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Washington,
D.C. 20549
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FOR
THE FISCAL YEAR ENDED JANUARY 3, 2009
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(Exact name of
registrant as specified in its charter)
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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(Address
of principal executive offices)
(Zip
Code)
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(Title
of Class)
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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_
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes
__ No X
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Synalloy
Corporation
Form
10-K for Period Ended January 3, 2009
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Page # |
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Item
1
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2
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Item
1A
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6
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Item
2
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9
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Item
3
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9
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Item
4
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9
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Item
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10
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Item
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11
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Item
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12
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Item
7A
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19
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Item
8
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20
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25
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35
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37
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Item
9
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39
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Item
9A
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39
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Item
10
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39
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Item
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40
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Item
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Item
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40
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Item
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40
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Item
15
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41
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42
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43
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Forward-Looking
Statements
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), wastewater 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.
provide
additional manufacturing capacity, and provide improved product handling and
additional space for planned equipment additions; and installing automated
hydro-testing equipment for pipe up to 72 inches. In addition, Bristol is
currently completing a capital project to renovate several of its continuous
pipe mills which is expected to increase their capabilities while improving
their performance.
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 fabrication 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.
In order
to establish stronger business relationships, only a few raw material suppliers
are used. Five suppliers furnish about 80 percent of total dollar purchases of
raw materials, with one supplier totaling 48 percent. However, the Company does
not believe that the loss of any of these suppliers would have a materially
adverse effect on the Company as raw materials are readily available from a
number of different sources and the Company anticipates no difficulties in
fulfilling its requirements.
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,
waste water treatment and LNG industries, with some other important industry
users being mining, power generation (including nuclear), water treatment,
brewery, food processing, petroleum, pharmaceutical and alternative
fuels.
Specialty
Chemicals Segment – This Segment includes four operating companies, all
of which are wholly-owned subsidiaries of the Company. BU Specialties, OP, and
SFR 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, which
was 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 the Executive Vice President of BU Specialties
who spends a substantial amount of his time in sales and service to customers.
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 conducts
precise 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.
OP sells
aqueous pigment dispersions including 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. On March 6,
2009, The Company entered into a Purchase Agreement to sell the pigment
dispersion business of OP. The sale includes substantially all of OP’s assets
for a purchase price approximately equal to their net book value as of the date
of sale, and any gain or loss resulting from the disposition will not be
material. As part of the Agreement, the Company will continue to toll
manufacture pigments for a transitional period of up to one year. The operations
of OP are not material to the consolidated financial statements and the
disposition will not be recorded as a discontinued operation. OP will continue
to produce and sell chemical dispersions utilizing some of its existing
equipment, and is attempting to introduce new chemical dispersions directed at
the latex and rubber industries, as well as other selected targeted
customers.
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 fulfilling its
requirements.
Please
see Note O to the Consolidated Financial Statements, which are included in Item
8 of this Form 10-K, for financial information about the Company's
Segments.
Research
and Development Activities
The Specialty Chemicals Segment operates primarily on the
basis of delivering products soon after orders are received. Accordingly,
backlogs are not a factor in this business. The same applies to commodity pipe
sales in the Metals Segment. However, backlogs are important in the Metals
Segment’s 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 $45,500,000 at the end of 2008, approximately 75 percent of
which should be completed in 2009, and $57,000,000 and $54,900,000 at the 2007
and 2006 respective year ends.
Available
information
The
Company electronically files with the Securities and Exchange Commission (SEC)
its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its
periodic reports on Form 8-K, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “1934
Act), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC
maintains a site on the Internet, www.sec.gov, that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The Company also makes
its filings available, free of charge, through its Web site, www.synalloy.com, as
soon as reasonably practical after the electronic filing of such material with
the SEC.
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, most 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
feedstock, such as crude oil and natural gas, which have been subject to
historical periods of rapid and significant movements in price. These
fluctuations in price could be aggravated by factors beyond our control such as
political instability, and supply and demand factors, including 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 adversely affected, 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 F 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 246 employees represented by unions at the Bristol,
Tennessee facility, which is 54 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 December
2009, March 2010 and February 2014. 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 may not be able to make changes
necessary to continue to be a market leader and an effective
competitor. 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.
Our internal controls over financial
reporting could fail to prevent or detect misstatements. 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
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Location
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Principal
Operations
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Building Square Feet
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Land
Acres
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(1) Leased
facility.
(2) Plant
was closed in 2001 and all structures and manufacturing equipment have been
removed.
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2008
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2007
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Quarter
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High
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Low
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High
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Low
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1st
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$ 17.96
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$ 11.00
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$ 29.98
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$ 18.01
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2nd
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17.52
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11.85
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47.45
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29.50
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3rd
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17.44
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12.00
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36.32
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17.01
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4th
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14.46
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3.52
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23.89
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14.79
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The
information required by Item 201(d) of Regulation S-K is set forth under Part
III, Item 12 of this Form 10-K.
Unregistered
Sales of Equity Securities
Pursuant
to the compensation arrangement with directors discussed under Item 12 "Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters" in this Form 10-K, on April 24, 2008, the Company issued to each of its
non-employee directors 959 shares of its common stock (an aggregate of 4,795
shares). Such shares were issued to the directors in lieu of $15,000 of their
annual cash retainer fees. Issuance of these shares was not registered under the
Securities Act of 1933 based on the exemption provided by Section 4(2) thereof
because no public offering was involved.
During
the fourth quarter ended January 3, 2009, the Registrant did not issue or
purchase any other shares of common stock.
Neither
the Company, nor any affiliated purchaser (as defined in Rule 10b-18(a)(3) of
the Securities Exchange Act of 1934) on behalf of the Company repurchased any of
the Company’s securities during the fourth quarter of 2008.
Item 6 Selected Financial Data
(Dollar
amounts in thousands except for per share data)
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2008
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2007
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2006
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2005
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2004
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Operations
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Net
sales
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$ |
192,476 |
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$ |
178,285 |
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$ |
152,047 |
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$ |
131,408 |
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$ |
101,602 |
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Gross
profit
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19,877 |
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28,163 |
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22,724 |
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16,781 |
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13,976 |
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Selling,
general & administrative expense
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10,934 |
|
|
|
11,706 |
|
|
|
10,562 |
|
|
|
10,369 |
|
|
|
9,432 |
|
|
Operating
income
|
|
|
8,943 |
|
|
|
16,457 |
|
|
|
12,757 |
|
|
|
6,412 |
|
|
|
4,544 |
|
|
Net
income continuing operations
|
|
|
5,983 |
|
|
|
10,125 |
|
|
|
7,608 |
|
|
|
5,147 |
|
|
|
2,274 |
|
|
Net
loss discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(51 |
) |
|
|
(1,100 |
) |
|
Net
income
|
|
|
5,983 |
|
|
|
10,125 |
|
|
|
7,608 |
|
|
|
5,096 |
|
|
|
1,174 |
|
|
Financial
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
94,366 |
|
|
|
96,621 |
|
|
|
89,357 |
|
|
|
70,982 |
|
|
|
71,202 |
|
|
Working
capital
|
|
|
50,859 |
|
|
|
46,699 |
|
|
|
46,384 |
|
|
|
28,664 |
|
|
|
35,088 |
|
|
Long-term
debt, less current portion
|
|
|
9,959 |
|
|
|
10,246 |
|
|
|
17,731 |
|
|
|
8,091 |
|
|
|
21,205 |
|
|
Shareholders'
equity
|
|
|
62,867 |
|
|
|
58,140 |
|
|
|
47,127 |
|
|
|
39,296 |
|
|
|
33,930 |
|
|
Financial
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
4.0 |
|
|
|
2.9 |
|
|
|
3.4 |
|
|
|
2.5 |
|
|
|
3.8 |
|
|
Gross
profit to net sales
|
|
|
10 |
% |
|
|
16 |
% |
|
|
15 |
% |
|
|
13 |
% |
|
|
14 |
% |
|
Long-term
debt to capital
|
|
|
14 |
% |
|
|
15 |
% |
|
|
27 |
% |
|
|
17 |
% |
|
|
38 |
% |
|
Return
on average assets
|
|
|
6 |
% |
|
|
11 |
% |
|
|
9 |
% |
|
|
7 |
% |
|
|
3 |
% |
|
Return
on average equity
|
|
|
10 |
% |
|
|
19 |
% |
|
|
18 |
% |
|
|
14 |
% |
|
|
7 |
% |
|
Per
Share Data (income/(loss) – diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income continuing operations
|
|
$ |
.95 |
|
|
$ |
1.60 |
|
|
$ |
1.22 |
|
|
$ |
.84 |
|
|
$ |
.37 |
|
|
Net
loss discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(.01 |
) |
|
|
(.18 |
) |
|
Net
income
|
|
|
.95 |
|
|
|
1.60 |
|
|
|
1.22 |
|
|
|
.83 |
|
|
|
.19 |
|
|
Dividends
declared and paid
|
|
|
.25 |
|
|
|
.15 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Book
value
|
|
|
10.06 |
|
|
|
9.32 |
|
|
|
7.68 |
|
|
|
6.43 |
|
|
|
5.64 |
|
|
Other
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
2,796 |
|
|
$ |
2,634 |
|
|
$ |
2,672 |
|
|
$ |
2,862 |
|
|
$ |
3,068 |
|
|
Capital
expenditures
|
|
$ |
4,037 |
|
|
$ |
4,486 |
|
|
$ |
3,092 |
|
|
$ |
3,246 |
|
|
$ |
2,313 |
|
|
Employees
at year end
|
|
|
459 |
|
|
|
482 |
|
|
|
437 |
|
|
|
434 |
|
|
|
442 |
|
|
Shareholders
of record at year end
|
|
|
826 |
|
|
|
834 |
|
|
|
897 |
|
|
|
935 |
|
|
|
1,009 |
|
|
Average
shares outstanding - diluted
|
|
|
6,281 |
|
|
|
6,296 |
|
|
|
6,234 |
|
|
|
6,139 |
|
|
|
6,142 |
|
|
Stock
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
range of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
17.96 |
|
|
$ |
47.45 |
|
|
$ |
18.90 |
|
|
$ |
12.34 |
|
|
$ |
10.75 |
|
|
Low
|
|
|
3.52 |
|
|
|
14.79 |
|
|
|
10.38 |
|
|
|
9.10 |
|
|
|
6.52 |
|
|
Close
|
|
|
5.00 |
|
|
|
17.67 |
|
|
|
18.54 |
|
|
|
10.46 |
|
|
|
9.90 |
|
Item
7 Management's Discussion and Analysis of Financial Condition and Results of
Operations
As noted in Note F to the Consolidated Financial Statements
included in Item 8 of this Form 10-K, the Company has accrued $1,364,000 as of
January 3, 2009, in environmental remediation costs which, in management's best
estimate, are expected to satisfy anticipated costs of known remediation
requirements as outlined in Note F. 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. 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.
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. Based on assessments performed
in 2008 on the assets of the Company, no write-downs were deemed necessary. The
Company also reviews the $1,355,000 of goodwill for impairment annually in the
fourth quarter utilizing applicable fair value measurements and based on its
review in 2008, concluded that no impairment charges were necessary. The Company
believes that if impairment charges should occur with respect to its existing
assets, the charges would not be material to the consolidated financial
statements. 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, including goodwill, were
less than the carrying values of those assets, significant impairment charges
could be necessary. Based on the closing price of the Company’s common stock at
January 3, 2009, the aggregate market value of the Company was significantly
below the consolidated book value of the Company at January 3, 2009. As a
result, the Company also estimated the fair value of all of the other reporting
units in the Company, and compared the result to the aggregate market
capitalization in order to ensure that the reporting unit with the goodwill was
not overvalued.
Liquidity
and Capital Resources
Cash flows provided by operations during 2008 totaled
$5,940,000. This compares to cash flows provided by operations during 2007 of
$12,333,000, or a decrease in cash flows of $6,393,000 from 2007 to 2008. Cash
flows in 2008 were generated from net income totaling $8,779,000 before
depreciation and amortization expense of $2,796,000. Cash flows were also
positively impacted in 2008 by a $5,890,000 decrease in the Company’s
inventories as inventories declined from $48,801,000 at the end of 2007 to
$42,911,000 at the end of 2008. Almost all of the decrease occurred in the
Metals Segment, primarily as a result of the significant declines in cost from
stainless steel surcharges, discussed further in the Metals Segment Comparison
of 2008 to 2007 below. Accounts receivable increased $1,381,000 in 2008,
reflecting a 13 percent increase in sales in the fourth quarter of 2008. In
addition, accounts payable decreased $3,735,000 in 2008, resulting primarily
from the decline 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 at year end. The accounts receivable increase and accounts
payable decrease more than offset cash flows generated from the inventory
decline. Also negatively impacting cash flows in 2008 was a decline in accrued
expenses at the end of 2008 compared to the end of 2007, as advances from
customers (prepayments from customers used to purchase raw materials required
for piping systems projects) declined $2,453,000, and accruals for profit based
incentives declined $1,157,000 reflecting the reduction in profits earned in
2008 compared to 2007.
Cash
flows in 2007 were generated from net income totaling $12,759,000 before
depreciation and amortization expense of $2,634,000. In 2007, conditions in the
Metals Segment were reversed from those existing in 2008 as the Segment was
experiencing significant increases in stainless steel surcharges driving up
inventory costs. As a result, consolidated inventories increased $7,256,000 in
2007, which also negatively impacted 2007’s cash flows. Accounts receivable
declined $2,312,000 in 2007, primarily from the decline in sales experienced in
2007, down four percent over the prior year amount. Accounts payable increased
$1,735,000 in 2007, resulting primarily from the increase 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 at year end. The
net result of the inventory and accounts receivable increases and the accounts
payable decrease was a $3,209,000 use of cash flows in 2007. Cash flows were
positively impacted by a $4,245,000 increase in advances from customers,
included in accrued expenses, at the end of 2007, compared to the end of 2006,
offset by a $1,829,000 decrease in income tax liabilities.
In 2008,
the Company’s current assets decreased $3,538,000 and current liabilities
decreased $7,698,000, from the year ended 2007 amounts, which caused working
capital for 2008 to increase by $4,160,000 to $50,859,000 from the 2007 total of
$46,699,000. The current ratio for the year ended January 3, 2009, increased to
4.0:1 from the 2007 year-end ratio of 2.9:1.
In 2008,
the Company utilized its line of credit facility to fund its working capital
needs and fund capital expenditures of $4,037,000. As a result of the cash flows
generated in 2008, the Company was able to pay a $1,566,000 dividend and reduce
borrowings by $287,000 in 2008. The Company expects that cash flows from 2009
operations and available borrowings will be sufficient to make debt payments,
fund estimated capital expenditures of $3,900,000 and normal operating
requirements, and pay a dividend of $.10 per share, or a total of $625,000, on
March 10, 2009. The Company’s Credit Agreement with a lender provides a
$27,000,000 line of credit that expires on December 31, 2010. 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 January 3, 2009, the amount available for borrowing was
$15,000,000, of which $4,942,000 was borrowed, leaving $10,058,000 of
availability. Borrowings under the Credit Agreement are collateralized by
substantially all of the assets of the Company. At January 3, 2009, 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.
Results
of Operations
The
Company generated net income of $5,893,000, or $.95 per share, on sales of
$192,476,000 in 2008, compared to net earnings of $10,125,000, or $1.60 per
share, on sales of $178,285,000 in 2007. For the fourth
quarter
of 2008, the Company experienced a net loss of $513,000, or $.08 per share, on
sales of $43,489,000, compared to net earnings of $1,144,000, or $.18 per share,
on sales of $38,431,000 in the fourth quarter of 2007.
Consolidated
gross profits declined 29 percent to $19,877,000 in 2008, compared to
$28,163,000 in 2007, and as a percent of sales decreased to ten percent of sales
in 2008 compared to 16 percent of sales in 2007. Most of the decreases in
dollars and in percentage of sales were in the Metals Segment as discussed in
the Metals Segment Comparison of 2008 to 2007 below. Consolidated selling,
general and administrative expense for 2008 decreased by $772,000, compared to
2007, and declined one percent as a percent of sales to six percent. The dollar
decrease resulted primarily from a decrease in 2008 in management incentives,
which are based on profits, compared to 2007.
Comparison
of 2007 to 2006
In 2007,
the Company generated a 33 percent increase in net income, earning $10,125,000,
or $1.60 per share, on sales of $178,285,000, which is a 17 percent increase
over the previous record sales of 2006. This compares to net earnings of
$7,608,000, or $1.22 per share, on sales of $152,047,000 in 2006. For the fourth
quarter of 2007, net earnings declined 62 percent to $1,144,000, or $.18 per
share on a four percent sales decline to $38,431,000, compared to net earnings
of $3,003,000, or $.48 per share, on sales of $40,059,000 in the fourth quarter
of 2006. 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 of 2006.
Consolidated
gross profits increased 24 percent or $5,439,000 to $28,163,000 in 2007 compared
to 2006, and as a percent of sales increased one percent to 16 percent of sales
in 2007 compared to 2006. Most of the increase in dollars and increase in
percentage of sales came from the Metals Segment as discussed in the Metals
Segment Comparison of 2007 to 2006 below. Consolidated selling, general and
administrative expense for 2007 increased by $1,144,000 compared to 2006, but
remained unchanged as a percent of sales at seven percent. The dollar increase
came primarily from a combination of incurring costs of more than $250,000 from
implementing Sarbanes-Oxley Section 404 Regulations covering internal controls,
and an increase in 2007 in management incentives, which are based on profits,
compared to 2006.
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Amount
in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Net
sales
|
|
$ |
131,877 |
|
|
|
100.0 |
% |
|
$ |
126,219 |
|
|
|
100.0 |
% |
|
$ |
102,822 |
|
|
|
100.0 |
% |
|
Cost
of goods sold
|
|
|
117,856 |
|
|
|
89.4 |
% |
|
|
104,816 |
|
|
|
83.0 |
% |
|
|
86,712 |
|
|
|
84.3 |
% |
|
Gross
profit
|
|
|
14,021 |
|
|
|
10.6 |
% |
|
|
21,403 |
|
|
|
17.0 |
% |
|
|
16,110 |
|
|
|
15.7 |
% |
|
Selling
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
4,696 |
|
|
|
3.6 |
% |
|
|
5,015 |
|
|
|
4.0 |
% |
|
|
4,498 |
|
|
|
4.4 |
% |
|
Operating
income
|
|
$ |
9,325 |
|
|
|
7.0 |
% |
|
$ |
16,388 |
|
|
|
13.0 |
% |
|
$ |
11,612 |
|
|
|
11.3 |
% |
|
Year-end
backlogs -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Piping
systems
|
|
$ |
45,500 |
|
|
|
|
|
|
$ |
57,000 |
|
|
|
|
|
|
$ |
54,900 |
|
|
|
|
|
The
Metals Segment sales increased five percent for the year ended 2008 compared to
2007 from a seven percent increase in average selling prices, partially offset
by a five percent decline in unit volumes. Gross profit for the year ended 2008
declined 35 percent to $14,021,000, or 11 percent of sales, from 2007 year end’s
total of $21,403,000, or 17 percent of sales. Operating income for
the year ended 2008 declined 43 percent to $9,325,000 from 2007 year end’s total
of $16,388,000. Sales for the fourth quarter of 2008 increased 11 percent to
$28,209,000 from sales of $25,410,000 in the fourth quarter of 2007, resulting
from a 49 percent increase in unit volumes, partially offset by a 16 percent
decline in average selling prices. The Segment had a negative gross margin of
$602,000 for the fourth quarter of 2008 compared to a gross profit of
$2,575,000, or ten percent of sales, for the fourth quarter of 2007. The Segment
experienced an operating loss of $1,196,000 for the fourth quarter of 2008
compared to generating operating income of $1,937,000 in the fourth quarter of
2007.
Commodity
pipe unit volumes increased 200 percent in the fourth quarter of 2008 resulting
in a three percent increase for the year compared to the same period last year.
The increase in commodity volumes reflects the apparent benefit that the
unfair-trade case, filed in January 2008 by U.S. producers of stainless steel
pipe and the United Steelworkers Union against China, had on imports over the
last three quarters of 2008, coupled with the very low volume experienced in
2007’s fourth quarter. Gross profits are impacted by stainless steel surcharges
which 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 (FIFO) 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. Unfortunately, stainless
steel surcharges began a decline in the third quarter of 2008 which accelerated
in the fourth quarter of 2008 which reduced profits significantly. This decline
created steady downward pressure on commodity selling prices causing average
selling prices to fall 32 percent in the fourth quarter of 2008 and 11 percent
for the year compared to the same periods in 2007. This resulted in an
approximately $2,000,000 loss in the fourth quarter of 2008 under our FIFO
inventory method that matched the low selling prices with much higher inventory
costs. The rapid decline in commodity pricing also created an inventory
valuation issue at year end as the market value of much of our commodity
inventory fell below our costs, which led to an approximate $1,000,000 charge in
the fourth quarter of 2008 to reduce the January 3, 2009 inventory value to
market prices.
The
non-commodity business continued to deliver excellent results. Although unit
volumes fell 14 percent for the year and 27 percent in the fourth quarter of
2008, average selling prices increased 31 percent for the year and 16 percent
for the quarter compared to the same periods in 2007. The majority of the
decline in unit volumes came in our piping systems operation as customers pushed
out delivery dates in the fourth quarter of 2008 in response to the economic
downturn. The increase in average selling prices came primarily from a change in
product mix. As a result, the non-commodity business generated excellent gross
profits for the year and in the fourth quarter of 2008. Piping systems’ backlog
was $45,500,000 at the end of the fourth quarter of 2008 compared to $38,700,000
at the end of the third quarter of 2008 and $57,000,000 at the end of the fourth
quarter of 2007.
Selling
and administrative expense decreased $319,000, or six percent in 2008 when
compared to 2007, but remained unchanged at four percent of sales in 2008
consistent with 2007. The dollar decrease came primarily from decreased
management incentives, which are based on profits, offset somewhat by an
increase in sales commission expense, resulting from the increase in sales in
2008 compared to 2007.
Comparison
of 2007 to 2006 – Metals Segment
The
Metals Segment achieved sales growth of 23 percent for 2007 from a 61 percent
increase in average selling prices, partially offset by a 24 percent decline in
unit volumes when compared to 2006. Operating income of $16,388,000 was 41
percent higher than 2006’s total of $11,612,000. The large increases in average
selling prices resulted partly from higher stainless steel surcharges, primarily
in the first three quarters of 2007, compared to 2006. The increased selling
prices resulted from our accomplishing our goal of expanding into markets that
require larger pipe sizes, higher-priced alloys, larger proportions of
non-commodity products, and products fabricated by our piping systems plant. The
change in product mix includes the successful development of business from
liquid natural gas (LNG), wastewater and water treatment, biofuels and electric
utility scrubber projects. Many of the products produced for these markets are
subject to more stringent specifications, including 100 percent x-ray of the
weld seams. In addition, some of these non-commodity products are made from
expensive alloys and are more difficult to produce. Accordingly, their cost and
sales price are much higher than commodity products.
The
decline in unit volume for 2007 as compared to 2006 resulted from a 37 percent
decline in pipe sales, partially offset by a 31 percent increase in piping
systems. The increase in gross profit was more than accounted for by a surge in
our piping systems products to more than triple the amounts earned in 2006,
while pipe sales yielded slightly lower profits. During the first six months of
2007, the Company continued to experience an upward trend in surcharges
experienced in the third and fourth quarters of 2006. As a result, surcharges
were significantly higher than they were in the first six months of 2006 with an
accompanying benefit to gross profits. Over the last six months of 2007,
surcharges declined reducing gross profits.
Sales for
the fourth quarter of 2007 declined 12 percent from a 44 percent decline in unit
volumes, partially offset by a 57 percent increase in average selling prices,
while operating income declined 60 percent to $1,937,000 for the fourth quarter
of 2007, compared to $4,892,000 in the fourth quarter of 2006. The decrease in
unit volume experienced in the fourth quarter of 2007 resulted from a 75 percent
decline in commodity pipe sales, partially
offset by
31 percent higher piping systems unit volumes compared to the fourth quarter of
2006. Weak market conditions that began in the third quarter of 2007
deteriorated further in the fourth quarter of 2007 causing the big unit volume
decrease in pipe sales. Stainless steel surcharges in 2007 declined
significantly in August, September and October, and although nickel prices rose
in November and December, they flattened in January 2008 and fell in February
2008. This uncertainty of nickel pricing along with distributors’ desire to
reduce inventories at 2007 year end caused distributors to limit purchases
throughout the fourth quarter of 2007. Another factor causing the volume
declines for the year and fourth quarter of 2007 when compared to the same
periods of 2006 was the significant increase in imports, primarily from China.
Finally, the weakening of end-use demand for commodity pipe experienced toward
the end of the third quarter of 2007 accelerated in the fourth quarter of 2007.
Although our non-commodity business in the fourth quarter of 2007 was strong, it
was not enough to offset the negative impact on profitability from the lower
than expected commodity pipe sales which generated substantial under absorption
of fixed and overhead costs. Piping systems continued to experience the
favorable impact of its strong backlog as operating income increased
significantly in the fourth quarter of 2007 compared to a year earlier. Piping
systems’ backlog was $57,000,000 at the end of 2007 compared to $54,900,000 at
the end 2006.
Selling
and administrative expense increased $517,000, or 12 percent in 2007 when
compared to 2006, but remained unchanged at four percent of sales in 2007
consistent with 2006. The dollar increase came primarily from increased
management incentives, which are based on profits, and sales commissions,
resulting from the increase in sales in 2007 compared to 2006.
Specialty Chemicals
Segment–The following tables summarize operating results for the three
years indicated. Reference should be made to Note O to the Consolidated
Financial Statements included in Item 8 of this Form 10-K.
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Amount
in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Net
sales
|
|
$ |
60,599 |
|
|
|
100.0 |
% |
|
$ |
52,066 |
|
|
|
100.0 |
% |
|
$ |
49,225 |
|
|
|
100.0 |
% |
|
Cost
of goods sold
|
|
|
54,743 |
|
|
|
90.3 |
% |
|
|
45,306 |
|
|
|
87.0 |
% |
|
|
42,611 |
|
|
|
86.6 |
% |
|
Gross
profit
|
|
|
5,856 |
|
|
|
9.7 |
% |
|
|
6,760 |
|
|
|
13.0 |
% |
|
|
6,614 |
|
|
|
13.4 |
% |
|
Selling
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
3,745 |
|
|
|
6.2 |
% |
|
|
3,983 |
|
|
|
7.6 |
% |
|
|
3,970 |
|
|
|
8.1 |
% |
|
Operating
income
|
|
$ |
2,111 |
|
|
|
3.5 |
% |
|
$ |
2,777 |
|
|
|
5.4 |
% |
|
$ |
2,644 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Specialty Chemicals Segment sales increased 16 percent for the year ended 2008
compared to 2007. In spite of the sales increase, gross profit for the year
ended 2008 decreased 13 percent to $5,856,000, or ten percent of sales, compared
to a gross profit of $6,760,000, or 13 percent of sales, for 2007. Operating
income declined 24 percent to $2,111,000 for the year ended 2008 compared to
$2,777,000 earned in 2007. Sales increased 17 percent to $15,280,000 for the
fourth quarter of 2008 compared to $13,021,000 for the fourth quarter of 2007.
Gross profit for the fourth quarter of 2008 was $1,040,000, or seven percent of
sales, which was down 30 percent from the fourth quarter of 2007’s total of
$1,479,000, or 11 percent of sales. Operating income declined 64 percent to
$191,000 for the fourth quarter of 2008 compared to $538,000 for the fourth
quarter of 2007. The increase in revenues in 2008 came primarily from adding new
products during the year, together with increased selling prices of our basic
chemical products to pass on some of the higher raw material and energy-related
costs. The declines in gross profit and operating income for the year and fourth
quarter of 2008, when compared to the same periods in 2007, were caused
primarily by our inability to pass on all of the increases in raw material and
energy related costs. Gross profits in 2008 were also negatively
impacted by higher than expected start up costs from several of the new products
added in 2008. We also had approximately $130,000 in claims and the write down
of inventories to reflect obsolescence and market valuation issues that
negatively impacted the fourth quarter of 2008.
Selling
and administrative expense decreased $238,000 or six percent in 2008 compared to
the 2007 amount, and decreased to six percent of sales in 2008 from eight
percent of sales in 2007. The decrease resulted primarily from reduced selling
expenses primarily in the OP operation.
Comparison
of 2007 to 2006 – Specialty Chemicals Segment
The
Specialty Chemicals Segment sales increased six percent for the year ended 2007
and 18 percent in the fourth quarter of 2007 compared to the same periods of
2006. The increase in revenues in 2007 resulted primarily from adding several
new products during the year, an increase in demand for our contract
manufacturing products, and increased selling prices on our basic chemical
products to pass on higher energy related costs. Our basic chemical and contract
manufacturing businesses continued to benefit from favorable market conditions
experienced throughout 2007. As a result, gross profits for 2007 increased two
percent to $6,760,000 compared to $6,614,000 for 2006. Although sales increased
in the fourth quarter of 2007 compared to 2006, gross profit as a percent of
sales declined two percent to 11 percent, or $1,479,000, compared to 13 percent,
or $1,483,000, generated in 2006. Sales and gross profits were negatively
impacted both for the year and fourth quarter of 2007 by lower results in our
pigment business resulting from increased raw material costs that we were unable
to pass on, coupled with a slowdown in business throughout the pigment product
lines.
Selling
and administrative expense increased $13,000, or less than one percent in 2007
compared to 2006, and remained unchanged at eight percent of sales in 2007,
consistent with 2006. As a result of the factors discussed above, operating
income for 2007 increased five percent to $2,777,000, compared to $2,644,000 for
2006, and declined 14 percent to $538,000 for the fourth quarter of 2007,
compared to $622,000 for the fourth quarter of 2006.
Corporate
expense decreased $215,000, or 29 percent, to $2,493,000 for 2008, compared to
$2,708,000 incurred in 2007. The decrease resulted primarily from a decrease in
management incentives totaling $299,000 in 2008 when compared to 2007’s total of
$762,000, offset somewhat by environmental expenses in 2008 of $647,000,
compared to $441,000 in 2007. Interest expense in 2008 decreased $321,000 from
2007 as a result of decreases in borrowings and the LIBOR interest rate under
the lines of credit with the Company’s bank. The amount accrued to record the
fair market value of the Company’s interest rate swap increased $181,000 to
$376,000 at January 3, 2009, up from $195,000 accrued at 2007 year end, also
reflecting the reduction in the LIBOR interest rate. See Item 7A
below.
Comparison
of 2007 to 2006 – Corporate
Corporate
expense increased $613,000, or 29 percent, to $2,708,000 for 2007, compared to
$2,095,000 incurred in 2006. The increase resulted primarily from increased
management incentives in 2007 when compared to 2006, environmental expenses of
$441,000, compared to $360,000 in 2006, and more than $250,000 from implementing
Sarbanes-Oxley Section 404 Regulations in 2007 covering internal controls.
Interest expense in 2007 increased $248,000 from 2007 as a result of increases
in borrowings and the LIBOR interest rate under the lines of credit with the
Company’s bank. The Company also had accrued a $195,000 liability at December
27, 2007, which increased $147,000 from $48,000 accrued at 2006 year end,
reflecting the fair market value of the Company’s interest rate swap contract.
See Item 7A below.
Contractual
Obligations and Other Commitments
As of
January 3, 2009, the Company’s contractual obligations and other commitments
were as follows:
|
(Amounts
in thousands)
|
|
|
|
|
Payment
Obligations for the Year Ended
|
|
|
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
(1)
|
|
$ |
5,483 |
|
|
$ |
467 |
|
|
$ |
5,016 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Revolving
credit facility
(1)
|
|
|
4,942 |
|
|
|
- |
|
|
|
4,942 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Interest
payments (2)
|
|
|
1,284 |
|
|
|
652 |
|
|
|
632 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Operating
leases
|
|
|
215 |
|
|
|
90 |
|
|
|
82 |
|
|
|
37 |
|
|
|
3 |
|
|
|
3 |
|
|
|
- |
|
|
Capital
leases
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Purchase
obligations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Deferred
compensation
(3)
|
|
|
370 |
|
|
|
72 |
|
|
|
72 |
|
|
|
72 |
|
|
|
72 |
|
|
|
72 |
|
|
|
10 |
|
|
Total
|
|
$ |
12,294 |
|
|
$ |
1,281 |
|
|
$ |
10,744 |
|
|
$ |
109 |
|
|
$ |
75 |
|
|
$ |
75 |
|
|
$ |
10 |
|
|
(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 2008 on the
debt and payments on the Company’s
$4,500,000
interest rate swap which expires in 2010.
|
|
|
(3)
For a description of the deferred compensation obligation, see Note G to
the Consolidated Financial Statements included in
|
|
|
Item
8 of this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Arrangements
See Note
Q 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.
Management of the Specialty Chemicals Segment was successful
in increasing revenues in 2008 reflecting efforts to generate new products,
improve existing products, and compete in markets not as susceptible to foreign
imports. Unfortunately, higher petroleum costs drove up raw material
and energy costs which hurt profitability. If the recent decline in oil and
natural gas prices continues into the future, our costs of raw materials and
energy costs should decline, which would help profitability. On March 6, 2009,
The Company entered into a Purchase Agreement to sell the pigment dispersion
business of OP. The sale includes substantially all of OP’s assets for a
purchase price approximately equal to their net book value as of the date of
sale, and any gain or loss resulting from the disposition will not be material.
As part of the Agreement, the Company will continue to toll manufacture pigments
for a transitional period of up to one year. OP will continue to produce and
sell chemical dispersions utilizing some of its existing equipment, and is
attempting to introduce new chemical dispersions directed at the latex and
rubber industries, as well as other selected targeted customers. Management
believes that divesting the pigment dispersion business will free up resources
and working capital allowing the Specialty Chemicals Segment to focus on
activities more in line with the remaining specialty chemicals operations.
Although Management is confident it is positioned to compete effectively,
current economic conditions make operating performance in 2009
uncertain.
As a
result of the significant increases in stainless steel pipe imported from China,
the Metals Segment along with three other U.S. producers of stainless steel pipe
and the United Steelworkers Union filed an unfair-trade case against China on
January 30, 2008. It is the third case involving pipe and tube imports from
China filed since early 2007. The U.S. Department of Commerce (DOC) findings
have supported petitioners in all three cases, and it has issued final
determinations on welded stainless steel pipe. On January 21, 2009, it announced
its determination of duties ranging from 12 percent to over 300 percent on
stainless steel welded pipe smaller than 16 inches in diameter imported from
China. The International Trade Commission (ITC) had its final vote in late
February and will issue its final ruling in March. As discussed above, based on
activity over the last three quarters, we believe the actions by the ITC and the
DOC have already reduced import activity and have had a positive influence on
demand for domestic producers. This is encouraging, but, until this trade case
is finalized, it will add uncertainty to the future results from commodity pipe.
This positive impact on commodity pipe volumes has been offset by falling
stainless steel prices which, along with the uncertainty of the economy, have
caused distributors to limit stocking of inventories. Although stainless steel
surcharges appear to have stabilized so far in 2009, the significant declines
experienced in the fourth quarter of 2008 have created a poor pricing
environment for our commodity
pipe,
which will negatively impact profitability in the first quarter of 2009. It is
possible that the stimulus spending by the Federal Government will fund
increased activity in the water and waste water treatment area, which is a
significant part of our piping systems business. However, the impact from
current economic conditions both domestically and world-wide makes it difficult
to predict the performance of this Segment for 2009. In spite of
this, management continues to be optimistic about the piping systems business
over the long term based on our current bidding activity for projects and our
strong backlog, with over 80 percent of the backlog coming from energy and water
and wastewater treatment projects. The backlog was $45,500,000 at the end of the
fourth quarter of 2008 of which approximately 75 percent should be completed in
2009. Management also believes we are the largest and most capable domestic
producer of non-commodity stainless pipe and an effective producer of commodity
stainless pipe which should serve the Company well in the long
term.
Item
7A Quantitative and Qualitative Disclosures about Market Risks
Fair
value of the Company's debt obligations, which approximated the recorded value,
consisted of:
$10,426,000
under a $27,000,000 line of credit and term loan agreement expiring December 31,
2010 with a variable interest rate of 1.95 percent.
At
December 27, 2007
Cash flow
hedges are hedges that use 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 D 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 has
a notional amount of $4,500,000 pursuant to which the Company receives interest
at Libor and pays interest at 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 other
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 in 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 January 3, 2009 or December 29,
2007.
Item 8 Financial Statements and Supplementary Data
|
|
|
|
|
|
|
|
|
Years
ended January 3, 2009 and December 29, 2007
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
97,215 |
|
|
$ |
28,269 |
|
|
Accounts
receivable, less allowance for doubtful
|
|
|
|
|
|
|
|
|
|
accounts
of $1,279,000 and $1,236,000, respectively
|
|
|
21,201,589 |
|
|
|
19,887,556 |
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
13,678,997 |
|
|
|
9,218,395 |
|
|
Work-in-process
|
|
|
16,755,349 |
|
|
|
28,824,639 |
|
|
Finished
goods
|
|
|
12,476,926 |
|
|
|
10,758,064 |
|
|
Total
inventories
|
|
|
42,911,272 |
|
|
|
48,801,098 |
|
|
Deferred
income taxes (Note J)
|
|
|
2,265,949 |
|
|
|
2,284,000 |
|
|
Prepaid
expenses and other current assets
|
|
|
1,419,841 |
|
|
|
433,250 |
|
|
Total
current assets
|
|
|
67,895,866 |
|
|
|
71,434,173 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
value of life insurance
|
|
|
2,867,975 |
|
|
|
2,805,500 |
|
|
Property,
plant and equipment, net (Note C)
|
|
|
22,129,571 |
|
|
|
20,858,606 |
|
|
Goodwill
|
|
|
1,354,730 |
|
|
|
1,354,730 |
|
|
Deferred
charges, net
|
|
|
118,035 |
|
|
|
168,291 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
94,366,177 |
|
|
$ |
96,621,300 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt (Note D)
|
|
$ |
466,667 |
|
|
$ |
466,667 |
|
|
Accounts
payable
|
|
|
9,294,052 |
|
|
|
13,029,172 |
|
|
Accrued
expenses (Notes D and E)
|
|
|
6,722,397 |
|
|
|
10,772,331 |
|
|
Current
portion of environmental reserves (Note F)
|
|
|
554,000 |
|
|
|
467,371 |
|
|
Total
current liabilities
|
|
|
17,037,116 |
|
|
|
24,735,541 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note D)
|
|
|
9,958,981 |
|
|
|
10,246,015 |
|
|
Environmental
reserves (Note F)
|
|
|
810,000 |
|
|
|
580,000 |
|
|
Deferred
compensation (Note G)
|
|
|
369,512 |
|
|
|
409,462 |
|
|
Deferred
income taxes (Note J)
|
|
|
3,324,000 |
|
|
|
2,510,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity (Notes H and I)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
752,765 |
|
|
|
532,860 |
|
|
Retained
earnings
|
|
|
69,529,995 |
|
|
|
65,113,597 |
|
|
|
|
|
78,282,760 |
|
|
|
73,646,457 |
|
|
Less
cost of common stock in treasury: 1,752,466 and
|
|
|
|
|
|
|
|
|
|
1,762,695
shares, respectively
|
|
|
15,416,192 |
|
|
|
15,506,175 |
|
|
Total
shareholders' equity
|
|
|
62,866,568 |
|
|
|
58,140,282 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
94,366,177 |
|
|
$ |
96,621,300 |
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended January 3, 2009, December 29, 2007 and December 30,
2006
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
192,476,072 |
|
|
$ |
178,285,015 |
|
|
$ |
152,047,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
172,598,831 |
|
|
|
150,121,564 |
|
|
|
129,323,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
19,877,241 |
|
|
|
28,163,451 |
|
|
|
22,724,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
10,933,874 |
|
|
|
11,706,485 |
|
|
|
10,562,498 |
|
|
Gain
from sale of property and plant (Note B)
|
|
|
- |
|
|
|
- |
|
|
|
(595,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
8,943,367 |
|
|
|
16,456,966 |
|
|
|
12,757,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
684,943 |
|
|
|
1,006,413 |
|
|
|
757,884 |
|
|
Change
in fair value of interest rate swap (Note D)
|
|
|
181,000 |
|
|
|
147,000 |
|
|
|
36,000 |
|
|
Other,
net (Note B)
|
|
|
(401,268 |
) |
|
|
(20,211 |
) |
|
|
(632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax
|
|
|
8,478,692 |
|
|
|
15,323,764 |
|
|
|
11,964,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
2,496,000 |
|
|
|
5,199,000 |
|
|
|
4,356,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,982,692 |
|
|
$ |
10,124,764 |
|
|
$ |
7,608,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income:
|
|
|
|
|
|
|
|
Per
basic common share
|
$ .96
|
|
|
$1.63
|
|
$
1.24
|
|
|
|
|
|
|
|
|
|
Per
diluted common share
|
$ .95
|
|
|
$1.60
|
|
$
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
in
|
|
|
|
|
|
Cost
of Common
|
|
|
|
|
|
|
|
Common
|
|
|
Excess
of
|
|
|
Retained
|
|
|
Stock
in
|
|
|
|
|
|
|
|
Stock
|
|
|
Par
Value
|
|
|
Earnings
|
|
|
Treasury
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
10,124,764 |
|
|
|
|
|
|
|
10,124,764 |
|
|
Payment
of dividends, $.15 per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
(927,189 |
) |
|
|
|
|
|
|
(927,189 |
) |
|
Issuance
of 1,945 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
the treasury
|
|
|
|
|
|
|
57,919 |
|
|
|
|
|
|
|
17,070 |
|
|
|
74,989 |
|
|
Stock
options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
99,793 shares, net
|
|
|
|
|
|
|
223,137 |
|
|
|
|
|
|
|
327,328 |
|
|
|
550,465 |
|
|
Employee
stock option and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grant
compensation
|
|
|
|
|
|
|
174,761 |
|
|
|
|
|
|
|
|
|
|
|
174,761 |
|
|
Capital
contribution
|
|
|
|
|
|
|
20,340 |
|
|
|
|
|
|
|
|
|
|
|
20,340 |
|
|
Impact
of adoption of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN
48 - (Note J)
|
|
|
|
|
|
|
|
|
|
|
995,000 |
|
|
|
|
|
|
|
995,000 |
|
|
Balance
at December 29, 2007
|
|
|
8,000,000 |
|
|
|
532,860 |
|
|
|
65,113,597 |
|
|
|
(15,506,175 |
) |
|
|
58,140,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
5,982,692 |
|
|
|
|
|
|
|
5,982,692 |
|
|
Payment
of dividends, $.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
(1,566,294 |
) |
|
|
|
|
|
|
(1,566,294 |
) |
|
Issuance
of 9,229 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
the treasury
|
|
|
|
|
|
|
7,472 |
|
|
|
|
|
|
|
81,186 |
|
|
|
88,658 |
|
|
Stock
options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
1,000 shares, net
|
|
|
|
|
|
|
(4,147 |
) |
|
|
|
|
|
|
8,797 |
|
|
|
4,650 |
|
|
Employee
stock option and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
grant
compensation
|
|
|
|
|
|
|
216,580 |
|
|
|
|
|
|
|
|
|
|
|
216,580 |
|
|
Balance
at January 3, 2009
|
|
$ |
8,000,000 |
|
|
$ |
752,765 |
|
|
$ |
69,529,995 |
|
|
$ |
(15,416,192 |
) |
|
$ |
62,866,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended January 3, 2009, December 29, 2007 and December 30,
2006
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,982,692 |
|
|
$ |
10,124,764 |
|
|
$ |
7,608,154 |
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
2,745,738 |
|
|
|
2,579,142 |
|
|
|
2,616,940 |
|
|
Amortization
of deferred charges
|
|
|
50,256 |
|
|
|
54,924 |
|
|
|
54,924 |
|
|
Deferred
income taxes
|
|
|
832,051 |
|
|
|
(581,000 |
) |
|
|
14,000 |
|
|
Reduction
in reserves for uncertain tax positions
|
|
|
(199,000 |
) |
|
|
(151,000 |
) |
|
|
- |
|
|
Provision
for losses on accounts receivable
|
|
|
66,813 |
|
|
|
229,453 |
|
|
|
315,295 |
|
|
Loss
(gain) on sale of property, plant and equipment
|
|
|
19,336 |
|
|
|
(1,300 |
) |
|
|
(625,738 |
) |
|
Cash
value of life insurance
|
|
|
(62,475 |
) |
|
|
(81,935 |
) |
|
|
(84,051 |
) |
|
Environmental
reserves
|
|
|
316,629 |
|
|
|
205,318 |
|
|
|
126,854 |
|
|
Issuance
of treasury stock for director fees
|
|
|
74,970 |
|
|
|
74,989 |
|
|
|
81,226 |
|
|
Employee
stock option and grant compensation
|
|
|
216,580 |
|
|
|
174,761 |
|
|
|
75,624 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,380,846 |
) |
|
|
2,311,820 |
|
|
|
(881,272 |
) |
|
Inventories
|
|
|
5,889,826 |
|
|
|
(7,255,636 |
) |
|
|
(17,063,135 |
) |
|
Other
assets and liabilities
|
|
|
(37,095 |
) |
|
|
(85,480 |
) |
|
|
(341,401 |
) |
|
Accounts
payable
|
|
|
(3,735,120 |
) |
|
|
1,253,469 |
|
|
|
583,842 |
|
|
Accrued
expenses
|
|
|
(4,049,934 |
) |
|
|
4,728,581 |
|
|
|
196,851 |
|
|
Income
taxes payable
|
|
|
(790,478 |
) |
|
|
(1,247,586 |
) |
|
|
(520,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
5,939,943 |
|
|
|
12,333,284 |
|
|
|
(7,842,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(4,037,239 |
) |
|
|
(4,485,928 |
) |
|
|
(3,092,242 |
) |
|
Proceeds
from sale of property, plant and equipment
|
|
|
1,200 |
|
|
|
1,300 |
|
|
|
846,980 |
|
|
Decrease
in notes receivable
|
|
|
- |
|
|
|
- |
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(4,036,039 |
) |
|
|
(4,484,628 |
) |
|
|
(1,845,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(payments on) proceeds from long-term debt
|
|
|
(287,034 |
) |
|
|
(7,485,416 |
) |
|
|
9,640,877 |
|
|
Proceeds
from exercised stock options
|
|
|
4,650 |
|
|
|
550,465 |
|
|
|
65,810 |
|
|
Dividends
paid
|
|
|
(1,566,294 |
) |
|
|
(927,189 |
) |
|
|
- |
|
|
Excess
tax benefits from Stock Grant Plan
|
|
|
13,720 |
|
|
|
- |
|
|
|
- |
|
|
Capital
contributed
|
|
|
- |
|
|
|
20,340 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(1,834,958 |
) |
|
|
(7,841,800 |
) |
|
|
9,706,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
68,946 |
|
|
|
6,856 |
|
|
|
19,034 |
|
|
Cash
and cash equivalents at beginning of year
|
|
|
28,269 |
|
|
|
21,413 |
|
|
|
2,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
97,215 |
|
|
$ |
28,269 |
|
|
$ |
21,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
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, primarily for establishing reserves on accounts receivable,
inventories and environmental issues, 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 2008 ended on January 3, 2009, having 53 weeks, and
fiscal year 2007 ended on December 29, 2007 and fiscal year 2006 ended on
December 30, 2006, both having 52 weeks.
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
$2,405,000, $2,169,000 and $2,708,000 in 2008, 2007 and 2006, 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. As of January 3, 2009 and December 29,
2007, $4,467,000 and $2,981,000, respectively, for inventory has been reduced
for obsolescence and market reserves.
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.
Goodwill,
representing intangibles arising from the excess of purchase price over fair
value of net assets of businesses acquired, is not amortized but is reviewed
annually in the fourth quarter for impairment. Deferred charges represent other
intangible assets that are amortized over their useful lives. Accumulated
amortization of deferred charges totaled $218,000 and $167,000 as of January 3,
2009 and December 29, 2007, respectively.
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 and for disputed claims and quality issues. The allowance
is based upon a review of outstanding receivables, historical collection
information and existing economic conditions. The Company performs periodic
credit evaluations of its customers’ financial condition and generally does not
require collateral. Receivables are generally due within 30 to 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 $342,000, $413,000 and $312,000 in 2008, 2007 and 2006,
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.
Fair Value Disclosures.
Effective December 30, 2007, the Company adopted 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, and SFAS No. 159, “The
Fair Value Option for Financial Assets and Liabilities” (“SFAS 159”). SFAS 157
defines fair value, establishes a framework for measuring fair value under
Generally Accepted Accounting Principles and enhances disclosures about fair
value measurements. Fair value is defined under SFAS 157 as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
SFAS 159 provides companies with an option to report selected financial assets
and liabilities at fair value that are not currently required to be measured at
fair value. Accordingly, companies would then be required to report unrealized
gains and losses on these items in earnings at each subsequent reporting date.
The objective is to improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. There was no impact on the financial statements from
the adoption of either of these Statements.
Effective
December 30, 2007, the Company determines the fair values of its financial
instruments based on the fair value hierarchy established in SFAS 157 which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs when measuring fair value. Level-1 measurements utilize quoted
prices in active markets for identical assets or liabilities. The Company does
not currently have any Level-1 financial assets or
liabilities. Level-2 measurements utilize observable inputs other
than Level-1 prices, such as quoted prices for similar assets or liabilities,
quoted prices in markets that are not active, or other inputs observable or that
can be corroborated by observable market data for substantially the full term of
the assets or liabilities. The Company has a level-2 liability from its interest
rate swap having a fair value of $376,000 and $195,000 at January 3, 2009 and
December 29, 2007, respectively. Changes in its fair value are being recorded in
current liabilities with corresponding offsetting entries to other expense.
Level-3 measurements utilize unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or
liabilities. The Company does not currently have any material Level-3 financial
assets or liabilities.
On
February 12, 2008, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position No. 157-2, Effective Date of FASB Statement
No. 157 (“FSP No. 157-2”). FSP No. 157-2 amends SFAS
No. 157 to delay the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (that
is, at least annually). For items within its scope, FSP No. 157-2 defers the
effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. Synalloy
will delay application of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities until January 4, 2009.
Business Combinations. In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations”, which the
Company adopted on January 4, 2009. This standard will significantly change the
accounting for business acquisitions both during the period of the acquisition
and in subsequent periods. Among the more significant changes in the accounting
for acquisitions are the following: Transaction costs will generally be
expensed. Certain such costs are presently treated as costs of the acquisition.
In-process research and development (IPR&D) will be accounted for as an
asset, with the cost recognized as the research and development is realized or
abandoned. IPR&D is presently expensed at the time of the acquisition.
Contingencies, including contingent consideration, will generally be recorded at
fair value with subsequent adjustments recognized in operations. Contingent
consideration is presently accounted for as an adjustment of purchase price.
Decreases in valuation allowances on acquired deferred tax assets will be
recognized in operations. Such changes previously were considered to be
subsequent
changes in the allocation of the purchase price and were recorded as adjustments
to goodwill. Generally, the effects of SFAS No. 141R on the Company’s
consolidated financial statements will depend on acquisitions occurring in 2009
and thereafter. SFAS No.141R does not require retroactive restatement of
accounting for business combinations prior to January 4, 2009.
Determination of the Useful Life of
Intangible Assets. In April 2008, the FASB issued FASB Staff Position No.
FAS 142-3 (“FSP 142-3”) “Determination of the Useful Life of Intangible
Assets.” FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The intent of FSP 142-3 is to improve the consistency between
the useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS 141R and other GAAP. The FSP is effective for the Company beginning
January 4, 2009. The guidance for determining the useful life of intangible
assets included in this FSP 142-3 will be applied prospectively to intangible
assets acquired after the January 4, 2009 effective date. This standard is not
expected to have a material impact on the Company’s financial
statements.
Other Income and
Expense: The Company received partial payment of $394,000 on a note
receivable from a Chinese joint venture which was deemed uncollectible and
written off in 2005. The joint venture agreement expired and the joint venture
was dissolved in 2008, and payments were made to the note holders from the
distribution of the joint venture’s assets. The income is included in other
income.
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.
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
305,618 |
|
|
$ |
305,618 |
|
|
Land
improvements
|
|
|
1,015,063 |
|
|
|
970,235 |
|
|
Buildings
|
|
|
12,725,673 |
|
|
|
11,675,486 |
|
|
Machinery,
fixtures and equipment
|
|
|
50,714,007 |
|
|
|
47,019,510 |
|
|
Construction-in-progress
|
|
|
391,776 |
|
|
|
1,261,289 |
|
|
|
|
|
65,152,137 |
|
|
|
61,232,138 |
|
|
Less
accumulated depreciation
|
|
|
43,022,566 |
|
|
|
40,373,532 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment
|
|
$ |
22,129,571 |
|
|
$ |
20,858,606 |
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
$
15,000,000 Revolving line of credit
|
|
$ |
4,942,316 |
|
|
$ |
4,646,016 |
|
|
$ 7,000,000
Term loan
|
|
|
5,483,332 |
|
|
|
6,066,666 |
|
|
|
|
|
10,425,648 |
|
|
|
10,712,682 |
|
|
Less
current portion of term loan
|
|
|
466,667 |
|
|
|
466,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,958,981 |
|
|
$ |
10,246,015 |
|
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. 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 January 3, 2009 was 1.95 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 January 3, 2009, the amount available for borrowing was
$15,000,000, of which $4,942,000 was borrowed, leaving $10,058,000 of
availability.
Borrowings
under the Credit Agreement are collateralized by substantially all of the assets
of the Company. At January 3, 2009, the Company was in compliance with its debt
covenants which include, among others, maintaining certain EBITDA, fixed charge
and tangible net worth amounts as defined in the Credit Agreement.
Average
borrowings outstanding during fiscal 2008, 2007 and 2006 were $11,708,000,
$13,944,000 and $10,525,000 with weighted average interest rates of 4.37
percent, 6.79 percent and 6.57 percent, respectively. The Company made interest
payments of $706,000 in 2008, $1,003,000 in 2007 and $647,000 in 2006. The
amount of long-term debt maturities for the next five years are as follows: 2009
- - $467,000; and 2010 - $9,959,000.
On
February 23, 2006, the Company entered into an interest rate swap contract with
its bank with a notional amount of $4,500,000 pursuant to which the Company
receives interest at Libor and pays interest 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 $376,000 liability in accrued interest as of January 3, 2009 to
reflect the fair market value of the swap, compared to $195,000 accrued at
December 29, 2007. (See Note Q)
|
|
|
2008
|
|
|
2007
|
|
|
Salaries,
wages and commissions
|
|
$ |
1,314,193 |
|
|
$ |
2,871,635 |
|
|
Advances
from customers
|
|
|
3,578,754 |
|
|
|
6,031,371 |
|
|
Insurance
|
|
|
479,365 |
|
|
|
451,488 |
|
|
Taxes,
other than income taxes
|
|
|
54,892 |
|
|
|
340,096 |
|
|
Benefit
plans
|
|
|
184,707 |
|
|
|
244,143 |
|
|
Interest
|
|
|
382,539 |
|
|
|
258,254 |
|
|
Professional
fees
|
|
|
147,505 |
|
|
|
194,148 |
|
|
Utilities
|
|
|
183,035 |
|
|
|
134,010 |
|
|
Other
accrued items
|
|
|
397,407 |
|
|
|
247,186 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses
|
|
$ |
6,722,397 |
|
|
$ |
10,772,331 |
|
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. In prior years remediation projects
were completed to clean up eleven of 15 SWMUs on the Spartanburg plant site at a
cost of approximately $530,000. The Company is in the process of completing an
analysis of the remaining four SWMUs and has accrued $639,000 at January 3,
2009, to provide for completion of this project and other cleanup
costs.
At the
Augusta plant site, the Company submitted a Baseline 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 (former regulated unit). The Company completed and certified closure
of the surface impoundment during 2002. During the fourth quarter of 2005, the
Company completed a preliminary analysis of remedial alternatives to eliminate
direct contact with surface soils based on the Baseline Risk Assessment, and has
accrued $650,000 at January 3, 2009, for 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 to address the final area of contamination identified
was submitted for regulatory approval and was approved in March of 2005. The
Company has $75,000 accrued at January 3, 2009, to provide for estimated future
remedial and cleanup costs.
The
Company has been designated, along with others, as a potentially responsible
party under the Comprehensive Environmental Response, Compensation, and
Liability Act, or comparable state statutes, at two waste disposal sites.
Notifications were received by the Company in November 2007 and February 2008.
It is impossible to determine the ultimate costs related to the two sites due to
several factors such as the unknown possible magnitude of possible
contamination, the unknown timing and extent of the corrective actions which may
be required, and the determination of the Company’s liability in proportion to
the other parties. At the present time, the Company does not have sufficient
information to form an opinion as to whether it has any liability, or the amount
of such liability, if any. However, it is reasonably possible that some
liability exists.
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
G 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, $370,000 at January 3, 2009, has been
accrued.
Note
H Shareholders’ Rights
The
Company has a Shareholders’ Rights Plan which expires by its terms March 26,
2009. The Company does not intend to extend, amend or replace the
Plan.
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
Exercise
|
|
|
Options
|
|
|
Contractual
|
|
|
Value
of
|
|
|
Options
|
|
|
|
|
Price
|
|
|
Outstanding
|
|
|
Term
|
|
|
Options
|
|
|
Available
|
|
|
|
|
|
|
|
|
|
|
(in
years)
|
|
|
|
|
|
|
|
|
At
December 31, 2005
|
|
$ |
9.64 |
|
|
|
331,550 |
|
|
|
|
|
$ |
740,000 |
|
|
|
199,100 |
|
|
Exercised
|
|
$ |
6.21 |
|
|
|
(26,900 |
) |
|
|
|
|
$ |
254,000 |
|
|
|
|
|
|
Cancelled
|
|
$ |
4.65 |
|
|
|
(8,000 |
) |
|
|
|
|
$ |
111,000 |
|
|
|
8000 |
|
|
Expired
|
|
$ |
18.88 |
|
|
|
(14,500 |
) |
|
|
|
|
|
|
|
|
|
- |
|
|
At
December 30, 2006
|
|
$ |
8.48 |
|
|
|
282,150 |
|
|
|
4.1 |
|
|
$ |
4,865 |
|
|
|
207,100 |
|
|
Exercised
|
|
$ |
10.39 |
|
|
|
(132,407 |
) |
|
|
|
|
|
$ |
8,550 |
|
|
|
|
|
|
Expired
|
|
$ |
12.14 |
|
|
|
(19,000 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
|
At
December 29, 2007
|
|
$ |
8.51 |
|
|
|
130,743 |
|
|
|
4.6 |
|
|
$ |
1,198,000 |
|
|
|
207,100 |
|
|
Exercised
|
|
$ |
4.65 |
|
|
|
(1,000 |
) |
|
|
|
|
|
$ |
8,550 |
|
|
|
|
|
|
Expired
|
|
$ |
13.63 |
|
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
(207,100 |
) |
|
At
January 3, 2009
|
|
$ |
8.48 |
|
|
|
128,243 |
|
|
|
3.7 |
|
|
$ |
4,865 |
|
|
|
- |
|
|
Exercisable
options
|
|
$ |
8.04 |
|
|
|
98,789 |
|
|
|
3.0 |
|
|
$ |
4,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
Date
|
|
|
|
|
|
|
Options
expected to vest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
|
|
|
|
At
December 30, 2006
|
|
$ |
9.96 |
|
|
|
55,856 |
|
|
|
8.1 |
|
|
$ |
6.77 |
|
|
|
|
|
|
Vested
|
|
$ |
9.96 |
|
|
|
(12,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 29, 2007
|
|
$ |
9.96 |
|
|
|
43,454 |
|
|
|
7.1 |
|
|
$ |
6.77 |
|
|
|
|
|
|
Vested
|
|
$ |
9.96 |
|
|
|
(14,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At
January 3, 2009
|
|
$ |
9.96 |
|
|
|
29,454 |
|
|
|
6.1 |
|
|
$ |
6.77 |
|
|
|
|
|
The
following table summarizes information about stock options outstanding at
January 3, 2009:
|
|
|
|
|
|
|
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
|
|
|
$ 7.28
|
to
|
|
$ |
7.75 |
|
|
|
45,250 |
|
|
$ |
7.67 |
|
|
|
.43 |
|
|
|
45,250 |
|
|
$ |
7.67 |
|
|
$ 6.75
|
|
|
|
|
|
|
|
1,500 |
|
|
$ |
6.75 |
|
|
|
1.38 |
|
|
|
1,500 |
|
|
$ |
6.75 |
|
|
$ 5.01
|
|
|
|
|
|
|
|
1,500 |
|
|
$ |
5.01 |
|
|
|
2.32 |
|
|
|
1,500 |
|
|
$ |
5.01 |
|
|
$ 4.65
|
|
|
|
|
|
|
|
13,900 |
|
|
$ |
4.65 |
|
|
|
3.32 |
|
|
|
13,900 |
|
|
$ |
4.65 |
|
|
$ 9.96
|
|
|
|
|
|
|
|
66,093 |
|
|
$ |
9.96 |
|
|
|
6.09 |
|
|
|
36,639 |
|
|
$ |
9.96 |
|
|
|
|
|
|
|
|
|
|
128,243 |
|
|
|
|
|
|
|
|
|
|
|
98,789 |
|
|
|
|
|
The
Company has two stock option plans. After April 30, 2008, there were no grants
available under either of the Plans, and the Company did not grant any options
during 2006, 2007 or 2008. Under the 1998 Plan covering officers and key
employees, 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. Both 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. In 2008, 2007 and 2006,
options for 1,000, 132,407 and 26,900 shares were exercised by employees and
directors for an aggregate exercise price of $5,000, $1,375,000 and $167,000,
respectively. The proceeds were generated from cash received of $5,000 in 2008,
and from cash received of $550,000 and $66,000 and from the repurchase of 32,614
and 5,727 shares from employees and directors totaling $825,000 and $101,000, in
2007 and 2006, respectively. At the 2008, 2007 and 2006 respective year ends,
options to purchase 98,789, 87,289 and 226,294 shares with weighted average
exercise prices of $8.04, $7.79 and $9.56, respectively, were fully exercisable.
Compensation cost charged against income before taxes for the options was
approximately $76,000, or $.01 per share, for 2008, 2007 and 2006. As of January
3, 2009, there was $82,000 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 the next 13 months. The fair value of the
unvested options computed under SFAS 123R was estimated at the time the options
were granted.
The
Company has a Stock Awards Plan in effect at January 3, 2009. A summary of plan
activity for 2007 and 2008 is as follows:
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
Shares
|
|
|
Grant
Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Granted
February 12, 2007
|
|
|
22,510 |
|
|
$ |
25.00 |
|
|
Forfeited
or expired
|
|
|
(330 |
) |
|
$ |
25.00 |
|
|
Outstanding
at December 29, 2007
|
|
|
22,180 |
|
|
$ |
25.00 |
|
|
Granted
February 12, 2008
|
|
|
11,480 |
|
|
$ |
16.35 |
|
|
Vested
|
|
|
(4,436 |
) |
|
$ |
25.00 |
|
|
Forfeited
or expired
|
|
|
(3,980 |
) |
|
$ |
21.48 |
|
|
Outstanding
at January 3, 2009
|
|
|
25,244 |
|
|
$ |
21.62 |
|
The
Compensation & Long-Term Incentive Committee of the Board of Directors of
the Company approves stock grants under the Company’s 2005 Stock Awards Plan to
certain management employees of the Company. The stock awards 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 is 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 are held in escrow by the Company.
An employee is not entitled to any voting rights with respect to any shares not
yet vested, and the shares are not transferable. Compensation expense totaling
$555,000 on the grants issued in 2007 and $188,000 on the grants issued in 2008
is being charged against earnings equally over a period of 60 months from the
dates of the grants, with the offset recorded in Shareholders’ Equity.
Compensation cost charged against income for the awards was approximately
$141,000, $90,000 net of income taxes, or $.01 per share in 2008, and $99,000,
$65,000 net of income taxes, or $.01 per share, for 2007. As of January 3, 2009,
there was $428,000 of total unrecognized compensation cost related to unvested
stock grants under the 2005 Stock Awards Plan. (See Note R)
Note
J Income Taxes
|
(Amounts
in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Inventory
valuation reserves
|
|
$ |
895 |
|
|
$ |
1,125 |
|
|
Allowance
for doubtful accounts
|
|
|
461 |
|
|
|
449 |
|
|
Inventory
capitalization
|
|
|
961 |
|
|
|
577 |
|
|
Environmental
reserves
|
|
|
319 |
|
|
|
237 |
|
|
Other
|
|
|
357 |
|
|
|
423 |
|
|
Total
deferred tax assets
|
|
|
2,993 |
|
|
|
2,811 |
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
Tax
over book depreciation and amortization
|
|
|
3,775 |
|
|
|
2,895 |
|
|
Prepaid
expenses
|
|
|
276 |
|
|
|
142 |
|
|
Total
deferred tax liabilities
|
|
|
4,051 |
|
|
|
3,037 |
|
|
Net
deferred tax liabilities
|
|
$ |
(1,058 |
) |
|
$ |
(226 |
) |
|
(Amounts
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,425 |
|
|
$ |
5,324 |
|
|
$ |
4,001 |
|
|
State
|
|
|
247 |
|
|
|
456 |
|
|
|
341 |
|
|
Total
current
|
|
|
1,672 |
|
|
|
5,780 |
|
|
|
4,342 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
816 |
|
|
|
(538 |
) |
|
|
1 |
|
|
State
|
|
|
8 |
|
|
|
(43 |
) |
|
|
13 |
|
|
Total
deferred
|
|
|
824 |
|
|
|
(581 |
) |
|
|
14 |
|
|
Total
|
|
$ |
2,496 |
|
|
$ |
5,199 |
|
|
$ |
4,356 |
|
|
(Amounts
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
at U.S. statutory rates
|
|
$ |
2,883 |
|
|
|
34.0 |
% |
|
$ |
5,273 |
|
|
|
34.4 |
% |
|
$ |
4,087 |
|
|
|
34.2 |
% |
|
State
income taxes, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
tax benefit
|
|
|
168 |
|
|
|
2.0 |
% |
|
|
271 |
|
|
|
1.8 |
% |
|
|
205 |
|
|
|
1.7 |
% |
|
Changes
in contingent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
reserves
|
|
|
(199 |
) |
|
|
(2.4 |
%) |
|
|
(151 |
) |
|
|
(1.0 |
%) |
|
|
259 |
|
|
|
2.2 |
% |
|
Manufacturing
exemption
|
|
|
(163 |
) |
|
|
(1.9 |
%) |
|
|
(340 |
) |
|
|
(2.2 |
%) |
|
|
(131 |
) |
|
|
(1.1 |
%) |
|
General
business credit
|
|
|
(46 |
) |
|
|
(.6 |
%) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other,
net
|
|
|
(147 |
) |
|
|
(1.7 |
%) |
|
|
146 |
|
|
|
.9 |
% |
|
|
(64 |
) |
|
|
(.6 |
%) |
|
Total
|
|
$ |
2,496 |
|
|
|
29.4 |
% |
|
$ |
5,199 |
|
|
|
33.9 |
% |
|
$ |
4,356 |
|
|
|
36.4 |
% |
Income tax payments of approximately $2,646,000, $5,757,000
and $4,935,000 were made in 2008, 2007 and 2006, respectively. The Company had
South Carolina state net operating loss carry forwards of approximately
$39,100,000 at January 3, 2009, which expire between the years 2017
to 2027, and $37,200,000 at December 27, 2007. Since the likelihood of
recognizing these carryforwards is remote, they have been fully reserved in the
financial statements.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes,” at the beginning of fiscal year 2007. As a result of the implementation,
the Company recognized a $995,000 decrease to reserves for uncertain tax
positions. This decrease was accounted for as an adjustment in 2007 to the
beginning balance of retained earnings on the Balance Sheet. After the
cumulative effect decrease, at the beginning of 2007, the Company had
approximately $350,000 of total gross unrecognized tax benefits that, if
recognized, would favorably affect the effective income tax rate in any future
periods. During 2007, the Company recognized $151,000 of unrecognized tax
benefits or $.02 per share, leaving $199,000 accrued at December 29, 2007.
During 2008, the Company favorably resolved all of the accrued uncertain tax
positions recognizing benefits of $199,000 or $.03 per share. The Company and
its subsidiaries are subject to U.S. federal income tax as well as income tax of
multiple state jurisdictions. The Company has substantially concluded all U.S.
federal income tax matters and substantially all material state and local income
tax matters for years through 2002. The Company’s continuing practice is to
recognize interest and/or penalties related to income tax matters in income tax
expense. The Company had no accruals for interest and penalties at the end of
2008, and $89,000 accrued for interest and $0 accrued for penalties at the end
of December 29, 2007.
Note
K 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 $15,500 for 2008. Under EGTRRA,
employees who are age 50 or older may contribute an additional $5,000 per year
for a maximum of $20,500 for 2008. 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 2008 the
maximum was four percent. The matching contribution is allocated weekly.
Matching contributions of approximately $341,000, $338,000 and $319,000 were
made for 2008, 2007 and 2006, respectively. The Company may also make a
discretionary contribution, which if made, would be distributed to all eligible
participants regardless of whether they contribute to the Plan. No discretionary
contributions were made to the Plan in 2008, 2007 and 2006. The Company also contributes to union-sponsored defined
contribution retirement plans. Contributions relating to these plans were
approximately $694,000, $737,000 and $595,000 for 2008, 2007 and 2006,
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
246, or 54 percent of the Company’s total employees. They are represented by two
locals affiliated with the AFL-CIO and one local affiliated with the Teamsters.
The Company considers relationships with its union employees to be satisfactory.
Collective bargaining contracts will expire in December 2009, March 2010 and
February 2014.
Note
L 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: 2009 -
$90,000; 2010 - $82,000; 2011 - $37,000; 2012 - $3,000 and 2013 - $3,000. Rent
expense related to operating leases was $104,000, $104,000 and $107,000 in 2008,
2007 and 2006, 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 Earnings Per Share
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,982,692 |
|
|
$ |
10,124,764 |
|
|
$ |
7,608,154 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share
- weighted average shares
|
|
|
6,245,344 |
|
|
|
6,211,639 |
|
|
|
6,122,195 |
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options and stock grants
|
|
|
35,780 |
|
|
|
84,272 |
|
|
|
112,092 |
|
|
Denominator
for diluted earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share
- weighted average shares
|
|
|
6,281,124 |
|
|
|
6,295,911 |
|
|
|
6,234,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
$ |
.96 |
|
|
$ |
1.63 |
|
|
$ |
1.24 |
|
|
Diluted
income per share
|
|
$ |
.95 |
|
|
$ |
1.60 |
|
|
$ |
1.22 |
|
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 117,707, 68,981 and 170,058 weighted
average shares of common stock in 2008, 2007 and 2006, respectively, which were
not included in the diluted earnings per share calculation as their effect was
anti-dilutive.
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, wastewater 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 of
which are 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 (See
Note R).
Operating
income is total revenue less operating expenses, excluding interest expense and
income taxes. Identifiable assets, all of which are located in the United
States, are those assets used in operations by each Segment. The Chemical
Segment’s identifiable assets include goodwill of $1,355,000 as of the years
ended 2008 and 2007. 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 $647,000,
$441,000 and $360,000 for 2008, 2007 and 2006 respectively. (See Note F)
Corporate assets consist principally of cash, certain investments, and property
and equipment.
The
Metals Segment has one domestic customer (HD Supply) that accounted for
approximately 11, 12 and 15 percent of the Metals Segment’s revenues in 2008,
2007 and 2006, respectively, and approximately ten percent of the Company’s
consolidated revenues in 2006. The Segment also has one domestic customer that
accounted for approximately 12 and 14 percent of the Segment’s revenues in 2008
and 2006, and less than ten percent for 2007. 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 has one domestic customer that
accounted for approximately 12, 13, and 13 percent of the Segment’s revenues in
2008, 2007 and 2006, respectively. The Segment also has one domestic customer
that accounted for approximately 13 percent of the Segment’s revenues in 2008
and 2006 and less than ten percent in 2007. Loss of either of these customers’
revenues would have a material adverse effect on the Specialty Chemicals
Segment.
Segment
Information:
|
(Amounts
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
Metals
Segment
|
|
$ |
131,877 |
|
|
$ |
126,219 |
|
|
$ |
102,822 |
|
|
Specialty
Chemicals Segment
|
|
|
60,599 |
|
|
|
52,066 |
|
|
|
49,225 |
|
|
|
|
$ |
192,476 |
|
|
$ |
178,285 |
|
|
$ |
152,047 |
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals
Segment
|
|
$ |
9,325 |
|
|
$ |
16,388 |
|
|
$ |
11,612 |
|
|
Specialty
Chemicals Segment
|
|
|
2,111 |
|
|
|
2,777 |
|
|
|
2,644 |
|
|
|
|
|
11,436 |
|
|
|
19,165 |
|
|
|
14,256 |
|
|
Less
unallocated corporate expenses
|
|
|
2,493 |
|
|
|
2,708 |
|
|
|
2,094 |
|
|
Gain
from sale of property and plant
|
|
|
- |
|
|
|
- |
|
|
|
(596 |
) |
|
Operating
income
|
|
|
8,943 |
|
|
|
16,457 |
|
|
|
12,758 |
|
|
Other
expense, net
|
|
|
464 |
|
|
|
1,133 |
|
|
|
794 |
|
|
Income
before income taxes
|
|
$ |
8,479 |
|
|
$ |
15,324 |
|
|
$ |
11,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals
Segment
|
|
$ |
55,839 |
|
|
$ |
62,463 |
|
|
|
|
|
|
Specialty
Chemicals Segment
|
|
|
30,534 |
|
|
|
27,318 |
|
|
|
|
|
|
Corporate
|
|
|
7,993 |
|
|
|
6,840 |
|
|
|
|
|
|
|
|
$ |
94,366 |
|
|
$ |
96,621 |
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals
Segment
|
|
$ |
1,605 |
|
|
$ |
1,519 |
|
|
$ |
1,543 |
|
|
Specialty
Chemicals Segment
|
|
|
1,058 |
|
|
|
986 |
|
|
|
893 |
|
|
Corporate
|
|
|
133 |
|
|
|
129 |
|
|
|
236 |
|
|
|
|
$ |
2,796 |
|
|
$ |
2,634 |
|
|
$ |
2,672 |
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals
Segment
|
|
$ |
2,472 |
|
|
$ |
2,222 |
|
|
$ |
1,913 |
|
|
Specialty
Chemicals Segment
|
|
|
1,454 |
|
|
|
2,128 |
|
|
|
1,172 |
|
|
Corporate
|
|
|
111 |
|
|
|
136 |
|
|
|
7 |
|
|
|
|
$ |
4,037 |
|
|
$ |
4,486 |
|
|
$ |
3,092 |
|
|
Geographic
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
183,864 |
|
|
$ |
173,144 |
|
|
$ |
148,572 |
|
|
Elsewhere
|
|
|
8,612 |
|
|
|
5,141 |
|
|
|
3,475 |
|
|
|
|
$ |
192,476 |
|
|
$ |
178,285 |
|
|
$ |
152,047 |
|
Note
P Quarterly Results (Unaudited)
|
(Amount
in thousands except for per share data)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
50,974 |
|
|
$ |
52,922 |
|
|
$ |
45,091 |
|
|
$ |
43,489 |
|
|
Gross
profit
|
|
|
6,299 |
|
|
|
8,432 |
|
|
|
4,708 |
|
|
|
438 |
|
|
Net income
(loss)
|
|
|
1,862 |
|
|
|
3,392 |
|
|
|
1,242 |
|
|
|
(513 |
) |
|
Per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.30 |
|
|
|
.54 |
|
|
|
.20 |
|
|
|
(.08 |
) |
|
Diluted
|
|
|
.30 |
|
|
|
.54 |
|
|
|
.20 |
|
|
|
(.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
44,398 |
|
|
$ |
43,941 |
|
|
$ |
51,515 |
|
|
$ |
38,431 |
|
|
Gross
profit
|
|
|
8,820 |
|
|
|
8,312 |
|
|
|
6,977 |
|
|
|
4,054 |
|
|
Net income
|
|
|
3,525 |
|
|
|
3,196 |
|
|
|
2,260 |
|
|
|
1,144 |
|
|
Per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.57 |
|
|
|
.51 |
|
|
|
.36 |
|
|
|
.18 |
|
|
Diluted
|
|
|
.56 |
|
|
|
.50 |
|
|
|
.36 |
|
|
|
.18 |
|
Note
Q Interest Rate Swap
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 hedges are hedges that use 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 D, 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 has a notional amount of
$4,500,000 pursuant to which the Company receives interest at LIBOR and pays
interest at 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 discussed in Note D. 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 other
expense.
On March
6, 2009, The Company entered into a Purchase Agreement to sell the pigment
dispersion business of Organic Pigment, LLC (OP). The sale includes
substantially all of OP’s assets for a purchase price approximately equal to
their net book value as of the date of sale, and any gain or loss resulting from
the disposition will not be material. As part of the Agreement, the Company will
continue to toll manufacture pigments for a transitional period of up to one
year. The pigment sales of OP totaled approximately $6,700,000 for the year
ended January 3, 2009. However the operations of OP are not material to the
consolidated financial statements and the disposition will not be recorded as a
discontinued operation.
On
February 12, 2009, the Board of Directors of the Company voted to pay an annual
dividend of $.10 per share that was paid on March 10, 2009 to holders of record
on February 24, 2009, for a total cash payment of $625,000. 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 12, 2009, the Compensation & Long-Term Incentive Committee of the
Board of Directors of the Company approved stock grants under the Company’s 2005
Stock Awards Plan. On February 12, 2009, 5,500 shares, with a market price of
$5.22 per share, 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 $29,000, before
income taxes of approximately $10,000, will be recorded against earnings equally
over the following 60 months from the date of grant with the offset recorded in
Shareholders’ Equity. (See Note I)
Management’s
Annual Report On Internal Control Over Financial Reporting
Management
of the Company is responsible for preparing the Company’s annual consolidated
financial statements and for establishing and maintaining adequate internal
control over financial reporting for the Company. Management has
evaluated the effectiveness of the Company’s internal control over financial
reporting as of January 3, 2009 based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment,
management believes that the Company’s internal control over financial reporting
as of January 3, 2009 was effective.
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 January 3, 2009 and December 29, 2007,
and the related consolidated statements of operations, shareholders’ equity and
cash flows for each of the years in the three-year period ended January 3,
2009. Our audit also included the financial statement schedule listed
in Item 15(a)2 of the Company’s Annual Report on Form 10-K. We also have audited
the Company’s internal control over financial reporting as of January 3, 2009,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these consolidated financial statements
and schedule, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and an opinion on the Company’s internal
control over financial reporting 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
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, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
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.
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 January 3, 2009 and December 29, 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 3, 2009, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, Synalloy
Corporation and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of January 3, 2009, based on
criteria established in Internal Control—Integrated Framework issued by
COSO. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
As
discussed in Note J to the consolidated financial statements, in 2007 the
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement 109.
/s/ Dixon
Hughes PLLC
Charlotte,
NC
March 17,
2009
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.
Management’s
Annual Report on Internal Control over Financial Reporting and the attestation
report of the Company’s registered public accounting firm on the Company’s
internal control over financial reporting are set forth at the conclusion of the
Company’s consolidated statements set forth in Item 8 of this Form 10-K. There
has been no change in the Company's internal control over financial reporting
during the last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Item
9B Other Information
Not
applicable
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. 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
Non-employee
directors are 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
2008, 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 2008, each non-employee director received 959 shares of
restricted stock (an aggregate of 4,795 shares). Issuance of the shares granted
to the directors is not registered under the Securities Act of 1933 and the
shares 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.
The
information set forth under the captions “Board of Directors and Committees –
Related Party Transactions” and “– Director Independence” in the Proxy Statement
is incorporated therein by reference.
PART
IV
|
(a)
|
The
following documents are filed as a part of this report:
|
|
|
1.
|
Financial
Statements: The following consolidated financial statements of Synalloy
Corporation are included in Item 8:
|
|
|
|
|
Consolidated
Balance Sheets at January 3, 2009 and December 29, 2007
|
|
|
|
|
Consolidated
Statements of Operations for the years ended January 3, 2009, December 29,
2007 and December 30, 2006
|
|
|
|
|
Consolidated
Statements of Shareholders' Equity for the years ended January 3, 2009,
December 29, 2007 and December 30, 2006
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended January 3, 2009, December 29,
2007 and December 30, 2006
|
|
|
|
|
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 January 3,
2009, December 29, 2007 and December 30, 2006
|
|
|
|
|
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"
|
|
|
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 January 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from asset account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
1,236,000 |
|
|
$ |
67,000 |
|
|
$ |
24,000 |
|
|
$ |
1,279,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from asset account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
1,114,000 |
|
|
$ |
229,000 |
|
|
$ |
107,000 |
|
|
$ |
1,236,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from asset account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
1,039,000 |
|
|
$ |
315,000 |
|
|
$ |
240,000 |
|
|
$ |
1,114,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Allowances, uncollected accounts and credit balances written off against
reserve, net of recoveries.
|
|
|
By /s/ Ronald H.
Braam
Ronald
H. Braam
Chief
Executive Officer
|
March 17,
2009
Date
|
|
By /s/ Gregory M.
Bowie
Gregory
M. Bowie
Chief
Financial Officer
|
March 17,
2009
Date
|
Registrant
|
By /s/ James
G. Lane, Jr.
James
G. Lane, Jr.
Chairman
of the Board
|
March 17,
2009
Date
|
|
By /s/ Sibyl N.
Fishburn
Sibyl
N. Fishburn
Director
|
March 17,
2009
Date
|
|
By /s/ Carroll D.
Vinson
Carroll
D. Vinson
Director
|
March 17,
2009
Date
|
|
By /s/ Murray H.
Wright
Murray
H. Wright
Director
|
March 17,
2009
Date
|
|
By /s/ Craig C.
Bram
Craig
C. Bram
Director
|
March 17,
2009
Date
|
Index
to Exhibits
|
from
Item
601 of
Regulation
S-K
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Credit
Agreement, dated as of December 13, 2005, between Registrant and Carolina
First Bank, incorporated by reference to Registrant’s Form 10-K for the
year ended December 30, 2006
|
|
|
|
Employment
Agreement, dated January 1, 2006, between Registrant and Ronald H. Braam,
incorporated by reference to Registrant’s Form 10-K for the year ended
December 30, 2006
|
|
10.9
|
|
Amendment
1 to the Synalloy Corporation 2005 Stock Awards Plan incorporated by
reference to Registrant’s Form 10-K for the year ended December 29,
2007
|
|
|
|
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, incorporated by reference to the Form 10-K for the year
ended December 31, 2005
|
|
21
|
|
Subsidiaries
of the Registrant, incorporated by reference to the Form 10-K for the year
ended January 3, 2009
|
|
31
|
|
Rule
13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief
Financial Officer
|
|
|
|
Certifications
Pursuant to 18 U.S.C. Section 1350
|