to increase prices consistent
with
the increases in manufacturing costs, which caused an erosion of gross profits.
Also impacting profitability was the effect of changes in product mix and
expenses, including contract tolling, at the Spartanburg
plant
related to new products and upgrading of the staff in expectation of higher
production levels in 2006. The Spartanburg location lost a high margin tolling
contract in 2005 that also reduced profitability at the plant. Although the
Segment was able to add several new contracts in Spartanburg during the fourth
quarter of 2005, they were not placed in production long enough to offset the
lost profits.
Selling
and administrative expense remained relatively flat in 2005 compared to 2004,
and declined as a percent of sales to nine percent in 2005 compared to ten
percent in 2004 resulting from management’s efforts to maintain an even level of
sales and administrative expense to offset the higher manufacturing costs the
Segment was experiencing. Management was pleased with the overall performance
of
the Segment, considering the negative impact of steadily rising raw material
and
operating costs experienced throughout 2005, as operating
income increased slightly to $1,639,000 and $265,000 for the year and fourth
quarter of 2005, respectively, compared to $1,539,000 and $134,000 for the
same
periods of 2004.
For
information related to environmental matters, see Note G to the Consolidated
Financial Statements included in Item 8 of this Form 10-K.
Discontinued
Operations
On
March
25, 2004, the Company entered into an agreement to sell its liquid dye business
composed of vat, sulfur, liquid disperse and liquid reactive dyes, which had
annual sales of approximately $4,500,000, for approximately its net book value,
and several customers and related products of the remaining textile dye business
were rationalized. Business conditions in the remaining dye business were poor
throughout 2004, especially in the first six months, as BU Colors (a newly
formed subsidiary of the Company called Blackman Uhler, LLC) experienced
operating losses in every quarter of 2004. In the third quarter of 2004, the
Company decided to attempt to sell the remaining dye business and on December
28, 2004, entered into a purchase agreement to sell the dye business. The
transaction closed on January 31, 2005. The terms included the sale of the
inventory of BU Colors along with certain equipment and other property
associated with the business being sold, and the licensing of certain
intellectual property, for a purchase price of approximately $4,872,000, of
which $4,022,000 was paid at closing, and the balance of $850,000 was to be
paid
over time based on the operations of the purchaser. On January 17, 2006, the
Company and the purchaser amended the purchase agreement replacing the periodic
purchase price payments with a one-time payment of $400,000, which was received
on January 18, 2006, and was reclassified to a current note receivable in the
financial statements at December 31, 2005. As a result of the sale of the dye
business in 2004, the Company has discontinued the operations of BU Colors
and
has presented the financial information of BU Colors as discontinued operations.
In December of 2004, the Company completed an impairment assessment in
accordance with FAS No. 144, on the plant and equipment located at the
Spartanburg facility related to the BU Colors operations. As a result, the
Company recognized an impairment charge of $581,000 from the write-down of
plant
and equipment. Reference should be made to Notes B and S to the Consolidated
Financial Statements included in Item 8 of this Form 10-K.
Unallocated
Income and Expense
Reference
should be made to Note P to the Consolidated Financial Statements, included
in
Item 8 of this Form 10-K, for the schedule that includes these
items.
Comparison
of 2006 to 2005 - Corporate
Corporate
expense increased $52,000, or three percent, to $2,094,000 for 2006 compared
to
2005. The increase resulted primarily from increased management incentives
offset by environmental expenses of $360,000, compared to $719,000 in 2005.
Environmental expense for 2005 includes accrued environmental remediation costs
of $311,000 at the Spartanburg facility and $300,000 at the Augusta facility,
closed in 2001. Reference should be made to Note G to the Consolidated Financial
Statements included in Item 8 of this Form 10-K. Interest expense in 2006
decreased $126,000 from 2005 as a result of decreases in borrowings offset
by
increases in the LIBOR interest rate under the lines of credit with a
lender.
Comparison
of 2005 to 2004 - Corporate
Corporate
expense increased $470,000, or 30 percent, to $2,042,000 for 2005 compared
to
2004. The increase resulted primarily from environmental expenses of $719,000,
compared to $572,000 in 2004, which includes accruing environmental remediation
costs of $311,000 at the Spartanburg facility and $300,000 at the Augusta
facility, closed in 2001. Reference should be made to Note G to the Consolidated
Financial Statements included in Item 8 of this Form 10-K. Also contributing
to
the increase were increased professional fees and general
insurance
expenses. Interest expense in 2005 decreased $147,000 from 2004 as a result
of
decreases in borrowings offset by increases in the prime interest rate under
the
lines of credit with a lender.
Contractual
Obligations and Other Commitments
As
of
December 30, 2007, contractual obligations and other commitments were as
follows:
|
(Amounts
in thousands)
|
Payment
Obligations for the Year Ended
|
|||||||||||||||||||||
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
||||||||||||||||
|
Obligations:
|
||||||||||||||||||||||
|
Long-term
debt
(1)
|
$
|
6,533
|
$
|
467
|
$
|
467
|
$
|
467
|
$
|
5,132
|
$
|
-
|
$
|
-
|
||||||||
|
Revolving
credit facility
(1)
|
11,665
|
-
|
-
|
-
|
11,665
|
-
|
-
|
|||||||||||||||
|
Interest
payments (2)
|
3,332
|
879
|
848
|
818
|
787
|
-
|
-
|
|||||||||||||||
|
Operating
leases
|
406
|
100
|
99
|
92
|
75
|
40
|
-
|
|||||||||||||||
|
Capital
leases
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Purchase
obligations
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Deferred
compensation
(3)
|
470
|
72
|
72
|
72
|
72
|
72
|
110
|
|||||||||||||||
|
Total
|
$
|
22,406
|
$
|
1,518
|
$
|
1,486
|
$
|
1,449
|
$
|
17,731
|
$
|
112
|
$
|
110
|
||||||||
|
(1)
Includes only obligations to pay principal not interest
expense.
|
||||||||||||||
|
(2)
Represents estimated interest payments to be made on the bank debt,
with
principal payments made as
|
||||||||||||||
|
scheduled,
using average borrowings for each year times the average interest
rate for
2006 on the debt.
|
||||||||||||||
|
(3)
for a description of the deferred compensation obligation, see Note
H to
the Consolidated Financial Statements
|
||||||||||||||
|
included
in Item 8 of this Form 10-K.
|
||||||||||||||
Off-Balance
Sheet Arrangements
See
Note
R to the Consolidated Financial Statements included in Item 8 of this Form
10-K
for a discussion of the Company’s off-balance sheet arrangements.
Current
Conditions and Outlook
Management
remains confident in the potential success of its fire retardant products in
2007. Because of the successful results from required testing and plant
production trials at several significant potential customers, our
Sleep
Safe™
line is
gaining recognition as a low cost solution to the Federal regulations that
go
into effect on July 1, 2007. This source of anticipated new business together
with management’s expectation of continued growth in other products, and
based
on
current conditions in the general economy, lead us to believe that 2007 should
produce a continuation of improved results from the Specialty Chemicals Segment.
Piping systems’ backlog increased steadily throughout 2006 ending the year at
$54,900,000 which is about $35,000,000 higher than a year earlier. Management
expects about 80 percent of the backlog to be completed over the next 12 months
which
should provide an improved level of sales and profits for piping systems in
2007. Our optimism about the future is also based on the large dollar amount
of
projects we expect to bid during 2007. Assuming no significant decline in demand
and a continuation of the surcharges currently in effect, pipe sales and profits
should produce results comparable to 2006 which, combined with anticipated
efficiencies from higher pipe production for our piping systems, should enhance
profitability compared to 2006.
Item
7a Quantitative and Qualitative Disclosures about Market
Risks
The
Company is exposed to market risks from adverse changes in interest rates.
In
this regard, changes in U. S. interest rates affect the interest earned on
the
Company's cash and cash equivalents as well as interest paid on its
indebtedness. Except as described below, the Company does not engage in
speculative or leveraged transactions, nor does it hold or issue financial
instruments for trading purposes. The Company is exposed to changes in interest
rates primarily as a result of its borrowing activities used to maintain
liquidity and fund business operations.
Fair
value of the Company's debt obligations, which approximated the recorded value,
consisted of:
At
December 30, 2006
$
18,198,000 under a $27,000,000 line of credit and term loan agreement expiring
December 31, 2010 with a variable interest rate of 6.85 percent.
At
December 31, 2005
$
8,557,000 under a $27,000,000 line of credit and term loan agreement expiring
December 31, 2010 with a variable interest rate of 5.79 percent.
The
Company periodically utilizes derivative instruments that are designated and
qualify as hedges under Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" and related
pronouncements. Cash flow and fair value hedges are hedges that are intended
to
eliminate the risk of changes in the fair values of assets, liabilities and
certain types of firm commitments. The Company's objective in using these
instruments is to help protect its earnings and cash flows from interest rate
risks on its long-term indebtedness and fluctuations in the fair value of
commodities used in the Company’s stainless steel raw materials. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objectives and strategies for undertaking
the hedge transactions. In this documentation, the Company specifically
identifies the asset, liability and non-cancelable commitment that has been
designated as a hedged item and states how the hedging instrument is expected
to
hedge the risks related to that item. The Company formally measures
effectiveness of its hedging relationships both at the hedge inception and
on an
ongoing basis. The Company discontinues hedge accounting prospectively when
it
determines that the derivative is no longer effective in offsetting changes
in
the fair value or cash flows of a hedged item; when the derivative expires;
when
it is probable that the forecasted transaction will not occur; when a hedged
firm commitment no longer meets the definition of a firm commitment; or when
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
Cash
flow
hedges are hedges that use simple derivatives to offset the variability of
expected future cash flows. Variability can appear in floating rate liabilities
and can arise from changes in interest rates. The Company uses an interest
rate
swap in which it pays a fixed rate of interest while receiving a variable rate
of interest to change the cash flow profile of its variable-rate borrowing
to
match a fixed rate profile. As discussed in Note E to the Consolidated Financial
Statements, the Company entered into a long-term debt agreement with its bank
and pays interest based on a variable interest rate. To mitigate the variability
of the interest rate risk, the Company entered into a derivative/swap contract
in February of 2006 with the bank, coupled with a third party who will pay
a
variable rate of interest (an “interest rate swap”). The interest rate swap is
for $4,500,000 with a fixed interest rate of 5.27 percent, and runs from March
1, 2006 to December 31, 2010, which equates to the final payment amount and
due
date of the term loan. Although the swap is expected to effectively offset
variable interest in the borrowing hedge, accounting is not utilized. Therefore,
changes in its fair value are being recorded in current assets or liabilities,
as appropriate, with corresponding offsetting entries to interest expense.
In
the
ordinary course of business, the Company's income and cash flows may be affected
by fluctuations in the price of nickel, which is a component of stainless steel
raw materials used in its production of stainless steel pipe. The Company is
subject to raw material surcharges on the nickel component from its stainless
steel suppliers. For certain non-cancelable fixed price sales contracts having
delivery dates in the future, the Company is not able to obtain fixed price
purchase commitments to cover the nickel surcharge component of the stainless
steel raw material requirements of the sales contract which creates a cost
exposure from fluctuations in the nickel surcharges. Where such exposure exists,
the Company considers the use of cash settled commodity price swaps with
durations approximately equal to the expected delivery dates of the applicable
raw materials to hedge the price of its nickel requirements. The Company
designates these instruments as fair value hedges and the resulting changes
in
their fair value are recorded as inventory costs. Subsequent gains and losses
are recognized into cost of products sold in the same period as the underlying
physical transaction. While these hedging activities may protect the Company
against higher nickel prices, they may also prevent realizing possible lower
raw
material costs in the event that the market price of nickel falls below the
price stated in a forward sale or futures contract. There were no outstanding
hedging contracts on nickel commodities at December 30, 2006.
Item
8 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
|
|||||||
|
Years
ended December 30, 2006 and December 31, 2005
|
|||||||
|
2006
|
2005
|
||||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
21,413
|
$
|
2,379
|
|||
|
Accounts
receivable, less allowance for doubtful
|
|||||||
|
accounts
of $1,114,000 and $1,039,000, respectively
|
22,428,829
|
21,862,852
|
|||||
|
Inventories
|
|||||||
|
Raw
materials
|
17,361,355
|
10,366,091
|
|||||
|
Work-in-process
|
13,323,868
|
8,560,707
|
|||||
|
Finished
goods
|
10,860,239
|
5,555,529
|
|||||
|
Total
inventories
|
41,545,462
|
24,482,327
|
|||||
|
Deferred
income taxes (Note K)
|
1,793,000
|
1,219,000
|
|||||
|
Prepaid
expenses and other current assets (Note S)
|
307,740
|
427,728
|
|||||
|
Total
current assets
|
66,096,444
|
47,994,286
|
|||||
|
Cash
value of life insurance
|
2,723,565
|
2,639,514
|
|||||
|
Property,
plant and equipment, net (Note C)
|
18,951,820
|
18,697,760
|
|||||
|
Deferred
charges, net and other assets (Note D)
|
1,585,337
|
1,650,622
|
|||||
|
Total
assets
|
$
|
89,357,166
|
$
|
70,982,182
|
|||
|
Liabilities
and Shareholders' Equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Current
portion of long-term debt (Note E)
|
$
|
466,667
|
$
|
466,667
|
|||
|
Accounts
payable
|
11,775,703
|
11,191,861
|
|||||
|
Accrued
expenses (Notes B, E and F)
|
6,043,750
|
5,846,899
|
|||||
|
Current
portion of environmental reserves (Note G)
|
226,053
|
104,199
|
|||||
|
Income
taxes
|
1,200,198
|
1,720,702
|
|||||
|
Total
current liabilities
|
19,712,371
|
19,330,328
|
|||||
|
Long-term
debt (Note E)
|
17,731,431
|
8,090,554
|
|||||
|
Environmental
reserves (Note G)
|
616,000
|
611,000
|
|||||
|
Deferred
compensation (Note H)
|
470,212
|
541,962
|
|||||
|
Deferred
income taxes (Note K)
|
3,700,000
|
3,112,000
|
|||||
|
Shareholders'
equity (Notes I and J)
|
|||||||
|
Common
stock, par value $1 per share - authorized
|
|||||||
|
12,000,000
shares; issued 8,000,000 shares
|
8,000,000
|
8,000,000
|
|||||
|
Capital
in excess of par value
|
56,703
|
-
|
|||||
|
Retained
earnings
|
54,921,022
|
47,329,620
|
|||||
|
62,977,725
|
55,329,620
|
||||||
|
Less
cost of common stock in treasury: 1,864,433
|
|||||||
|
and
1,892,160 shares, respectively
|
15,850,573
|
16,033,282
|
|||||
|
Total
shareholders' equity
|
47,127,152
|
39,296,338
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
89,357,166
|
$
|
70,982,182
|
|||
|
See
accompanying notes to consolidated financial statements.
|
|||||||
|
Consolidated
Statements of Operations
|
||||||||||
|
Years
ended December 30, 2006, December 31, 2005 and January 1,
2005
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
sales
|
$
|
152,047,386
|
$
|
131,408,094
|
$
|
101,601,949
|
||||
|
Cost
of sales
|
129,323,082
|
114,626,675
|
87,625,897
|
|||||||
|
Gross
profit
|
22,724,304
|
16,781,419
|
13,976,052
|
|||||||
|
Selling,
general and administrative expense
|
10,562,498
|
10,369,188
|
9,431,583
|
|||||||
|
Gain
from sale of property and plant (Note B)
|
(595,600
|
)
|
-
|
-
|
||||||
|
Operating
income
|
12,757,406
|
6,412,231
|
4,544,469
|
|||||||
|
Other
(income) and expense
|
||||||||||
|
Gain
on trade case settlement (Note B)
|
-
|
(2,541,950
|
)
|
-
|
||||||
|
Loss
on write-off of note receivable (Note B)
|
-
|
840,000
|
-
|
|||||||
|
Interest
expense
|
793,884
|
919,812
|
1,067,089
|
|||||||
|
Other,
net
|
(632
|
)
|
(83,995
|
)
|
(52
|
)
|
||||
|
Income
from continuing operations before
|
||||||||||
|
income
tax
|
11,964,154
|
7,278,364
|
3,477,432
|
|||||||
|
Provision
for income taxes
|
4,356,000
|
2,131,000
|
1,203,000
|
|||||||
|
Net
income from continuing operations
|
7,608,154
|
5,147,364
|
2,274,432
|
|||||||
|
Loss
from discontinued operations
|
-
|
(73,413
|
)
|
(1,671,314
|
)
|
|||||
|
Benefit
from income taxes
|
-
|
(22,000
|
)
|
(571,000
|
)
|
|||||
|
Net
loss from discontinued operations (Note S)
|
-
|
(51,413
|
)
|
(1,100,314
|
)
|
|||||
|
Net
income
|
$
|
7,608,154
|
$
|
5,095,951
|
$
|
1,174,118
|
||||
|
Net
income (loss) per basic common share:
|
||||||||||
|
Net
income from continuing operations
|
$
|
1.24
|
$
|
.85
|
$
|
.38
|
||||
|
Net
loss from discontinued operations
|
-
|
$
|
(.01
|
)
|
$
|
(.18
|
)
|
|||
|
Net
income
|
$
|
1.24
|
$
|
.84
|
$
|
.20
|
||||
|
Net
income (loss) per diluted common share:
|
||||||||||
|
Net
income from continuing operations
|
$
|
1.22
|
$
|
.84
|
$
|
.37
|
||||
|
Net
loss from discontinued operations
|
-
|
$
|
(.01
|
)
|
$
|
(.18
|
)
|
|||
|
Net
income
|
$
|
1.22
|
$
|
.83
|
$
|
.19
|
||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||
|
Consolidated
Statements of Shareholders' Equity
|
||||||||||||||||
|
Cost
of
|
||||||||||||||||
|
Capital
in
|
Common
|
|||||||||||||||
|
Common
|
Excess
of
|
Retained
|
Stock
in
|
|||||||||||||
|
Stock
|
Par
Value
|
Earnings
|
Treasury
|
Total
|
||||||||||||
|
Balance
at January 3, 2004
|
$
|
8,000,000
|
$
|
-
|
$
|
41,433,837
|
$
|
(16,877,515
|
)
|
$
|
32,556,322
|
|||||
|
Net
income
|
1,174,118
|
1,174,118
|
||||||||||||||
|
Issuance
of 14,260 shares
|
||||||||||||||||
|
of
common stock
|
||||||||||||||||
|
from
the treasury
|
5,292
|
119,697
|
124,989
|
|||||||||||||
|
Stock
options exercised
|
||||||||||||||||
|
for
16,000 shares
|
(5,292
|
)
|
(54,610
|
)
|
134,301
|
74,399
|
||||||||||
|
|
|
|
|
|
||||||||||||
|
Balance
at January 1, 2005
|
8,000,000
|
-
|
42,553,345
|
(16,623,517
|
)
|
33,929,828
|
||||||||||
|
Net
income
|
5,095,951
|
5,095,951
|
||||||||||||||
|
Issuance
of 10,975 shares
|
||||||||||||||||
|
of
common stock
|
||||||||||||||||
|
from
the treasury
|
32,774
|
92,231
|
125,005
|
|||||||||||||
|
Stock
options exercised
|
||||||||||||||||
|
for
77,301 shares, net
|
(32,774
|
)
|
(319,676
|
)
|
498,004
|
145,554
|
||||||||||
|
|
|
|
|
|
||||||||||||
|
Balance
at December 31, 2005
|
8,000,000
|
-
|
47,329,620
|
(16,033,282
|
)
|
39,296,338
|
||||||||||
|
Net
income
|
7,608,154
|
7,608,154
|
||||||||||||||
|
Issuance
of 6,554 shares
|
||||||||||||||||
|
of
common stock
|
||||||||||||||||
|
from
the treasury
|
25,690
|
55,536
|
81,226
|
|||||||||||||
|
Stock
options exercised
|
||||||||||||||||
|
for
21,173 shares, net
|
(44,611
|
)
|
(16,752
|
)
|
127,173
|
65,810
|
||||||||||
|
Employee
stock option
|
|
|
|
|
||||||||||||
|
compensation
|
75,624
|
75,624
|
||||||||||||||
|
|
|
|
|
|
||||||||||||
|
Balance
at December 30, 2006
|
$
|
8,000,000
|
$
|
56,703
|
$
|
54,921,022
|
$
|
(15,850,573
|
)
|
$
|
47,127,152
|
|||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||
|
Years
ended December 30, 2006, December 31, 2005 and January 1,
2005
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
income
|
$
|
7,608,154
|
$
|
5,095,951
|
$
|
1,174,118
|
||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||
|
(used
in) provided by operating activities:
|
||||||||||
|
Loss
from discontinued operations, net of tax
|
-
|
51,413
|
1,100,314
|
|||||||
|
Depreciation
expense
|
2,616,940
|
2,675,321
|
2,565,948
|
|||||||
|
Amortization
of deferred charges
|
54,924
|
186,602
|
501,724
|
|||||||
|
Deferred
income taxes
|
14,000
|
111,000
|
573,000
|
|||||||
|
Provision
for losses on accounts receivable
|
315,295
|
511,771
|
610,525
|
|||||||
|
Provision
for write-down of note receivable
|
-
|
840,000
|
-
|
|||||||
|
(Gain)
loss on sale of property, plant and equipment
|
(625,738
|
)
|
96,720
|
9,607
|
||||||
|
Cash
value of life insurance
|
(84,051
|
)
|
(85,415
|
)
|
(86,642
|
)
|
||||
|
Environmental
reserves
|
126,854
|
(405,555
|
)
|
276,251
|
||||||
|
Issuance
of treasury stock for director fees
|
81,226
|
125,005
|
124,989
|
|||||||
|
Employee
stock option compensation
|
75,624
|
-
|
-
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(881,272
|
)
|
(7,825,011
|
)
|
(3,237,757
|
)
|
||||
|
Inventories
|
(17,063,135
|
)
|
1,867,805
|
(7,836,262
|
)
|
|||||
|
Other
assets and liabilities
|
(341,401
|
)
|
(222,286
|
)
|
(36,430
|
)
|
||||
|
Accounts
payable
|
583,842
|
3,105,403
|
398,623
|
|||||||
|
Accrued
expenses
|
196,851
|
3,603,798
|
75,057
|
|||||||
|
Income
taxes payable
|
(520,504
|
)
|
1,710,093
|
10,609
|
||||||
|
Net
cash (used in) provided by continuing
|
||||||||||
|
operating
activities
|
(7,842,391
|
)
|
11,442,615
|
(3,776,326
|
)
|
|||||
|
Net
cash provided by discontinued operating activities
|
-
|
3,982,643
|
4,396,707
|
|||||||
|
Net
cash (used in) provided by operating activities
|
(7,842,391
|
)
|
15,425,258
|
620,381
|
||||||
|
Investing
activities
|
||||||||||
|
Purchases
of property, plant and equipment
|
(3,092,242
|
)
|
(3,245,588
|
)
|
(2,313,219
|
)
|
||||
|
Proceeds
from sale of property, plant and equipment
|
846,980
|
4,650
|
10,887
|
|||||||
|
Decrease
(increase) in notes receivable
|
400,000
|
28,000
|
(428,000
|
)
|
||||||
|
Net
cash used in continuing operations
|
||||||||||
|
investing
activities
|
(1,845,262
|
)
|
(3,212,938
|
)
|
(2,730,332
|
)
|
||||
|
Net
cash used in discontinued operations
|
||||||||||
|
investing
activities
|
-
|
-
|
(116,859
|
)
|
||||||
|
Net
cash used in investing activities
|
(1,845,262
|
)
|
(3,212,938
|
)
|
(2,847,191
|
)
|
||||
|
Financing
activities
|
||||||||||
|
Net
proceeds from (payments on) revolving lines of
|
||||||||||
|
credit
|
9,640,877
|
(8,647,845
|
)
|
2,443,651
|
||||||
|
Proceeds
from exercised stock options
|
65,810
|
145,554
|
74,399
|
|||||||
|
Net
cash provided by (used in) continuing
|
||||||||||
|
operations
financing activities
|
9,706,687
|
(8,502,291
|
)
|
2,518,050
|
||||||
|
Net
cash used in discontinued
|
||||||||||
|
operations
financing activities
|
-
|
(4,000,000
|
)
|
-
|
||||||
|
Net
cash provided by (used in) financing activities
|
9,706,687
|
(12,502,291
|
)
|
2,518,050
|
||||||
|
Increase
(decrease) in cash and cash equivalents
|
19,034
|
(289,971
|
)
|
291,240
|
||||||
|
Cash
and cash equivalents at beginning of year
|
2,379
|
292,350
|
1,110
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
21,413
|
$
|
2,379
|
$
|
292,350
|
||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||
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.
Reclassification.
For
comparative purposes, certain amounts in the 2005 and 2004 financial statements
have been reclassified to conform with the 2006 presentation.
Use
of Estimates.
The
preparation of the financial statements in conformity with U. S. 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 ending the Saturday nearest to
December 31. Fiscal year 2006 ended on December 30, 2006, fiscal year 2005
ended
on December 31, 2005, and fiscal year 2004 ended on January 1, 2005.
Revenue
Recognition.
Revenue
from product sales is recognized at the time ownership of goods transfers to
the
customer and the earnings process is complete. Shipping costs of approximately
$2,708,000, $1,881,000 and $1,443,000 in 2006, 2005 and 2004, respectively,
are
recorded in cost of goods sold.
Inventories.
Inventories are stated at the lower of cost or market. Cost is determined by
the
first-in, first-out (FIFO) method. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and current market conditions.
Long-Lived
Assets. Property,
plant and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful life of the assets. Land
improvements and buildings are depreciated over a range of ten to 40 years,
and
machinery, fixtures and equipment are depreciated over a range of three to
20
years.
The
costs
of software licenses are amortized over five years using the straight-line
method. Debt expenses are amortized over the period of the underlying debt
agreement using the straight-line method.
Intangibles
arising from acquisitions represent the excess of cost over fair value of net
assets of businesses acquired. Goodwill and indefinite lived intangible assets
are not amortized but are reviewed annually for impairment. Other intangible
assets that are not deemed to have an indefinite life are amortized over their
useful lives.
The
Company continually reviews the recoverability of the carrying value of
long-lived assets. The Company also reviews long-lived assets for impairment
whenever events or changes in circumstances indicate the carrying amount of
such
assets may not be recoverable. When the future undiscounted cash flows of the
operation to which the assets relate do not exceed the carrying value of the
asset, the assets are written down to fair value.
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 receivable
and cash surrender value of life insurance.
Accounts
receivable from the sale of products are recorded at net realizable value and
the Company generally grants credit to customers on an unsecured basis.
Substantially all of the Company’s accounts receivables are due from companies
located throughout the United States. The Company provides an allowance for
doubtful collections that is based upon a review of outstanding receivables,
historical collection information and existing economic conditions. The Company
performs periodic credit evaluations of its customers’ financial condition and
generally does not require collateral. Receivables are generally due within
30
to 45 days. Delinquent receivables are written off based on individual credit
evaluations and specific circumstances of the customer.
The
cash
surrender value of life insurance is the contractual amount on policies
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 $312,000,
$566,000 and $551,000 in 2006, 2005 and 2004, respectively.
Fair
Value of Financial Instruments.
The
carrying amounts reported in the balance sheet for cash and cash equivalents,
trade accounts receivable, cash surrender value of life insurance, investments
and borrowings under the Company’s line of credit approximate their fair value.
Stock
Options.
Effective January 1, 2006, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No.123-Revised 2004 ("SFAS
123R"), "Share-Based Payment”, which was issued by the FASB in December 2004,
using the modified prospective application as permitted under SFAS 123R.
Accordingly, prior period amounts have not been restated. Under this
application, the Company is required to record compensation expense for all
awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
Compensation expense of approximately $76,000 was recorded in 2006 with a
similar amount expected over the next four years. Prior to the adoption of
SFAS
123R, the Company used the intrinsic value method as prescribed by APB No.
25
and thus recognized no compensation expense for options granted with exercise
prices equal to the fair market value of the Company's common stock on the
date
of grant.
Fair
Value Measurements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 (“SFAS 157”), “Fair Value Measurements,” which defines fair
value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is permitted, provided
the reporting company has not yet issued financial statements, including for
interim periods, for that fiscal year. The Company is currently evaluating
the
impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a
material impact on its consolidated financial position, results of operations
or
cash flows.
Accounting
for Uncertainty in Income Taxes.
In June
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies
how tax benefits for uncertain tax positions are to be recognized, measured,
and
derecognized in financial statements; requires certain disclosures of uncertain
tax matters; specifies how reserves for uncertain tax positions should be
classified on the balance sheet; and provides transition and interim period
guidance, among other provisions. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company is currently evaluating the impact of
FIN 48 on its consolidated financial position, results of operations, and cash
flows.
Note
B Special Items
Other
Income and Expense: The
Company completed the move of Organic Pigments’ operations from Greensboro, NC
to Spartanburg, SC in the first quarter of 2006, recording plant relocation
costs of $213,000 in administrative expense in the quarter. The Greensboro
plant
was closed in the first quarter of 2006 and on August 9, 2006, the Company
sold
the property for a net sales price of $811,000. The property had a net book
value of $215,000, and the Company recorded a pre-tax gain on the sale of
approximately $596,000 in the third quarter of 2006.
In
2003,
the Company in conjunction with a group of domestic stainless steel pipe
producers (the “Domestic Producers”) filed a claim with the U.S. Bureau of
Customs and Border Protection pursuant to Federal regulations requesting the
distribution of antidumping duties levied against a foreign producer and
importer (the “Importer”) of stainless steel pipe under the Continued Dumping
and Subsidiary Offset Act (“CDSOA”) for the time period June 22, 1992 through
November 30, 1994. The Domestic Producers entered into an agreement with the
Importer to facilitate a settlement of the claim which called for the Domestic
Producers to retain 63 percent of monies to be paid by the Importer owed under
the CDSOA in return for the Importer ending years of litigation and
expeditiously paying the duties and interest to Customs. In December of 2005,
the Company received a distribution of its share of funds totaling $4,483,000
of
which $2,542,000 was recorded as a gain in other income, and
$1,866,000 was
recorded as a current liability in accrued expenses, including $1,584,000
which was paid to the Importer in
January
2006 under the terms of the agreement.
In
December 2005, Congress repealed the CDSOA program, effective with imports
entered after October 1, 2007. (See Note F)
As
a part
of the acquisition of OP in 1998, the Company obtained an $840,000 note
receivable from an affiliated company in which OP owns 45 percent. The
affiliated company has as its primary asset a minority investment in a Chinese
pigment plant from which OP purchases some of its raw materials. The joint
venture agreement expires in 2008. The joint venture had been profitable since
1998, but reported an operating loss for 2005 and indicated that market and
operating conditions were not expected to improve and is anticipating incurring
losses going forward. Based on the current and anticipated operating losses
of
the joint venture and other factors the Company was able to ascertain, the
likelihood that the affiliated company will be able to repay the note receivable
became unlikely. The receivable was written off at December 31, 2005 and the
$840,000 loss was included in other expense in 2005.
Accounting
for the Impairment of Long-Lived Assets.
In 2004
the Company completed an impairment assessment on the plant and equipment
located at Spartanburg, South Carolina, revising its business plans and
projections to better reflect what management believed were current market
conditions. After completing an analysis of the business at the site and
exploring other options that were available, it became apparent that the
facility could not adequately recover the fixed costs related to the facility
under current business conditions. This resulted in the recording of an
impairment loss on the plant and equipment in 2004 in the Specialty Chemicals
Segment, which resulted in the recording of a write-down of $581,000 against
plant and equipment utilized by discontinued operations. (See Note S) The
impairment assessment at the facility has been updated through the 2006 year-end
and no additional write-downs are currently deemed necessary on the continuing
operations at the Spartanburg location.
Note
C Property, Plant and Equipment
Property,
plant and equipment consist of the following:
|
2006
|
2005
|
||||||
|
Land
|
$
|
305,618
|
$
|
406,868
|
|||
|
Land
improvements
|
965,235
|
951,934
|
|||||
|
Buildings
|
10,592,438
|
11,109,234
|
|||||
|
Machinery,
fixtures and equipment
|
44,126,119
|
43,922,988
|
|||||
|
Construction-in-progress
|
860,454
|
1,653,309
|
|||||
|
56,849,864
|
58,044,333
|
||||||
|
Less
accumulated depreciation
|
37,898,044
|
39,346,573
|
|||||
|
Total
property, plant & equipment
|
$
|
18,951,820
|
$
|
18,697,760
|
|||
Note
D Deferred Charges and Other Assets
Deferred
charges and other assets consist of the following:
|
2006
|
2005
|
||||||
|
Deferred
charges
|
|||||||
|
Goodwill
|
$
|
1,354,730
|
$
|
1,354,730
|
|||
|
Product
license agreements
|
150,000
|
150,000
|
|||||
|
Debt
expense
|
185,639
|
184,000
|
|||||
|
1,690,369
|
1,688,730
|
||||||
|
Less
accumulated amortization
|
112,424
|
57,500
|
|||||
|
Total
deferred charges, net
|
1,577,945
|
1,631,230
|
|||||
|
Other
|
7,392
|
19,392
|
|||||
|
Total
deferred charges, net and other assets
|
$
|
1,585,337
|
$
|
1,650,622
|
|||
Note
E Long-term Debt
|
2006
|
2005
|
||||||
|
$
15,000,000 Revolving line of credit
|
$
|
11,664,765
|
$
|
1,557,221
|
|||
|
$
7,000,000 Term loan
|
6,533,333
|
7,000,000
|
|||||
|
18,198,098
|
8,557,221
|
||||||
|
Less
current portion of term loan
|
466,667
|
466,667
|
|||||
|
$
|
17,731,431
|
$
|
8,090,554
|
||||
On
December 13, 2005, the Company entered into a Credit Agreement with a lender
to
provide a $27,000,000 line of credit that expires on December 31, 2010, and
refinanced the Company’s existing bank indebtedness. The Credit Agreement
provides for a revolving line of credit of $20,000,000, which includes a
$5,000,000 sub-limit for swing-line loans that requires additional pre-approval
by the bank, and a five-year $7,000,000 term loan that requires equal quarterly
payments of $117,000, plus interest, with a balloon payment at the expiration
date. Current interest rates are LIBOR plus 1.50 percent, and can vary based
on
EBITDA performance from LIBOR plus 1.50 percent to LIBOR plus 3.00 percent.
The
rate at December 30, 2006 was 6.85 percent. Borrowings under the revolving
line
of credit are limited to an amount equal to a borrowing base calculation that
includes eligible accounts receivable, inventories, and cash surrender value
of
the Company’s life insurance as defined in the Credit Agreement. As of December
30, 2006, the amount available for borrowing was $15,000,000, of which
$11,665,000 was borrowed, leaving $ 3,335,000 of availability.
Borrowings
under the Credit Agreement are collateralized by substantially all of the assets
of the Company. At December 30, 2006, the Company was in compliance with its
debt covenants which include, among others, maintaining certain EBITDA, fixed
charge and tangible net worth amounts.
Average
borrowings outstanding during fiscal 2006, 2005 and 2004 were $10,525,000,
$12,659,000 and $19,338,000 with weighted average interest rates of 6.57
percent, 5.84 percent and 4.17 percent, respectively. The Company made interest
payments of $647,000 in 2006, $873,000 in 2005, and $798,000 in 2004. The amount
of long-term debt maturities for the next five years is as follows: 2007 -
$467,000; 2008 - $467,000; 2009 - $467,000; and 2010 - $16,797,000.
On
February 23, 2006, the Company entered into an interest rate swap contract
with
its bank for $4,500,000 at a fixed interest rate of 5.27 percent. The contract
runs from March 1, 2006 to December 31, 2010, which equates to the final payment
amount and due date of the term loan. The Company has accrued a $48,000
liability with a corresponding entry to interest expense to reflect the fair
market value of the swap at December 30, 2006. (See Note R)
Note
F Accrued Expenses
Accrued
expenses consist of the following:
|
2006
|
2005
|
||||||
|
Amounts
owed under duty payment agreement (Note B)
|
$
|
-
|
$
|
1,866,207
|
|||
|
Salaries,
wages and commissions
|
2,479,173
|
1,247,502
|
|||||
|
Advances
from customers
|
1,786,418
|
1,254,404
|
|||||
|
Insurance
|
589,347
|
524,029
|
|||||
|
Taxes,
other than income taxes
|
331,771
|
225,291
|
|||||
|
Benefit
plans
|
218,191
|
176,341
|
|||||
|
Interest
|
147,403
|
40,871
|
|||||
|
Professional
fees
|
112,872
|
181,320
|
|||||
|
Other
accrued items
|
378,575
|
330,934
|
|||||
|
Total
accrued expenses
|
$
|
6,043,750
|
$
|
5,846,899
|
|||
Note
G Environmental
Compliance Costs
At
December 30, 2006, the Company has accrued $842,000 in remediation costs which,
in management’s best estimate, are expected to 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 three to four 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.
Prior
to
1987, the Company utilized certain products at its chemical facilities that
are
currently classified as hazardous materials. 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. In 1998 the Company completed
an RCRA Facility Investigation at its Spartanburg plant site, and based on
the
results, completed a Corrective Measures Study in 2000. A Corrective Measures
Plan specifying remediation procedures to be performed was submitted in 2000
and
the Company received regulatory approval. During 2005, a remediation project
was
completed to clean up two of the three remaining SWMUs on the Spartanburg plant
site at a cost of approximately $530,000 which was accrued at January 1, 2005.
The Company is in the process of completing an analysis of the remaining SWMU
and has accrued $311,000 to provide for completion of this project.
At
the
Augusta plant site, the Company submitted a Risk Assessment and Corrective
Measures Plan for regulatory approval. A Closure and Post-Closure Care Plan
was
submitted and approved in 2001 for the closure of the surface impoundment.
The
Company completed the surface impoundment during 2002. During the fourth quarter
of 2005, the Company completed a preliminary analysis based on the risk
assessment of the surface contamination at the site, and accrued $305,000 in
the
fourth quarter for additional estimated future remedial and cleanup costs.
The
Company has identified and evaluated two SWMUs at its plant in Bristol,
Tennessee that revealed residual groundwater contamination. An Interim
Corrective Measures Plan was submitted for regulatory approval in 2000 to
address the final area of contamination identified which was approved in March
of 2005. The Company has $72,000 accrued at December 30, 2006, to provide for
estimated future remedial and cleanup costs.
The
Company had been designated, along with others, as a potentially responsible
party under the Comprehensive Environmental Response, Compensation, and
Liability Act, or comparable state statutes, at two waste disposal sites. The
Company settled its obligations at both of the sites paying $97,000 and $196,000
in the first quarter of 2005 both of which were accrued at January 1,
2005.
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
H Deferred Compensation
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, $470,000 at December 30, 2006, has been
accrued.
Note
I Shareholders’ Rights
The
Company has a Shareholders’ Rights Plan (the “Plan”) which expires in March
2009. Under the terms of the Plan, the Company declared a dividend distribution
of one right for each outstanding share to holders of record at the close of
business on March 26, 1999. Each Right entitles holders to purchase 2/10 of
one
share of Common Stock at a price of $25.00 per share. Initially, the Rights
are
not exercisable and will automatically trade with the Common Stock. Each right
becomes exercisable only after a person or group acquires more than 15 percent
of the Company’s Common Stock, or announces a tender or exchange offer for more
than 15 percent of the stock. At that time, each right holder, other than the
acquiring person or group, may use the Right to purchase $25.00 worth of the
Company’s Common Stock at one-half of the then market price.
Note
J Stock Options
A
summary
of activity in the Company’s stock option plans is as follows:
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
Intrinsic
|
||||||||||||||
|
Exercise
|
Contractual
|
Value
of
|
Options
|
|||||||||||||
|
Price
|
Outstanding
|
Term
|
Options
|
Available
|
||||||||||||
|
(in
years)
|
||||||||||||||||
|
At
January 3, 2004
|
$
|
8.06
|
594,500
|
159,000
|
||||||||||||
|
Granted
|
$
|
-
|
-
|
-
|
||||||||||||
|
Exercised
|
$
|
4.65
|
(16,000
|
)
|
||||||||||||
|
Cancelled
|
(32,500
|
)
|
32,500
|
|||||||||||||
|
Expired
|
(41,000
|
)
|
(18,500
|
)
|
||||||||||||
|
At
January 1, 2005
|
$
|
7.93
|
505,000
|
173,000
|
||||||||||||
|
Granted
|
$
|
9.96
|
80,000
|
(80,000
|
)
|
|||||||||||
|
Exercised
|
$
|
5.89
|
(137,850
|
)
|
||||||||||||
|
Cancelled
|
(106,100
|
)
|
106,100
|
|||||||||||||
|
Expired
|
(9,500
|
)
|
-
|
|||||||||||||
|
At
December 31, 2005
|
$
|
9.64
|
331,550
|
$
|
740,000
|
199,100
|
||||||||||
|
Granted
|
-
|
-
|
||||||||||||||
|
Exercised
|
$
|
6.21
|
(26,900
|
)
|
$
|
254,000
|
||||||||||
|
Cancelled
|
$
|
4.65
|
(8,000
|
)
|
$
|
111,000
|
8,000
|
|||||||||
|
Expired
|
$
|
18.88
|
(14,500
|
)
|
-
|
-
|
||||||||||
|
At
December 30, 2006
|
$
|
9.64
|
282,150
|
4.1
|
$
|
2,512,000
|
207,100
|
|||||||||
|
Exercisable
options
|
$
|
9.56
|
226,294
|
3.1
|
$
|
2,033,000
|
||||||||||
|
Options
expected to vest
|
$
|
9.96
|
55,856
|
8.1
|
$
|
479,000
|
||||||||||
The
following table summarizes information about stock options outstanding at
December 30, 2006:
|
Outstanding
Stock Options
|
Exercisable
Stock Options
|
|||||||||||||||
|
Weighted
Average
|
Weighted
|
|||||||||||||||
|
Remaining
|
Average
|
|||||||||||||||
|
Range
of
|
Exercise
|
Contractual
|
Exercise
|
|||||||||||||
|
Exercise
Prices
|
Shares
|
Price
|
Life
in Years
|
Shares
|
Price
|
|||||||||||
|
$
15.13
|
71,000
|
$
|
15.13
|
0.33
|
71,000
|
$
|
15.13
|
|||||||||
|
$
13.63
|
4,500
|
$
|
13.63
|
1.33
|
4,500
|
$
|
13.63
|
|||||||||
|
$
7.28 to $7.75
|
61,250
|
$
|
7.69
|
2.40
|
61,250
|
$
|
7.69
|
|||||||||
|
$
6.75
|
4,500
|
$
|
6.75
|
3.38
|
4,500
|
$
|
6.75
|
|||||||||
|
$
5.01
|
6,000
|
$
|
5.01
|
4.32
|
6,000
|
$
|
5.01
|
|||||||||
|
$
4.65
|
54,900
|
$
|
4.65
|
5.32
|
54,900
|
$
|
4.65
|
|||||||||
|
$
9.96
|
80,000
|
$
|
9.96
|
8.09
|
24,144
|
$
|
9.96
|
|||||||||
|
282,150
|
226,294
|
|||||||||||||||
The
Company has three stock option plans. Stock option grants to purchase common
stock of the Company are available for officers and key employees under the
1998
Plan, and may be granted through April 30, 2008 to employees at a price not
less
than the fair value on the date of grant. Options were granted through January
28, 1998 to employees under the 1988 Plan. Under the 1994 Non-Employee Directors
Plan, options were granted to non-employee directors through April 29, 2004.
Under the 1988 and 1998 Plans, options may be exercised
beginning
one year after date of grant at a rate of 20 percent annually on a cumulative
basis, and unexercised options expire ten years from the grant date. Under
the
1994 Non-Employee Directors’ Plan, options may be exercised at the date of
grant. All of the plans are incentive stock option plans, therefore there are
no
income tax consequences to the Company when an option is granted or exercised.
The Company did not grant any options during 2006 and does not expect to grant
options to its employees, officers or non-employee directors in future periods.
On
December 20, 2005, the Board of Directors of the Company passed a resolution
to
accelerate the vesting schedules of substantially all outstanding unvested
options issued to officers and key employees effective as of the date of the
resolution. The Company determined that the modification to accelerate vesting
did not require recognition of compensation cost in its financial statements
for
the year ended December 31, 2005 under the provisions of APB 25. As a result,
40,000 options with an exercise price of $4.65 became fully vested, 20,000
that
would have fully vested on April 25, 2006, and 20,000 that would have fully
vested on April 25, 2007. In addition, 24,144 options with an exercise price
of
$9.96 became fully vested, 16,000 that would have fully vested on February
3,
2006, 3,598 that would have fully vested on February 3, 2007, and 4,546 that
would have vested at 2,000 per year on February 3, 2008 and 2009 and 546 in
2010.
At
the
2006 and 2005 respective year ends, options to purchase 226,294 and 275,694
shares were fully exercisable. Compensation cost charged against income before
taxes for the options was approximately $76,000, or $.01 per share, for the
year
ended December 30, 2006. As of December 30, 2006, there was $233,000 of total
unrecognized compensation cost related to unvested stock options granted under
the Company's stock option plans which is expected to be recognized over a
period of 4 years. The fair value of the unvested options computed under SFAS
123R was estimated at the time the options were granted using the Black-Scholes
option pricing model, and is being recognized over the vesting period of the
options. The following weighted-average assumptions were used for 2005:
risk-free interest rate of five percent; volatility factors of the expected
market price of the Company’s Common Shares of .659; an expected life of the
option of seven years. The dividend yield used in the calculation was zero
percent. The weighted average fair value on the date of grant was $6.77. 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.
The
following illustrates the effect on net income available to common stockholders
if the Company had applied the fair value recognition provisions of SFAS 123R
in
2005 and 2004:
|
2005
|
2004
|
||||||
|
Net
income reported
|
$
|
5,095,951
|
$
|
1,174,118
|
|||
|
Compensation
expense, net of tax
|
(305,192
|
)
|
(138,566
|
)
|
|||
|
Pro
forma net income
|
$
|
4,790,759
|
$
|
1,035,552
|
|||
|
Basic
income per share
|
$
|
0.84
|
$
|
0.20
|
|||
|
Compensation
expense, net of tax
|
(0.05
|
)
|
(0.03
|
)
|
|||
|
Pro
forma basic income per share
|
$
|
0.79
|
$
|
0.17
|
|||
|
Diluted
income per share
|
$
|
0.83
|
$
|
0.19
|
|||
|
Compensation
expense, net of tax
|
(0.05
|
)
|
(0.02
|
)
|
|||
|
Pro
forma diluted income per share
|
$
|
0.78
|
$
|
0.17
|
|||
Note
K 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:
|
(Amounts
in thousands)
|
2006
|
2005
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Inventory
valuation reserves
|
$
|
1,042
|
$
|
890
|
|||
|
Allowance
for doubtful accounts
|
401
|
395
|
|||||
|
Inventory
capitalization
|
555
|
367
|
|||||
|
Environmental
reserves
|
248
|
260
|
|||||
|
Total
deferred tax assets
|
2,246
|
1,912
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Tax
over book depreciation
|
2,772
|
2,977
|
|||||
|
Prepaid
expenses
|
465
|
553
|
|||||
|
Other
|
916
|
275
|
|||||
|
Total
deferred tax liabilities
|
4,153
|
3,805
|
|||||
|
Net
deferred tax liabilities
|
$
|
(1,907
|
)
|
$
|
(1,893
|
)
|
|
Significant
components of the provision for and (benefits from) income taxes for continuing
operations are as follows:
|
(Amounts
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
4,001
|
$
|
1,696
|
$
|
1,443
|
||||
|
State
|
341
|
335
|
45
|
|||||||
|
Total
current
|
4,342
|
2,031
|
1,488
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
1
|
84
|
(233
|
)
|
||||||
|
State
|
13
|
16
|
(52
|
)
|
||||||
|
Total
deferred
|
14
|
100
|
(285
|
)
|
||||||
|
Total
|
$
|
4,356
|
$
|
2,131
|
$
|
1,203
|
||||
The
reconciliation of income tax computed at the U. S. federal statutory tax rates
to income tax expense for continuing operations is:
|
(Amounts
in thousands)
|
2006
|
2005
|
2004
|
|||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||
|
Tax
at US statutory rates
|
$
4,087
|
34.2%
|
$
2,475
|
34.0%
|
$
1,182
|
34.0%
|
||||||
|
State
income taxes, net of
|
||||||||||||
|
Federal
tax benefit
|
205
|
1.7%
|
221
|
3.0%
|
45
|
1.3%
|
||||||
|
Changes
in contingent
|
|
|
|
|
||||||||
|
tax
reserves
|
259
|
2.2%
|
(501)
|
(6.8%)
|
-
|
-
|
||||||
|
Manufacturing
exemption
|
(131)
|
(1.1%)
|
(34)
|
(0.5%)
|
-
|
-
|
||||||
|
Other,
net
|
(64)
|
(0.6%)
|
(30)
|
(0.4%)
|
(24)
|
(0.7%)
|
||||||
|
Total
|
$
4,356
|
36.4%
|
$
2,131
|
29.3%
|
$
1,203
|
34.6%
|
||||||
Income
tax payments of approximately $4,935,000, $301,000 and $72,000 were made in
2006, 2005 and 2004, respectively. The Company has South Carolina state net
operating loss carryforwards of approximately $38,400,000 which expire between
the years 2017 to 2025. Since the likelihood of recognizing these carryforwards
is remote, they have been fully reserved in the financial statements.
Note
L Benefit Plans and Collective Bargaining Agreements
The
Company has a 401(k) Employee Stock Ownership Plan covering all non-union
employees. Employees may contribute to the Plan up to 100 percent of their
salary with a maximum of $15,000 for 2006. 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 in cash and then used by the Plan Trustee to purchase
Synalloy stock. The Company contributes on behalf of each eligible participant
a
matching contribution equal to a percentage which is determined each year by
the
Board of Directors. For 2006 the maximum was four percent. The matching
contribution is allocated weekly. Matching contributions of approximately
$319,000, $321,000 and $348,000 were made for 2006, 2005 and 2004, 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 were made to the Plan in 2006,
2005
and 2004. The
Company also contributes to union-sponsored defined contribution retirement
plans. Contributions relating to these plans were approximately $595,000,
$515,000, and $333,000 for 2006, 2005 and 2004, respectively.
The
Company has three collective bargaining agreements at its Bristol, Tennessee
facility. The number of employees of the Company represented by these unions
is
232, or 53 percent. They are represented by two locals affiliated with the
AFL-CIO and one local affiliated with the Teamsters. Collective bargaining
contracts will expire in February 2009, December 2009 and March
2010.
Note
M Leases
The
Company’s Specialty Chemicals Segment leases a warehouse facility in Dalton
Georgia, and in addition, the Company leases various manufacturing and office
equipment at each of its locations, all under operating leases. The amount
of
future minimum lease payments under the operating leases are as follows: 2007
-
$100,000; 2008 - $99,000; 2009 - $92,000; 2010 - $75,000; and 2011 - $40,000.
Rent expense related to operating leases was $107,000, $124,000 and $130,000
in
2006, 2005 and 2004, respectively. The Company does not have any leases that
are
classified as capital leases for any of the periods presented in the financial
statements.
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 arising
out
of the normal conduct of the Company’s business. Other than the environmental
contingencies discussed in Note G, management is not currently aware of any
asserted or unasserted material liabilities.
Note
O Earnings Per Share
The
following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
|
2006
|
2005
|
2004
|
||||||||
|
Numerator:
|
||||||||||
|
Net
income from continuing operations
|
$
|
7,608,154
|
$
|
5,147,364
|
$
|
2,274,432
|
||||
|
Denominator:
|
||||||||||
|
Denominator
for basic earnings per
|
||||||||||
|
share
- weighted average shares
|
6,122,195
|
6,068,324
|
6,007,365
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Employee
stock options
|
112,092
|
70,775
|
134,302
|
|||||||
|
Denominator
for diluted
|
||||||||||
|
earnings
per share
|
6,234,287
|
6,139,099
|
6,141,667
|
|||||||
|
Basic
income per share
|
$
|
1.24
|
$
|
.85
|
$
|
.38
|
||||
|
Diluted
income per share
|
$
|
1.22
|
$
|
.84
|
$
|
.37
|
||||
The
diluted earnings per share calculations exclude the effect of potentially
dilutive shares when the inclusion of those shares in the calculation would
have
an anti-dilutive effect. The Company had 170,058, 260,775, and 370,698 weighted
average shares of common stock which were not included in the diluted earnings
per share calculation as their effect was anti-dilutive in 2006, 2005 and 2004,
respectively.
Note
P Industry Segments
The
Company operates in two principal industry segments: metals and specialty
chemicals. The Company identifies such segments based on products and services.
The Metals Segment consists of Synalloy Metals, Inc. a wholly-owned subsidiary
which owns 100 percent of Bristol Metals, LLC. 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, pulp and paper,
waste
water treatment and LNG industries. Products include piping systems and a
variety of other components. The Specialty Chemicals Segment consists of
Manufacturers Soap and Chemical Company, a wholly owned subsidiary which owns
100 percent of Manufacturers Chemicals, LLC, and Blackman Uhler Specialties,
LLC, Organic Pigments, LLC and SFR, LLC all wholly-owned subsidiaries of the
Company. The
Specialty Chemicals Segment manufactures a wide variety of specialty chemicals,
pigments and dyes for the carpet, chemical, paper, metals, photographic,
pharmaceutical, agricultural, fiber, paint, textile, automotive, petroleum,
cosmetics, mattress, furniture and other industries.
Operating
profit is total revenue less operating expenses, excluding interest expense
and
income taxes of the continuing operations. Identifiable assets, all of which
are
located in the United States, are those assets used in operations by each
Segment. Centralized data processing and accounting expenses are allocated
to
the two Segments based upon estimates of their percentage of usage. Unallocated
corporate expenses include environmental charges of $438,000, $821,000 and
$698,000 for 2006, 2005 and 2004 respectively. (See Note G) Corporate assets
consist principally of cash, certain investments, and property and equipment.
The
Metals Segment had one domestic customer (Hughes Supply, Inc.) that accounted
for approximately 15, 11 and 20 percent of the Metals Segment’s revenues in
2006, 2005 and 2004, respectively, and approximately 10 and 13 percent of
consolidated revenues in 2006 and 2004, respectively. The Metals Segment also
had one domestic customer that accounted for approximately 14 percent of the
Segment’s revenues in 2006, and less than ten percent for 2005 and 2004. Loss of
either of these customers’ revenues would have a material adverse effect on both
the Metals Segment and the Company. The Specialty Chemicals Segment had one
domestic customer that accounted for approximately 13 percent of the Segment’s
revenues in 2006 and 2005, respectively, and less than ten percent for 2004.
The
Specialty Chemicals Segment also had one domestic customer that accounted for
approximately 13 percent of the Segment’s revenues in 2006, and less than ten
percent for 2005 and 2004. Loss of either of these customers’ revenues would
have a material adverse effect on the Specialty Chemicals Segment.
Segment
Information:
|
(Amounts
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Net
sales
|
||||||||||
|
Metals
Segment
|
$
|
102,822
|
$
|
86,053
|
$
|
63,958
|
||||
|
Specialty
Chemicals Segment
|
49,225
|
45,355
|
37,644
|
|||||||
|
$
|
152,047
|
$
|
131,408
|
$
|
101,602
|
|||||
|
Operating
income
|
||||||||||
|
Metals
Segment
|
$
|
11,612
|
$
|
6,815
|
$
|
4,577
|
||||
|
Specialty
Chemicals Segment
|
2,644
|
1,639
|
1,539
|
|||||||
|
14,256
|
8,454
|
6,116
|
||||||||
|
Less
unallocated corporate expenses
|
2,094
|
2,042
|
1,572
|
|||||||
|
Gain
from sale of property and plant
|
(596
|
)
|
-
|
-
|
||||||
|
Operating
income
|
12,758
|
6,412
|
4,544
|
|||||||
|
Other
expense, net
|
794
|
(866
|
)
|
1,067
|
||||||
|
Income
from continuing operations
|
$
|
11,964
|
$
|
7,278
|
$
|
3,477
|
||||
|
Identifiable
assets
|
||||||||||
|
Metals
Segment
|
$
|
58,552
|
$
|
40,816
|
||||||
|
Specialty
Chemicals Segment
|
24,702
|
24,309
|
||||||||
|
Corporate
|
6,103
|
5,857
|
||||||||
|
$
|
89,357
|
$
|
70,982
|
|||||||
|
Depreciation
and amortization
|
||||||||||
|
Metals
Segment
|
$
|
1,543
|
$
|
1,395
|
$
|
1,291
|
||||
|
Specialty
Chemicals Segment
|
893
|
997
|
971
|
|||||||
|
Corporate
|
236
|
470
|
806
|
|||||||
|
$
|
2,672
|
$
|
2,862
|
$
|
3,068
|
|||||
|
Capital
expenditures
|
||||||||||
|
Metals
Segment
|
$
|
1,913
|
$
|
2,635
|
$
|
1,703
|
||||
|
Specialty
Chemicals Segment
|
1,172
|
534
|
596
|
|||||||
|
Corporate
|
7
|
77
|
14
|
|||||||
|
$
|
3,092
|
$
|
3,246
|
$
|
2,313
|
|||||
|
Geographic
sales
|
||||||||||
|
United
States
|
$
|
148,572
|
$
|
126,676
|
$
|
98,440
|
||||
|
Elsewhere
|
3,475
|
4,732
|
3,162
|
|||||||
|
$
|
152,047
|
$
|
131,408
|
$
|
101,602
|
|||||
Note
Q Quarterly Results (Unaudited)
The
following is a summary of quarterly operations for 2006 and 2005:
|
(Amount
in thousands)
|
First
|
Second
|
Third
|
Fourth
|
|||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||
|
2006
|
|||||||||||||
|
Net
sales
|
$
|
36,162
|
$
|
36,729
|
$
|
39,097
|
$
|
40,059
|
|||||
|
Gross
profit
|
3,999
|
5,269
|
6,209
|
7,247
|
|||||||||
|
Net
income from continuing operations
|
698
|
1,498
|
2,409
|
3,003
|
|||||||||
|
Per
common share
|
|||||||||||||
|
Diluted
|
0.11
|
0.24
|
0.39
|
0.48
|
|||||||||
|
Basic
|
0.11
|
0.24
|
0.39
|
0.49
|
|||||||||
|
Net
income
|
698
|
1,498
|
2,409
|
3,003
|
|||||||||
|
Per
common share
|
|||||||||||||
|
Diluted
|
0.11
|
0.24
|
0.39
|
0.48
|
|||||||||
|
Basic
|
0.11
|
0.24
|
0.39
|
0.49
|
|||||||||
|
2005
|
|||||||||||||
|
Net
sales
|
$
|
33,327
|
$
|
31,484
|
$
|
30,675
|
$
|
35,922
|
|||||
|
Gross
profit
|
5,138
|
4,261
|
3,502
|
3,880
|
|||||||||
|
Net
income from continuing operations
|
1,497
|
1,044
|
525
|
2,081
|
|||||||||
|
Per
common share
|
|||||||||||||
|
Diluted
|
0.25
|
0.17
|
0.09
|
0.34
|
|||||||||
|
Basic
|
0.25
|
0.17
|
0.09
|
0.34
|
|||||||||
|
Net
income
|
1,457
|
1,033
|
525
|
2,081
|
|||||||||
|
Per
common share
|
|||||||||||||
|
Diluted
|
0.24
|
0.17
|
0.09
|
0.34
|
|||||||||
|
Basic
|
0.24
|
0.17
|
0.09
|
0.34
|
|||||||||
Note
R Derivative and Hedging Transactions
The
Company periodically utilizes derivative instruments that are designated and
qualify as hedges under Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" and related
pronouncements. Cash flow and fair value hedges are hedges that are intended
to
eliminate the risk of changes in the fair values of assets, liabilities and
certain types of firm commitments. The Company's objective in using these
instruments is to help protect its earnings and cash flows from interest rate
risks on its long-term indebtedness and fluctuations in the fair value of
commodities used in the Company’s stainless steel raw materials. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objectives and strategies for undertaking
the hedge transactions. In this documentation, the Company specifically
identifies the asset, liability and non-cancelable commitment that has been
designated as a hedged item and states how the hedging instrument is expected
to
hedge the risks related to that item. The Company formally measures
effectiveness of its hedging relationships both at the hedge inception and
on an
ongoing basis. The Company discontinues hedge accounting prospectively when
it
determines that the derivative is no longer effective in offsetting changes
in
the fair value or cash flows of a hedged item; when the derivative expires;
when
it is probable that the forecasted transaction will not occur; when a hedged
firm commitment no longer meets the definition of a firm commitment; or when
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
Interest
Rate Swap
Cash
flow
hedges are hedges that use simple derivatives to offset the variability of
expected future cash flows. Variability can appear in floating rate liabilities
and can arise from changes in interest rates. The Company uses an interest
rate
swap in which it pays a fixed rate of interest while receiving a variable rate
of interest to change
the
cash
flow profile of its variable-rate borrowing to match a fixed rate profile.
As
discussed in Note E, the Company entered into a long-term debt agreement with
its bank and pays interest based on a variable interest rate. To mitigate the
variability of the interest rate risk, the Company entered into a
derivative/swap contract in February of 2006 with the bank, coupled with a
third
party who will pay a variable rate of interest (an “interest rate swap”). The
interest rate swap is for $4,500,000 with a fixed interest rate of 5.27 percent,
and runs from March 1, 2006 to December 31, 2010, which equates to the final
payment amount and due date of the term loan. Although the swap is expected
to
effectively offset variable interest in the borrowing, hedge accounting is
not
utilized. Therefore, changes in its fair value are being recorded in current
assets or liabilities, as appropriate, with corresponding offsetting entries
to
interest expense.
Commodity
Futures Contract
In
the
ordinary course of business, the Company's income and cash flows may be affected
by fluctuations in the price of nickel, which is a component of stainless steel
raw materials used in its production of stainless steel pipe. The Company is
subject to raw material surcharges on the nickel component from its stainless
steel suppliers. For certain non-cancelable fixed price sales contracts having
delivery dates in the future, the Company is not able to obtain fixed price
purchase commitments to cover the nickel surcharge component of the stainless
steel raw material requirements of the sales contract which creates a cost
exposure from fluctuations in the nickel surcharges. Where such exposure exists,
the Company considers the use of cash settled commodity price swaps with
durations approximately equal to the expected delivery dates of the applicable
raw materials to hedge the price of its nickel requirements. The Company
designates these instruments as fair value hedges and the resulting changes
in
their fair value are recorded as inventory costs. Subsequent gains and losses
are recognized into cost of products sold in the same period as the underlying
physical transaction. While these hedging activities may protect the Company
against higher nickel prices, they may also prevent realizing possible lower
raw
material costs in the event that the market price of nickel falls below the
price stated in a forward sale or futures contract.
In
May
2005, the Company entered into a derivative transaction to hedge the price
of
nickel, a component of stainless steel raw materials. The futures contract
covered approximately 100 metric tonnes of nickel and expired on December 1,
2005. The Company paid $406,000 under the contract which was offset by the
difference in the price paid for the nickel surcharge component of the raw
materials being hedged, and therefore was added to the cost of the raw
materials. There were no outstanding hedging contracts on nickel commodities
at
December 30, 2006.
Note
S Discontinued Operations
On
July
23, 2003 the Company purchased certain assets of Rite Industries. These assets
along with Synalloy’s existing textile dye business were placed in a newly
formed subsidiary of the Company called Blackman Uhler, LLC (BU Colors) of
which
75 percent was owned by the Company. The acquisition provided a new customer
base in the paper and other non-textile industries. Total cost of the
acquisition was $200,000 and the Company funded the acquisition with available
cash. As a result of the continuing downward trends in the textile industry
and
poor financial performance of the textile dye business, the Company decided
to
divest the liquid dye portion of its dye business servicing the textile
industry, and began downsizing the remaining dye business in the fourth quarter
of 2003. On March 25, 2004, the Company entered into an agreement to sell the
liquid dye business composed of vat, sulfur, liquid disperse and liquid reactive
dyes with annual sales of approximately $4,500,000 for approximately its net
book value, and several customers and related products of the remaining textile
dye business were rationalized. Business conditions in the remaining dye
business were poor throughout 2004, especially in the first six months, as
BU
Colors experienced operating losses in every quarter of 2004. In the third
quarter of 2004, the Company decided to attempt to sell the remaining dye
business and on December 28, 2004, entered into a purchase agreement to sell
the
dye business. The transaction closed on January 31, 2005. The terms included
the
sale of the inventory of BU Colors along with certain equipment and other
property associated with the business being sold, and the licensing of certain
intellectual property, for a purchase price of approximately $4,872,000, of
which $4,022,000 was paid at closing, and the balance of $850,000 was to be
paid
over time based on the operations of the purchaser. On January 17, 2006, the
Company and the purchaser amended the purchase agreement replacing the periodic
purchase price payments with a one-time payment of $400,000 which was received
on January 18, 2006, and was reclassified to a current note receivable in the
financial statements at December 31, 2005.
As
a
result of the sale of the dye business in 2004, the Company has discontinued
the
operations of BU Colors and has presented the financial information of BU Colors
as discontinued operations. In December of 2004, the
Company
completed an impairment assessment in accordance with FAS No. 144, on the plant
and equipment located at the Spartanburg facility related to the BU Colors
operations. As a result, the Company recognized an impairment charge of $581,000
from the write-down of plant and equipment (See Note B) Financials of the
discontinued operations for 2005 and 2004 are as follows:
Balance
Sheets of Discontinued Operations
|
December
31, 2005 and January 1, 2005
|
2005
|
2004
|
|||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Accounts
receivable, net
|
$
|
-
|
$
|
2,057,910
|
|||
|
Inventories
|
-
|
3,286,837
|
|||||
|
Other
current assets
|
-
|
38,625
|
|||||
|
Total
assets
|
$
|
-
|
$
|
5,383,372
|
|||
|
Liabilities
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
-
|
$
|
1,130,677
|
|||
|
Accrued
expenses
|
-
|
218,639
|
|||||
|
Total
current liabilities
|
-
|
1,349,316
|
|||||
|
Due
to Synalloy Corporation
|
-
|
4,034,056
|
|||||
|
Total
liabilities
|
$
|
-
|
$
|
5,383,372
|
|||
|
Statements
of Discontinued Operations
|
|||||||
|
Years
ended December 31, 2005 and January 1, 2005
|
2005
|
2004
|
|||||
|
Net
sales
|
$
|
1,585,803
|
$
|
21,979,133
|
|||
|
Cost
of sales
|
1,273,988
|
18,989,359
|
|||||
|
Gross
profit
|
311,815
|
2,989,774
|
|||||
|
Selling,
general and administrative expense
|
347,361
|
3,827,007
|
|||||
|
Operating
loss
|
(35,546
|
)
|
(837,233
|
)
|
|||
|
Long-lived
asset impairment costs (Note B)
|
-
|
581,024
|
|||||
|
Interest
expense, net
|
37,867
|
253,057
|
|||||
|
Loss
from discontinued operations
|
$
|
(73,413
|
)
|
$
|
(1,671,314
|
)
|
|
Note
S Subsequent Events
On
February 8, 2007, the Board of Directors of the Company voted to pay an annual
dividend of $.15 per share payable on March 15, 2007 to holders of record on
February 23, 2007, for a total cash payment of $927,000. The Board presently
plans to review at the end of each fiscal year the financial performance and
capital needed to support future growth to determine the amount of cash
dividend, if any, which is appropriate.
On
February 8, 2007, the Board of Directors of the Company approved stock grants
under the Company’s 2005 Stock Awards Plan, which was approved by shareholders
at the April 28, 2005 Annual Meeting. On February 12, 2007, 22,510 shares were
granted under the Plan to certain management employees of the Company. The
stock
awards will vest in 20 percent increments annually on a cumulative basis,
beginning one year after the date of grant. In order for the awards to vest,
the
employee must be in the continuous employment of the Company since the date
of
the award. Any portion of an award that has not vested will be forfeited upon
termination of employment. The Company may terminate any portion of the award
that has not vested upon an employee’s failure to comply with all conditions of
the award or the Plan. Shares representing awards that have not yet vested
will
be held in escrow by the Company. An employee will not be entitled to any voting
rights with respect to any shares not yet vested, and the shares are not
transferable. Compensation expense totaling $563,000, before income taxes of
approximately $203,000, will be recorded against earnings equally over the
following 60 months from the date of grant with the offset recorded in
Shareholders’ Equity.
Report
of
Management
The
accompanying financial statements have been prepared in conformity with U.
S.
generally accepted accounting principles and the financial statements for the
years ended December 30, 2006, December 31, 2005 and January 1, 2005 have been
audited by Dixon Hughes PLLC, 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 Dixon Hughes PLLC.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and
Shareholders
of Synalloy Corporation
We
have
audited the accompanying consolidated balance sheets of Synalloy Corporation
(“the Company”) and subsidiaries as of December 30, 2006 and December 31, 2005,
and the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the years in the three year period ended December 30,
2006. Our audit also included the financial statement schedule listed in Item
15(a)2 to the Company’s Annual Report on Form 10-K. These consolidated financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were
not
engaged to perform an audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in
the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, 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 financial position of Synalloy Corporation and
subsidiaries as of December 30, 2006 and December 31, 2005, and the results
of
their operations and their cash flows for each of the years in the three-year
period ended December 30, 2006 in conformity with accounting principles
generally accepted in the United States of America. 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.
/s/
Dixon
Hughes PLLC
Charlotte,
NC
March
14,
2007
Item
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not
applicable
Item
9A Controls and Procedures
Based
on
the evaluation required by 17 C.F.R. Section 240.13a-15(b) or 240.15d-15(b)
of
the Company's disclosure controls and procedures (as defined in 17 C.F.R.
Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief executive officer
and chief financial officer concluded that such controls and procedures, as
of
the end of the period covered by this annual report, were
effective.
No
disclosure is currently required under 17 C.F.R. Section 229.308 (a) and (b).
There has been no change in the registrant's internal control over financial
reporting during the last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
Item
9B Other Information
Not
applicable
PART
III
Item
10 Directors, Executive Officers and Corporate
Governance
Incorporated
by reference to the information set forth under the captions "Election of
Directors," "Executive Officers" on page 5, and "Section 16(a) Beneficial
Ownership Reporting Compliance" on page 8 of the Company's definitive proxy
statement to be used in connection with its Annual Meeting of Shareholder to
be
held April 26, 2007 (the "Proxy Statement").
Code
of
Ethics. The Company's Board of Directors has adopted a Code of Ethics that
applies to the Company's Chief Executive Officer, Vice President, Finance and
corporate and divisional controllers. The Code of Ethics is available on the
Company's website at: www.synalloy.com. Any amendment to, or waiver from, this
Code of Ethics will be posted on the Company's internet site.
Audit
Committee Financial Expert. The Company's Board of Directors has determined
that
the Company has at least one "audit committee financial expert," as that term
is
defined by Item 407(d)(5) of Regulation S-K promulgated by the Securities and
Exchange Commission, serving on its Audit Committee. Mr. Carroll D. Vinson
meets
the terms of the definition and is independent, as independent is defined for
audit committee members in the rules of the NASDAQ Global Market. Pursuant
to
the terms of Item 407(d) of Regulation S-K, a person who is determined to be
an
"audit committee financial expert" will not be deemed an expert for any purpose
as a result of being designated or identified as an "audit committee financial
expert" pursuant to Item 407(d), and such designation or identification does
not
impose on such person any duties, obligations or liability that are greater
than
the duties, obligations or liability imposed on such person as a member of
the
Audit Committee and Board of Directors in the absence of such designation or
identification. Further, the designation or identification of a person as an
"audit committee financial expert" pursuant to Item 401 does not affect the
duties, obligations or liability of any other member of the Audit Committee
or
Board of Directors.
Audit
Committee. The Company has a separately designated standing Audit Committee
of
the Board of Directors established in accordance with Section 3(a)(58)(A) of
the
Securities Exchange Act of 1934. The members of the Audit Committee are Carroll
D. Vinson, Murray H. Wright and Craig C. Bram.
Item
11 Executive Compensation
Incorporated
by reference to the information set forth under the captions “Compensation
Committee Interlocks and Insider Participation,” “Compensation Discussion and
Analysis,” and "Remuneration of Directors and Officers" on pages 8 to 13,
respectively, of the Proxy Statement; provided, however, the “Compensation
Committee Report” shall not be deemed incorporated herein by
reference.
Item
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Incorporated
by reference to the information set forth under the captions "Beneficial Owners
of More Than Five Percent of the Company's Common Stock" and "Security Ownership
of Management" on pages 3 to 4 of the Proxy Statement.
Equity
Compensation Plan Information. The following table sets forth aggregated
information as of December 30, 2006 about all of the Company's equity
compensation plans.
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights (a)
|
Weighted
average exercise price of outstanding options, warrants
and rights (b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities
reflected in column (a)(c))
|
|||||||
|
Equity
compensation plans approved by security holders
|
282,150
|
$
|
9.64
|
507,100
|
||||||
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||||||
|
Total
|
282,150
|
$
|
9.64
|
507,100
|
||||||
At
the
February 8, 2007 meeting, The Board approved the Directors’ annual compensation
for each non-employee director elected by shareholders at the annual meeting
in
April. Directors will be paid an annual retainer of $35,000, and each director
has the opportunity to elect to receive $15,000 of the retainer in restricted
stock. For 2006 and 2007, each director elected to receive $15,000 of the annual
retainer in restricted stock. The number of restricted shares is determined
by
the average of the high and low stock price on the day prior to the Annual
Meeting of Shareholders. For 2006, each non-employee director received 1,201
shares of restricted stock (an aggregate of 6,005 shares). The shares granted
to
the directors are not registered under the Securities Act of 1933 and are
subject to forfeiture in whole or in part upon the occurrence of certain events.
The
number of restricted shares will be determined by the average of the high and
low stock price on the day prior to the Annual Meeting of Shareholders. The
shares granted to the directors are not registered and are subject to forfeiture
in whole or in part upon the occurrence of certain events. The above table
does
not reflect these shares issued to non-employee directors.
On
February 8, 2007, the Board of Directors of the Company approved stock grants
under the Company’s 2005 Stock Awards Plan, which was approved by shareholders
at the April 28, 2005 Annual Meeting. On February 12, 2007, 22,510 shares were
granted under the Plan to certain management employees of the Company. The
stock
awards will vest in 20 percent increments annually on a cumulative basis,
beginning one year after the date of grant. In order for the awards to vest,
the
employee must be in the continuous employment of the Company since the date
of
the award. Any portion of an award that has not vested will be forfeited upon
termination of employment. The Company may terminate any portion of the award
that has not vested upon an employee’s failure to comply with all conditions of
the award or the plan. Shares representing awards that have not yet vested
will
be held in escrow by the Company. An employee will not be entitled to any voting
rights with respect to any shares not yet vested, and the shares are not
transferable.
Item
13 Certain Relationships and Related
Transactions
Incorporated
by reference to the information set forth under the captions “Related Party
Transactions” on page 6 to 7 of the Proxy Statement.
Item
14 Principal Accountant Fees and
Services
Incorporated
by reference to the information set forth under the captions "Independent
Registered Public Accounting Firm - Fees Paid to Independent Auditors" and
"Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors" on pages 16 to 17 of the Proxy Statement.
PART
IV
Item
15 Exhibits and Financial Statement
Schedules
|
(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 Operations at December 30, 2006, December 31, 2005
and
January 1, 2005
|
|||
|
|
|
Consolidated
Balance Sheets for the years ended December 30, 2006 and December
31,
2005
|
|
|
|
|
Consolidated
Statements of Shareholders' Equity for the years ended December 30,
2006,
December 31, 2005 and January 1, 2005
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 30, 2006, December
31, 2005 and January 1, 2005
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
2.
|
Financial
Statements Schedules: The following consolidated financial statements
schedule of Synalloy Corporation is included in Item
15:
|
|
|
|
|
Schedule
II - Valuation and Qualifying Accounts for the years ended December
30,
2006, December 31, 2005 and January 1, 2005
|
|
|
|
|
All
other 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:
|
|
|
|
|
See
"Exhibit Index"
|
|
Schedule
II Valuation and
Qualifying Accounts
|
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
|||||||||
|
Balance
at
|
Charged
to
|
Balance
at
|
|||||||||||
|
Beginning
|
Cost
and
|
Deductions
|
End
of
|
||||||||||
|
Description
|
of
Period
|
Expenses
|
(1)
|
Period
|
|||||||||
|
Year
ended December 30, 2006
|
|||||||||||||
|
Deducted
from asset account:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
1,039,000
|
$
|
315,000
|
$
|
240,000
|
$
|
1,114,000
|
|||||
|
Year
ended December 31, 2005
|
|||||||||||||
|
Deducted
from asset account:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
678,000
|
$
|
512,000
|
$
|
151,000
|
$
|
1,039,000
|
|||||
|
Year
ended January 1, 2005
|
|||||||||||||
|
Deducted
from asset account:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
242,000
|
$
|
610,000
|
$
|
174,000
|
$
|
678,000
|
|||||
|
(1)
Allowances, uncollected accounts and credit balances written off
against
reserve, net of recoveries.
|
|||||||||||||
Signatures
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.
|
By
/s/
Ronald H. Braam
Ronald
H. Braam
Chief
Executive Officer
|
March
29, 2007
Date |
|
By
/s/
Gregory M. Bowie
Gregory
M. Bowie
Chief
Financial Officer
|
March
29, 2007
Date
|
SYNALLOY
CORPORATION
Registrant
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.
James
G. Lane, Jr.
Chairman
of the Board
|
March
29, 2007
Date
|
|
By
/s/
Sibyl N. Fishburn
Sibyl
N. Fishburn
Director
|
March
29, 2007
Date
|
|
By
/s/
Carroll D. Vinson
Carroll
D. Vinson
Director
|
March
29, 2007
Date
|
|
By
/s/
Murray H. Wright
Murray
H. Wright
Director
|
March
29, 2007
Date
|
|
By
/s/
Craig C. Bram
Craig
C. Bram
Director
|
March
29, 2007
Date
|
Index
to
Exhibits
|
Exhibit
No.
from
Item
601 of
Regulation
S-B
|
|
Description
|
|
3.1
|
|
Restated
Certificate of Incorporation of Registrant, as amended, incorporated
by
reference to Registrant's Form 10-Q for the period ended April 2,
2005
|
|
3.2
|
|
Bylaws
of Registrant, as amended, incorporated by reference to Registrant's
Form
10-Q for the period ended March 31, 2001 (the "first quarter 2001
Form
10-Q")
|
|
4.1
|
|
Form
of Common Stock Certificate, incorporated by reference to the first
quarter 2001 Form 10-Q
|
|
4.2
|
|
Rights
Agreement, dated as of February 4, 1999, as amended May 22, 2000,
between
registrant and American Stock Transfer and Trust Company, incorporated
by
reference to exhibits to Registrant's Form 8-K filed May 22, 2000
and Form
8-A filed March 29, 1999
|
|
10.1
|
|
Synalloy
Corporation 1988 Long-Term Incentive Stock Plan, incorporated by
reference
to the first quarter 2001 Form 10-Q
|
|
10.2
|
|
Synalloy
Corporation Restated 1994 Non-Employee Directors' Stock Option Plan,
incorporated by reference to the first quarter 2001 Form
10-Q
|
|
10.3
|
|
Synalloy
Corporation 1998 Long-Term Incentive Stock Plan, incorporated by
reference
to the first quarter 2001 Form 10-Q
|
|
10.4
|
|
Registrant's
Subsidiary and Divisional Management Incentive Plan, as restated,
effective January 2, 2006
|
|
10.5
|
|
Synalloy
Corporation 2005 Stock Awards Plan, incorporated by reference to
the Proxy
Statement for the 2005 Annual Meeting of Shareholders
|
|
10.6
|
Credit
Agreement, dated as of December 13, 2005, between Registrant and
Carolina
First Bank
|
|
|
10.7
|
|
Amended
Salary Continuation Agreement, dated February 6, 2003, between Registrant
and Ronald H. Braam, incorporated by reference to the Form 10-K for
the
year ended January 3, 2004
|
|
10.8
|
|
Employment
Agreement, dated January 1, 2006, between Registrant and Ronald H.
Braam
|
|
10.10
|
Agreement
between Registrant’s Bristol Metals, L. P. subsidiary and the United
Steelworkers of America Local 4586, dated December 9, 2004, incorporated
by reference to the Form 10-K for the year ended January 1,
2005
|
|
|
10.11
|
|
Agreement
between Registrant’s Bristol Metals, L. P. subsidiary and the United
Association of Journeymen and Apprentices of the Plumbing and Pipe
Fitting
Industry of the United States and Canada Local Union No. 538, dated
February 16, 2004
|
|
21
|
|
Subsidiaries
of the Registrant
|
|
31
|
|
Rule
13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and
Chief
Financial Officer
|
|
32
|
|
Certifications
Pursuant to 18 U.S.C. Section 1350
|