2017 ANNUAL REPORT
COMPANY PROFILE
Founded in 1945, Synalloy Corporation has a rich
history supplying its customers with quality products and
with an additional shared services office in Spartanburg,
South Carolina, Synalloy and its affiliates currently
services while providing employees with an excellent
employ over 500 people with operations in South
place to work. Headquartered in Richmond, Virginia
Carolina, Ohio, Pennsylvania, Tennessee, and Texas.
The Company is a diverse manufacturer comprised of two major operating segments:
METALS SEGMENT
SPECIALTY CHEMICALS SEGMENT
• Manufacturer of welded stainless steel, duplex, super
• Custom tolling and contract manufacturing
duplex, and high nickel alloy pipe
• Expertise in surfactants, defoamers, and other
• Manufacturer of stainless steel and carbon heavy
specialty chemicals
wall pipe
• Manufacturer of fiberglass and steel liquid storage
tanks, separation equipment, and ASME
code vessels
• Master distributor of hot finish, seamless carbon steel pipe
and tubing, with an emphasis on large outside diameters
and exceptionally heavy wall thickness
• Breadth of equipment and capabilities
• Proprietary products available for sale to distributors
Dear Shareholders, Customers & Employees,
In last year’s annual report letter, I commented that
2016 would represent the bottom in Synalloy’s financial
performance and that we were beginning to see the
early signs of a recovery across our business units.
The recovery did in fact take hold and continued to
strengthen as the year progressed. We expect that
positive momentum to carry over into 2018. For the
first time in the Company’s history, net sales on a
continuing operations basis in 2017 crossed the $200
million mark, up 45% over 2016. Adjusted EBITDA was
$12.5 million, up from the prior year of $2.1 million.
We received solid contributions from every business unit,
with growth most pronounced in our Metals Segment.
Our share price responded favorably to the improved
results, appreciating over 22% by year-end. After
paying an annual dividend for nine straight years, the
Company decided not to pay a dividend in 2016. I
am pleased that our 2017 performance allowed us to
reinstate the annual dividend in 2017 at $.13 per share.
As you know, maintaining the strength of our balance
sheet is a top priority and we wrapped up 2017 in a
very good position. During the year, we increased
our ABL line from $45 million to $65 million. At year-
end, our net debt was just over $25 million, or 1.5 times
trailing EBITDA. With ample borrowing capacity, we are
in excellent shape to pursue growth opportunities as
they develop.
Safety remains our top operational initiative. We had
another good year for the Company, experiencing
zero lost time accidents in the Chemicals Segment and
two lost time accidents in the Metals Segment. We
continue to stress and support the importance of safety
throughout the organization.
I would like to speak to the general business conditions
and the likely impact on our operating companies.
As I write this letter, it is early in the first quarter, so
much can change over the course of the year. However,
our management team is encouraged by the positive
trends we are seeing in our respective businesses and
are cautiously optimistic that 2018 has the potential to
be one of our best years.
Let me start with the Metals Segment. When oil prices
cratered in the fall of 2014, capital expenditures in
the energy sector collapsed very quickly thereafter.
By the second quarter of 2015, our Metals businesses
were feeling the full effects of the declining capital
budgets. While other parts of the economy were
performing reasonably well, our primary end markets
were essentially in a recession. The second half of 2015
and all of 2016 were about as bad as anyone in the
Metals Segment had seen in the past twenty years or
longer. As 2017 progressed, we began to see order
activity show modest gains as distribution customers
restocked their inventories, and E&P customers in
the Permian Basin stepped up well completions.
However, project spending for new infrastructure in the
midstream and downstream energy markets remained
depressed for most of the year. After three long years
of below average capital spending in the energy sector,
as well as other key end markets, we now expect to
see a material increase in activity in 2018 and 2019.
Total capital spending in upstream, midstream and
downstream energy markets in North America is expected
to approach $200 billion in both 2018 and 2019. Rising oil
prices are making these projects more economical. The
ability to expense these projects immediately under the
new corporate tax reform, can only serve to accelerate
the pace of spending.
Capital projects are tremendous drivers for our Metals
businesses. Stainless steel welded pipe and tube is used
heavily in downstream energy projects. These projects
require our special alloy product with much higher selling
prices and associated profit margins. Reflecting the start
of this improving product mix, our backlog of stainless
steel pipe and tube orders as of December 31, 2017
had an average selling price that was 35% higher than
the average selling price realized throughout 2017.
With higher oil prices, we also expect to see increased
drilling activity in the Gulf of Mexico. Wood Mackenzie
is looking for a 15% increase in capital spending in
this sector for 2018. Our seamless carbon steel pipe
and tube from SPT-Houston has historically done very
well when deep-water drilling intensifies. The backlog
for our storage tanks and vessels in the Permian Basin
is also beginning to reflect improving product mix
and pricing. We are manufacturing larger and more
complicated tanks and our pressure vessel business
is also showing very nice growth. The backlog as of
December 31, 2017 had tank unit prices that were 27%
higher than the average realized throughout 2017.
We are very pleased with the progress of BRISMET’s
Munhall location, which we acquired last March. Since
taking over the operation, we have successfully qualified
the facility to supply every approved manufacturers’ list
that we have pursued. Recently, we replaced all three
laser units, ahead of schedule and below the estimated
cost at the time we acquired the business. In January, we
executed a five-year lease with Marcegaglia SPA for the
Munhall facility and signed a new collective bargaining
agreement with the union. We are particularly excited
about the growth potential of nickel tubing, which we
are now producing on the laser mills.
As far as the nickel market is concerned, we expect metal
to remain in deficit during this year, which should result
in modest price increases over the next twelve months.
Nickel losses in 2017 were much improved over prior
years, but still reduced our GAAP pre-tax earnings by
approximately $1.6 million. Increasing nickel surcharges
in the fourth quarter of 2017 will provide some inventory
profits in the first quarter of 2018, while flat to rising nickel
prices for the balance of the year should help us avoid any
nickel losses in 2018.
In March of this year, President Trump signed an executive
order to implement a 25% tariff on all steel products
entering the U.S. While discussions continue regarding
possible country and product exemptions, we expect a
favorable outcome for the domestic producers of welded
stainless steel pipe and tube. After years of battling
dumping and subsidies from multiple countries, we look
forward to competing on a level playing field. Recent
investments by Bristol Metals have positioned this business
unit to produce an additional 25 million pounds of
stainless steel pipe and tube annually.
With 2017 sales slightly down in the Chemicals Segment,
operating income fell by $.5 million from 2016. Unusual
bad debt accruals and legal fees accounted for most of
the decline. Even with the fall-off from the prior year,
the Chemical Segment still generated a healthy EBITDA
margin of just under 12%. Several much needed capital
projects were completed in 2017, including a new
steam boiler at Manufacturers Chemicals. Looking
ahead to 2018, we believe that organic sales and profit
growth will resume for this Segment as they introduce
several new product lines. I would like to congratulate
Greg Gibson, our Chemicals Segment President, on his
election to the Society of Chemical Manufacturers and
Affiliates (SOCMA) Board of Directors.
While heartened by the recovery in 2017, I still believe
that Synalloy’s best days are ahead of us. The capital
expenditures and acquisitions that we made in the last
down cycle have yet to realize their full potential. We
have taken them for a test run, but not driven them full
out in a strong demand market. Corporate tax reform
will be a major boon to Synalloy in the coming years. It
provides an incentive to reignite capital spending in our
end markets, and drive substantial organic growth in
our Metals businesses. Reducing our statutory federal
tax rate from the historical level of 34% to 21%, has the
potential to increase our cash flow by approximately
$1.62 million annually.
Lastly, I encourage you to read the section in this annual
report which highlights the spirit of giving that exists in
all Synalloy employees. It is a truly remarkable group of
people who work hard every day for the Company and
still take time to serve their communities. We are proud
of all that they do, both at work and at home!
Thank you for your continuing support.
Best Regards,
Craig C. Bram
Chief Executive Officer & President
March 15, 2018
FINANCIAL HIGHLIGHTS
(dollar amounts in thousands except per share data and stock price)
2017
2016
2015
OPERATIONS
Net Sales
Gross Profit
Goodwill Impairment
Operating (Loss) Income
Net (Loss) Income
FINANCIAL POSITION
Total Assets
Shareholders’ Equity
FINANCIAL RATIOS
Gross Profit to Net Sales
Return on Average Equity
PER SHARE DATA—DILUTED
Net (Loss) Income
STOCK PRICE
Price Range of Common Stock
High
Low
Close
$ 201,148
28,081
-
2,746
1,341
$ 138,566
16,904
-
(8,246)
(6,994)
$ 175,460
25,319
17,158
(13,031)
(10,269)
159,874
89,700
138,638
88,593
149,043
95,154
14%
2%
12%
-7%
14%
-10%
$ 0.15
$ (0.81)
$ (1.18)
$ 15.30
$ 9.75
$ 13.40
$ 11.70
$ 6.42
$ 10.95
$ 18.49
$ 6.20
$ 6.88
NET SALES
(in millions)
ADJUSTED EBITDA
(in millions)
WORKING CAPITAL
(in millions)
TOTAL DEBT
OUTSTANDING
(in millions)
$250 -
200 -
150 -
100 -
50 -
0 -
$25 -
$80 -
$40 -
20 -
15 -
10 -
5 -
0 -
60 -
30 -
40 -
20 -
20 -
0 -
10 -
0 -
$201.1 $138.6 $175.0
$12.5 $2.1 $12.0
$74.4 $64.9 $58.3
$25.9 $8.8 $28.1
2017 2016 2015
2017 2016 2015
2017 2016 2015
2017 2016 2015
STRONG
COMMUNITIES
START WITH
STRONG PEOPLE
The Synalloy team strives to improve our communities and we are proud to support organizations across the
country that make a difference.
Helping our neighbors is a simple concept. At Synalloy it’s also one of our core values. The Synalloy footprint
stretches far and wide over the United States and we are honored that we have the opportunity to make a
positive, lasting impact in the communities we serve.
While our products are used for infrastructure projects all over this great country to keep America running, it’s
our people at each Synalloy facility that help keep their communities going strong. Since our earliest days as a
company, Synalloy has been a proud supporter of numerous charitable and local community-building initiatives
that help support all of the localities that we call home.
Here are just a few examples of the ways Synalloy and our employees stand up to support our communities:
F.I. DENNING CENTER
For more than 20 years, Manufacturers Chemicals employees have maintained a long-standing partnership with
the F.I. Denning Center in Cleveland, TN, which is an alternative school for at-risk children who may have fallen
behind due to circumstances out of their control. While our employees have supported numerous initiatives,
including school supply drives, technology donations, and mock job interview sessions, the best is yet to come.
We will be supporting Denning’s new job shadow program, which will give students a real-world, hands-on
chance to explore career opportunities available to them after graduation.
ANDREWS FOOD PANTRY & OPERATION BLESSING
Palmer of Texas employees have also shown Texas-sized generosity throughout their region by supporting the
local food bank over the past several years. Most recently, employees had a very successful fundraising campaign
to assist local families in need during the holiday season. Palmer of Texas staffers collected and donated non-
perishable food items to the Andrews Food Pantry and West Texas Food Bank. They also collected unwrapped
toys to help Operation Blessing in Andrews, TX, provide toys for local kids over the holidays, an initiative they
have been supporting since 2013.
BIG BROTHERS BIG SISTERS
At our BRISMET pipe division in Bristol, TN, employees have been heavily involved with the local Big Brothers Big
Sisters. For more than eight years, we have been a major sponsor of the organization’s popular golf tournament
fundraiser, as well as offering support and entering teams in their bowling tournaments and volunteering in their
initiatives to feed the homeless.
RAINBOW KITCHEN
Our employees in Munhall, PA regularly participate in an annual non-perishable food drive for Rainbow Kitchen,
a food bank that supports children and low income families in the local area.
These long-standing initiatives are just a few of the ways we continually support our communities. But when
disaster strikes, we don’t hesitate to offer a helping hand. Never has this been more evident than in the abundance
of generosity shown by Synalloy team members following the devastating 2017 hurricane season. Where people
were thirsty, we delivered water. Where folks were hungry, we made sure they were fed. We didn’t do it for the
publicity. We did it because it’s our duty to do the right thing. We did it because teamwork is one of our guiding
principles. We did it to make our communities stronger.
HURRICANE HARVEY RELIEF
When the wind and rain stopped after Hurricane Harvey, the damage to the Gulf Coast was heartbreaking.
To help with recovery efforts, Synalloy donated $10,000 to the American Red Cross, as well as $5,000 to the
Employee Hardship fund to assist our employees impacted by the hurricane. In addition, our employees reached
into their own pockets and donated an additional $5,000 to relief efforts.
PROJECT H2O
The images and reports of storm damage around the Gulf were disturbing to say the least. As a company
with team members and facilities throughout the affected region, helping with the recovery efforts was a no-
brainer. Numerous members of our BRISMET pipe division team worked with the students, faculty, and families
of Carter County Schools in Elizabethton, TN to collect more than 170,000 bottles of donated drinking water
for distribution. With a little help from our friends at Pittman Trucking, we were able to deliver the much-needed
water to four very thankful communities in Texas and Florida. As one community member said it best, we
weren’t just bringing water, we were delivering life.
Giving is not something you do when it’s convenient. It’s not something you do when it’s easy. It’s what you do
when you see a neighbor in need, which is exactly why we do it year after year at Synalloy, and we couldn’t be
more proud of our team.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2017
OR
2
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19687
SYNALLOY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
57-0426694
(I.R.S. Employer Identification No.)
4510 Cox Road, Suite 201, Richmond, Virginia, 23060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 585-3605
Securities registered pursuant to Section 12(b) of the Act
Name of each exchange on which registered:
Common Stock, $1.00 Par Value
(Title of Class)
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
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
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act. (Check one)
Large accelerated filer
Non-accelerated filer
Emerging growth company
Do not check if smaller reporting company
Smaller reporting company
Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
Based on the closing price as of June 30, 2017, which was the last business day of the registrant's most recently completed second fiscal quarter, the
aggregate market value of the common stock held by non-affiliates of the registrant was $92.9 million. Based on the closing price as of March 9, 2018,
the aggregate market value of common stock held by non-affiliates of the registrant was $109.8 million. The registrant did not have any non-voting
common equity outstanding at either date.
The number of shares outstanding of the registrant's common stock as of March 9, 2018 was 8,757,434.
Portions of the Proxy Statement for the 2017 annual shareholders' meeting are incorporated by reference into Part III of this Form 10-K.
Documents Incorporated By Reference
Synalloy Corporation
Synalloy Corporation
Form 10-K
Form 10-K
For Period Ended December 31, 2017
For Period Ended December 31, 2017
Table of Contents
Table of Contents
Business
Business
Risk Factors
Risk Factors
Unresolved Staff Comments
Unresolved Staff Comments
Properties
Properties
Legal Proceedings
Legal Proceedings
Mine Safety Disclosures
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Security
Equity Security
Selected Financial Data
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risks
Quantitative and Qualitative Disclosures about Market Risks
Financial Statements and Supplementary Data
Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Segment Information
Segment Information
Management's Annual Report On Internal Control Over Financial Reporting
Management's Annual Report On Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements -
Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements -
KPMG LLP
KPMG LLP
Report of Independent Registered Public Accounting Firm - Internal Control - KPMG LLP
Report of Independent Registered Public Accounting Firm - Internal Control - KPMG LLP
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Controls and Procedures
Other Information
Other Information
Directors, Executive Officers and Corporate Governance
Directors, Executive Officers and Corporate Governance
Executive Compensation
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Matters
Certain Relationships and Related Transactions
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Principal Accountant Fees and Services
Part I
Part I
Part II
Part II
Part III
Part III
Part IV
Part IV
Item 1
Item 1
Item 1A
Item 1A
Item 1B
Item 1B
Item 2
Item 2
Item 3
Item 3
Item 4
Item 4
Item 5
Item 5
Item 6
Item 6
Item 7
Item 7
Item 7A
Item 7A
Item 8
Item 8
Item 9
Item 9
Item 9A
Item 9A
Item 9B
Item 9B
Item 10
Item 10
Item 11
Item 11
Item 12
Item 12
Item 13
Item 13
Item 14
Item 14
Item 15
Item 15
Exhibits and Financial Statement Schedules
Exhibits and Financial Statement Schedules
Signatures
Signatures
Index to Exhibits
Index to Exhibits
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Forward-Looking Statements
This Annual Report on Form 10-K includes and incorporates by reference "forward-looking statements" within the meaning of
the federal securities laws. All statements that are not historical facts are forward-looking statements. The words "estimate,"
"project," "intend," "expect," "believe," "should," "anticipate," "hope," "optimistic," "plan," "outlook," "should," "could," "may"
and similar expressions identify forward-looking statements. The forward-looking statements are subject to certain risks and
uncertainties, including without limitation those identified below, which could cause actual results to differ materially from
historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements. The
following factors could cause actual results to differ materially from historical results or those anticipated: adverse economic
conditions; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased
costs; raw materials availability; employee relations; ability to maintain workforce by hiring trained employees; labor efficiencies;
customer delays or difficulties in the production of products; new fracking regulations; a prolonged decrease in nickel and oil
prices; unforeseen delays in completing the integrations of acquisitions; risks associated with mergers, acquisitions, dispositions
and other expansion activities; financial stability of our customers; environmental issues; negative or unexpected results from tax
law changes; unavailability of debt financing on acceptable terms and exposure to increased market interest rate risk; inability to
comply with covenants and ratios required by our debt financing arrangements; ability to weather an economic downturn; loss of
consumer or investor confidence and other risks detailed from time-to-time in Synalloy Corporation's Securities and Exchange
Commission filings. Synalloy Corporation assumes no obligation to update any forward-looking information included in this
Annual Report on Form 10-K.
PART I
Item 1 Business
Synalloy Corporation, a Delaware corporation, was incorporated in 1958 as the successor to a chemical manufacturing business
founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. The
Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060 with an additional corporate and
shared services office at 775 Spartan Boulevard, Suite 102, Spartanburg, South Carolina 29301. Unless indicated otherwise, the
terms "Company," "we" "us," and "our" refer to Synalloy Corporation and its consolidated subsidiaries.
The Company's business is divided into two reportable operating segments, the Metals Segment and the Specialty Chemicals
Segment. The Metals Segment operates as three reporting units, all International Organization for Standardization ("ISO") certified
manufacturers, including Bristol Metals, LLC ("BRISMET"), a wholly-owned subsidiary of Synalloy Metals, Inc., Palmer of
Texas Tanks, Inc. ("Palmer") and Specialty Pipe & Tube, Inc. ("Specialty"). BRISMET manufactures stainless steel and other
alloy pipe and tube. Palmer manufactures liquid storage solutions and separation equipment, and Specialty is a master distributor
of seamless carbon pipe and tube. The Metals Segment's markets include the oil and gas, chemical, petrochemical, pulp and paper,
mining, power generation (including nuclear), water and waste water treatment, liquid natural gas ("LNG"), brewery, food
processing, petroleum, pharmaceutical and other heavy industries. The Specialty Chemicals Segment operates as one reporting
unit which includes Manufacturers Chemicals, LLC ("MC"), a wholly-owned subsidiary of Manufacturers Soap and Chemical
Company ("MS&C"), and CRI Tolling, LLC ("CRI Tolling"). The Specialty Chemicals Segment produces specialty chemicals for
the chemical, paper, metals, mining, agricultural, fiber, paint, textile, automotive, petroleum, cosmetics, mattress, furniture,
janitorial and other industries. MC manufactures lubricants, surfactants, defoamers, reaction intermediaries and sulfated fats and
oils. CRI Tolling provides chemical tolling manufacturing resources to global and regional chemical companies and contracts with
other chemical companies to manufacture certain, pre-defined products.
General
Metals Segment – This segment is comprised of three wholly-owned subsidiaries: Synalloy Metals, Inc., which owns 100 percent
of BRISMET, located in Bristol, Tennessee and Munhall, Pennsylvania; Palmer, located in Andrews, Texas; and Specialty, located
in Mineral Ridge, Ohio and Houston, Texas.
BRISMET manufactures welded pipe and tube, primarily from stainless steel, but also from other corrosion-resistant metals. Pipe
is produced in sizes from one-half inch to 120 inches in diameter and wall thickness up to one and one-half inches. Eighteen-inch
and smaller diameter pipe is made on equipment that forms and welds the pipe in a continuous process. Pipe larger than 18 inches
in diameter is formed on presses or rolls and welded on batch welding equipment. Pipe is normally produced in standard 20-foot
lengths. However, BRISMET has unusual capabilities in the production of long length pipe without circumferential welds. This
can reduce the installation cost for the customer. Lengths up to 60 feet can be produced in sizes up to 18 inches in diameter. In
larger sizes, BRISMET has a unique ability among domestic producers to make 48-foot lengths in diameters up to 36 inches. Over
the past four years, BRISMET has made substantial capital improvements, installing an energy efficient furnace to anneal pipe
2
quicker while minimizing natural gas usage; system improvements in pickling to maintain the proper chemical composition of
the pickling acid; and developing a heavy wall/quick turn welded pipe production shop by adding a 4,000 tonne press along with
all necessary ancillary processes. BRISMET's Munhall facility manufactures welded pipe as well as new product offerings in
welded tubing in diameters from 5/8 inch to 8 inches and gauges in diameters from 0.028 inches to 0.120 inches. The Munhall
facility was designed for improved product flow and the latest technology including laser welding and in-line annealing.
Palmer is a manufacturer of fiberglass and steel storage tanks for the oil and gas, waste water treatment and municipal water
industries. Located in Andrews, Texas, Palmer is ideally located in the heart of a significant oil and gas production territory. Palmer
produces made-to-order fiberglass tanks, utilizing a variety of custom mandrels and application specific materials. Its fiberglass
tanks range from two feet to 30 feet in diameter at various heights. The majority of these tanks are used for oil field waste water
capture and are an integral part of the environmental regulatory compliance of the drilling process. Each fiberglass tank is
manufactured to American Petroleum Institute Q1 standards to ensure product quality. Palmer's steel storage tank facility enables
efficient, environmentally compliant production with designed-in expansion capability to support future growth. Finished steel
tanks range in size predominantly from 50 to 1,500 barrels and are used to store extracted oil. During 2014, Palmer obtained all
of the necessary certifications to produce certified pressure vessels. These certifications allow Palmer to sell all of the separator
and storage equipment needed at a well site.
Specialty is a leading master distributor of hot finish, seamless, carbon steel pipe and tubing, with an emphasis on large outside
diameters and exceptionally heavy wall thickness. Specialty's products are primarily used for mechanical and high pressure
applications in the oil and gas, capital goods manufacturing, heavy industrial, construction equipment, paper and chemical
industries. Operating from facilities located in Mineral Ridge, Ohio and Houston, Texas, Specialty is well-positioned to serve the
major industrial and energy regions and successfully reach other target markets across the United States. Specialty performs value-
added processing on approximately 80 percent of products shipped, which would include cutting to length, heat treatment, testing,
boring and end finishing and typically processes and ships orders in 24 hours or less. Based upon its short lead times, Specialty
plays a critical role in the supply chain, supplying long lead-time items to markets that demand fast deliveries, custom lengths and
reliable execution of orders.
In order to establish stronger business relationships, the Metals Segment uses only a few raw material suppliers. Nine suppliers
furnish approximately 80 percent of total dollar purchases of raw materials, with one supplier furnishing 40 percent of material
purchases. However, the Company does not believe that the loss of this supplier 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.
Specialty Chemicals Segment – This segment consists of the Company's wholly-owned subsidiary MS&C. MS&C owns 100
percent of the membership interests of MC, which has a production facility in Cleveland, Tennessee. This segment also includes
CRI Tolling which is located in Fountain Inn, South Carolina. MC and CRI Tolling are aggregated as one reporting unit and
comprise the Specialty Chemicals Segment. Both facilities are fully licensed for chemical manufacture. MC manufactures
lubricants, surfactants, defoamers, reaction intermediaries and sulfated fats and oils. CRI Tolling provides chemical tolling
manufacturing resources to global and regional companies and contracts with other chemical companies to manufacture certain
pre-defined products.
MC produces over 1,100 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. 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, paint, mining, oil and gas and janitorial
applications. MC's capabilities also include 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.
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.
The Specialty Chemicals Segment maintains six laboratories for applied research and quality control which are staffed by eleven
employees.
Most raw materials used by the segment are generally available from numerous independent suppliers and approximately 52
percent of total purchases are from its top 15 suppliers. While some raw material needs are met by a sole supplier or only a few
suppliers, the Company anticipates no difficulties in fulfilling its raw material requirements.
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Please see Note 15 to the Consolidated Financial Statements, which are included in Item 8 of this Form 10-K, for financial
information about the Company's segments.
Sales and Distribution
Metals Segment – The Metals Segment utilizes separate sales organizations for its different product groups. Stainless steel pipe
is sold worldwide under the BRISMET trade name through authorized stocking distributors at warehouse locations throughout
the country. Producing sales and providing service to the distributors and end-user customers are BRISMET's President, two
outside sales employees, seven independent manufacturers' representatives and eight inside sales employees. Additionally,
BRISMET operates international offices in Brussels, Belgium and Shanghai, China, with one person in each office.
Palmer employs three sales professionals that manage the relationship with customers and partnerships to identify and secure new
sales. Additionally, the Metals Segment President assists in account relationship management with large customers. Customer
feedback and in-field experience generate product enhancements and new product development.
Approximately 80 percent of Specialty's pipe and tube sales are to North American pipe and tube distributors with the remainder
comprised of sales to end use customers. In addition to Specialty's President, Specialty utilizes two manufacturers' representatives
and nine inside sales employees, whom are located at both locations, to obtain sales orders and service its customers.
The Metals Segment had one domestic customer that accounted for approximately 14 percent of the segment's revenues for 2015.
There were no customers representing more than ten percent of the Metals Segment's revenues for 2017 or 2016.
Specialty Chemicals Segment – Specialty chemicals are sold directly to various industries nationwide by five full-time outside
sales employees and eight manufacturers' representatives. The Specialty Chemicals Segment has one customer that accounted for
approximately 23, 25 and 31 percent of the segment's revenues for 2017, 2016 and 2015, respectively. The concentration of sales
to this customer declined as a result of this customer moving production of the products previously produced and sold by the
Specialty Chemicals Segment in house.
Competition
Metals Segment – Welded stainless steel pipe is the largest sales volume product of the Metals Segment. Although information
is not publicly available regarding the sales of most other producers of this product, management believes that the Company is
one of the largest domestic producers of such pipe. This commodity product is highly competitive with eight known domestic
producers, including the Company, and imports from many different countries.
Due to the size of the tanks produced and shipped to its customers, the majority of Palmer's products is sold within a 300 mile
radius from its plant in Andrews, Texas. There are currently 18 tank producers, with similar capabilities, servicing that same area.
Specialty is a leader in the specialized products segment of the pipe and tube market by offering an industry-leading in-stock
inventory of a broad range of high quality products, including specialized products with limited availability. Specialty's dual
branches have both common and regional-specific products and capabilities. There are four known significant pipe and tube
distributors with similar capabilities to Specialty.
Specialty Chemicals Segment – The Company is the sole producer of certain specialty chemicals manufactured for other
companies under processing agreements and also produces proprietary specialty chemicals. The Company's sales of specialty
products are insignificant compared to the overall market for specialty chemicals. The market for most of the products is highly
competitive and many competitors have substantially greater resources than does the Company.
Mergers, Acquisitions and Dispositions
The Company is committed to a long-term strategy of (a) reinvesting capital in our current business segments to foster their organic
growth, (b) disposing of underperforming business segments and (c) completing acquisitions that expand our current business
segments or establish new manufacturing platforms. Targeted acquisitions are priced to be economically feasible and focus on
achieving positive long-term benefits. These acquisitions may be paid for in the form of cash, stock, debt or a combination thereof.
The amount and type of consideration and deal charges paid could have a short-term dilutive effect on the Company's earnings
per share. However, such transactions are anticipated to provide long-term economic benefit to the Company.
On December 9, 2016, the Company's subsidiary BRISMET, entered into a definitive agreement to acquire the stainless steel pipe
and tube assets of Marcegaglia USA, Inc. ("MUSA") located in Munhall, PA to enhance its on-going business with additional
capacity and technological advantages. The transaction closed on February 28, 2017. The agreement was structured as an asset
purchase and excluded MUSA's galvanized and ornamental tubing products. The purchase price for the transaction, which excludes
real estate and certain other assets, totaled $14,954,000; the assets purchased from MUSA include inventory, production and
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maintenance supplies and equipment less specific identified liabilities assumed. In accordance with the agreement, on December
9, 2016, BRISMET entered into an escrow agreement and deposited $3,000,000 into the escrow fund. During the fourth quarter
of 2017, the Company finalized the purchase price allocation for the acquisition. As part of the MUSA transaction, BRISMET
assumed all of MUSA's rights and obligations pursuant to the Collective Bargaining Agreement between MUSA and the United
Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union AFL-CIO,
on behalf of Local Union 5852-22 (the "Union") dated October 1, 2013 (the "CBA"). At the closing of the transaction, BRISMET
and the Union amended the CBA to include a modest wage increase and to extend the CBA's termination date to September 30,
2018. A new CBA was ratified that extends the termination date to January 2023.
Environmental Matters
Environmental expenditures that relate to an existing condition caused by past operations and do not contribute to future revenue
generation are expensed. Liabilities are recorded when environmental assessments and/or cleanups are probable and the costs of
these assessments and/or cleanups can be reasonably estimated. Changes to laws and environmental issues, including climate
change, are made or proposed with some frequency and some of the proposals, if adopted, might directly or indirectly result in a
material reduction in the operating results of one or more of our operating units. We are presently unable to foresee the future well
enough to quantify such risks. See Note 7 to the Consolidated Financial Statements, which are included in Item 8 of this Form
10-K, for further discussion.
Research and Development Activities
The Company spent approximately $556,000 in 2017, $603,000 in 2016 and $548,000 in 2015 on research and development
activities that were expensed in its Specialty Chemicals Segment. Five individuals, all of whom are graduate chemists, are engaged
primarily in research and development of new products and processes, the improvement of existing products and processes, and
the development of new applications for existing products.
Seasonal Nature of the Business
With the exception of Palmer and Specialty's Houston location, which primarily serves the oil and gas industry, the Company’s
businesses and products are generally not subject to any seasonal impact that results in significant variations in revenues from one
quarter to another. Fourth quarter revenue and profit for Palmer and Specialty Houston can be as much as 25 percent below the
other three quarters due to vacation schedules for customer field crews working at the drill sites.
Backlogs
The Specialty Chemicals Segment operates primarily on the basis of delivering products soon after orders are received. Accordingly,
backlogs are not a factor in this business. The same applies to seamless, carbon steel pipe and tubing sales in the Metals Segment.
However, backlogs are important in the Metals Segment's welded stainless steel pipe and tank manufacturing operations, where
both businesses incur significant dollar value of committed orders in advance of production. Its backlog of open orders for welded
stainless steel pipe were $28,783,000 and $18,752,000 and for tanks were $17,192,000 and $9,878,000 at the end of 2017 and
2016, respectively.
Employee Relations
At December 31, 2017, the Company had 533 employees. The Company considers relations with employees to be strong. The
number of employees of the Company represented by unions, located at the Bristol, Tennessee, Munhall, Pennsylvania and Mineral
Ridge, Ohio facilities, is 223, or 42 percent of the Company's employees. They are represented by three locals affiliated with the
United Steelworkers. Collective bargaining contracts for the Steelworkers expire in July 2019, June 2020 and January 2023,
respectively.
Financial Information about Geographic Areas
Information about revenues derived from domestic and foreign customers is set forth in Note 15 to the Consolidated Financial
Statements.
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, which 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,
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through its Web site, www.synalloy.com, as soon as reasonably practical after the electronic filing of such material with the SEC.
The information on the Company's Web site is not incorporated into this Annual Report on Form 10-K or any other filing the
Company makes with the SEC.
Item 1A Risk Factors
There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and
financial condition. Set forth below are descriptions of those risks and uncertainties that we believe to be material, but the risks
and uncertainties described are not the only risks and uncertainties that could affect our business. Reference should be made to
"Forward-Looking Statements" above, and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below.
The cyclical nature of the industries in which our customers operate causes demand for our products to be cyclical, creating
uncertainty regarding future profitability. Various changes in general economic conditions affect the industries in which our
customers operate. These changes include decreases in the rate of consumption or use of our customers’ products due to economic
downturns. Other factors causing fluctuation in our customers’ positions are changes in market demand, capital spending, lower
overall pricing due to domestic and international overcapacity, lower priced imports, currency fluctuations, and increases in use
or decreases in prices of substitute materials. As a result of these factors, our profitability has been and may in the future be subject
to significant fluctuation.
Domestic competition could force lower product pricing and may have an adverse effect on our revenues and profitability. From
time-to-time, intense competition and excess manufacturing capacity in the commodity stainless steel industry have resulted in
reduced selling prices, excluding raw material surcharges, for many of our stainless steel products sold by the Metals Segment.
In order to maintain market share, we would have to lower our prices to match the competition. These factors have had and may
continue to have an adverse impact on our revenues, operating results and financial condition and may continue to do so in the
future.
Our business, financial condition and results of operations could be adversely affected by an increased level of imported products.
Our business is susceptible to the import of products from other countries, particularly steel products. Import levels of various
products are affected by, among other things, overall world-wide demand, lower cost of production in other countries, the trade
practices of foreign governments, government subsidies to foreign producers, the strengthening of the U.S. dollar and
governmentally imposed trade restrictions in the United States. Although imports from certain countries have been curtailed by
anti-dumping duties, imported products from
other countries could significantly reduce prices. Increased imports of certain products, whether illegal dumping or legal imports,
could reduce demand for our products in the future and adversely affect our business, financial position, results of operations or
cash flows.
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 that may have an adverse impact on our financial performance.
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, which could result in our failure to timely
deliver products to our customers. Purchase prices and availability of these critical raw materials are subject to volatility. Some
of the raw materials used by the Specialty Chemicals 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
Organization of the Petroleum Exporting Countries ("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,
at prices 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 attempt to pass changes in the prices of raw materials along to our customers. However, we cannot always
do so, and any limitation on our ability to pass through any price increases could have an adverse effect on our financial performance.
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, specifically for the Specialty Chemicals Segment.
We rely on a small number of suppliers for our raw materials and any interruption in our supply chain could affect our operations.
In order to foster stronger business relationships, the Metals Segment uses only a few raw material suppliers. During the year
ended December 31, 2017, nine suppliers furnished approximately 80 percent of our total dollar purchases of raw materials, with
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one supplier providing 40 percent. However, these raw materials are available from a number of sources, and the Company
anticipates no difficulties in fulfilling its raw materials requirements for the Metals Segment. Raw materials used by the Specialty
Chemicals Segment are generally available from numerous independent suppliers and approximately 52 percent of total purchases
were made from our top 15 suppliers during the year ended December 31, 2017. Although some raw material needs are met by a
single supplier or only a few suppliers, the Company anticipates no difficulties in fulfilling its raw material requirements for the
Specialty Chemicals Segment. While the Company believes that raw materials for both segments are readily available from
numerous sources, the loss of one or more key suppliers in either segment, or any other material change in our current supply
channels, could have an adverse effect on the Company’s ability to meet the demand for its products, which could impact our
operations, revenues and financial results.
A substantial portion of our overall sales is dependent upon a limited number of customers, and the loss of one or more of such
customers would have a material adverse effect on our business, results of operation and profitability. The products of the Specialty
Chemicals Segment are sold to various industries nationwide. The Specialty Chemicals Segment has one customer that accounted
for approximately 23 percent, 25 percent and 31 percent of revenues for 2017, 2016 and 2015, respectively. The concentration of
sales to this customer declined as a result of this customer moving production of the products previously produced and sold by
the Specialty Chemicals Segment in house. The loss of this customer would have a material adverse effect on the revenues of the
Specialty Chemicals Segment of the Company.
The Metals Segment had one customer that accounted for approximately 14 percent of revenues for 2015. There were no customers
representing more than ten percent of the Metals Segment's revenues in 2017 or 2016. Palmer and Specialty, which are a part of
the Metals Segment, sell much of their products to the oil and gas industry. Any change in this industry, or any change in this
industry’s demand for their products, would have a material adverse effect on the profits of the Metals Segment and the Company.
Our operating results are sensitive to the availability and cost of energy and freight, which are important in the manufacture and
transport of our products. Our operating costs increase when energy or freight costs rise. During periods of increasing energy and
freight costs, we might not be able to fully recover our operating cost increases through price increases without reducing demand
for our products. In addition, we are dependent on third party freight carriers to transport many of our products, all of which are
dependent on fuel to transport our products. The prices for and availability of electricity, natural gas, oil, diesel fuel 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 and may result in the decline of freight carrier capacity in our geographic markets, or make freight carriers
unavailable. Further, increases in energy or freight costs that cannot be passed on to customers, or changes in costs relative to
energy and freight costs paid by competitors, has adversely affected, and may continue to adversely affect, our profitability.
Oil prices are extremely volatile. A substantial or extended decline in the price of oil could adversely affect our financial condition
and results of operations. Prices for oil can fluctuate widely. Our Palmer and Specialty (Houston, Texas) units' revenues are highly
dependent on our customers adding oil well drilling and pumping locations. Should oil prices decline such that drilling becomes
unprofitable for our customers, such customers will likely cap many of their current wells and cease or curtail expansion. This
will decrease the demand for our tanks and pipe and tube and adversely affect the results of our operations.
Significant changes in nickel prices could have an impact on the sales of the Metals Segment. The Metals Segment uses nickel in
a number of its products. Nickel prices are currently at a relatively low level, which reduces our manufacturing costs for certain
products. When nickel prices increase, many of our customers increase their orders in an attempt to avoid future price increases,
resulting in increased sales for the Metals Segment. Conversely, when nickel prices decrease, many of our customers wait to place
orders in an attempt to take advantage of subsequent price decreases, resulting in reduced sales for the Metals Segment. On average,
the Metals Segment turns its inventory of commodity pipe every six months, but the nickel surcharge on sales of commodity pipe
is established on a monthly basis. The difference, if any, between the price of nickel on the date of purchase of the raw material
and the price, as established by the surcharge, on the date of sale has the potential to create an inventory price change gain or loss.
If the price of nickel steadily increases over time, as it did from 2005 to 2007, the Metals Segment is the beneficiary of the increase
in nickel price in the form of metal price change gains. Conversely, if the price of nickel steadily decreases over time, as it did
from 2011 to 2016, the Metals Segment suffers metal price change losses. 2017 was a highly volatile year, with nickel prices
starting at a peak in January, and declining through the first nine months, with a steep trough during the third quarter (average
down 25 percent from the first quarter), before rebounding to almost beginning of year levels by December. This volatile pattern
did result in average nickel prices being up 48 percent for the full year of 2017 and up 38 percent for the fourth quarter 2017, when
compared to the same periods of the prior year; however, substantial declines within the year generated cumulative inventory price
change losses that exceeded inventory price change gains by $2,634,000 for the year. We will incur inventory price losses in the
future if nickel prices decrease. Any material changes in the cost of nickel could impact our sales and result in fluctuations in the
profits for the Metals Segment.
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The Company began hedging its nickel exposure effective in the beginning of 2016 to provide coverage against extreme downside
product pricing exposure related to the content of nickel alloy contained in purchased stainless steel inventory. The sales price of
stainless steel product (containing nickel alloy) is subject to a variable pricing component for alloys (nickel, chrome, molybdenum
and iron) contained in the product. Each month, industry pricing indices are published which set the following month’s price
surcharges for those alloys. The Company typically holds approximately six to seven months of inventory, with fixed priced
purchase orders (where the alloy pricing index is “locked”, eliminating the Company’s exposure) consisting of approximately 50
percent of held stainless steel inventories. As a result, the eventual sales prices for approximately 50 percent of held stainless steel
inventories will vary until a customer order commitment is received, and the selling price is established. In the past, the Company
fully absorbed the potential negative market volatility that resulted from sales prices declining during the inventory hold period.
In 2017 and 2016, the cumulative negative impact during the inventory hold period totaled $2,634,000 and $5,751,000, respectively,
due to a substantial and prolonged period of nickel commodity pricing declines.
The Company’s nickel hedge program covers approximately three months of pricing exposure, via forward contracts, to sell nickel
at fixed prices. Other alloys do not have hedge contracts available in the marketplace. The Company reviews the current nickel
pricing level and if it believes there is significant downside exposure in future pricing, management will protect against these
projected declines by purchasing contracts to “Put” nickel pounds to the trading party, with strike prices at 15 percent below the
three-month forward price at the time of the contract. As a result, there is zero hedge coverage for the first 15 percent of nickel
price decline, but dollar for dollar coverage for 100 percent of any decline below that level.
As of December 31, 2017 and December 31, 2016, the Company had a hedge position equal to 1,351,000 and 639,000, respectively,
of pounds of nickel, representing 53 and 34 percent, respectively, of the Company’s total nickel content of stainless steel pounds
in inventory. The Company does not utilize hedge accounting for these transactions but marks to market the value of the outstanding
contracts with all adjustments being included in cost of sales in the Consolidated Statements of Operations. The fair value of the
nickel contracts at December 31, 2017 and December 31, 2016 was an asset of approximately $9,000 and $87,000, respectively.
The Company’s downside exposure is limited to the potential that the total of the fair value of the nickel contracts would be reduced
to zero, if nickel pricing does not decline to the contracted strike prices. The program is designed to mitigate but not eliminate the
Company's nickel pricing exposure.
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 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 profitability could be adversely affected.
Our lengthy sales cycle for the Specialty Chemicals Segment makes it difficult to predict quarterly revenue levels and operating
results. Purchasing the products of the Specialty Chemicals Segment is a major commitment on the part of our customers. Before
a potential customer determines to purchase products from the Specialty Chemicals Segment, the Company must produce test
product material so that the potential customer is satisfied that we can manufacture a product to their specifications. The production
of such test materials is a time-consuming process. Accordingly, the sales process for products in the Specialty Chemicals Segment
is a lengthy process that requires a considerable investment of time and resources on our part. As a result, the timing of our revenues
is difficult to predict, and the delay of an order could cause our quarterly revenues to fall below our expectations and those of the
public market analysts and investors.
Our operations expose us to the risk of environmental, health and safety liabilities and obligations, which could have a material
adverse effect on our financial condition, results of operations or cash flows. We are subject to numerous federal, state and local
environmental protection and health and safety laws governing, among other things:
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•
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the generation, use, storage, treatment, transportation, disposal and management of hazardous substances and wastes;
emissions or discharges of pollutants or other substances into the environment;
investigation and remediation of, and damages resulting from, releases of hazardous substances; and
the health and safety of our employees.
8
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.
We have incurred, and expect to continue to incur, additional capital expenditures in addition to ordinary costs to comply with
applicable environmental laws, such as those governing air emissions and wastewater discharges. Our failure to comply with
applicable environmental laws and permit requirements could result in civil and/or criminal fines or penalties, enforcement actions,
and regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures such as the installation of
pollution control equipment, which could have a material adverse effect on our financial condition, results of operations or cash
flows.
We are currently, and may in the future be, required to investigate, remediate or otherwise address contamination at our current
or former facilities. Many of our current and former facilities have a history of industrial usage for which additional investigation,
remediation or other obligations could arise in the future and that could materially adversely affect our business, financial condition,
results of operations or cash flows. In addition, we are currently, and could in the future be, responsible for costs to address
contamination identified at any real property we used as a disposal site.
Although we cannot predict the ultimate cost of compliance with any of the requirements described above, 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.
We could be subject to third party claims for property damage, personal injury, nuisance or otherwise as a result of violations of,
or liabilities under, environmental, health or safety laws in connection with releases of hazardous or other materials at any current
or former facility. We could also be subject to environmental indemnification claims in connection with assets and businesses that
we have acquired or divested.
There can be no assurance that any future capital and operating expenditures to maintain compliance with environmental laws, as
well as costs to address contamination or environmental claims, will not exceed any current estimates or adversely affect our
financial condition and results of operations. In addition, any unanticipated liabilities or obligations arising, for example, out of
discovery of previously unknown conditions or changes in laws or regulations, could have an adverse effect on our business,
financial condition, results of operations or cash flows.
We are dependent upon the continued operation of our production facilities, which are subject to a number of hazards. In both of
our business segments, but especially in the Specialty Chemicals Segment, our 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 capabilities are highly specialized, which
limits our ability to shift production to another facility 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, failure to timely fulfill customer orders 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. As of December 31, 2017, we had 223 employees represented
by unions at our Bristol, Tennessee, Munhall, Pennsylvania and Mineral Ridge, Ohio facilities, which is 42 percent of the aggregate
number of Company employees. These employees are represented by three local unions affiliated with the United Steelworkers
(the “Steelworkers Union"). The collective bargaining contracts for the Steelworkers Unions will expire in July 2019, June 2020
and January 2023. Although we believe that our present labor relations are satisfactory, our failure to renew these agreements on
9
reasonable terms as the current agreements expire could result in labor disruptions and increased labor costs, which could adversely
affect our financial performance.
Our current capital structure includes indebtedness, which is secured by all or substantially all of our assets and which contains
restrictive covenants that may prevent us from obtaining adequate working capital, making acquisitions or capital improvements.
Our existing credit facility contains 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 facility requires us to meet a minimum fixed charge coverage ratio 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 facility 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 any then outstanding related debt could be accelerated
and become immediately due and payable. In addition, in the event of such a default, our lender may refuse to advance additional
funds, demand immediate repayment of our outstanding indebtedness, and elect to foreclose on our assets that secure the credit
facility.
There were no events of default under our credit facility at December 31, 2017. Although we believe we will remain in compliance
with these covenants in the foreseeable future and that our relationship with our lender is strong, there is no assurance our lender
would consent to an amendment or waiver in the event of noncompliance; or that such consent would not be conditioned upon
the receipt of a cash payment, revised principal payout terms, increased interest rates or restrictions in the expansion of the credit
facility for the foreseeable future, or that our lender would not exercise rights that would be available to them, including, among
other things, demanding payment of outstanding borrowings. In addition, our ability to obtain additional capital or alternative
borrowing arrangements at reasonable rates may be adversely affected. All or any of these adverse events would further limit our
flexibility in planning for, or reacting to, downturns in our business.
We may need new or additional financing in the future to expand our business or refinance existing indebtedness, and our inability
to obtain capital on satisfactory terms or at all may have an adverse impact on our operations and our financial results. 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 facility. 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, our current receivable and inventory balances do not support additional debt availability or because we may not have sufficient
cash flows 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. If we are unable to access capital on satisfactory terms and
conditions, this could have an adverse impact on our operations and our financial results.
Our existing property and liability insurance coverages contain exclusions and limitations on coverage. We maintain 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 the operations of the Specialty Chemicals
Segment. As a result, our existing coverage may not be sufficient to cover any losses we may incur and 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 or cash flows.
We may not be able to make the operational and product changes necessary to continue to be an effective competitor. We must
continue to enhance our existing products and to develop and manufacture new products with improved capabilities in order to
continue to be an effective competitor in our business markets. In addition, we must anticipate and respond to changes in industry
standards that affect our products and the needs of our customers. We also 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.
The success of any new or enhanced products will depend on a number of factors, such as technological innovations, increased
manufacturing and material costs, customer acceptance and the performance and quality of the new or enhanced products. As we
introduce new products or refine existing products, we cannot predict the level of market acceptance or the amount of market
share these new or enhanced products may achieve. Moreover, we may experience delays in the introduction of new or enhanced
products. Any manufacturing delays or problems with new or enhanced product launches will adversely affect our operating results.
In addition, the introduction of new products could result in a decrease in revenues from existing products. Also, we may need
more capital for product development and enhancement than is available to us, which could adversely affect our business, financial
condition or results of operations. We sell our products in industries that are affected by technological changes, new product
introductions and changing industry standards. If we do not respond by developing new products or enhancing existing products
10
on a timely basis, our products will become obsolete over time and our revenues, cash flows, profitability and competitive position
will suffer.
In addition, if we fail to accurately predict future customer needs and preferences, we may invest heavily in the development of
new or enhanced products that do not result in significant sales and revenue. Even if we successfully innovate in the development
of new and enhanced products, we may incur substantial costs in doing so, and our profitability may suffer. Our products must be
kept current to meet the needs of our customers. To remain competitive, we must develop new and innovative products on an on-
going basis. If we fail to make innovations, or the market does not accept our new or enhanced products, our sales and results
could suffer.
Our inability to anticipate and respond to changes in industry standards and the needs of our customers, or to utilize changing
technologies in responding to those changes, could have a material adverse effect on our business and our results of operations.
Our strategy of using acquisitions and dispositions to position our businesses may not always be successful, which may have a
material adverse impact on our financial results and profitability. 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 acquisitions, 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; significant transaction costs that were not identified during due diligence;
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. If acquisition
opportunities are not available or if one or more acquisitions are not successfully integrated into our operations, this could have
a material adverse impact on our financial results and profitability.
The loss of key members of our management team, or difficulty attracting and retaining experienced technical personnel, could
reduce our competitiveness and have an adverse effect on our business and results of operations. The successful implementation
of our strategies and handling of other issues integral to our future success will depend, in part, on our experienced management
team. The loss of key members of our management team could have an adverse effect on our business. Although we have entered
into employment agreements with key members of our management team including Craig C. Bram, President and Chief Executive
Officer, Dennis M. Loughran, Senior Vice President and Chief Financial Officer, Sally M. Cunningham, Vice President of Corporate
Administration, J. Kyle Pennington, President of Metals Segment, James G. Gibson, General Manager and President of Specialty
Chemicals Segment, Steven J. Baroff, President and General Manager of Specialty, K. Dianne Beck, Vice President of Specialty,
Christopher D. Sitka, Vice President of Specialty and Kevin Van Zandt, Vice President of Bristol Metals-Munhall, employees may
resign from the Company at any time and seek employment elsewhere, subject to certain non-competition restrictions. Additionally,
if we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be
harmed.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of
such activities could result in delays or eliminate new wells from being started, thus reducing the demand for our fiberglass and
steel storage tanks, pressure vessels and heavy walled pipe and tube. Hydraulic fracturing (“fracking”) is currently an essential
and common practice to extract oil from dense subsurface rock formations and this lower cost extraction method is a significant
driving force behind the surge of oil exploration and drilling in several locations in the United States. However, the Environmental
Protection Agency, U.S. Congress and state legislatures have considered adopting legislation to provide additional regulations and
disclosures surrounding this process. In the event that new legal restrictions surrounding the fracking process are adopted in the
areas in which our customers operate, we may see a dramatic decrease in Palmer's and Specialty - Texas' profitability which could
have an adverse impact on our financial results.
Our allowance for doubtful accounts may not be adequate to cover actual losses. An allowance for doubtful accounts in maintained
for estimated losses resulting from the inability of our customers to make required payments. This allowance may not be adequate
to cover actual losses, and future provisions for losses could materially and adversely affect our operating results. The allowance
for doubtful accounts is based on an evaluation of the outstanding receivables and existing economic conditions. The amount of
future losses is susceptible to changes in economic, operating and other outside forces and conditions, all of which are beyond
our control, and these losses may exceed current estimates. Although management believes that the allowance for doubtful accounts
is adequate to cover current estimated losses, management cannot make assurances that we will not further increase the allowance
for doubtful accounts. A significant increase in the allowance for doubtful accounts could adversely affect our earnings.
11
We depend on third parties to distribute certain of our products and because we have no control over such third parties we are
subject to adverse changes in such parties’ operations or interruptions of service, each of which may have an adverse effect on
our operations. We use third parties over which we have only limited control to distribute certain of our products. Our dependency
on these third party distributors has increased as our business has grown. Because we rely on these third parties to provide
distribution services, any change in our ability to access these third party distribution services could have an adverse impact on
our revenues and put us at a competitive disadvantage with our competitors.
Freight costs for products produced in our Palmer facility restrict our sales area for this facility. The freight and other distribution
costs for products sold from our Palmer facility are extremely high. As a result, the market area for these products is restricted,
which limits the geographic market for Palmer’s tanks and the ability to significantly increase revenues derived from sales of
products from the Palmer facility.
New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex
and may result in damage to our reputation with customers. On August 22, 2012, under the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the SEC adopted new requirements for companies that use certain
minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties.
These regulations require companies to conduct annual due diligence and disclose whether or not such minerals originate from
the Democratic Republic of Congo and adjoining countries. Tungsten and tantalum are designated as conflict minerals under the
Dodd-Frank Act. These metals are used to varying degrees in our welding materials and are also present in specialty alloy products.
These new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products. In addition,
we could incur additional costs to comply with the disclosure requirements, including costs related to determining the source of
any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently
verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement,
which may harm our reputation. In such event, we may also face difficulties in satisfying customers who could require that all of
the components of our products are conflict mineral-free.
Our inability to sufficiently or completely protect our intellectual property rights could adversely affect our business, prospects,
financial condition and results of operations. Our ability to compete effectively in both of our business segments will depend on
our ability to maintain the proprietary nature of the intellectual property used in our businesses. These intellectual property rights
consist largely of trade-secrets and know-how. We rely on a combination of trade secrets and non-disclosure and other contractual
agreements and technical measures to protect our rights in our intellectual property. We also depend upon confidentiality agreements
with our officers, directors, employees, consultants and subcontractors, as well as collaborative partners, to maintain the proprietary
nature of our intellectual property. These measures may not afford us sufficient or complete protection, and others may independently
develop intellectual property similar to ours, otherwise avoid our confidentiality agreements or produce technology that would
adversely affect our business, prospects, financial condition and results of operations.
Our internal controls over financial reporting could fail to prevent or detect misstatements. Because of its inherent limitations,
internal controls 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. Any failure to maintain effective internal controls
or to timely effect any necessary improvement in our internal controls and disclosure controls could, among other things, result
in losses from fraud or error, harm our reputation or cause investors to lose confidence in our reported financial information, all
of which could have a material adverse effect on our financial condition, results of operations and cash flows.
Cyber security risks and cyber incidents could adversely affect our business and disrupt operations. Cyber incidents can result
from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access
to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational
disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability
for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting
customer or investor confidence.
Loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs could adversely
affect our sales and earnings. Our business depends on maintaining an immediately available supply of various products to meet
customer demand. Many of our relationships with key product suppliers are longstanding, but are terminable by either party. The
loss of key supplier authorizations, or a substantial decrease in the availability of their products, could put us at a competitive
disadvantage and have a material adverse effect on our business. Supply interruptions could arise from raw material shortages,
inadequate manufacturing capacity or utilization to meet demand, financial problems, labor disputes or weather conditions affecting
suppliers' production, transportation disruptions or other reasons beyond our control.
12
In addition, as a master distributor, we face the risk of key product suppliers changing their relationships with distributors generally,
or Specialty in particular, in a manner that adversely impacts us. For example, key suppliers could change the following: the prices
we must pay for their products relative to other distributors or relative to competing products; the geographic or product line
breadth of distributor authorizations; supplier purchasing incentive or other support programs; or product purchase or stock
expectations.
The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in response to declining
customer demand. Certain of our product and raw material suppliers have historically offered to their customers and distributors,
including us, incentives for purchasing their products. In addition to market or customer account-specific incentives, certain
suppliers pay incentives to the customer or distributor for attaining specific purchase volumes during the program period. In some
cases, in order to earn incentives, we must achieve year-over-year growth in purchases with the supplier. When the demand for
our products declines, we may be less willing to add inventory to take advantage of certain incentive programs, thereby potentially
adversely impacting our profitability.
The ongoing effects of the Tax Cuts and Jobs Act ("The Act") and the refinement of provisional estimates could make our results
difficult to predict. Our effective tax rate may fluctuate in the future as a result of The Act, which was enacted on December 22,
2017. The Act introduced significant changes to U.S. income tax law that will have a meaningful impact on our provision for
income taxes. Accounting for the income tax effects of the Tax Act requires significant judgments and estimates in the interpretation
and calculations of the provisions of the The Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the The Act, we made reasonable
estimates of the effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. The
U.S. Treasury Department, the Internal Revenue Service ("IRS"), and other standard-setting bodies may issue guidance on how
the provisions of the The Act will be applied or otherwise administered that is different from our interpretation. As we collect and
prepare necessary data, and interpret the The Act and any additional guidance issued by the IRS or other standard-setting bodies,
we may make adjustments to the provisional amounts that could materially affect our financial position and results of operations
as well as our effective tax rate in the period in which the adjustments are made.
Item 1B Unresolved Staff Comments
None.
13
Item 2 Properties
The Company operates the major plants and facilities listed below, all of which are in adequate condition for their current usage.
All facilities throughout the Company are believed to be adequately insured. The buildings are of various types of construction
including brick, steel, concrete, concrete block and sheet metal. All have adequate transportation facilities for both raw materials
and finished products. In September 2016, the Company sold its real estate properties previously owned in Tennessee, South
Carolina, Texas and Ohio to Store Funding and concurrently leased back these real properties; see Note 12 to the Consolidated
Financial Statements included in Item 8 of this Form 10-K. On February 28, 2017, the Company purchased certain stainless steel
pipe and tube assets of MUSA in Munhall, PA. As part of this acquisition, the Company entered into a 15-month lease with the
sellers for the current manufacturing facility. The lease was amended to extend the term of the lease to May 31, 2023. A parcel of
land in Mineral Ridge, OH used for inventory storage, the corporate headquarters located in Richmond, VA, and the shared service
center located in Spartanburg, SC continue to be leased by the Company from other parties.
Location
Munhall, PA
Bristol, TN
Principal Operations
Manufacturing stainless steel pipe
Manufacturing stainless steel pipe
Cleveland, TN
Chemical manufacturing and warehousing facilities
Fountain Inn, SC
Chemical manufacturing and warehousing facilities
Andrews, TX
Houston, TX
Manufacturing liquid storage solutions and separation equipment
Cutting facility and storage yard for heavy walled pipe
Mineral Ridge, OH
Cutting facility and storage yard for heavy walled pipe
Mineral Ridge, OH
Richmond, VA
Spartanburg, SC
Augusta, GA
Storage yard for heavy walled pipe
Corporate headquarters
Office space for corporate employees and shared service center
Chemical manufacturing (1)
Building Square Feet
284,000
Land Acres
20.0
275,000
143,000
136,834
122,662
29,821
12,000
—
5,911
4,858
—
73.1
18.8
16.9
19.6
10.0
12.0
4.6
—
—
46.0
(1) Property owned by Company; plant was closed in 2001 and all structures and manufacturing equipment have been removed.
Item 3 Legal Proceedings
For a discussion of legal proceedings, see Notes 7 and 13 to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Item 4 Mine Safety Disclosures
Not applicable.
14
PART II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company had 468 common shareholders of record at March 9, 2018. The Company's common stock trades on the NASDAQ
Global Market under the trading symbol SYNL. The Company's credit agreement restricts the payment of dividends indirectly through
a minimum fixed charge coverage covenant. The Company paid a $0.13 cash dividend on November 6, 2017 and a $0.30 cash
dividend on December 8, 2015. No dividends were declared or paid in 2016. The prices shown below are the high and low sales
prices for the common stock for each full quarterly period in the last two fiscal years as quoted on the NASDAQ Global Market.
Quarter
1st
2nd
3rd
4th
2017
2016
High
Low
High
Low
$
13.35
$
9.75
$
10.07
$
13.75
13.10
15.30
10.40
10.30
11.88
8.50
9.68
11.70
6.42
7.25
6.56
8.57
The information required by Item 201(d) of Regulation S-K is set forth in Part III, Item 12 of this Annual Report on Form 10-K.
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Source: Russell Investment Group
15
Comparison of 5 Year Cumulative Total Return Graph
12/12
12/13
12/14
12/15
12/16
12/17
Synalloy Corporation
$
100.00
$
109.05
$
127.38
$
51.74
$
82.35
$
Russell 2000
NASDAQ Non-Financial
100.00
100.00
138.82
141.29
145.62
164.62
139.19
176.19
168.85
189.29
101.67
193.58
247.35
This graph and related information shall not be deemed to be “filed” with the Securities and Exchange Commission or “soliciting
material” or subject to Regulation 14A, or the liabilities of Section 18 of the 1934 Act, except to the extent the Company specifically
requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the
Securities Act of 1933 or the 1934 Act.
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 May 17, 2017, the Company issued an aggregate of 24,209
shares of restricted stock to non-employee directors in lieu of $287,500 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.
The Company also issued 34,322 shares of common stock in 2017 to management and key employees that vested pursuant to the
2005 and 2015 Stock Awards Plans. 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.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Period
January 1, 2017 - January 31, 2017
February 1, 2017 - February 29, 2017
March 1, 2017 - March 31, 2017
April 1, 2017 - April 30, 2017
May 1, 2017 - May 31, 2017
June 1, 2017 - June 30, 2017
July 1, 2017 - July 31, 2017
August 1, 2017 - August 31, 2017
Total
(a)
Total number of
shares (or units)
purchased
(b)
Average price paid
per share (or unit)
— $
— $
— $
— $
— $
— $
— $
— $
—
—
—
—
—
—
—
—
—
(c)
Total number of
shares (or units)
purchased as part
of publicly
announced plans
or programs
(d)
Maximum number
(or approximate
dollar value) of
shares (or units)
that may yet be
purchased under
the plans or
programs
—
—
—
—
—
—
—
—
—
870,100
870,100
870,100
870,100
870,100
870,100
870,100
870,100
The Stock Repurchase Plan was approved by the Company's Board of Directors on August 31, 2015 authorizing the Company's chief
executive officer or the chief financial officer to repurchase shares of the Company's stock on the open market, provided however,
that the number of shares of common stock repurchased pursuant to the resolutions adopted by the Board do not exceed 1,000,000
shares and no shares shall be repurchased at a price in excess of $10.99 per share or during an insider trading "closed window" period.
There was no guarantee on the exact number of shares that will be purchased by the Company and the Company could discontinue
purchases at any time that management determines additional purchases are not warranted. The Stock Repurchase Plan expired on
August 31, 2017.
16
Item 6 Selected Financial Data
Selected Financial Data and Other Financial Information
(Dollar amounts in thousands except for per share data)
Operations (b)
Net sales
Gross profit
Selling, general & administrative expense(e)
Goodwill impairment
Operating income (loss)(e)
Net income (loss) - continuing operations
Net loss - discontinued operations
Net income (loss)
Financial Position
Total assets(d), (e)
Working capital(d), (f)
Long-term debt, less current portion(e)
Shareholders' equity
Financial Ratios
Current ratio(d), (e), (f)
Gross profit to net sales(b)
Long-term debt to capital(e)
Return on average assets(b), (d), (e)
Return on average equity(b)
Per Share Data (Income/(Loss) – Diluted)
Net income (loss) - continuing operations
Net loss - discontinued operations
Net income (loss)
Dividends declared and paid
Book value
Other Data
Depreciation and amortization(b), (e)
Capital expenditures(b)
Employees at year end
Shareholders of record at year end
Average shares outstanding - diluted
Stock Price
Price range of common stock
High
Low
Close
2017
2016
2015(c)
2014 (a)
2013
$ 201,148
$ 138,566
$ 175,460
$ 199,505
$ 196,751
28,081
24,875
—
2,746
1,341
—
1,341
16,904
22,673
—
(8,246)
(6,994)
(99)
(7,093)
25,319
21,938
17,158
(13,031)
(10,269)
(1,251)
(11,520)
32,929
16,530
—
16,098
12,619
(7,157)
5,462
19,798
15,987
—
3,547
2,898
(1,137)
1,761
159,874
138,638
149,043
187,633
163,068
74,396
25,914
89,700
64,868
8,804
88,593
58,310
23,410
95,154
64,580
27,039
74,992
20,713
109,454
106,098
3.2:1
14%
22%
1%
2%
3.0:1
12 %
9 %
(4)%
(7)%
3.2:1
14 %
20 %
(6)%
(10)%
2.6:1
4.0:1
17%
20%
7%
12%
10%
16%
2%
3%
$
0.15
$
—
0.15
0.13
10.27
7,738
5,279
533
488
8,727
$
$
(0.81)
(0.01)
(0.82)
—
10.22
6,695
3,044
412
527
8,650
$
$
(1.18)
(0.14)
(1.32)
0.30
11.02
$
6,634
$
10,905
411
540
8,710
$
15.30
$
11.70
$
18.49
$
9.75
13.40
6.42
10.95
6.20
6.88
$
$
$
1.45
(0.82)
0.63
0.30
12.57
5,132
8,066
464
575
8,715
18.84
13.14
17.67
0.42
(0.16)
0.25
0.26
12.21
4,625
5,648
670
619
6,947
17.38
12.53
15.53
(a) 2014 represents a 53 week year.
(b) Information in the section or line has been re-stated to reflect continuing operations only.
(c) Effective December 31, 2015, the Company changed from a fiscal year to a calendar year.
(d) Effective 2015, the section or line includes the effects of the adoption of ASU 2015-17, Balance Sheet Classification and Deferred Taxes, requiring all deferred
tax assets and liabilities and any related valuation allowance to be classified as non-current on our consolidated balance sheets. Prior periods were not
retrospectively adjusted.
(e) Information in the line has been re-stated to reflect the adoption of ASU 2015-03, Interest - Imputation of Interest, requiring debt issuance cots related to a
recognized debt liability be presented as a direct deduction of the debt liability.
(f) Information in the line has been re-stated to reflect the reclassification of deferred lease liabilities from accrued expenses to other long-term liabilities.
17
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its
estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates
used in the preparation of the Company's consolidated financial statements.
Allowance for Doubtful Accounts
The Company maintained an allowance for doubtful accounts of approximately $35,000 as of December 31, 2017, for estimated
losses resulting from the inability of its customers to make required payments. 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 60 days.
Delinquent receivables are written off based on individual credit evaluations and specific circumstances of the customer.
Inventory Adjustments and Reserves
At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or
product lines that are being sold below our cost. This would indicate that an adjustment would be required.
During the years ended December 31, 2017 and December 31, 2016, adjustments of $254,000 and $93,000 to inventory cost were
required by our storage tank facility as lower demand for oil and gas products caused the net realizable value to fall below inventory
cost for certain tanks.
During the year ended December 31, 2016, an adjustment of $43,000 to inventory cost was required by our Metals Segment mainly
due to decreases in nickel prices. Stainless steel, both in its raw material (coil or plate) or finished goods (pipe) state is purchased /
sold using a base price plus an additional surcharge which is dependent on current nickel prices. As raw materials are purchased,
it is priced to the Company based upon the surcharge at that date. When the selling price of the finished pipe is set for the customer,
approximately three months later, the then-current nickel surcharge is used to determine the proper selling prices. A lower of cost
or net realizable value adjustment is recorded when the Company's inventory cost, based upon a historical nickel price, is greater
than the current selling price of that product due to a reduction in the nickel surcharge. An adjustment was not required at December
31, 2017.
The Company establishes inventory reserves for:
• Estimated obsolete or unmarketable inventory. As of December 31, 2017 and December 31, 2016, the Company identified
inventory items with no sales or expected sales activity for finished goods or no usage for raw materials for a certain
period of time. For those inventory items that are not currently being marketed and unable to be sold, a reserve was
established for 100 percent of the inventory cost less any estimated scrap proceeds. The Company reserved $411,000 and
$697,000 at December 31, 2017 and December 31, 2016, respectively.
• Estimated quantity losses. The Company performs an annual physical inventory during the fourth quarter each year. For
those facilities that complete their physical inventory before the end of December, a reserve is established for the potential
quantity losses that could occur subsequent to their physical. This reserve is based upon the most recent physical inventory
results. At December 31, 2017 and December 31, 2016, the Company had $286,000 and $269,000, respectively, reserved
for expected physical inventory quantity losses.
Impairment of Long-Lived Assets
The Company continually reviews the recoverability of the carrying value of long-lived assets. Long-lived assets are reviewed
for impairment when events or changes in circumstances, also referred to as "triggering events", indicate that the carrying value
of a long-lived asset or group of assets (the "Assets") may no longer be recoverable. Triggering events include: a significant decline
in the market price of the Assets; a significant adverse change in the operating use or physical condition of the Assets; a significant
adverse change in legal factors or in the business climate impacting the Assets' value, including regulatory issues such as
18
environmental actions; the generation by the Assets of historical cash flow losses combined with projected future cash flow losses;
or the expectation that the Assets will be sold or disposed of significantly before the end of the useful life of the Assets.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations in accordance with Generally
Accepted Accounting Principles ("GAAP"). Under this method, the total consideration transferred to consummate the acquisition
is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values
as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments
to allocate the consideration transferred to the identifiable tangible and intangible assets, if any, acquired and liabilities assumed.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is tested for impairment at the
reporting unit level, annually in the fourth quarter and whenever circumstances indicate that the carrying value may not be
recoverable. The evaluation of impairment involves using either a step zero qualitative approach or a quantitative approach, if
required, as outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350.
The step zero approach allows an entity to first assess qualitative factors to determine whether it is more likely than not that the
Fair Value of a reporting unit is less than its carrying value. If an entity cannot make this determination, then the quantitative
approach will be followed. The quantitative approach involves a comparison of the fair value of the reporting unit in which the
goodwill is recorded to its carrying amount. If the reporting unit's fair value exceeds its carrying value, no impairment loss is
recognized. However, if the reporting unit's carrying value exceeds its fair value, an impairment charge equal to the difference in
the carrying value of the goodwill and reporting unit's fair value is recorded. The Company performed the quantitative analysis
during the fourth quarter of 2017 which resulted in no impairment of the goodwill recognized of $1,355,000 for the Specialty
Chemicals Segment or the goodwill recognized of $4,649,000 for the Metals Segment for the year ended December 31, 2017.
When the quantitative approach is used, in making our determination of fair value of the reporting unit, we rely on the discounted
cash flow method. This method uses projections of cash flows from the reporting unit. This approach requires significant judgments
including the Company's projected net cash flows, the weighted average cost of capital ("WACC") used to discount the cash flows
and terminal value assumptions. We derive these assumptions used in the testing from several sources. Many of these assumptions
are derived from our internal budgets, which would include existing sales data based on current product lines and assumed
production levels, manufacturing costs and product pricing. We believe that our internal forecasts are consistent with those that
would be used by a potential buyer in valuing our reporting units.
Earn-Out Liability
In connection with the acquisition of MUSA's stainless steel assets on February 28, 2017, the Company is required to make
contingent earn-out payments to the prior owners based upon actual sales levels of stainless steel pipe and tube (outside diameter
of ten inches or less). In accordance with ASC Topic 805, Business Combinations, the Company determined the fair value of the
earn-out liability on the acquisition date using a Monte Carlo simulation model. Future changes to the fair value of the earn-out
liability will be determined each quarter-end and charged to income or expense in the “Earn-Out Adjustment” line item in the
Consolidated Statements of Operations and Other Comprehensive Income.
Liquidity and Capital Resources
Cash flows provided by continuing operating activities during 2017 and 2016 totaled $2,235,000 and $5,355,000 respectively, a
decrease in cash flows of $3,120,000. The significant components of those results are as follows:
• Net income from continuing operations for 2017 was $1,341,000. Adding back non-cash, non-operating items, including
a) depreciation and amortization expense of $7,738,000, b) the earn-out adjustment of $689,000 and c) deducting the
gain on the sale of available for sale securities of $310,000, resulted in favorable cash generation from continuing
operations of $9,458,000, an increase of $7,385,000 from $2,073,000 for the prior year. That prior year amount includes
a net loss from continuing operations of $6,994,000, plus add backs for non-cash, non-operating items of a) depreciation
and amortization of $6,695,000 and b) the loss on the sale of property, plant and equipment resulting from the sale-
leaseback of $2,372,000.
• Accounts receivable from continuing operations used $10,877,000 cash during 2017 as sales increased 48 percent for
November and December 2017 compared to the same two months of 2016. Accounts receivable days outstanding remained
relatively stable, decreasing from 51.5 days at the end of 2016 to 50.7 days at the end of 2017.
19
•
Inventory used $7,088,000 of cash as the Company consciously built inventory at the Bristol Metals-Munhall location
from acquisition levels along with higher inventory at other facilities to support increased sales activity. Inventory turns,
calculated on a three-month average basis, increased from 1.90 turns at the end of 2016 to 2.51 turns at the end of 2017.
• Accounts payable favorably affected cash flows from continuing operations by $7,572,000 in 2017 as higher inventory
purchases were made during November and December of 2017 in the Metals Segment, which increased the 2017 year-
end accounts payable balance. Accounts payable days outstanding was consistent at 60 days for both years.
•
Finally, the change in other assets and accrued expenses resulted mainly from an $11,000,000 non-cash reversal of an
accrual recorded during the fourth quarter 2016 for a judgment received on an on-going lawsuit which was initially
identified during the Company's due diligence associated with the acquisition of Palmer. During 2017, the plaintiff of
the case entered into settlement agreements with Palmer/Synalloy and the former shareholders of Palmer. The former
shareholders of Palmer satisfied the financial conditions specified in their settlement agreement resulting in the plaintiff
filing a Release of Final Judgment with the Court. As a result of the release, the $11,000,000 legal liability and
corresponding indemnified receivable due from the former shareholders of Palmer were eliminated. This litigation is
more fully described in Note 13.
In 2017, the Company's current assets and current liabilities increased $10,143,000 and $615,000, respectively, from the year
ended 2016 amounts, which caused working capital for 2017 to increase by $9,528,000 to $74,396,000 from the 2016 total of
$64,868,000. The current ratio for the year ended December 31, 2017, increased to 3.2:1 from the 2016 year-end ratio of 3.0:1.
The Company used cash from investing activities during 2017 of $17,401,000. The Bristol Metals-Munhall acquisition during the
first quarter 2017 used $11,954,000 and the Company incurred capital asset purchases of $5,279,000. Financing activities during
2017 generated $15,117,000 of cash as the Company borrowed funds during 2017 for the aforementioned acquisition and capital
purchases. The Company declared a $0.13 per share dividend during the fourth quarter 2017 which resulted in a use of cash of
$1,149,000.
On August 31, 2016, the Company amended its Credit Agreement with its bank to create a new credit facility in the form of an
asset-based revolving line of credit in the amount of $45,000,000. The maturity date of the Line was February 28, 2019. On October
30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of the Line by $20,000,000 to a maximum
of $65,000,000 and extended the maturity date to October 30, 2020. Interest under the Credit Agreement is calculated using the
One Month LIBOR Rate (as defined in the Credit Agreement), plus a pre-defined spread. Borrowings under the Credit Agreement
are limited to an amount equal to a Borrowing Base calculation (as defined in the Credit Agreement) that includes eligible accounts
receivable and inventory. The Company determined the refinancing should be accounted for as a debt modification. The Company
incurred lender and third party costs associated with the debt restructuring that were capitalized on the balance sheet while certain
other third party costs were expensed.
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the
stock and membership interests of its subsidiaries. In the Credit Agreement, the Company's bank agreed to release its liens on the
real estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 12.
Covenants under the amended Credit Agreement include maintaining a minimum fixed charge coverage ratio and a limitation on
the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs. At December 31,
2017, the Company was in compliance with all debt covenants. The Company believes that its current liquidity position is sufficient
to meet its needs going forward.
Results of Operations
Comparison of 2017 to 2016 – Consolidated
For the full-year 2017, the net income from continuing operations totaled $1,341,000, or $0.15 per share. This compared to full-
year 2016 net loss from continuing operations of $6,994,000, or $0.81 loss per share. For the fourth quarter of 2017 the Company
recorded net income from continuing operations of $1,017,000, or $0.11 per share. This compares to net loss from continuing
operations of $1,436,000, or $0.17 loss per share for fourth quarter of 2016. The full-year and fourth quarter 2017 operating results
include an operating loss of $245,000 and an operating profit of $14,000, respectively, due to Bristol Metals-Munhall's operations
which was acquired in the first quarter 2017.
Consolidated gross profit from continuing operations increased 66 percent to $28,081,000 in 2017, compared to $16,904,000 in
2016, and, as a percent of sales, increased to 14 percent of sales in 2017 compared to twelve percent of sales in 2016. For the
fourth quarter of 2017, consolidated gross profit from continuing operations was $7,663,000, an increase of 108 percent from the
fourth quarter of 2016 of $3,684,000. Consolidated gross profit from continuing operations was 15 percent of sales for the fourth
20
quarter of 2017 and eleven percent of sales for same period of 2016. The increases in dollars and in percentage of sales were
attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2017 to 2016 below.
Consolidated selling, general and administrative expense from continuing operations for 2017 increased by $2,202,000 to
$24,875,000, or twelve percent of sales, compared to $22,673,000, or 16 percent of sales for 2016. These costs increased $407,000
during the fourth quarter of 2017 to $5,955,000 compared to $5,548,000 for the same period of 2016 and were eleven percent of
sales for the fourth quarter 2017 compared to 17 percent of sales for the fourth quarter of 2016. The dollar increase for both the
year and fourth quarter of 2017 when compared to the same periods of 2016 resulted primarily from the inclusion of Bristol Metals-
Munhall's selling, general and administrative expenses for the entire year and fourth quarter for 2017. Since Bristol Metals-Munhall
was acquired in February 2017, none of its selling, general, and administrative expenses were included in the prior year. This
accounted for $1,139,000 and $356,000 of the annual and fourth quarter increase in selling, general and administrative costs for
2017. The remainder of the increase for the year resulted from higher incentive based bonuses, bad debt expense, stock compensation
costs and personnel costs, partly offset by lower amortization and one-time sale-leaseback closing costs which were incurred in
the prior year. In addition, the Company incurred $795,000 for one-time acquisition related costs mainly associated with the Bristol
Metals-Munhall acquisition in 2017 compared to $106,000 of one-time acquisition costs associated with this acquisition in 2016.
These costs were $13,000 and $30,000 for the fourth quarters of 2017 and 2016, respectively. All of these items will be discussed
in greater detail in the respective sections below.
Comparison of 2016 to 2015 – Consolidated
For the full-year 2016, the net loss from continuing operations totaled $6,994,000, or $0.81 loss per share. This compared to full-
year 2015 net loss from continuing operations of $10,269,000, or $1.18 loss per share. For the fourth quarter of 2016 the Company
recorded a net loss from continuing operations of $1,436,000, or $0.17 loss per share. This compares to a net loss from continuing
operations of $17,717,000, or $2.04 loss per share for fourth quarter of 2015.
Consolidated gross profit from continuing operations decreased 33 percent to $16,904,000 in 2016, compared to $25,319,000 in
2015, and, as a percent of sales, decreased to twelve percent of sales in 2016 compared to 14 percent of sales in 2015. For the
fourth quarter of 2016, consolidated gross profit from continuing operations was $3,684,000, an increase of eight percent from
the fourth quarter of 2015 of $3,424,000. Consolidated gross profit from continuing operations was eleven percent of sales for the
fourth quarter of 2016 and ten percent of sales for same period of 2015. The majority of the changes in dollars and in percentage
of sales were attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2016 to 2015 below.
Consolidated selling, general and administrative expense from continuing operations for 2016 increased by $735,000 or three
percent to $22,673,000 (16 percent of sales) compared to $21,938,000 (13 percent of sales) for 2015. These costs decreased $78,000
or one percent to $5,548,000 for the fourth quarter of 2016 from $5,626,000 for the same period of 2015 and were 17 percent of
sales for the fourth quarter 2016 compared to 16 percent of sales for the fourth quarter of 2015. The increase for the full-year 2016
resulted from higher salaries and wages, directors fees, amortization and sale-leaseback closing costs partly offset by lower
professional fees, sales commissions and incentive based bonuses. In addition, the Company incurred $106,000 in 2016 for
acquisition costs associated with the Bristol Metals-Munhall acquisition which was finalized in 2017 compared to $500,000 of
one-time acquisition costs associated with the Specialty acquisition in 2015. These costs were $30,000 and $46,000 for the fourth
quarters of 2016 and 2015, respectively. All of these items will be discussed in greater detail in the respective sections below.
Metals Segment – The following table summarizes operating results from continuing operations and backlogs for the three years
indicated.
(in thousands)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expense
Goodwill impairment
Business interruption proceeds
(Gain) loss on sale-leaseback
Operating income (loss)
Year-end backlog - Storage tanks
2017
2016
2015
Amount
%
Amount
%
Amount
%
$
152,957
100.0 % $
133,452
19,505
14,080
—
—
87.2 %
12.8 %
9.2 %
— %
— %
(239)
(0.1)%
$
$
5,664
17,192
3.7 % $
$
90,215
82,676
7,539
12,360
—
—
2,166
(6,987)
9,878
100.0 % $
114,908
100.0 %
91.6 %
8.4 %
13.7 %
— %
— %
2.4 %
(7.7)% $
$
100,077
14,831
12,009
17,158
(1,246)
—
(13,090)
9,964
87.1 %
12.9 %
10.5 %
14.9 %
(1.1)%
— %
(11.4)%
21
Comparison of 2017 to 2016 – Metals Segment
The Metals Segment's net sales from continuing operations increased 70 percent for the full-year 2017 as compared to the same
period of 2016 and net sales for the fourth quarter of 2017 totaled $41,136,000, an increase of 88 percent compared to 2016 net
sales of $21,883,000. Excluding Bristol Metals-Munhall, full-year 2017 sales increased 41 percent compared to the same period
of 2016 and fourth quarter 2017 sales were 48 percent greater than the same period for 2016.
Stainless steel pipe net sales from continuing operations increased 79 percent and 114 percent for the full-year and fourth quarter,
respectively, of 2017 when compared to the same periods of the prior year. Excluding Bristol Metals-Munhall, net sales would
have increased 33 percent and 46 percent for the full-year and fourth quarter, respectively, of 2017. The total pipe sales increase
for the year resulted from a 88 percent increase in average unit volumes partially offset by a nine percent decrease in average
selling price. For the fourth quarter, average unit volumes increased 131 percent while the average selling price decreased 17
percent for 2017 compared to 2016. The lower average selling price for the full-year and fourth quarter resulted from the incremental
sales of Bristol Metals-Munhall as their sales of smaller diameter pipe and tube had an unfavorable effect on average selling prices.
Seamless heavy-wall carbon steel pipe and tube sales increased 68 percent and 53 percent for the full-year and fourth quarter,
respectively, of 2017 compared to the same periods of the prior year. The full year sales induction was comprised of a 63 percent
increase in average unit volumes combined with a five percent increase in average selling price. For the fourth quarter, average
unit volumes increased 45 percent while average selling prices increased eight percent. Heavier demand in 2017, primarily related
to improvements in the oil and gas sector, drove the sales increase.
Storage tank sales increased 43 percent and 52 percent for the full-year and fourth quarter, respectively, of 2017 when compared
to the same periods for the prior year. The full-year increase was comprised of a 15 percent increase in the number of tanks sold
and 29 percent increase in average selling price. For the fourth quarter, the storage tank increase resulted from a 21 percent increase
in the number of tanks sold combined with a 31 percent decrease in average selling price. The results highlight a move toward
higher levels of activity in the Permian Basis and other Palmer of Texas delivery areas, as WTI pricing and other economic
indicators have risen throughout the second half of 2017.
The Metals Segment's operating results from continuing operations increased $12,651,000 to an operating profit of $5,664,000
for the full-year 2017 compared to an operating loss of $6,987,000 for 2016. For the fourth quarter, the Metals Segment's operating
results from continuing operations increased $4,331,000 to an operating profit of $3,005,000 compared to a loss of $1,326,000
for 2017 compared to 2016, respectively. Current year operating results were affected by the following factors:
a) The addition of Bristol Metals-Munhall operations as noted above. The full-year 2017 and fourth quarter of 2017
operating results includes $443,000 and $558,000, respectively, for Bristol Metals-Munhall operations. These
amounts do not reflect the earn-out adjustment for the year since that expense is not included in the Metals
Segment's operating results.
b) Nickel prices and resulting surcharges for 304 and 316 alloys experienced a rebound in the fourth quarter when
compared to the third quarter of 2017. Surcharges for both alloys increased by $0.14 per pound in the fourth quarter,
however, the increase was not sufficient to offset the cumulative impact of third quarter declines, with the Metals
Segment experiencing a metal price change loss of $925,000 for the quarter, up from the prior year’s fourth quarter
metal price change loss of $194,000. The current quarter’s metal price change loss brought the full year metal price
change loss to $2,633,000, compared to the full year 2016 metal price change loss of $5,751,000.
c) Year over year changes in volume, pricing and product mix, as noted above, combined for a 36 percent improvement
in gross profit margins in 2017 compared to 2016.
d) Operating income from both seamless carbon pipe and tube and storage tanks and vessels continued to show solid
improvement over the prior year.
Selling, general and administrative expense from continuing operations increased $1,720,000, or 14 percent for the full-year 2017
when compared to 2016. This expense category was nine percent of sales for 2017 and 14 percent of sales for 2016. For the fourth
quarter, selling, general and administrative expense was $3,363,000 (eight percent of sales) in 2017, an increase of $163,000 from
$3,200,000 (15 percent of sales) for the same period of 2016. The dollar increase for both the year and fourth quarter of 2017
when compared to the same periods of 2016 resulted primarily from the inclusion of Bristol Metals-Munhall's selling, general and
administrative expenses. Since Bristol Metals-Munhall was acquired in February 2017, none of its selling, general, and
administrative expenses were included in the prior year. This accounted for $1,139,000 and $356,000 of the annual and fourth
quarter increase in selling, general and administrative costs for 2017. The remaining changes in selling, general and administrative
expense resulted from incentive bonus expense ($510,000 higher and $6,000 lower for the full-year and fourth quarter, respectively),
allocated administrative costs (higher by $312,000 and $78,000 for the full-year and fourth quarter, respectively), professional
fees (lower by $284,000 and $23,000 for the full-year and fourth quarter, respectively), loss on sale of fixed assets (higher by
22
$191,000 and $30,000 for the full-year and fourth quarter, respectively), travel costs (lower by $161,000 and $89,000 for the full-
year and fourth quarter, respectively), amortization expense (lower by $120,000 and $30,000 for the full-year and fourth quarter,
respectively) and salaries and wages ($86,000 higher and $103,000 lower for the full-year and fourth quarter, respectively).
Comparison of 2016 to 2015 – Metals Segment
The Metals Segment's sales from continuing operations decreased $24,693,000 or 21 percent for the full-year of 2016 compared
to the same period of 2015. For the fourth quarter of 2016, Metals Segment sales from continuing operations totaled $21,883,000,
a decrease of $537,000 or two percent from $22,420,000 for the fourth quarter of 2015. Sales in prior year periods reflected stronger
order shipments across all markets in early 2015, before the precipitous decline in oil prices occurred.
Stainless steel pipe sales from continuing operations decreased 28 percent and 17 percent for the full-year and fourth quarter,
respectively, of 2016 when compared to the same periods of the prior year. The pipe sales decrease for the year resulted from a
ten percent decrease in average unit volumes and an 18 percent decrease in average selling price. For the fourth quarter, average
unit volumes decreased seven percent while the average selling price decreased ten percent for 2016 compared to 2015. Low
nickel prices weighed heavily on stainless steel pipe sales throughout most of 2016, with only late year increases having some
minor favorable impacts during the fourth quarter. That late year movement resulted in average nickel prices being up 14 percent
for the fourth quarter, while the average for the full year of 2016 was down 19 percent, when compared to the same periods of the
prior year, respectively.
Seamless heavy-wall carbon steel pipe and tube sales decreased 17 percent while increasing 26 percent for the full-year and fourth
quarter, respectively, of 2016 compared to the same periods of the prior year. The full year sales reduction was comprised of a
two percent increase in average unit volumes offset by a 19 percent decrease in average selling price. For the fourth quarter, average
unit volumes increased 36 percent while average selling prices decreased ten percent. Heavier fourth quarter demand, primarily
related to improvements in the oil and gas sector and reduced inventory overhang, drove the sales increase.
Storage tank sales increased one percent and 33 percent for the full-year and fourth quarter, respectively, of 2016 when compared
to the same periods for the prior year. The full-year increase was comprised of a 15 percent increase in the number of tanks sold
offset by a 14 percent decrease in average selling price. For the fourth quarter, the storage tank increase resulted from a 51 percent
increase in the number of tanks sold offset by an 18 percent decrease in average selling price. The results highlight a move toward
higher levels of activity in the Permian Basin and other Palmer delivery areas, as WTI pricing and other economic indicators have
risen throughout the second half of 2016.
The Metals Segment's operating results from continuing operations increased $6,103,000 to a loss of $6,987,000 for the full-year
2016 compared to an operating loss of $13,090,000 for 2015. For the fourth quarter, the Metals Segment's operating results from
continuing operations increased $17,164,000 to a loss of $1,326,000 compared to a loss of $18,490,000 for 2016 compared to
2015, respectively. Current year operating results was affected by the following factors:
a) The Metals Segment recorded a pre-tax goodwill impairment charge of $17,158,000 in the fourth quarter of 2015.
See the "Comparison of 2015 to 2014 - Metals Segment" section for further explanation.
b) $2,166,000 in net charges associated with the loss recognized on three Metal Segment properties sold as part of the
sale-leaseback transaction that took place during the third quarter. This amount is net of the deferred gain amortization
of $60,000 recorded in the fourth quarter 2016.
c) Lost contribution margin due to lower volumes across all segments as continued low oil and gas prices, as well as
sustained lower levels of customer spending across all industrial classes, had an unfavorable effect on sales and
profits for our storage tank and carbon pipe distribution facilities, as well as our stainless steel welded pipe markets.
d) As a result of continued low nickel prices during 2016, the Company experienced metal price change loss of
approximately $5,751,000 and $194,000 for the full-year and fourth quarter of 2016. This compares to metal price
change loss of approximately $6,872,000 and $2,012,000, respectively, for the same periods of 2015.
Selling, general and administrative expense from continuing operations increased $351,000, or three percent for the full-year 2016
when compared to 2015. This expense category was 14 percent of sales for 2016 and ten percent of sales for 2015. For the fourth
quarter, selling, general and administrative expense was $3,200,000 (15 percent of sales) in 2016, an increase of $345,000 from
$2,855,000 (13 percent of sales) for the same period of 2015. The changes in selling, general and administrative expense resulted
from higher salaries and wages ($259,000 and $136,000 for the full-year and fourth quarter, respectively), higher sales commissions
($32,000 and $174,000 for the full-year and fourth quarter, respectively), higher allocated administrative costs ($408,000 and
$102,000 for the full-year and fourth quarter, respectively) and higher amortization expense ($181,000 and $45,000 for the full-
year and fourth quarter, respectively). These amounts were partially offset by lower incentive bonus expense ($403,000 and $56,000
for the full-year and fourth quarter, respectively) and lower professional fees ($129,000 and $147,000 for the full-year and fourth
quarter, respectively).
23
Specialty Chemicals Segment – The following tables summarize operating results for the three years indicated. Reference
should be made to Note 15 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
2017
2016
2015
(Amounts in thousands)
Amount
%
Amount
%
Amount
%
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expense
(Gain) loss on sale-leaseback
Operating income
$
48,191
39,217
8,974
4,678
(95)
100.0 % $
81.4 %
18.6 %
9.7 %
(0.2)%
$
4,391
9.1 % $
48,351
38,884
9,467
4,579
206
4,682
100.0% $
80.4%
19.6%
9.5%
0.4%
60,552
50,064
10,488
4,823
—
9.7% $
5,665
100.0%
82.7%
17.3%
8.0%
—%
9.3%
Comparison of 2017 to 2016 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment decreased $161,000 to $48,190,000 for 2017 compared to $48,351,000 in 2016. For
the fourth quarter of 2017, sales were $11,701,000, representing a five percent increase from $11,167,000 for the same quarter of
2016. Pounds shipped during the full-year decreased by nine percent for 2017 compared to 2016. For the fourth quarter of 2017,
pounds shipped decreased 17 percent. Overall selling prices increased nine percent and 22 percent for the full-year and fourth
quarter, respectively, of 2017 compared to the same periods of 2016. Net sales were negatively impacted during the full year and
fourth quarter of 2017 by:
a) The loss of a single customer in the second half of 2016 reduced sales in 2017 by approximately $2,100,000.
b) 2017 volume was negatively impacted by the slower than anticipated ramp up of our new fire retardant customer at
CRI Tolling. Shipments did commence in the second half of the third quarter and continued to build into the fourth
quarter to approximately 60 percent of expected volumes. Our agreement with this customer calls for an annual volume
of 3,000,000 pounds, the run rate, which we now expect to achieve in the first quarter of 2018.
c) We experienced some delays in customer deliveries due to weather conditions and an industry wide diminished trucking
capacity.
The Specialty Chemicals Segment's operating income for the full-year of 2017 decreased six percent to $4,390,000. The fourth
quarter of 2017 decreased 38 percent from the prior year quarter to $594,000. Operating income for the full year 2017 was negatively
impacted by an increase to the allowance for doubtful accounts of $239,000 for one customer that became financially unstable
and became uncollectable, and $184,000 for the year and $93,000 for the fourth quarter for one-time legal expenses. The decrease
in operating income was partially offset by lower incentive based bonuses of $223,000 for the year and $255,000 for the fourth
quarter along with a $206,000 charge in the third quarter 2016 associated with the book loss on two Specialty Chemicals Segment
properties sold as part of the sale-leaseback transaction closed in 2016 with no comparable loss recognized in 2017.
Selling, general and administrative expense increased $99,000 or two percent in 2017 when compared to 2016, which represented
ten percent of sales and nine percent of sales, respectively. For the fourth quarter, selling, general and administrative expense was
$877,000 (seven percent of sales) in 2017, a decrease of $191,000 when compared to $1,068,000 (ten percent of sales) for the
same period of 2016. These decreases resulted from lower wages and benefits in 2017 ($265,000 and $48,000 lower for the full-
year and fourth quarter, respectively) and lower incentive based bonuses ($223,000 and $255,000 lower for the full-year and fourth
quarter, respectively) offset by higher bad debt expense ($289,000 and $15,000 higher for the full-year and fourth quarter,
respectively), professional fees ($167,000 and $93,000 higher for the full-year and fourth quarter, respectively) and additional
corporate costs allocated to the segment ($192,000 and $48,000 higher for the full-year and fourth quarter, respectively).
Comparison of 2016 to 2015 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment for the full-year 2016 were $48,351,000, a decrease of $12,201,000 or 20 percent from
the full-year 2015 amount of $60,552,000. Sales for the fourth quarter of 2016 were $11,167,000, a $1,978,000 or 15 percent
decrease from the same quarter of 2015. Pounds shipped during the full-year decreased 16 percent for 2016 compared to 2015.
For the fourth quarter of 2016, pounds shipped decreased 13 percent. Overall selling prices decreased four percent and two percent
for the full-year and fourth quarter, respectively, of 2016 compared to the same periods of 2015. Sales were affected during the
full-year and fourth quarter of 2016 by:
a) Lower sales due to in-sourcing of several products by customers who were able to absorb production due to weak
demand for their other products, as well as delayed ramp-up of several new products due primarily to customer
scheduling; and
24
b) Lower selling prices per pound for oil based products. With the reduction in oil prices, the Specialty Chemicals
Segment's raw material costs decreased, which resulted in lower passed through material value as part of the billed
selling prices.
The Specialty Chemicals Segment's operating income for the full-year of 2016 decreased $983,000 or 17 percent to $4,682,000.
The fourth quarter of 2016 decreased eight percent from the prior year quarter to $961,000. The decrease in operating income for
the full-year and fourth quarter was directly related to the lower sales levels.
Selling, general and administrative expense decreased $244,000 or five percent in 2016 when compared to 2015. This expense
category was nine percent of sales for 2016 and eight percent of sales for 2015. For the fourth quarter, selling, general and
administrative expense was $1,068,000 (ten percent of sales) in 2016, an increase of $17,000 from $1,052,000 (eight percent of
sales) for the same period of 2015. The changes in selling, general and administrative expense resulted from lower sales commissions
in 2016 ($391,000 and $54,000 for the full-year and fourth quarter, respectively) and lower professional fees ($72,000 and $51,000
for the full-year and fourth quarter, respectively), partially or entirely offset by higher allocated administrative costs ($264,000
and $66,000 for the full-year and fourth quarter, respectively) and higher incentive based bonuses ($80,000 and $43,000 for the
full-year and fourth quarter, respectively).
Comparison of 2017 to 2016 – Corporate
Corporate expenses increased $384,000 to $6,117,000, or three percent of sales, in 2017 up from $5,733,000, four percent of sales,
in 2016. The full-year increase resulted primarily from:
•
•
•
•
Professional fees increased $148,000 from the prior year resulting from higher audit and banking fees in the current year;
Personnel costs were $145,000 higher as a result of normal annual rate increases;
Performance based bonuses increased $537,000 from the prior year. Pre-defined Adjusted EBITDA targets were achieved
in 2017 but were not achieved in 2016; and
Stock grant compensation expense increased $147,000 as a result of awards granted in 2017 in addition to the amendment
of the vesting schedules for the May 5, 2016 and February 8, 2017 stock grants awarded from the 2015 Stock Awards
Plan.
These increases above were partially offset by:
•
Shelf registration fees of $145,000 and one-time closing costs associated with the sale leaseback transaction of $165,000
incurred in 2016 that did not recur in 2017;
• Lower rent expense as a result of an early lease termination fee of $34,000 incurred in 2016 to move the location of the
corporate office located in Richmond, VA; and
• Lower directors' fees of $32,000 as a result of one director who did not renew his term for the 2017 year.
Acquisition costs of $795,000 for 2017 and $106,000 for 2016 resulted from costs associated with the MUSA acquisition. See
Note 18.
Interest expense was $985,000 and $933,000 for the full-years of 2017 and 2016, respectively. The increase in interest expense
during 2017 resulted from an increase in the average debt outstanding as a result of funds used for the acquisition of Bristol Metals-
Munhall in the first quarter of 2017.
During the third quarter of 2016, the Company completed a sale-leaseback transaction whereby all of the Company's operating
real estate assets were sold to a third party and are being leased back by the Company. The Company received gross sales proceeds
of $22,000,000, or approximately $4,230,000 in excess of net book value of total assets sold. Pursuant to the applicable accounting
standards, the Company was required to calculate the gain or loss associated with the transaction on a property by property basis.
As a result, losses associated with three of the properties in this transaction, totaling $2,455,000, were charged against earnings
during the third quarter. Gains associated with the remaining three properties, totaling approximately $6,685,000, were deferred
and will be amortized on the straight-line method over the initial lease term of 20 years. Total incremental (benefit) cost associated
with the sale-leaseback transaction for 2016 is as follows:
25
Metals Segment Operating (Income) Loss
Specialty Chemicals Segment Operating (Income) Loss
Unallocated Corporate Expenses
Total incremental costs
$
$
(60,000) $
(24,000)
—
(84,000) $
(60,000) $
(24,000)
64,000
(20,000) $
4th Quarter
2017
2016
Full-Year
2017
(239,000) $
(95,000)
—
(334,000) $
2016
2,166,000
206,000
165,000
2,537,000
Comparison of 2016 to 2015 – Corporate
Corporate expenses increased $627,000 to $5,733,000, or four percent of sales, in 2016 up from $5,106,000, three percent of sales,
in 2015. The full-year increase resulted primarily from:
•
•
•
Professional fees decreased $192,000 from the prior year resulting from additional professional services obtained in the
prior year surrounding registration statement filing, goodwill impairment testing and valuation and SEC comment letter
response;
Personnel costs were $590,000 higher as additional personnel were added during the third quarter of 2015 to strengthen
the Company's corporate staff combined with normal annual rate increases;
Performance based bonuses increased $220,000 from the prior year. Pre-defined Adjusted EBITDA targets were not
achieved in either year. However, the portion of the performance based bonus relating to personal goal achievements was
higher in the current year;
• One-time closing costs associated with the sale-leaseback transaction increased corporate expenses by $165,000 in 2016.
These costs will not recur in future years; and
• Directors' fees increased $203,000 for 2016 compared to 2015 as an additional director was added during 2016 along
with increases to the annual retainer during 2016.
Acquisition costs of $106,000 for 2016 and $500,000 for 2015 resulted from costs associated with the MUSA and the Specialty
acquisition. See Note 18.
Interest expense was $933,000 and $1,353,000 for the full-years of 2016 and 2015, respectively. The decrease in interest expense
during 2016 resulted from the company using the proceeds from the September 30, 2016 sale-leaseback transaction to pay off the
remaining term loan and lower the outstanding balance of the revolving line of credit.
During the third quarter of 2016, the swap contract entered into on September 3, 2013 was settled leaving only the swap contract
entered into on August 12, 2012 outstanding as of December 31, 2016.
Contractual Obligations and Other Commitments
As of December 31, 2017, the Company's contractual obligations and other commitments were as follows:
(Amounts in thousands)
Payment Obligations for the Year Ended
Total
2018
2019
2020
2021
2022
Thereafter
Obligations:
Revolving credit facility
$
25,914
$
— $
— $
25,914
$
— $
— $
Interest on bank debt
Capital lease
2,401
298
891
85
891
85
619
70
—
39
—
19
—
—
—
Operating leases
Deferred compensation (1)
Total
$
(1) For a description of the deferred compensation obligation, see Note 8 to the Consolidated Financial Statements included in
48,069
76,897
29,528
3,757
2,861
2,884
2,904
2,745
2,892
3,858
2,952
2,920
215
36
21
21
21
17
$
$
$
$
$
$
33,882
33,783
99
Item 8 of this Form 10-K.
Current Conditions and Outlook
The Company remains optimistic that its 2018 financial results will surpass those achieved in 2017. The Company's primary end
markets continue to point toward increasing demand and improving prices. Any concrete steps to limit imports of stainless steel
26
pipe and tube will further improve market dynamics for this critical product line. The Company also expects the Specialty Chemicals
Segment to bounce back from its flat results and post both revenue and profit gains as new products are added to its line-up. The
Company’s balance sheet is in excellent shape and we have ample borrowing capacity to meet our needs going forward.
Item 7A Quantitative and Qualitative Disclosures about Market Risks
The Company is exposed to market risks from adverse changes in interest rates and nickel prices.
Changes in United States interest rates affect the interest earned on the Company's cash and cash equivalents as well as interest
paid on its indebtedness. Except as described below, the Company does not engage in speculative or leveraged transactions, nor
does it hold or issue financial instruments for trading purposes. The Company is exposed to changes in interest rates primarily as
a result of its borrowing activities used to maintain liquidity and fund business operations.
Fair value of the Company's debt obligations, which approximated the recorded value, consisted of:
At December 31, 2017
• $25,914,000 under a revolving line of credit with an availability of $30,813,000, expiring on October 30, 2020 with
a variable interest rate of 3.44 percent.
• An interest rate swap contract with a notional amount of $10,500,000 which fixes the term loan interest rate at 3.74
percent. The fair value of the interest rate swap contract was an asset to the Company of $128,000.
The Company hedges its nickel exposure to provide coverage against extreme downside product pricing exposure related to the
content of nickel alloy contained in purchased stainless steel inventory. The sales price of stainless steel product (containing nickel
alloy) is subject to a variable pricing component for alloys (nickel, chrome, molybdenum and iron) contained in the product. Each
month, industry pricing indices are published which set the following month’s price surcharges for those alloys. The Company
typically holds approximately six to seven months of inventory, with fixed priced purchase orders (where the alloy pricing index
is “locked”, eliminating the Company’s exposure) consisting of approximately 50 percent of held stainless steel inventories. As
a result, the eventual sales prices for approximately 50 percent of held stainless steel inventories will vary until a customer order
commitment is received, and the selling price is established. The Company’s downside exposure is limited to the potential that
the total of the fair value of the nickel contracts would be reduced to zero, if nickel pricing does not decline to the contracted strike
prices. The program is designed to mitigate but not eliminate the Company's nickel pricing exposure. The Company had a hedge
position equal to 1,351,000 of pounds of nickel, representing 53 percent of the Company’s total nickel content of stainless steel
pounds in inventory at December 31, 2017. The fair value of the nickel contracts at December 31, 2017 was an asset of approximately
$9,000.
27
Item 8 Financial Statements and Supplementary Data
The Company's consolidated financial statements, related notes, report of management and report of the independent registered
public accounting firm follow on subsequent pages of this report.
Consolidated Balance Sheets
As of December 31, 2017 and December 31, 2016
Assets
Current assets
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $35,000 and $82,000, respectively
Inventories, net
Raw materials
Work-in-process
Finished goods
Total inventories, net
Prepaid expenses and other current assets
Indemnified contingencies - see Note 13
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred charges, net and other non-current assets
2017
2016
$
14,706
28,704,481
$
62,873
18,028,946
37,748,316
9,491,408
24,885,457
72,125,181
6,802,072
—
107,646,440
35,080,009
6,003,525
10,880,521
263,655
31,973,073
9,897,857
18,928,579
60,799,509
7,272,569
11,339,888
97,503,785
27,324,092
1,354,730
12,308,838
146,618
Total assets
$
159,874,150
$
138,638,063
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt
Long-term portion of earn-out liability
Long-term deferred sale-leaseback gain
Deferred income taxes
Other long-term liabilities
Shareholders' equity
Common stock, par value $1 per share - authorized 24,000,000 shares; issued 10,300,000 shares
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Less cost of common stock in treasury - 1,566,769 and 1,630,690 shares, respectively
Total shareholders' equity
Commitments and contingencies – see Note 13
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
28
$
$
24,256,812
8,993,454
33,250,266
16,684,508
15,950,787
32,635,295
25,913,557
3,170,099
5,933,350
635,910
1,270,542
10,300,000
35,193,152
58,129,382
(10,864)
103,611,670
13,911,244
89,700,426
8,804,206
—
6,267,623
1,609,492
728,892
10,300,000
34,714,206
57,936,533
—
102,950,739
14,358,184
88,592,555
$
159,874,150
$
138,638,063
Consolidated Statements of Operations and Other Comprehensive Income
Years ended December 31, 2017, December 31, 2016 and December 31, 2015
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense
Acquisition related costs
Business interruption proceeds
Goodwill impairment
(Gain) loss on sale-leaseback
Operating income (loss)
Other (income) and expense
Interest expense
Change in fair value of interest rate swap
Earn-out adjustment
Casualty insurance gain
Other, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
2017
2016
2015
$
201,147,682
$
138,565,782
$
175,460,438
173,066,732
121,661,303
150,141,663
28,080,950
16,904,479
25,318,775
24,874,589
794,983
22,672,872
106,227
—
—
(334,273)
2,745,651
985,366
(96,696)
688,523
—
(310,043)
1,478,501
137,139
—
—
2,371,778
(8,246,398)
932,572
12,997
—
—
—
(9,191,967)
(2,198,000)
21,937,988
499,761
(1,246,024)
17,158,249
—
(13,031,199)
1,352,806
41,580
(4,897,448)
(923,470)
(134,389)
(8,470,278)
1,799,000
Net income (loss) from continuing operations
1,341,362
(6,993,967)
(10,269,278)
Net loss from discontinued operations, net of tax
—
(99,334)
(1,251,058)
Net income (loss)
$
1,341,362
$
(7,093,301) $
(11,520,336)
Other comprehensive loss, net of tax:
Unrealized gains on available for sale securities, net of tax of $186,384
355,482
—
—
—
—
(366,346)
1,330,498
$
(7,093,301) $
(11,520,336)
0.15
0.15
$
$
(0.81) $
(0.81) $
— $
— $
(0.01) $
(0.01) $
(1.18)
(1.18)
(0.14)
(0.14)
Reclassification adjustment for gains included in net
income, net of tax of $189,633
Comprehensive income (loss)
Net income (loss) per common share from continuing operations:
Basic
Diluted
Net loss per diluted common share from discontinued operations:
Basic
Diluted
$
$
$
$
$
See accompanying notes to consolidated financial statements.
29
Consolidated Statements of Shareholders' Equity
Balance at January 3, 2015
$
10,300,000
$
34,054,374
$
79,167,323
$
— $
(14,068,144) $ 109,453,553
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Cost of
Common Stock
in Treasury
Total
Net loss
Payment of dividends, $0.30 per share
Issuance of 26,118 shares of common stock from the treasury
Stock options exercised for 666 shares, net
Employee stock option and grant compensation
Purchase of 100,400 shares of common stock
Balance at December 31, 2015
Net loss
Dividend on stock grant forfeiture
Issuance of 62,124 shares of common stock from the treasury
Employee stock option and grant compensation
Purchase of 29,500 shares of common stock
—
—
—
—
—
—
—
—
(11,520,336)
(2,617,513)
(102,237)
2,408
521,695
—
—
—
—
—
10,300,000
34,476,240
65,029,474
—
—
—
—
—
—
—
(221,507)
459,473
—
(7,093,301)
360
—
—
—
Balance at December 31, 2016
10,300,000
34,714,206
57,936,533
Net income
Other comprehensive loss, net of taxes
Payment of dividends, $0.13 per share
Issuance of 58,532 shares of common stock from the treasury
Stock options exercised for 5,389 shares, net
Employee stock option and grant compensation
—
—
—
—
—
—
—
—
—
(227,939)
68,469
638,416
1,341,362
—
(10,864)
(1,148,513)
—
—
—
—
—
—
—
Balance at December 31, 2017
$
10,300,000
$
35,193,152
$
58,129,382
$
(10,864) $
(13,911,244) $
89,700,426
See accompanying notes to consolidated financial statements.
30
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(11,520,336)
(2,617,513)
231,290
5,894
—
129,053
8,302
521,695
(820,460)
(820,460)
(14,651,420)
95,154,294
—
—
547,125
—
(7,093,301)
360
325,618
459,473
(253,889)
(253,889)
(14,358,184)
88,592,555
—
—
—
515,409
(68,469)
—
1,341,362
(10,864)
(1,148,513)
287,470
—
638,416
Consolidated Statements of Cash Flows
Years ended December 31, 2017, December 31, 2016 and December 31, 2015
Operating activities
Consolidated Statements of Cash Flows
Net income (loss)
Consolidated Statements of Cash Flows
Years ended December 31, 2017, December 31, 2016 and December 31, 2015
Income from discontinued operations, net of tax
Years ended December 31, 2017, December 31, 2016 and December 31, 2015
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Operating activities
Operating activities
Net income (loss)
Net income (loss)
Income from discontinued operations, net of tax
Income from discontinued operations, net of tax
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation expense
Amortization expense
Non-cash interest expense on debt issuance costs
Goodwill impairment
Deferred income taxes
Depreciation expense
Depreciation expense
Amortization expense
Gain on sale of available for sale securities
Amortization expense
Non-cash interest expense on debt issuance costs
Earn-out adjustments
Non-cash interest expense on debt issuance costs
Goodwill impairment
Provision for (reduction of) losses on accounts receivable
Goodwill impairment
Deferred income taxes
Provision for losses on inventories
Deferred income taxes
Gain on sale of available for sale securities
Loss (gain) on sale of property, plant and equipment
Gain on sale of available for sale securities
Earn-out adjustments
Amortization of deferred gain on sale-leaseback
Earn-out adjustments
Provision for (reduction of) losses on accounts receivable
Straight line lease cost on sale-leaseback
Provision for (reduction of) losses on accounts receivable
Provision for losses on inventories
Casualty insurance gain
Loss (gain) on sale of property, plant and equipment
Provision for losses on inventories
Change in cash value of life insurance
Amortization of deferred gain on sale-leaseback
Loss (gain) on sale of property, plant and equipment
Change in fair value of interest rate swap
Straight line lease cost on sale-leaseback
Amortization of deferred gain on sale-leaseback
Issuance of treasury stock for director fees
Casualty insurance gain
Straight line lease cost on sale-leaseback
Employee stock option and grant compensation
Change in cash value of life insurance
Casualty insurance gain
Dividend on stock grant forfeiture
Change in fair value of interest rate swap
Change in cash value of life insurance
Changes in operating assets and liabilities:
Issuance of treasury stock for director fees
Change in fair value of interest rate swap
Accounts receivable
Employee stock option and grant compensation
Issuance of treasury stock for director fees
Inventories
Dividend on stock grant forfeiture
Employee stock option and grant compensation
Other assets and liabilities
Changes in operating assets and liabilities:
Dividend on stock grant forfeiture
Accounts payable
Accounts receivable
Changes in operating assets and liabilities:
Accrued expenses
Inventories
Accounts receivable
Accrued income taxes
Other assets and liabilities
Inventories
Accounts payable
Other assets and liabilities
Accrued expenses
Accounts payable
Accrued income taxes
Accrued expenses
Accrued income taxes
Net cash provided by continuing operating activities
Net cash used in discontinued operating activities
Net cash provided by operating activities
Investing activities
Net cash (used in) provided by investing activities
Financing activities
Net cash provided by continuing operating activities
Purchases of property, plant and equipment
Net cash used in discontinued operating activities
Net cash provided by continuing operating activities
Proceeds from sale of property, plant and equipment
Net cash provided by operating activities
Net cash used in discontinued operating activities
Purchases of available for sale securities
Investing activities
Net cash provided by operating activities
Proceeds from available for sale securities
Purchases of property, plant and equipment
Investing activities
Acquisition of the stainless pipe and tube assets of Marcegaglia USA, Inc.
Proceeds from sale of property, plant and equipment
Purchases of property, plant and equipment
Proceeds from casualty insurance
Purchases of available for sale securities
Proceeds from sale of property, plant and equipment
Proceeds from life insurance policies
Proceeds from available for sale securities
Purchases of available for sale securities
Acquisition of the stainless pipe and tube assets of Marcegaglia USA, Inc.
Proceeds from available for sale securities
Proceeds from casualty insurance
Acquisition of the stainless pipe and tube assets of Marcegaglia USA, Inc.
Net borrowings from line of credit
Proceeds from life insurance policies
Proceeds from casualty insurance
Payments on long-term debt
Net cash (used in) provided by investing activities
Proceeds from life insurance policies
Payments on capital lease obligation
Financing activities
Net cash (used in) provided by investing activities
Payments on earn-out liability to MUSA sellers
Net borrowings from line of credit
Financing activities
Payments of debt issuance costs
Payments on long-term debt
Net borrowings from line of credit
Proceeds from exercised stock options
Payments on capital lease obligation
Payments on long-term debt
Dividends paid
Payments on earn-out liability to MUSA sellers
Payments on capital lease obligation
Purchase of common stock
Payments of debt issuance costs
Payments on earn-out liability to MUSA sellers
Net cash provided by (used in) financing activities
Proceeds from exercised stock options
Payments of debt issuance costs
(Decrease) increase in cash and cash equivalents
Dividends paid
Proceeds from exercised stock options
Cash and cash equivalents at beginning of year
Purchase of common stock
Dividends paid
Cash and cash equivalents at end of year
Net cash provided by (used in) financing activities
Purchase of common stock
(Decrease) increase in cash and cash equivalents
Net cash provided by (used in) financing activities
Cash and cash equivalents at beginning of year
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at end of year
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
31
31
31
2017
2016
2015
1,341,362
—
$
(7,093,301) $ (11,520,336)
1,251,058
99,334
2017
2017
5,294,695
2,443,117
1,341,362
1,341,362
60,529
—
—
—
(1,037,183)
5,294,695
5,294,695
2,443,117
(310,043)
2,443,117
60,529
688,523
60,529
—
201,641
—
(1,037,183)
1,196,428
(1,037,183)
(310,043)
25,730
(310,043)
688,523
(334,273)
688,523
201,641
397,071
201,641
1,196,428
—
25,730
1,196,428
—
(334,273)
25,730
(96,696)
397,071
(334,273)
287,500
—
397,071
638,416
—
—
—
(96,696)
—
287,500
(96,696)
(10,877,176)
638,416
287,500
(7,088,100)
—
638,416
11,229,799
—
7,572,308
(10,877,176)
(9,424,395)
(7,088,100)
(10,877,176)
26,197
11,229,799
(7,088,100)
2,235,450
7,572,308
11,229,799
—
(9,424,395)
7,572,308
2,235,450
26,197
(9,424,395)
2,235,450
26,197
(5,278,608)
—
2,235,450
72,789
2,235,450
—
(4,382,865)
2,235,450
4,141,564
(5,278,608)
(11,953,513)
72,789
(5,278,608)
—
(4,382,865)
72,789
—
4,141,564
(4,382,865)
(17,400,633)
(11,953,513)
4,141,564
—
(11,953,513)
17,109,351
—
—
—
(17,400,633)
—
(124,999)
(17,400,633)
(518,456)
17,109,351
(200,367)
—
17,109,351
—
(124,999)
—
(1,148,513)
(518,456)
(124,999)
—
(200,367)
(518,456)
15,117,016
—
(200,367)
(48,167)
(1,148,513)
—
62,873
—
(1,148,513)
14,706
15,117,016
—
(48,167)
15,117,016
62,873
(48,167)
14,706
62,873
14,706
$
$
$
$
$
2015
2016
2015
2016
4,356,911
4,235,203
2,277,480
2,459,787
(7,093,301) $ (11,520,336)
(7,093,301) $ (11,520,336)
120,521
72,290
1,251,058
99,334
1,251,058
99,334
17,158,249
—
(1,407,462)
150,462
4,235,203
4,356,911
4,356,911
4,235,203
2,459,787
2,277,480
—
—
2,277,480
2,459,787
72,290
120,521
(4,897,448)
—
120,521
72,290
17,158,249
—
60,855
(45,151)
17,158,249
—
(1,407,462)
150,462
2,003,885
983,505
(1,407,462)
150,462
—
—
(18,277)
2,294,917
—
—
(4,897,448)
—
—
(83,569)
(4,897,448)
—
(45,151)
60,855
—
101,633
60,855
(45,151)
2,003,885
983,505
(923,470)
—
(18,277)
2,294,917
2,003,885
983,505
(82,504)
1,502
—
(83,569)
(18,277)
2,294,917
41,581
12,997
—
101,633
—
(83,569)
118,762
330,000
(923,470)
—
—
101,633
521,695
459,473
(82,504)
1,502
(923,470)
—
—
360
41,581
12,997
(82,504)
1,502
330,000
118,762
41,581
12,997
11,380,941
(37,676)
459,473
521,695
118,762
330,000
4,173,337
2,032,621
360
—
521,695
459,473
(11,767,808)
(653,420)
—
360
(9,122,368)
4,418,578
(37,676)
11,380,941
(2,059,303)
9,582,445
4,173,337
2,032,621
11,380,941
(37,676)
(1,294,557)
3,038,362
(11,767,808)
(653,420)
4,173,337
2,032,621
17,376,973
5,355,121
(9,122,368)
4,418,578
(11,767,808)
(653,420)
(3,843,137)
(849,974)
(2,059,303)
9,582,445
(9,122,368)
4,418,578
16,526,999
1,511,984
(1,294,557)
3,038,362
(2,059,303)
9,582,445
5,355,121
17,376,973
(1,294,557)
3,038,362
(10,905,230)
(3,044,411)
(3,843,137)
(849,974)
17,376,973
5,355,121
21,500
22,215,362
1,511,984
16,526,999
(3,843,137)
(849,974)
—
—
16,526,999
1,511,984
—
—
(10,905,230)
(3,044,411)
—
(3,000,000)
22,215,362
21,500
(10,905,230)
(3,044,411)
1,219,048
—
—
—
21,500
22,215,362
720,518
1,502,283
—
—
—
—
(8,944,164)
17,673,234
—
(3,000,000)
—
—
—
1,219,048
—
(3,000,000)
990,929
6,928,640
720,518
1,502,283
1,219,048
—
(4,700,570)
(26,068,228)
(8,944,164)
17,673,234
720,518
1,502,283
(13,355)
(65,966)
(8,944,164)
17,673,234
—
—
990,929
6,928,640
(65,367)
(54,326)
(26,068,228)
(4,700,570)
990,929
6,928,640
8,302
—
(13,355)
(65,966)
(4,700,570)
(26,068,228)
(2,617,513)
—
—
—
(13,355)
(65,966)
(820,460)
(253,889)
(65,367)
(54,326)
—
—
(7,218,034)
(19,513,769)
—
8,302
(65,367)
(54,326)
364,801
(328,551)
(2,617,513)
—
8,302
—
26,623
391,424
(820,460)
(253,889)
(2,617,513)
—
391,424
62,873
(19,513,769)
(7,218,034)
(820,460)
(253,889)
364,801
(328,551)
(7,218,034)
(19,513,769)
26,623
391,424
364,801
(328,551)
62,873
391,424
26,623
391,424
391,424
62,873
$
$
$
$
$
$
$
$
$
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Description of Business
Synalloy Corporation (the "Company"), a Delaware corporation, was incorporated in 1958 as the successor to a chemical
manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler
Industries, Inc. The Company's executive offices are located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060.
The Company's business is divided into two reportable operating segments, the Metals Segment and the Specialty Chemicals
Segment. The Metals Segment currently operates as three reportable units including Bristol Metals, LLC ("BRISMET"), Palmer
of Texas Tanks, Inc. ("Palmer") and Specialty Pipe & Tube, Inc. ("Specialty"). Two other operations, Bristol Fab and Ram-Fab,
were sold or closed during 2014; see Note 19. BRISMET manufactures stainless steel and special alloy pipe and tube, Palmer
manufactures liquid storage solutions and separation equipment and Specialty is a master distributor of seamless carbon pipe and
tube. The Specialty Chemicals Segment operates as one reportable unit and is comprised of Manufacturers Chemicals, LLC ("MC")
and CRI Tolling, LLC ("CRI Tolling") and produces specialty chemicals.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned.
The Metals Segment is comprised of three subsidiaries: Synalloy Metals, Inc. which owns 100 percent of BRISMET, located in
Bristol, Tennessee and Munhall, Pennsylvania; Palmer, located in Andrews, Texas and Specialty, located in Mineral Ridge, Ohio
and Houston, Texas. The Specialty Chemicals Segment consists of two subsidiaries: Manufacturers Soap and Chemical Company
("MS&C") which owns 100 percent of MC, located in Cleveland, Tennessee and CRI Tolling, located in Fountain Inn, South
Carolina. All significant intercompany transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash
equivalents. The Company maintains cash balances at financial institutions with strong credit ratings.
Accounts Receivable
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 receivable are due from companies located throughout
the United States. The Company provides an allowance for doubtful accounts for projected uncollectable amounts. 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 60 days. Delinquent receivables are written off based on individual credit evaluations and specific
circumstances of the customer.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted
average methods.
Inventory cost is adjusted when its net realizable value is estimated to be below estimated selling price. At the end of each quarter,
all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being
sold below cost. This would indicate that an adjustment would be required.
In addition, the Company establishes inventory reserves for:
• Estimated obsolete or unmarketable inventory. The Company identified inventory items with no sales activity for finished
goods or no usage for raw materials for a certain period of time. For those inventory items not currently being marketed
and unable to be sold, a reserve was established for 100 percent of the inventory cost less any estimated scrap proceeds.
The Company reserved $411,157 and $697,000 at December 31, 2017 and December 31, 2016, respectively.
• Estimated quantity losses. The Company performs an annual physical count of inventory during the fourth quarter each
year. For those facilities that complete their physical inventory counts before the end of December, a reserve is established
for the potential quantity losses that could occur subsequent to their physical inventory. This reserve is based upon the
32
most recent physical inventory results. At December 31, 2017 and December 31, 2016, the Company had $285,627 and
$268,579, respectively, reserved for physical inventory quantity losses.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful
life of the assets. Leasehold improvements are depreciated over the shorter of their useful lives or the remaining non-cancellable
lease term, buildings are depreciated over a range of ten years 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. 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.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations. Under this method, the total
consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and
liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting
requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible
assets acquired, if any, and liabilities assumed.
Goodwill, Intangible Assets and Deferred Charges
Goodwill, arising from the excess of purchase price over fair value of net assets of businesses acquired, is not amortized but is
reviewed annually, at the reporting unit level, in the fourth quarter for impairment and whenever events or circumstances indicate
that the carrying value may not be recoverable. In 2017, the evaluation involved comparing the estimated fair value, based on a
discounted cash flow model, of the associated reporting unit to its carrying value, including goodwill. No goodwill impairment
was identified as a result of the testing procedures performed for the years ended December 31, 2017 and December 31, 2016.
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions. Deferred charges
represent other intangible assets and debt issuance costs. Intangible assets are amortized over their estimated useful lives using
either an accelerated or straight-line method. Deferred charges are amortized over their estimated useful lives using the straight-
line method. Deferred charges are amortized over a period ranging from three to ten years and intangible assets are amortized over
a period ranging from eight to 15 years. The weighted average amortization period for the customer relationships is approximately
eleven years. Deferred charges and intangible assets totaled $21,837,351 and $20,708,496 at December 31, 2017 and December 31,
2016, respectively. Accumulated amortization of deferred charges and intangible assets as of December 31, 2017 and December 31,
2016 totaled $10,693,175 and $8,253,040, respectively. Estimated amortization expense for the next five fiscal years based on
existing deferred charges and intangible assets is: 2018 - $2,380,950, 2019 - $2,246,816, 2020 - $2,073,384; 2021 - $1,899,298;
2022 - $1,677,948; and thereafter - $865,780. The Company recorded amortization expense of $2,443,117, $2,459,787 and
$2,277,480 for 2017, 2016 and 2015, respectively, which excludes amortization expense of debt issuance costs, which is reflected
in the consolidated financial statements as interest expense.
Earn-Out Liability
In connection with the acquisition of Bristol Metals-Munhall on February 28, 2017, the Company is required to make contingent
earn-out payments to the prior owners based upon actual sales levels of stainless steel pipe and tube (outside diameter of ten inches
or less). The Company determined the fair value of the earn-out liability on the acquisition date using a Monte Carlo simulation
model. Future changes to the fair value of the earn-out liability will be determined each quarter-end and charged to income or
expense in the “Earn-Out Adjustment” line item in the Consolidated Statements of Operations and Other Comprehensive Income.
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
Shipping costs of approximately $7,502,945, $4,488,041 and $5,155,011 in 2017, 2016 and 2015, respectively, are recorded in
cost of goods sold.
33
Research and Development Expenses
The Company incurred research and development expense of approximately $556,181, $603,067 and $548,257 in 2017, 2016 and
2015, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing accounts and their
respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in fiscal years in which those temporary differences are expected to be recovered or
settled. Deferred tax assets and liabilities were remeasured at December 22, 2017 as a result of the Tax Act signed into law on
December 22,2017. See Note 10 for further explanation. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
Additionally, the Company maintains the required reserves for any and all uncertain tax provisions.
Earnings Per Share of Common Stock
Earnings per share of common stock are computed based on the weighted average number of basic and diluted shares outstanding
during each period.
Fair Market Value
The Company makes estimates of fair value in accounting for certain transactions, in testing and measuring impairment and in
providing disclosures of fair value in its consolidated financial statements. The Company determines the fair values of its financial
instruments for disclosure purposes by maximizing the use of observable inputs and minimizing the use of unobservable inputs
when measuring fair value. Fair value disclosures for assets and liabilities are grouped in three levels. The levels prioritize the
inputs used to measure the fair value of the assets or liabilities. These levels are:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs
include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities
in markets that are less active.
Level 3 - Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain
pricing models, discounted cash flow methodologies and similar techniques.
Estimates of fair value using levels 2 and 3 may require judgments as to the timing and amount of cash flows, discount rates, and
other factors requiring significant judgment, and the outcomes may vary widely depending on the selection of these assumptions.
The Company's most significant fair value estimates as of December 31, 2017 and December 31, 2016 relate to the purchase price
allocation relating to the acquisition of the stainless steel operations of MUSA, earn-out liabilities, nickel forward option contracts,
estimating the fair value of the reporting units in testing goodwill for impairment, estimating the fair value of the interest rate swap
and providing disclosures of the fair values of financial instruments.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions, primarily for
testing goodwill for impairment, determining balances for the earn-out liability and certain employee benefit accruals, estimating
fair value of identifiable assets acquired and liabilities assumed as a result of business acquisitions and for establishing reserves
on accounts receivable, inventories and environmental issues, that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash
deposits and trade accounts receivable.
34
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
"Revenue from Contracts with Customers (Topic 606)", which changes the criteria for recognizing revenue. The standard requires
an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The standard requires a five-step
process for recognizing revenue including identifying the contract with the customer, identifying the performance obligations in
the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and
recognizing revenue when (or as) the entity satisfies a performance obligation. Two transition methods are available for
implementing the requirements of Topic 606: retrospectively for each prior reporting period presented or retrospectively with the
cumulative effect of initial application recognized at the date of initial application. The FASB has issued several amendments to
the standard, which are intended to promote a more consistent application of the principles outlined in the standard. The new
standard is effective for the Company for annual periods in fiscal years beginning after December 15, 2017. The Company will
adopt the new guidance on January 1, 2018, using the modified retrospective transition method..
The Company assessed the impact the new standard will have on the consolidated financial statements as well as its business
processes, internal controls, and accounting policies. As part of its assessment, the Company reviewed its contract portfolio and
determined how its contracts should be accounted for under Topic 606. Based on the assessment performed, the company determined
that the primary form of contracts with customers impacting revenue recognition are individual sales orders. The Company’s sales
orders consist of distinct goods with stand-alone selling prices and are typically completed within 12 months from inception. No
significant long-term sales contracts requiring revenue to be recognized over a period of time in excess of one year have been
identified.
The main performance obligation included in sales orders is the manufacture and distribution of goods as prescribed by our
customers. This performance obligation is satisfied upon the transfer of title of each distinct item, which occurs at a point-in-time.
Consistent with manufacturing and distribution industry norms, the Company’s transfer of title of goods is determined by FOB
shipping terms. Recognizing revenue in accordance with shipping terms is consistent with the Company’s current revenue
recognition policy under ASC Topic 605, therefore we do not expect any significant change in the timing under which we recognize
revenue.
Shipping and handling of goods is considered a part of the fulfillment of our performance obligation regardless of whether shipping
terms are shipping point or destination. This position is supported by the practical expedient provided under Topic 606 which
allows a company to account for shipping and handling as activities to fulfill the promise to transfer the good if that methodology
is consistently applied. For revenues recognized on orders prior to completion of shipping activities offsetting shipping costs are
accrued. This practice is consistent with the Company’s current accounting policy and will not result in any financial statement
impact.
Based on the assessment performed, the Company does not believe the standard will have a material impact on its consolidated
financial statements or internal controls over financial reporting, other than for the disclosures required by the standard.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability of
lease recognition and disclosure. The update establishes a right of use ("ROU") model which requires lessees to recognize lease
contracts with a term greater than one year on the balance sheet as ROU assets and lease liabilities. Leases will be classified as
either financing or operating which will determine expense classification and recognition. Topic 842 is effective for fiscal years
beginning after December 15, 2018 and must be applied using the modified retrospective approach. Early adoption is permitted.
While the Company expects Topic 842 to add material ROU assets and lease liabilities to the consolidated balance sheets related
to its current land and building operating leases, it is evaluating other effects that the new standard will have on the consolidated
financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting (Topic 718)."
The amendments in this updated guidance include changes to simplify the Codification for several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows and was effective for fiscal years beginning after December 15, 2016, including
interim periods within that reporting period. The Company implemented this standard on January 1, 2017 and it did not have a
material effect on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business"
which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of
assets or businesses. Topic 805 is effective for fiscal years beginning after December 15, 2017. The Company does not believe its
implementation will have a material effect on the Company's consolidated financial statements.
35
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill
Impairment," which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill
impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the
reporting unit. Topic 350 is effective for fiscal years beginning after December 15, 2019. The Company elected to early adopt the
provisions of this ASU in 2017. The implementation of this ASU did not have a material effect on the Company's consolidated
financial statements.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification
Accounting," which amends the scope of modification accounting for share-based payment arrangements, provides guidance on
the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply
modification accounting under Topic 718. Topic 718 is effective for fiscal years beginning after December 15, 2017. The Company
does not believe its implementation will have a material effect on the Company's consolidated financial statements.
Note 2 Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, accounts receivable, derivative instruments, accounts
payable, earn-out liabilities and debt instruments. For short-term instruments, other than those required to be reported at fair value
on a recurring basis and for which additional disclosures are included below, management concluded the historical carrying value
is a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their
expected realization. Therefore, as of December 31, 2017 and December 31, 2016, the carrying amount for cash and cash
equivalents, accounts receivable, accounts payable and the Company's revolving line of credit, which is based on a variable interest
rate, approximates their fair value.
During 2017, the Company sold shares of Level 1 available for sales securities. Proceeds from the sale totaled $4,141,564 which
resulted in a realized gain of $310,043 which is included in other income on the accompanying consolidated statements of operations.
As a result of the sale, unrealized gains of $555,979, $366,346 net of taxes, were reclassified out of accumulated other comprehensive
income ("AOCI") with the realized gain on sale included in earnings. As of December 31, 2017, the Company has additional
available for sale securities with unrealized losses of $14,111, $10,864 net of taxes, which is included in AOCI at December 31,
2017. The Company used the average cost method to determine the realized gain or loss for each transaction. The fair value of
available for sale securities held by the Company as of December 31, 2017 was $537,233 and is included in prepaid expenses and
other current assets on the accompanying consolidated balance sheets. The Company did not have any available for sale securities
held at December 31, 2016.
The Company has two Level 2 financial assets and liabilities. The fair value of the interest rate swap contract entered into on
August 21, 2012 was an asset of $127,981 and $31,285 at December 31, 2017 and December 31, 2016, respectively. The interest
rate swap was priced using discounted cash flow techniques. Changes in the swap fair value was recorded in current assets or
liabilities, as appropriate, with corresponding offsetting entries to other income (expense). Significant inputs to the discounted
cash flow model include projected future cash flows based on projected one-month LIBOR and the average margin for companies
with similar credit ratings and similar maturities. It is classified as Level 2 as it is not actively traded and is valued using pricing
models that use observable market inputs. See Note 17 for further discussion of interest rate swap.
To manage the impact on earnings of fluctuating nickel prices, the Company enters into three-month forward option contracts,
which are classified as Level 2. At December 31, 2017, the Company had contracts in place with notional quantities totaling
1,351,494 pounds with strike prices ranging from $3.75 to $4.64 per pound. At December 31, 2016, the Company had contracts
in place with notional quantities totaling 638,168 pounds with strike prices ranging from $3.92 to $4.38 per pound. The fair value
of the option contracts were an asset of $9,027 and $87,283 at December 31, 2017 and December 31, 2016, respectively. The fair
value of the contracts was priced using discounted cash flows techniques based on forward curves and volatility levels by asset
class determined on the basis of observable market inputs, when available. Changes in their fair value were recorded to cost of
goods sold with corresponding offsetting entries to other current assets.
The fair value of earn-out liabilities resulting from the MUSA acquisition discussed in Note 18 is classified as Level 3. The fair
value was estimated by applying the Monte Carlo simulation approach using management's projection of pounds shipped and
price per unit. Each quarter-end the Company re-evaluates its assumptions and adjusts to the estimated present value of the expected
payments to be made.
Earn-out liabilities associated with the acquisitions of Palmer in 2012 and Specialty in 2014 were adjusted to zero during 2015
and gains of approximately $2,483,333 and $2,414,115, respectively, were recognized. The Palmer earn-out period expired August
21, 2015 and the Specialty earn-out period expired on November 22, 2016. No earn-out payments were made in 2015 or 2016.
36
There were no changes in the carrying amount of the earn-out liability for the year ended December 31, 2016. The following table
presents a summary of changes in fair value of the Company's Level 3 liabilities measured on a recurring basis for 2017:
Balance at December 31, 2016
Fair value of earn-out liability associated with the MUSA acquisition at February 28, 2017
Earn-out payments to MUSA sellers
Change in fair value during the period
Balance at December 31, 2017
$
—
4,663,783
(518,456)
688,523
$
4,833,850
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 in the years ended December 31, 2017 or
December 31, 2016. There have also been no changes in the fair value methodologies used by the Company during the years ended
December 31, 2017 or December 31, 2016.
Note 3 Property, Plant and Equipment
Property, plant and equipment consist of the following:
Land
Leasehold improvements
Buildings
Machinery, fixtures and equipment
Machinery and equipment under capital lease
Construction-in-progress
Less accumulated depreciation
Property, plant and equipment, net
2017
2016
$
62,916
$
544,186
412,301
62,916
120,915
641,526
81,229,311
66,099,880
401,077
2,881,654
85,531,445
50,451,436
$
35,080,009
$
199,767
5,418,397
72,543,401
45,219,309
27,324,092
The Company recorded depreciation expense of $5,294,695, $4,235,203, and $4,356,911 for 2017, 2016 and 2015, respectively.
Accumulated depreciation includes $86,357 and $25,341 at December 31, 2017 and December 31, 2016, respectively, for assets
acquired under capital leases.
Note 4 Goodwill
There were no changes in the carrying amount of goodwill for the year ended December 31, 2016. The change in the carrying
amount of goodwill by segment for the year ended December 31, 2017 was as follows:
Balance at December 31, 2016
Acquisition of MUSA
Balance at December 31, 2017
Specialty
Chemicals
Segment
Metals Segment
Total
$
$
1,354,730
—
1,354,730
$
$
— $
4,648,795
4,648,795
$
1,354,730
4,648,795
6,003,525
In 2015, the fair value of all reporting units exceeded their carrying value. However, the impairment of the Specialty and Palmer
reporting units was primarily driven by the significant compression of the Company's stock price as a result of temporary business
declines being experienced in the Metals Segment. These declines primarily related to lower oil prices that caused significantly
reduced demand for Palmer and Specialty's products and, secondarily, related to lowered nickel surcharges which affected both
pounds shipped and selling prices for the BRISMET reporting unit. Other companies in the oil and gas sector were similarly
affected as a result of declining commodity prices. This temporary business decline resulted in a significant gap between the fair
value of the Company based on the discounted cash flow analysis and the market capitalization of the Company as of December
31, 2015. Therefore, the Company recorded a goodwill impairment charge of $17,158,249 for the Palmer and Specialty operations
during the fourth quarter of 2015 resulting in no goodwill remaining in the Metals Segment as of December 31, 2015.
37
Note 5 Long-term Debt
$65,000,000 Revolving line of credit, due October 30, 2020
$
25,913,557
$
8,804,206
2017
2016
On August 31, 2016, the Company amended its Credit Agreement with its bank to create a new credit facility in the form of an
asset-based revolving line of credit in the amount of $45,000,000. The Line was used to refinance and consolidate all previous
debt agreements. The maturity date of the Line was February 28, 2019. Interest on the Line was calculated using the One Month
LIBOR Rate (as defined in the Credit Agreement), plus a pre-defined spread. Borrowings under the Line were limited to an amount
equal to a Borrowing Base calculation (as defined in the Credit Agreement) that includes eligible accounts receivable and inventory.
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the
stock and membership interests of its subsidiaries. In the Credit Agreement, the Company's bank agreed to release its liens on the
real estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 12.
On October 30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of the Line by $20,000,000
to a maximum of $65,000,000 and extended the maturity date to October 30, 2020. None of the other provisions of the Credit
Agreement were changed as a result of this amendment.
Covenants under the Credit Agreement include maintaining a minimum fixed charge coverage ratio and a limitation on the
Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs. The Company
evaluated this transaction and determined the restructuring should be accounted for as a debt modification. The Company incurred
lender and third party costs associated with the debt restructuring that were capitalized on the balance sheet in non-current assets.
At December 31, 2017, the Company was in compliance with all debt covenants.
The line of credit interest rates were 3.44 percent and 2.62 percent at December 31, 2017 and December 31, 2016, respectively.
Additionally, the Company is required to pay a fee equal to 0.125 percent on the average daily unused amount of the line of credit
on a quarterly basis. As of December 31, 2017, the amount available for borrowing under the line of credit was $56,726,959 of
which $25,913,557 was borrowed, leaving $30,813,402 of availability. Average line of credit borrowings outstanding during fiscal
2017 and 2016 were $27,895,901 and $6,830,114 with weighted average interest rates of 3.09 percent and 2.88 percent, respectively.
The Company made interest payments on all credit facilities of $856,651 in 2017, $826,478 in 2016 and $1,149,163 in 2015.
Note 6 Accrued Expenses
Accrued expenses consist of the following:
Indemnified legal judgment (See Note 13)
Salaries, wages, and commissions
Taxes, other than income taxes
Current portion of earn-out liability
Advances from customers
Insurance
Professional fees
Warranty reserve
Benefit plans
Insurance financing liability
Customer rebate liability
Current portion, environmental reserves
Current portion, deferred gain sale-leaseback
Other accrued items
Total accrued expenses
38
2017
2016
$
— $
11,000,000
3,219,190
921,476
1,663,751
184,874
372,000
343,706
37,771
208,717
224,961
439,912
549,000
334,273
493,823
2,133,814
479,489
—
571,738
209,000
40,073
180,000
159,253
167,724
157,445
184,887
334,273
333,091
$
8,993,454
$
15,950,787
Note 7 Environmental Compliance Costs
At December 31, 2017 and December 31, 2016, the Company had accrued $549,000 and $589,887, respectively, for remediation
costs which, in management's best estimate, is sufficient to satisfy anticipated costs of known remediation requirements as outlined
below. Expenditures related to costs currently accrued are not discounted to their present values and are expected to be made over
the next year. As a result of the evolving nature of the environmental regulations, the difficulty in estimating the extent and remedy
of environmental contamination and the availability and application of technology, the estimated costs for future environmental
compliance and remediation are subject to uncertainties and it is not possible to predict the amount or timing of future costs of
environmental matters which may subsequently be determined.
Prior to 1987, the Company utilized certain products at its chemical facilities that are currently classified as hazardous materials.
Testing of the groundwater in the areas of the former wastewater treatment impoundments at these facilities disclosed the presence
of certain contaminants. In addition, several solid waste management units ("SWMUs") at the plant sites have been identified.
During 2014, at the former Augusta, GA plant site, the Georgia Department of Natural Resources, Environmental Protection
Division ("EPD") closed the surface impoundment regulated unit since the Company met post-closure clean-up goals and the
Company renewed the Corrective Action Permit, which includes a site-wide corrective action plan, long-term monitoring and
institutional controls. The Company has accrued $474,000 and $514,887 at December 31, 2017 and December 31, 2016,
respectively, for the completion of the site-wide corrective action plan, which should be finished by the end of the second quarter
of 2018. As part of the Asset Purchase Agreement for the sale of the former Spartanburg facility, the purchaser also agreed to pay
for all future annual monitoring and reporting costs at the Augusta facility required by the EPD until the site -wide corrective
action plan is completed.
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 2005. The Company has $75,000 accrued at December 31, 2017 and December 31,
2016, to provide for estimated future remedial and cleanup costs.
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 8 Deferred Compensation
The Company has deferred compensation agreements with certain former officers providing for payments for the longer of ten
years or life from age 65. The present value of such vested future payments, $159,080 at December 31, 2017 and $171,015 at
December 31, 2016, has been accrued.
39
Note 9 Stock Options, Stock Grants and New Stock Issues
A summary of activity in the Company's stock option plans is as follows:
Weighted
Average
Exercise
Price
Options
Outstanding
At January 3, 2015
Granted February 10, 2015
Exercised
Expired
At December 31, 2015
Exercised
Expired
At December 31, 2016
Exercised
Expired
At December 31, 2017
Exercisable options
Options expected to vest:
At December 31, 2015
Vested
Forfeited options
At December 31, 2016
Vested
Forfeited options
At December 31, 2017
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
12.25
16.01
12.47
14.08
12.79
—
16.01
12.77
11.55
15.26
12.96
12.45
13.76
12.71
16.01
14.72
14.35
15.38
14.72
157,295
32,532
(666)
(15,176)
173,985
—
(937)
173,048
(25,632)
(1,905)
145,511
119,861
85,960
(41,737)
(937)
43,286
(17,574)
(62)
25,650
Weighted
Average
Contractual
Term
(in years)
6.9
6.4
5.4
4.6
4.2
7.3
7.1
6.5
Intrinsic
Value of
Options
852,810
1,511
—
—
—
78,818
156,445
156,445
$
$
$
$
$
$
$
$
Grant Date Fair
Value
$
$
$
$
$
6.57
6.91
6.24
5.96
6.41
Options
Available
169,384
(32,532)
15,176
152,028
937
152,965
1,905
154,870
The following table summarizes information about stock options outstanding at December 31, 2017:
Outstanding Stock Options
Exercisable Stock Options
Weighted Average
Range of Exercise
Prices
Shares
Exercise Price
Remaining
Contractual Life
in Years
Shares
Weighted Average
Exercise Price
$
$
$
$
$
11.55
11.35
13.70
14.76
16.01
$
$
$
$
$
56,710
25,076
27,801
8,109
27,815
145,511
11.55
11.35
13.70
14.76
16.01
3.06
4.10
5.10
6.14
7.11
$
$
$
$
$
56,710
25,076
22,084
4,865
11,126
119,861
11.55
11.35
13.70
14.76
16.01
The 2011 Plan is an incentive stock option plan, therefore there are no income tax consequences to the Company when an option
is granted or exercised. The stock options will vest in 20 percent increments annually on a cumulative basis, beginning one year
after the date of grant. In order for the options to vest, the employee must be in the continuous employment of the Company since
the date of the grant. Any portion of the grant that has not vested will be forfeited upon termination of employment. Shares
representing grants 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. On February 10, 2015, the Company granted
options to purchase 32,532 shares of its commons stock at an exercise price of $16.01 per share to participants in the 2011 Plan.
40
The per share weighted-average fair value of this stock option grant was $6.39. The Black-Scholes model for this grant was based
on a risk-free interest rate of two percent, an expected life of seven years, an expected volatility of 0.46 and a dividend yield of
two percent.
In 2017 and 2015, options for 25,632 and 666 shares were exercised by employees and directors for an aggregate exercise price
of $296,050 and $8,302, respectively. The proceeds received by the Company were generated from the surrender of 20,243 shares
previously owned from employees and directors in 2017 and from cash received of $8,302 in 2015. No options were exercised
by employees or directors in 2016. At the 2017, 2016 and 2015 respective year ends, options to purchase 119,861, 129,762 and
88,025 shares with weighted average exercise prices of $12.45, $12.12 and $11.85, respectively, were fully exercisable.
Compensation cost charged against income before taxes for the options was approximately $80,966 for 2017, $135,085 for 2016
and $278,341 for 2015. As of December 31, 2017, there was $86,280 of unrecognized compensation cost related to unvested stock
options granted under the Company's stock option plans. The weighted average period over which the stock option compensation
cost is expected to be recognized is 1.90 years.
The Compensation & Long-Term Incentive Committee ("Compensation 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
grants will vest in 20 percent increments annually on a cumulative basis, beginning one year after the date of grant. In order for
the grants to vest, the employee must be in the continuous employment of the Company since the date of the grant. Any portion
of the grant that has not vested will be forfeited upon termination of employment. Shares representing grants 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. On January 5, 2015, 3,000 shares, with a market price of $17.95 per share, were
granted under the Plan to external consultants of the Company. The Company's 2005 Stock Awards Plan expired on February 3,
2015 at which time no further grants could be awarded. There are outstanding awards under this plan that will vest over the next
three years.
The 2015 Stock Awards Plan was approved by the Compensation Committee of the Board of Directors of the Company and
authorizes the issuance of up to 250,000 shares which can be awarded for a period of ten years from the effective date of the plan.
Prior to May 9, 2017, as discussed below, the stock awards vest in 20 percent increments annually on a cumulative basis, beginning
one year after the date of grant from shares held in treasury with the Company. 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 2015 Stock Awards Plan. An employee is not entitled to any
voting rights with respect to any shares not yet vested, and the shares are not transferable.
On February 19, 2016, the Compensation Committee of the Company's Board of Directors approved stock grants under the
Company's 2015 Stock Awards Plan to certain management employees of the Company where 50,062 shares with a market price
of $7.51 per share were granted under the Plan. On May 5, 2016, the Compensation Committee of the Company's Board of Directors
approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where
42,193 shares with a market price of $8.05 per share were granted under the Plan.
On February 8, 2017, the Compensation Committee of the Company's Board of Directors approved stock grants under the
Company's 2015 Stock Awards Plan to certain management employees of the Company where 44,687 shares with a market price
of $12.30 per share were granted under the Plan.
Effective May 1, 2017, the Company's Board of Directors approved the First Amendment to the 2015 Stock Awards Plan. The
amendment grants the Committee the authority to establish and amend vesting schedules for stock awards made pursuant to the
2015 Stock Awards Plan. On May 9, 2017, the Committee approved the amendment of the vesting schedules for the May 5, 2016
and February 8, 2017 stock grants reducing the vesting period from five years to three years. As a result of this amendment,
compensation expense increased in 2017 by $75,756 and $67,180, for the five employees receiving grants on May 5, 2016 and
eight employees receiving grants on February 8, 2017, respectively.
41
A summary of plan activity for the 2005 and 2015 Stock Awards Plans is as follows:
Outstanding at January 3, 2015
Granted January 5, 2015
Vested
Forfeited
Outstanding at December 31, 2015
Granted February 19, 2016
Granted May 5, 2016
Vested
Forfeited
Outstanding at December 31, 2016
Granted February 8, 2017
Vested
Outstanding at December 31, 2017
Weighted
Average
Grant Date Fair
Value
Shares
66,403
$
$
3,000
(17,903) $
(60) $
$
51,440
50,062
$
42,193
$
(21,133) $
(1,260) $
$
121,302
44,687
$
(34,322) $
$
131,667
15.00
17.95
13.86
13.34
15.57
7.51
8.05
13.12
17.73
10.03
12.30
10.45
10.69
Compensation expense on the grants issued is charged against earnings equally before forfeitures, if any, over a period of 60
months from the date of the grants for grants prior to May 5, 2016, with the offset recorded in Shareholders' Equity. Compensation
expense on grants issued after that date is charged against earnings over 36 months. Compensation cost charged against income
for the awards was approximately $557,450, $354,538 net of income taxes, or $0.04 per share for 2017, $324,388, $206,311 net
of income taxes, or $0.02 per share for 2016 and $243,354, $154,773 net of income taxes, or $0.02 per share, for 2015. As of
December 31, 2017, there was $1,073,914 of total unrecognized compensation cost related to unvested stock grants under the
Company's Stock Awards Plan. The weighted average period over which the stock grant compensation cost is expected to be
recognized is 2.12 years.
Each year, the Company allows each non-employee director to elect to receive up to 100 percent of their annual retainer in restricted
stock. The number of restricted shares issued is determined by the average of the high and low common stock price on the day
prior to the Annual Meeting of Shareholders or the date prior to the appointment to the Board for those individuals that are appointed
mid-term. On May 18, 2017, May 5, 2016 and May 12, 2015, non-employee directors received an aggregate of 24,209, 40,991
and 8,216 shares, respectively, of restricted stock in lieu of total retainer fees of $287,500, $330,000 and $118,750, respectively.
The shares granted to the directors are not registered under the Securities Act of 1933 and are subject to forfeiture in whole or in
part upon the occurrence of certain events.
42
Note 10 Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred
tax liabilities and assets are as follows at the respective year ends:
Deferred income tax assets:
Sale leaseback deferred gain
Inventory valuation reserves
Allowance for doubtful accounts
Inventory capitalization
Environmental reserves
Interest rate swap
Warranty accrual
Deferred compensation
Accrued bonus
Accrued expenses
State net operating loss carryforwards
Other
Total deferred income tax assets
Valuation allowance
Total net deferred income tax assets
Deferred income tax liabilities:
Tax over book depreciation and amortization
Prepaid expenses
Interest rate swap
Other
Total deferred income tax liabilities
Deferred income taxes
2017
2016
$
1,382,270
$
2,387,309
209,745
7,944
943,203
124,029
—
8,132
36,617
483,238
24,749
2,069,258
479,338
5,768,523
(2,087,860)
3,680,663
3,971,816
174,322
87,016
83,419
4,316,573
(635,910) $
$
379,005
28,556
1,780,957
199,191
15,185
62,035
60,745
337,028
77,629
1,724,843
389,530
7,442,013
(1,790,051)
5,651,962
6,946,812
211,300
—
103,342
7,261,454
(1,609,492)
Significant components of the provision for income taxes from continuing operations are as follows:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total
2017
2016
2015
$
1,067,490
$
106,832
1,174,322
(980,495) $
190,230
(790,265)
1,415,142
233,626
1,648,768
(1,043,384)
6,201
(1,037,183)
137,139
$
(1,329,302)
(78,433)
(1,407,735)
(2,198,000) $
(47,530)
197,762
150,232
1,799,000
$
Tax benefit from discontinued operations amounted to $51,000 and $651,000 for the fiscal years ended 2016 and 2015, respectively.
The Company did not have any discontinued operations for 2017.
43
The reconciliation of income tax computed at the U. S. federal statutory tax rates to income tax expense is:
2017
2016
2015
Amount
$
502,690
%
34.0 % $ (3,125,382)
Amount
%
34.0 % $ (2,880,574)
Amount
Tax at U.S. statutory rates
State income taxes, net of federal
tax benefit
State valuation allowance
Life insurance cash surrender
value
Earn-out adjustments
65,546
8,498
—
—
Manufacturing exemption
(116,980)
Stock option compensation
Uncertain tax positions
Rate change effects
Goodwill impairment
Other, net
Total
226
—
(380,961)
—
58,120
$
137,139
4.4 %
0.6 %
— %
— %
(7.9)%
— %
— %
(25.8)%
— %
(48,842)
95,961
503,700
—
—
45,929
—
—
—
4.0 %
330,634
9.3 % $ (2,198,000)
0.5 %
(1.0)%
(5.5)%
— %
— %
(0.5)%
— %
— %
285,426
94,068
—
(857,061)
(187,604)
94,637
(139,000)
—
— %
5,405,302
(16,194)
23.9 % $ 1,799,000
(3.6)%
%
34.0 %
(3.4)%
(1.1)%
— %
10.1 %
2.2 %
(1.1)%
1.6 %
— %
(63.8)%
0.3 %
(21.2)%
Income tax payments of $2,576,515, $991,888 and $2,250,558 were made in 2017, 2016 and 2015, respectively. The Company
had state net operating loss carryforwards at the end of fiscal years 2017 and 2016 of $49,711,027 and $49,676,851, respectively.
These losses will expire between the years of 2018 and 2037. A valuation allowance has been set up against $49,612,725 of these
state net operating loss carryforwards because it is not more likely than not that the losses will be realized in the foreseeable future.
The portion of the valuation allowance for the net operating loss carryforwards was $2,064,674 and $1,724,843 at December 31,
2017 and December 31, 2016, respectively. In addition, a $23,186 valuation allowance was established at December 31, 2017 for
other deferred tax assets. This resulted in a valuation allowance increase of $297,809 all related to continuing operations.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The
Company is no longer subject to U.S. federal examinations for years before 2014 or state income tax examinations for years before
2013. The Company completed its 2012 and 2013 federal income tax return examination by the Internal Revenue Service during
the second quarter of 2015.
The Company had no uncertain tax position activity during 2017 or 2016. The Company's continuing practice is to recognize
interest and/or penalties related to income tax matters in the provision for income taxes. The Company had no accruals for uncertain
tax positions including interest and penalties at the end of 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was signed into law by the President of the United States, enacting
significant changes to the Internal Revenue Code effective January 1, 2018. The Act includes a number of provisions including,
but not limited to, a permanent reduction of the U.S. corporate tax rate from 35 percent to 21 percent, eliminating the deduction
for domestic production activities, limiting the tax deductibility of interest expense, accelerating the expensing of certain business
assets and reducing the amount of executive pay that could qualify as a tax deduction. Many effects of The Act are international
in nature, such as the one-time transition tax, base erosion anti-abuse tax and the global intangible low-taxed income tax, and thus
would not pertain to the Company as it has no international operations. The Company's net deferred tax liability as of December
31, 2017 was determined based on the new permanently enacted corporate income tax rate of 21 percent. As a result, the 2017
income tax provision was reduced by $380,961 for a one-time non-cash revaluation adjustment of the net deferred tax liabilities.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S.
GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of The Act. The Company's revaluation
of its deferred tax assets and liabilities is provisional and subject to further clarification of the new law, including but not limited
to US state conformity that cannot be estimated at this time and measurement of underlying tax basis in certain business assets.
The ultimate impact may differ from provisional amounts due to, among other things, additional analysis, changes in interpretations
and assumptions the Company has made, and additional regulatory guidance that may be issued. Further guidance may be
forthcoming from federal and state agencies, which could result in additional adjustments. The accounting is expected to be
completed no later than the filing of the 2017 U.S. corporate income tax return in 2018.
44
Note 11 Benefit Plans and Collective Bargaining Agreements
The Company has a 401(k) Employee Stock Ownership Plan (the "401(k)/ESOP Plan") covering all non-union employees.
Employees could contribute to the 401(k)/ESOP Plan up to 100 percent of their wages with a maximum of $18,000 for 2017.
Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional
$6,000 per year for a maximum of $24,000 for 2017. 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. For the year ended December
31, 2015, contributions by the Company were made in cash and then used by the 401(k)/ESOP Plan Trustee to purchase Company
stock. Effective January 1, 2016, contributions by the Company are made in accordance with the investment elections made by
each participant for their deferral contributions. The Company contributes on behalf of each eligible participant a matching
contribution equal to a percentage determined each year by the Board of Directors. For 2017, 2016 and 2015 the maximum was
100 percent of employee contributions up to a maximum of four percent of their eligible compensation. The matching contribution
is applied to the employee accounts after each payroll. Matching contributions of approximately $608,473, $516,991 and $541,260
were made for 2017, 2016 and 2015, 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 401(k)/ESOP Plan. No discretionary
contributions were made to the 401(k)/ESOP Plan in 2017, 2016 or 2015.
The Company also has a 401(k) and Profit Sharing Plan (the "Bristol Plan") covering all employees of the United Steel Workers
of America, Local Union 4586 Collective Bargaining Agreement ("CBA"). Employees could contribute to the Bristol Plan up to
60 percent of pretax annual compensation, as defined in the Plan, with a maximum of $18,000 for 2017. Under the Economic
Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional $6,000 per year for
a maximum of $24,000 for 2017. The Company contributes three percent of a participant's eligible compensation for the plan year,
regardless of whether the participants contribute to the Bristol Plan. The Company's contributions were $174,229, $136,763 and
$147,005 for 2017, 2016 and 2015, respectively. Additional profit sharing amounts may also be contributed at the option of the
Company's Board of Directors, which if made, would be allocated to participants based on the ratio of the participant's compensation
to the total compensation of all participants eligible to participate in the Bristol Plan. No discretionary contributions were made
to the Bristol Plan in 2017, 2016 or 2015.
In connection with the MUSA acquisition discussed in Note 18, the Company assumed the rights and obligations pursuant to the
CBA between MUSA and the United Steel Workers of America, Local Union 5852-22 (the " Munhall Union"). As a part of this
CBA, the Company assumed the obligation of participating in the Steelworkers Pension Trust (plan number 499; EIN: 23-6648508),
a union-sponsored multi-employer defined benefit plan (the "Munhall Plan"), which covers all the Company's eligible Munhall
Union employees. The Munhall Plan has a plan year that coincides with the calendar year. Per the most recent available annual
funding notice, the plan was at least 80 percent funded for the plan year ended December 31, 2016. Per the terms of the agreement
the Company contributes 3.75 percent of each participant's eligible compensation for the plan year. Munhall Union employees
make no contributions to the Munhall Plan. The Company's contributions are less than 5 percent of total contributions to the plan
based on contributions for the plan year ended December 31, 2016. The Company's contributions to the Munhall Plan totaled
$69,245 for the year ended December 31, 2017. Additionally, as part of the CBA with the Munhall Union, members of the union
are eligible to make deferral contributions to the Company's 401(k)/ESOP Plan per the plan guidelines; however they do not
receive matching contributions of the 401(k)/ESOP Plan.
The Company also maintains a CBA with the United Steel Workers of America, Local Union 4564-07, which represents employees
at the Specialty-Mineral Ridge facility. In connection with this CBA, the Company contributes to union-sponsored defined
contribution retirement plans. Contributions relating to these plans were approximately $29,042, $22,256 and $37,712 for 2017,
2016 and 2015, respectively.
Note 12 Leases
On August 31, 2016, Synalloy and its operating subsidiaries ("the Synalloy Companies") entered into a Purchase and Sale Agreement
("PSA") with Store Capital Acquisitions, LLC, a Delaware limited liability company and an affiliate of Store Capital Corporation
(“Store Capital Acquisitions”). Store Capital Acquisitions assigned its rights under the PSA to Store Master Funding XII, LLC, a
Delaware limited liability company ("Store Funding"), prior to closing.
On September 30, 2016, pursuant to the terms and conditions of the PSA, the Synalloy Companies completed the sale of their real
estate properties in Tennessee, South Carolina, Texas and Ohio to Store Funding for a purchase price of $22,000,000. The net
book value of the real estate properties sold totaled $17,769,883 and the Company recognized a loss on the sale of certain locations
of $2,455,347. The Company also recognized a deferred gain of $6,685,464 on the sale of certain locations which is being amortized
on the straight-line method over the initial lease term of 20 years. The deferred gain recognized during the fourth quarter of 2016
totaled $83,568 and reduced the net loss recognized at December 31, 2016 in the accompanying consolidated statements of
45
operations to $2,371,778. The deferred gain recognized during 2017 totaled $334,273. Concurrent with the sale of its real properties,
the Company leased back all real properties sold to Store Funding. The closing of the sale-leaseback transaction provided the
Company with net proceeds (after transaction-related costs) of $21,925,000. The net proceeds were used to pay down debt under
the Company's credit agreement, as described in Note 5.
The initial non-cancellable term of the lease is 20 years, with two renewal options of ten years each. The lease includes a rent
escalator equal to the lesser of 1.25 times the percentage increase in the Consumer Price Index since the previous increase or two
percent. The lease met the operating lease requirements and has been accounted for as such. For each location, the Company
simultaneously entered into a sublease with each operating subsidiary.
The Company leases office space in Spartanburg, South Carolina and Richmond, Virginia, property for a storage yard in Mineral
Ridge, Ohio, manufacturing and warehouse space in Munhall, Pennsylvania and various manufacturing and office equipment at
each of its locations, all under operating leases.
The amount of future minimum lease payments under operating leases are as follows: 2018 - $2,744,596; 2019 - $2,861,487; 2020
- $2,903,841; 2021 - $2,892,396; 2022 - $2,883,906; and thereafter - $33,783,129. Rent expense related to operating leases was
$3,339,600, $1,143,895 and $685,903 in 2017, 2016 and 2015, respectively.
The Company leases machinery and equipment for its manufacturing facility in Cleveland, Tennessee under capital leases. Future
minimum commitments for capital leases are as follows:
Year ending December 31:
2018
2019
2020
2021
2022
Total minimum lease payments
Less imputed interest costs
Present value of net minimum lease payments
$
$
85,464
85,464
70,080
38,781
18,407
298,196
15,177
283,019
The current portion due under the capital lease is included in accrued expenses and the long-term portion is included in other long-
term liabilities in the accompanying consolidated balance sheets as of December 31, 2017 and December 31, 2016.
Note 13 Commitments and Contingencies
The Company is from time-to-time subject to various claims, other possible legal actions for product liability and other damages,
and other matters arising out of the normal conduct of the Company's business. No significant claims expenses were incurred
during 2017, 2016 or 2015, with the exception of the items discussed below. Any legal costs associated with commitments or
contingencies are expensed as incurred.
In January 2014, a Metals Segment customer filed suit against Palmer and Synalloy and another unrelated defendant in Texas state
court alleging breach of warranty, among other claims. The plaintiff’s claim for damages did not state a dollar amount. This matter
arose out of products manufactured and sold by Palmer prior to the Company’s acquisition of all of Palmer's outstanding stock in
August 2012. During August and September 2016, the parties to the lawsuit tried the matter in a bench trial in the District Court
of Harris County, Texas, 333rd Judicial District (the “Court”). On December 31, 2016, the Court entered final judgment in favor
of the Plaintiff and Synalloy and against Palmer. The Court ordered Palmer to pay the Plaintiff approximately $8,600,000 in
damages, plus pre- and post-judgment interest, and approximately $1,040,000 in attorneys’ fees. The Court ruled Synalloy has no
liability to the Plaintiff. The former shareholders of Palmer are contractually bound, pursuant to the Stock Purchase Agreement
by and among Synalloy and the former shareholders dated August 10, 2012, to hold harmless and indemnify Synalloy and Palmer
from any and all costs and damages, including the judgment described above and all associated attorneys' fees, arising out of this
matter. At December 31, 2016, the Company recorded $11,000,000 in accrued expenses and current assets to reflect the legal
liability and corresponding indemnified receivable due from the former shareholders of Palmer. On June 30, 2017, the plaintiff
entered into settlement agreements with Palmer/Synalloy and the former shareholders of Palmer, respectively, pursuant to which,
the parties agreed to settle and release the judgment in full. On August 31, 2017, the former shareholders of Palmer satisfied the
financial conditions specified in their settlement agreement with the plaintiff, and the plaintiff filed a Release of Final Judgment
with the Court. Because the former shareholders of Palmer were contractually bound, pursuant to the Stock Purchase Agreement
46
by and among Synalloy and the former shareholders dated August 10, 2012, to hold harmless and indemnify Synalloy and Palmer
from any and all costs and damages, including the judgment described above and all associated attorneys' fees, arising out of this
matter, neither Synalloy nor Palmer contributed to the payments required by the settlement agreements. The legal liability and
corresponding indemnified receivable due from the former shareholders of Palmer were reduced to zero at August 31, 2017.
In September 2014, a Metals Segment customer filed suit against Synalloy Fabrication, LLC (discontinued operation) and its
surety in the United States District Court for the District of Maryland (Baltimore Division) alleging breach of contract, among
other claims. The plaintiff's claim for damages was approximately $3,300,000 plus attorney's fees. This matter arose from a
disagreement over the scope of a pipe fabrication project and whether an enforceable contract exists between the parties. On March
11, 2016, the United States District Court of Maryland (Baltimore Division) granted summary judgment regarding liability in
favor of the plaintiff by ruling that an enforceable contract existed between the parties and the Company breached the agreement.
As a result of this ruling, the remaining issue in the case was the amount of the plaintiff's damages. Consequently, the Company
increased the facility closing liability to a level of $3,000,000 for the estimated costs associated with the claim for the year ended
December 31, 2015. In June 2016, the matter was settled for damages totaling $3,100,000. As a result, the Company increased
the facility closing liability and made a payment of $2,500,000 in June 2016. In September 2016, the remaining balance of $600,000
was paid in full. The amount required to adjust the facility closing reserve as a result of the settlement is included in discontinued
operations for 2016 and 2015 in the accompanying consolidated statement of operations.
Other than the environmental contingencies discussed in Note 7 and the matters discussed in this Note 13, management is not
currently aware of any other asserted or unasserted matters which could have a significant effect on the financial condition or
results of operations of the Company.
Note 14 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Net income (loss) from continuing operations
Net loss from discontinued operations, net of tax
$
$
1,341,362
$
— $
(6,993,967) $
(99,334) $
(10,269,278)
(1,251,058)
2017
2016
2015
Denominator:
Denominator for basic earnings per share - weighted average
shares
Effect of dilutive securities:
8,704,730
8,649,745
8,710,361
Employee stock options and stock grants
22,757
—
—
Denominator for diluted earnings per share - weighted average
shares
8,727,487
8,649,745
8,710,361
Net earnings (loss) per share from continuing operations:
Basic
Diluted
Net loss per share from discontinued operations:
Basic
Diluted
$
$
$
$
0.15
0.15
$
$
(0.81) $
(0.81) $
— $
— $
(0.01) $
(0.01) $
(1.18)
(1.18)
(0.14)
(0.14)
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 weighted average shares of common stock of 86,524 in 2017,
295,287 in 2016 and 229,025 in 2015, which were not included in the diluted earnings per share calculation as their effect was
anti-dilutive.
Note 15 Industry Segments
The Company's business is divided into two operating segments: Metals and Specialty Chemicals. The Company identifies such
segments based on products and services, long-term financial performance and end markets targeted. The Metals Segment operates
47
as three reporting units including Synalloy Metals, Inc., a wholly-owned subsidiary which owns 100 percent of BRISMET, Palmer
and Specialty, both wholly-owned subsidiaries of the Company. BRISMET manufactures pipe and tube from stainless steel and
other alloys, Palmer produces fiberglass and steel storage tanks and Specialty is a master distributor of seamless carbon pipe and
tube. The Metal Segment's products, some of which are custom-produced to individual orders and required for corrosive and high-
purity processes, are used principally by the chemical, petrochemical, pulp and paper, mining, power generation (including nuclear),
water and wastewater treatment, liquid natural gas, brewery, food processing, petroleum, pharmaceutical and other industries.
Products include pipe, storage tanks, pressure vessels and a variety of other components. The Specialty Chemicals Segment operates
as one reporting unit which includes MS&C, a wholly owned subsidiary of the Company which owns 100 percent of MC, and
CRI Tolling, a wholly owned subsidiary of the Company. The Specialty Chemicals Segment manufactures a wide variety of
specialty chemicals for the carpet, chemical, paper, metals, mining, agricultural, fiber, paint, textile, automotive, petroleum,
cosmetics, mattress, furniture, janitorial and other industries. MC manufactures lubricants, surfactants, defoamers, reaction
intermediaries and sulfated fats and oils. CRI Tolling provides chemical tolling manufacturing resources to global and regional
companies and contracts with other chemical companies to manufacture certain pre-defined products.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the
primary measure being operating income (loss). The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
Segment operating income is the segment's 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. During 2015,
the Company recorded an impairment charge of $17,158,249 of the total Metals Segment's goodwill as a result of the annual
impairment analysis performed in the fourth quarter; see Note 4. The Metals Segment's identifiable assets did not include any
goodwill in 2016. In relation to the acquisition of the stainless pipe and tube assets of MUSA (see Note 18), the Metals Segment
recognized goodwill of $4,648,795 in 2017. The Specialty Chemicals Segment's identifiable assets include goodwill of $1,354,730
in 2017 and 2016. 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 $37,748, $48,000 and $1,332 for
2017, 2016 and 2015, respectively. Corporate assets consist principally of cash, certain investments and equipment.
The Metals Segment had one customer that accounted for approximately 14 percent of revenues in 2015. There were no customers
representing more than ten percent of the Metals Segment's revenues in 2017 or 2016. The Specialty Chemicals Segment has one
customer that accounted for approximately 23 percent, 25 percent and 31 percent of revenues for 2017, 2016 and 2015. The
concentration of sales to this customer declined in 2016 as a result of this customer moving production of the certain products
previously produced and sold by the Specialty Chemicals Segment in house. The loss of this customer would have a material
adverse effect on the revenues of the Specialty Chemicals Segment and the Company.
In order to establish stronger business relationships, the Metals Segment uses only a few raw material suppliers. Nine suppliers
furnish about 80 percent of total dollar purchases of raw materials, with one supplier furnishing 40 percent. However, the Company
does not believe that the loss of this supplier 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. For the
Specialty Chemicals Segment, most raw materials are generally available from numerous independent suppliers and about 52
percent of total purchases are from its top 15 suppliers. While some raw material needs are met by a sole supplier or only a few
suppliers, the Company anticipates no difficulties in fulfilling its raw material requirements.
48
Segment Information:
All values are for continuing operations only.
Net sales
Metals Segment
Specialty Chemicals Segment
Operating income (loss)
Metals Segment
Goodwill impairment
Business interruption proceeds
Gain (loss) on sale-leaseback
Total Metals Segment
Specialty Chemicals Segment
Gain (loss) on sale-leaseback
Total Specialty Chemicals Segment
Unallocated straight line lease cost
Unallocated corporate expenses
Acquisition related costs
Operating income (loss)
Interest expense
Change in fair value of interest rate swap
Earn-out adjustments
Casualty insurance gain
Other income, net
Income (loss) before income taxes
Identifiable assets
Metals Segment
Specialty Chemicals Segment
Corporate
Depreciation and amortization
Metals Segment
Specialty Chemicals Segment
Corporate
Capital expenditures
Metals Segment
Specialty Chemicals Segment
Corporate
Sales by product group
Specialty chemicals
Stainless steel pipe
Seamless carbon steel pipe and tube
Liquid storage tanks and separation equipment
Geographic sales
United States
Elsewhere
2017
2016
2015
152,957,195
48,190,487
201,147,682
5,424,624
—
—
239,604
5,664,228
4,295,576
94,669
4,390,245
10,054,473
397,071
6,116,768
794,983
2,745,651
985,366
(96,696)
688,523
—
(310,043)
1,478,501
130,456,857
25,394,078
4,023,215
159,874,150
6,280,681
1,302,579
154,552
7,737,812
3,405,552
1,649,967
223,089
5,278,608
48,190,487
100,523,823
25,103,641
27,599,731
201,417,682
196,172,279
4,975,403
201,147,682
$
$
$
$
$
$
$
$
$
$
$
$
$
$
90,214,537
48,351,245
138,565,782
$
$
114,908,258
60,552,180
175,460,438
(4,820,374) $
—
—
(2,166,136)
(6,986,510)
4,887,143
(205,642)
4,681,501
(2,305,009)
101,633
5,733,529
106,227
(8,246,398)
932,572
12,997
—
—
—
(9,191,967) $
2,821,879
(17,158,249)
1,246,024
—
(13,090,346)
5,664,843
—
5,664,843
(7,425,503)
—
5,105,935
499,761
(13,031,199)
1,352,806
41,580
(4,897,448)
(923,470)
(134,389)
(8,470,278)
109,689,477
22,907,672
6,040,914
138,638,063
5,132,506
1,449,437
113,047
6,694,990
2,198,535
475,703
370,173
3,044,411
48,351,245
56,065,642
14,913,133
19,235,762
138,565,782
132,313,157
6,252,625
138,565,782
$
$
$
$
$
$
$
$
5,172,251
1,376,167
85,973
6,634,391
7,398,517
3,439,260
67,453
10,905,230
60,552,180
77,849,443
18,013,326
19,045,489
175,460,438
167,185,319
8,275,119
175,460,438
$
$
$
$
$
$
$
$
$
$
$
$
$
$
49
Note 16 Quarterly Results (Unaudited)
The following is a summary of quarterly operations for 2017 and 2016:
2017
Net sales
Gross profit
Net income (loss) from continuing operations
Net income from discontinued operations
Net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Per common share
Basic
Diluted
2016
Net sales from continuing operations
Gross profit from continuing operations
Net loss from continuing operations (1)
Loss from discontinued operations, net of tax
Net loss
Other comprehensive income
Comprehensive (loss)
Per common share from continuing operations
Basic
Diluted
Per common share from discontinued operations
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$42,203,579
$51,511,045
$54,595,924
$52,837,134
7,403,579
8,177,927
701,542
829,879
—
701,542
—
—
—
829,879
366,346
1,196,225
4,836,620
(1,206,752)
—
(1,206,752)
(366,346)
(1,573,098)
7,662,824
1,016,693
—
1,016,693
(10,864)
1,005,829
0.08
0.08
0.10
0.10
(0.14)
(0.14)
0.11
0.11
$36,312,012
$34,906,668
$34,297,231
$33,049,871
4,718,176
(1,366,732)
—
(1,366,732)
—
(1,366,732)
3,997,594
(1,583,395)
(99,334)
(1,682,729)
—
(1,682,729)
4,504,419
(2,608,276)
—
(2,608,276)
—
(2,608,276)
3,684,290
(1,435,564)
—
(1,435,564)
—
(1,435,564)
(0.16)
(0.16)
—
—
(0.18)
(0.18)
(0.01)
(0.01)
(0.30)
(0.30)
(0.17)
(0.17)
—
—
—
—
(1) The Company recorded a loss of $2,455,347 in the third quarter of 2016 associated with the sale-leaseback transaction.
Note 17 Interest Rate Swap
As discussed in Note 5, the Company has an interest rate swap associated with its Line which effectively is expected to offset
variable interest in the borrowing; hedge accounting was not utilized. The notional amount of the swap was $10,500,000 and
$12,750,000 at December 31, 2017 and December 31, 2016, respectively. Therefore, the fair value is recorded in current assets
or liabilities, as appropriate, with corresponding changes to fair value recorded to other income (expense). The Company recorded
an asset of $127,981 and $31,285 for the fair value of the Palmer swap at December 31, 2017 and December 31, 2016, respectively.
50
Note 18 Acquisitions
Acquisition of the Stainless Steel Pipe and Tube Assets of Marcegaglia USA, Inc.
On December 9, 2016, the Company's subsidiary Bristol Metals, LLC ("BRISMET"), entered into a definitive agreement to acquire
the stainless steel pipe and tube assets of MUSA located in Munhall, PA (the "Bristol Metals-Munhall") to enhance its on-going
business with additional capacity and technological advantages. The transaction closed on February 28, 2017 and was funded
through an increase to the Company's credit facility (See Note 5). The purchase price for the transaction, which excludes real
estate and certain other assets, totaled $14,953,513. The assets purchased from MUSA include inventory, production and
maintenance supplies and equipment less specific identified liabilities to be assumed. In accordance with the agreement, on
December 9, 2016, BRISMET entered into an escrow agreement and deposited $3,000,000 into the escrow fund. The deposit was
remitted to MUSA at the close of the transaction and was reflected as a credit against the purchase price.
A summary of sources and uses of proceeds for the acquisition is as follows:
Sources of funds:
Borrowings from revolving line of credit
Total sources of funds
Uses of funds:
Acquisition of MUSA Stainless assets
Total uses of funds
$
$
$
$
14,953,513
14,953,513
14,953,513
14,953,513
The transaction was accounted for using the acquisition method of accounting for business combinations. During the fourth quarter
of 2017, the Company finalized the purchase price allocation for the Bristol Metals-Munhall acquisition.
MUSA will receive quarterly earn-out payments for a period of four years years following closing. Aggregate earn-out payments
will be at least $3,000,000, with no maximum. Actual payouts will equate to three percent of BRISMET’s incremental revenue,
if any, from the amount of small diameter stainless steel pipe and tube (outside diameter of ten inches or less) sold. At February
28, 2017, the acquisition date, the Company forecasted earn out payments to be $4,063,204, which was discounted to a present
value of $3,604,330 using a discount rate applicable to future revenue of five percent. In determining the appropriate discount rate
to apply to the contingent payments, the risk associated with the functional form of the earn-out, the credit risk associated with
the payment of the earn-out and the methodology to quantify the earn-out were all considered. The fair value of the contingent
consideration was estimated by applying the Monte Carlo simulation approach using management's estimates of pounds shipped.
In the second quarter of 2017, Management adjusted the selling price used in the earn-out calculation associated with the MUSA
acquisition. Since this adjustment was determined within the measurement period, the beginning earn-out liability and goodwill
were increased by $1,059,453. Goodwill related to Bristol Metals-Munhall increased from $3,589,342 to $4,648,795 and the fair
value on contingent consideration was increased from $3,604,330 to $4,663,783. All other changes in fair value have been included
as other (income) loss on the Company's consolidated statements of operations.
The total purchase price was allocated to Bristol Metals-Munhall facility's net tangible and identifiable intangible assets based on
their estimated fair values as of February 28, 2017. The fair value assigned to the customer list intangible is being amortized on
an accelerated basis over 15 years. The excess of the consideration transferred over the fair value of the net tangible and identifiable
intangible assets and liabilities is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining
laser mill capabilities acquired as part of Bristol Metals-Munhall with BRISMET's current operations. All of the goodwill recognized
was assigned to the Company's Metals Segment and is expected to be deductible for income tax purposes.
51
The following table shows the initial estimate of value and revisions made during 2017:
Inventories
Other current assets - production and maintenance supplies
Equipment
Customer list intangible
Goodwill
Earn-out liability
Other liabilities assumed
$
Initial
estimate
5,434,000
1,548,701
7,576,733
992,000
3,589,342
(3,604,330)
(582,933)
$ 14,953,513
Revisions
Final
5,434,000
— $
1,548,701
—
7,576,733
—
992,000
—
4,648,795
1,059,453
(4,663,783)
(1,059,453)
(582,933)
—
— $ 14,953,513
$
$
Bristol Metals-Munhall's results of operations since acquisition are reflected in the Company's consolidated statements of
operations. The amount of Bristol Metals-Munhall's revenues and operating loss included in the consolidated statements of
operations for the year ended December 31, 2017 was $25,766,689 and $245,408, respectively. The following unaudited pro-
forma information is provided to present a summary of the combined results of the Company's operations with Bristol Metals-
Munhall as if the acquisition had occurred on January 1, 2016. The unaudited pro-forma financial information is for information
purposes only and is not necessarily indicative of what the results would have been had the acquisition been completed on the
date indicated above.
Pro-Forma (Unaudited)
Pro-forma revenues
Pro-forma net income (loss)
Earnings (loss) per share:
Basic
Diluted
2017
2016
$206,071,634
1,441,258
$161,591,159
(9,730,841)
0.17
0.17
(1.12)
(1.12)
The pro-forma calculation excludes non-recurring acquisition costs of $698,587 which were incurred by the Company during
2017. The stainless steel operations of MUSA's historical financial results were adjusted for both years to eliminate interest expense
charged by the prior owner. Pro-forma net income was reduced for both years for the amount of amortization on Bristol Metal
Munhall's customer list intangible and an estimated amount of interest expense associated with the additional line of credit
borrowings.
On March 1, 2017, pursuant to the terms and conditions of the MUSA asset purchase agreement, the Company entered into a lease
agreement to lease manufacturing and warehouse space at MUSA's Munhall, PA facility for $33,333 per month for the initial lease
term of 15 months. In February 2018, the lease was amended to extend the term of the lease for the period beginning June 1, 2018
and ending May 31, 2023 and includes escalating rent payments. The lease met the operating lease requirements and has been
accounted for as such; see Note 12.
Note 19 Dispositions and Closures
Associated with the closure of Bristol Fab in 2014, Bristol Fab's collective bargaining agreement with the Union expired and the
Company was legally obligated to pay a withdrawal liability to the Union's pension fund of approximately $1,904,628. This
obligation was payable over 26 months ending October 1, 2016 with an interest rate of 4.51 percent.
During 2016, the Company successfully completed the items and processes identified when the one-time closing charges were
developed. A charge of $99,334 and $1,251,058, net of tax respectively, was recorded as discontinued operations during 2016 and
2015 for a legal claim filed against Synalloy Fabrication as discussed in Note 13. The matter was settled during 2016 and the
settlement was paid in full by September 2016. As such, the facility closing reserve was zero as of December 31, 2016. Bristol
Fab was reported as a part of the Metals Segment.
52
The Company's results from discontinued operations are summarized below:
Net sales
Loss before income taxes
Benefit from income taxes
Net loss from discontinued operations
Note 20 Payment of Dividends
2016
2015
$
$
$
— $
—
(150,334) $ (1,902,058)
(51,000)
(651,000)
(99,334) $ (1,251,058)
At the end of each fiscal year the Board reviews the financial performance and capital needed to support future growth to determine
the amount of cash dividend, if any, which is appropriate. In 2017, the Company paid a $0.13 cash dividend on November 6, 2017
for a total of $1,148,513. In 2016, no dividends were declared or paid by the Company. In 2015, the Company paid a $0.30 cash
dividend on December 8, 2015 for a total payment of $2,617,513.
Note 21 Business Interruption Proceeds and Gain on Casualty Loss
On April 30, 2015, the Company's fiberglass tank fabrication facility at the Palmer complex in Andrews, Texas suffered fire damage
including minor structural damage as well as damage to the electrical system and overhead cranes. The Company completed repairs
to the facility and the losses were fully insured including business interruption coverage. Total business interruption insurance
recoveries recognized during the year ended December 31, 2015 were $1,246,024 and is shown separately in operating income
on the accompanying consolidated statements of operations. During the fourth quarter of 2015, the Company completed the
insurance claim settlement for the fire and recorded a casualty insurance gain of $923,470, representing the excess of insurance
proceeds over the net book value of assets damaged in the loss, and is shown separately in other income on the accompanying
consolidated statements of operations for the year ended December 31, 2015.
Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America. Management has excluded the Munhall facility's operations (acquired in the MUSA Stainless acquisition) from
its assessment of internal control over financial reporting as of December 31, 2017 because this material acquisition closed in the
first quarter of 2017. Total assets of $20.2 million and total revenue of $25.8 million associated with the Munhall facility represent
approximately 15 percent and 17 percent, respectively, of the related financial statement amounts of the Metals Segment as of,
and for the year ended, December 31, 2017.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 may deteriorate.
Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December
31, 2017 using the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in the Internal
Control-Integrated Framework (COSO 2013). Based on that evaluation, management believes the Company's internal control
over financial reporting was effective as of December 31, 2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017, has been audited by KPMG
LLP, an independent registered public accounting firm, which also audited the Company's Consolidated Financial Statements for
the year ended December 31, 2017. KPMG LLP's report on the Company's internal control over financial reporting is set forth
below.
53
Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting that occurred during the Company's fourth quarter
that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company believes that its disclosure controls and procedures were operating effectively as of December 31, 2017.
54
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Synalloy Corporation and subsidiaries (the “Company”) as of
December 31, 2017 and 2016, the related consolidated statements of operations and other comprehensive income, shareholders’
equity, and cash flows for each of the years in the three year period ended December 31, 2017, and the related notes and financial
statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results
of its operations and its cash flows for each of the years in the three year period ended December 31, 2017, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 13, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Richmond Virginia
March 13, 2018
55
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Synalloy Corporation and subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements
of operations and other comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2017, and the related notes and financial statement schedule II (collectively, the consolidated financial
statements), and our report dated March 13, 2018 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired certain assets of Marcegaglia USA, Inc. (the Munhall facility) during 2017, and management excluded
from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, the
Munhall facility’s internal control over financial reporting associated with total assets (including amounts resulting from the
purchase price allocation) of $20.2 million and total revenues of $25.8 million included in the consolidated financial statements
of the Company as of and for the year ended December 31, 2017. Our audit of internal control over financial reporting of the
Company also excluded an evaluation of the internal control over financial reporting of the Munhall facility.
Basis for Opinion
The Company’s management is responsible 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 the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. 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 audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
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.
56
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.
/s/ KPMG LLP
Richmond, Virginia
March 13, 2018
57
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer, the Company conducted an evaluation of the effectiveness of the Company’s
disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934 (the “Exchange Act”), as amended. Based on this evaluation, the Chief Executive Officer, Chief Financial Officer and
Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of December
31, 2017. There have been no significant changes in the Company’s internal controls or in other factors that could significantly
affect the internal controls subsequent to the date the Company completed the evaluation. Management has excluded the Munhall
facility's operations (acquired in the MUSA Stainless acquisition) from its assessment of internal control over financial reporting
as of December 31, 2017 because this material acquisition closed in the first quarter of 2017. Total assets of $20.2 million and
total revenue of $25.8 million associated with the Munhall facility represent approximately 15 percent and 17 percent, respectively,
of the related financial statement amounts of the Metals Segment as of, and for the year ended, December 31, 2017.
Item 9B Other Information
Not applicable.
PART III
Item 10 Directors, Executive Officers and Corporate Governance
In accordance with General Instruction G(3), information called for by Part III, Item 10, is incorporated herein by reference from
the information appearing under the caption "Proposal 1 - Election of Directors," "Executive Officers," and "Section 16(a) Beneficial
Ownership Reporting Compliance” in the definitive Proxy Statement for the 2016 Annual Meeting of Shareholders, which definitive
Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Code of Ethics. The Company's Board of Directors has adopted a Code of Ethics that applies to the Company's Chief Executive
Officer, Chief Financial Officer 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 website.
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 Anthony
A. Callander, Henry L. Guy and James W. Terry.
Audit Committee Financial Expert. The Company's Board of Directors has determined that the Company has at least one "audit
committee financial expert," as that term is defined by Item 407(d)(5) of Regulation S-K promulgated by the Securities and
Exchange Commission, serving on its Audit Committee. Mr. Anthony A. Callander meets the terms of the definition and is
independent, as independence is defined for audit committee members in the rules of the NASDAQ Global Market. Pursuant to
the terms of Item 407(d) of Regulation S-K, a person who is determined to be an "audit committee financial expert" will not be
deemed an expert for any purpose as a result of being designated or identified as an "audit committee financial expert" pursuant
to Item 407(d), and such designation or identification does not impose on such person any duties, obligations or liability that are
greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and Board of Directors
in the absence of such designation or identification. Further, the designation or identification of a person as an "audit committee
financial expert" pursuant to Item 407(d) does not affect the duties, obligations or liability of any other member of the Audit
Committee or Board of Directors.
Item 11 Executive Compensation
In accordance with General Instruction G(3), information called for by Part III, Item 11, is incorporated herein by reference from
the information appearing under the caption "Board of Directors and Committees - Compensation Committee Interlocks and
58
Insider Participation," "Director Compensation," "Discussion of Executive Compensation" and "Compensation Committee Report"
in the definitive Proxy Statement for the 2018 Annual Meeting of Stockholders, which definitive Proxy Statement will be filed
electronically with the SEC pursuant to Regulation 14A.
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
In accordance with General Instruction G(3), information called for by Part III, Item 12, is incorporated by reference from the
information appearing under the caption "Beneficial Owners of More Than Five Percent of the Company's Common Stock" and
"Security Ownership of Certain Beneficial Owners and Management" in the definitive Proxy Statement for the 2018 Annual
Meeting of Shareholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Equity Compensation Plan Information. The following table sets forth aggregated information as of December 31, 2017 about
all of the Company's equity compensation plans.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted
average
exercise price of
outstanding
options,
warrants and
rights
(b)
145,511
$
—
12.96
—
12.96
Total
(1) Represents shares remaining available for issuance under the 2015 Stock Awards Plan and the 2011 Plan.
145,511
$
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)) (1)
(c)
192,984
—
192,984
Non-employee directors are paid an annual retainer of $95,000, and each director has the opportunity to elect to receive 100 percent
of the retainer in restricted stock. For 2017, non-employee directors received an aggregate of $287,500 of the annual retainer in
restricted stock. The number of restricted shares is determined by the average of the high and low sale price of the Company's
stock on the day prior to the Annual Meeting of Shareholders. For 2017, six non-employee directors each received an aggregate
of 24,209 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.
Item 13 Certain Relationships and Related Transactions
In accordance with General Instruction G(3), information called for by Part III, Item 13, is incorporated by reference from the
information appearing under the caption "Board of Directors and Committees – Related Party Transactions" and "– Director
Independence" in the definitive Proxy Statement for the 2017 Annual Meeting of Shareholders, which definitive Proxy Statement
will be filed electronically with the SEC pursuant to Regulation 14A.
Item 14 Principal Accountant Fees and Services
In accordance with General Instruction G(3), information called for by Part III, Item 14, is incorporated by reference from the
information appearing under the caption "Independent Registered Public Accounting Firm - Fees Paid to Independent Registered
Public Accounting Firm" and "– Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Registered Public Accounting Firm" in the definitive Proxy Statement for the 2017 Annual Meeting of Shareholders, which
definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
59
PART IV
Item 15 Exhibits and Financial Statement Schedules
(a) The following documents are filed as a part of this report:
1. Financial Statements: The following consolidated financial statements of Synalloy Corporation are included in Part II,
Item 8:
Consolidated Balance Sheets at December 31, 2017 and December 31, 2016
Consolidated Statements of Operations for the years ended December 31, 2017, December 31, 2016 and December
31, 2015
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, December 31, 2016 and
December 31, 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, December 31, 2016 and December
31, 2015
Notes to Consolidated Financial Statements
2. Financial Statements Schedules: The following consolidated financial statements schedule of Synalloy Corporation is
included in Item 15:
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2017, December 31, 2016 and
December 31, 2015
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"
60
Schedule II Valuation and Qualifying Accounts
Column A
Column B
Column C
Column D
Column E
Description
Year ended December 31, 2017
Deducted from asset account:
Allowance for doubtful accounts
Inventory reserves
Year ended December 31, 2016
Deducted from asset account:
Allowance for doubtful accounts
Inventory reserves
Year ended December 31, 2015
Deducted from asset account:
Allowance for doubtful accounts
Inventory reserves
Balance at
Beginning of
Period
Charged to
(Reduction of)
Cost and
Expenses
Deductions
Balance at End
of Period
$
$
$
$
$
$
82,000
966,000
247,000
682,000
1,115,000
725,000
$
$
$
$
$
$
202,000
1,237,000
(45,000)
984,000
104,000
767,000
$
$
$
$
$
$
(249,000)
(1,506,000)
(120,000)
(700,000)
$
$
$
$
35,000
697,000
82,000
966,000
(972,000) (a) $
(810,000)
$
247,000
682,000
(a) Allowance for doubtful accounts deductions for 2015 includes an $801,000 payment to the former owners of Palmer. Per the
Stock Purchase Agreement between the former owners of Palmer and the Company (the "SPA"), the former owners of Palmer
reimbursed Synalloy for all uncollected accounts receivable after 120 days of Synalloy's ownership. Synalloy increased the
allowance for doubtful accounts to reflect the $801,000 payment to offset the outstanding accounts receivable at that time.
Over the next two years, Synalloy collected approximately $299,000 on these old accounts and the accounts receivable balance
was reduced accordingly. The SPA did not require the reimbursement of these subsequent collections to the former owners of
Palmer; however, Synalloy management, on our own recognizance during the second quarter of 2015, reimbursed the $299,000
collected on these old accounts and eliminated the outstanding receivable and allowance for doubtful accounts balances. This
transaction had no effect on earnings during any period.
61
Index to Exhibits
Exhibit No.
from
Item 601 of
Regulation S-K
1.1
3.1
Description
Underwriting Agreement dated September 24, 2013, incorporated by reference to Registrant's Form 8-K
filed September 24, 2013
Restated Certificate of Incorporation of Registrant, as amended, incorporated by reference to Registrant's
Form 10-Q for the period ended April 2, 2005
3.2 Restated Certificate of Incorporation of Registrant, as amended, incorporated by reference to Registrant's
Form 8-K filed May 18, 2015
3.3 Bylaws of Registrant, incorporated by reference to Registrant's Form 10-Q for the period ended March 31,
2001, as amended, which amendments are incorporated by reference to Registrant's Form 8-K filed
August 13, 2007
4.1 Form of Common Stock Certificate, incorporated by reference to Registrant's Form 10-Q for the period
ended March 31, 2001
10.1
Synalloy Corporation 2005 Stock Awards Plan, incorporated by reference to the Proxy Statement for the
2005 Annual Meeting of Shareholders
10.2 Synalloy Corporation 2015 Stock Awards Plan, incorporated by reference to the Proxy Statement for the
2015 Annual Meeting of Shareholders
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
Amendment 2 to the Synalloy Corporation 2005 Stock Awards Plan, incorporated by reference to
Registrant's Form 10-K for the year ended January 3, 2015
2011 Long-Term Incentive Stock Option Plan, incorporated by reference to Registrant's Proxy Statement
for the 2011 Annual Meeting of Shareholders
2015 Short-Term Cash Incentive and Restricted Stock Incentive Plan, incorporated by reference to
Registrant's Form 10-K for the year ended December 31, 2015
2016 Short-Term Cash Incentive and Restricted Stock Incentive Plan, incorporated by reference to the
Registrant's Form 10-K for the year ended December 31, 2016
10.3
10.4
10.5
10.6
10.7
10.8
2017 Short-Term Cash Incentive and Restricted Stock Incentive Plan
10.9 Agreement between Registrant's Bristol Metals, LLC subsidiary and the United Steelworkers of America
Local 4586, dated February 1, 2015, incorporated by reference to Registrant's From 10-K for the year
ended December 31, 2015
10.10 Agreement between Registrant's Specialty Pipe & Tube, Inc. subsidiary and the United Steel, Paper and
Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union Local
4564-07, dated July 1, 2014, incorporated by reference to Registrant's Form 10-K for the year ended
January 3, 2015
10.11 Agreement between Registrant's Bristol Metals, LLC subsidiary and the United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union Local 5852-22,
dated March 12, 2018, but effective January 6, 2018
10.12 Second Amended and Restated Loan Agreement, dated as of August 31, 2016, between Registrant and
Branch Banking and Trust (“BB&T”), incorporated by reference to Registrant's Form 10-Q for the period
ended September 30, 2016
10.13 Third Amended and Restated Loan Agreement, dated as of October 30, 2017, between Registrant and
BB&T, incorporated by reference to Registrant's Form 10-Q for the period ended September 30, 2017
10.14 Employment Agreement dated January 24, 2011, between Registrant and Craig C. Bram, incorporated by
reference to Registrant's Form 10-K for the year ended January 1, 2011
10.15 Amended Employment Agreement dated January 24, 2012, between Registrant and Craig C. Bram,
incorporated by reference to Registrant's Form 10-K for the year ended December 31, 2011
10.16 Amended Employment Agreement dated January 24, 2013, between Registrant and Craig C. Bram,
incorporated by reference to Registrant's Form 10-K for the year ended December 29, 2012
10.17 Amended Employment Agreement dated June 1, 2013, between Registrant and Craig C. Bram,
incorporated by reference to Registrant's Form 8-K filed June 28, 2013
10.18 Amended Employment Agreement dated May 1, 2014, between Registrant and Craig C. Bram,
incorporated by reference to Registrant's Form 10-K for the year ended January 3, 2015
10.19 Employment Agreement dated January 11, 2016, between Registrant and Dennis M. Loughran,
incorporated by reference to Registrant's Form 8-K filed January 11, 2016.
62
10.20 Employment Agreement dated January 11, 2016, between Registrant and J. Kyle Pennington, incorporated
by reference to Registrant's Form 8-K filed January 11, 2016.
10.21 Employment Agreement dated January 11, 2016, between Registrant and James G. Gibson, incorporated
by reference to Registrant's Form 8-K filed January 11, 2016.
10.22 Stock Purchase Agreement, dated as of August 10, 2012, among Jimmie Dean Lee, James Varner, Steven
C. O'Brate and Synalloy Corporation, incorporated by reference to Registrant's Form 8-K filed on August
24, 2012
10.23 Stock Purchase Agreement, dated as of November 21, 2014, between The Davidson Corporation and
Synalloy Corporation, incorporated by reference to Registrant's Form 8-K filed on November 25, 2014
10.24 Purchase and Sale Agreement, dated as of September 1, 2016, by and between Store Capital Acquisition,
LLC and Bristol Metals, LLC, Specialty Pipe & Tube, Inc., Palmer of Texas Tanks, Inc., Manufacturers
Soap & Chemical Company, Manufacturers Chemicals, LLC, and Synalloy Corporation, incorporated by
reference to Registrant's Form 10-Q for the period ended September 30, 2016
10.25 Master Lease Agreement, dated as of September 30, 2016 between Registrant and Store Master Funding
XII, LLC, incorporated by reference to Registrant's Form 10-K for the year ended December 31, 2016
10.26 Asset Purchase Agreement, dated as of December 9, 2016, by and between Marcegaglia USA, Inc. and
Bristol Metals, LLC, as amended by Amendment No. 1 to Asset Purchase Agreement, dated as of
February 28, 2017, by and between Marcegaglia USA, Inc. and Bristol Metals, LLC, incorporated by
reference to Registrant's Form 10-K for the year ended December 31, 2016
21 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP, independent registered public accounting firm
31.1 Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
31.3 Rule 13a-14(a)/15d-14(a) Certification of the Principal Accounting Officer
32 Certifications Pursuant to 18 U.S.C. Section 1350
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
*
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report on
Form 10-K shall be deemed "furnished" and not "filed."
63
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SYNALLOY CORPORATION
By /s/ Craig C. Bram
Craig C. Bram
President and Chief Executive Officer
(principal executive officer)
By /s/ Dennis M. Loughran
Dennis M. Loughran
Senior Vice President and Chief Financial Officer
(principal financial officer)
By /s/ Richard D. Sieradzki
Richard D. Sieradzki
Chief Accounting Officer
(principal accounting officer)
March 13, 2018
Date
March 13, 2018
Date
March 13, 2018
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date indicated.
Registrant
By /s/ Murray H. Wright
Murray H. Wright
Chairman of the Board
By /s/ Anthony A. Callander
Anthony A. Callander
Director
By /s/ Amy J. Michtich
Amy J. Michtich
Director
By /s/ James W. Terry, Jr.
James W. Terry, Jr.
Director
By /s/ Henry L. Guy
Henry L. Guy
Director
By /s/ Susan S. Gayner
Susan S. Gayner
Director
By /s/ Craig C. Bram
Craig C. Bram
Chief Executive Officer and Director
March 13, 2018
Date
March 13, 2018
Date
March 13, 2018
Date
March 13, 2018
Date
March 13, 2018
Date
March 13, 2018
Date
March 13, 2018
Date
64
SHAREHOLDER INFORMATION
CORPORATE OFFICERS
Telephone: (864) 585-3605
www.synalloy.com
Craig C. Bram
Chief Executive Officer & President
Dennis M. Loughran
Senior Vice President &
Chief Financial Officer
Sarah M. Cunningham (Sally)
Vice President, Corporate
Administration
METALS SEGMENT OFFICERS
BRISTOL METALS, LLC
Telephone: (423) 989-4700
www.brismet.com
J. Kyle Pennington
President
John C. Tidlow
Executive Vice President
Kevin L. Van Zandt
Executive Vice President,
Munhall Operations
Carl A. Devine
Vice President, Manufacturing &
Labor Relations
Kristopher T. Epperson
Vice President, Sales
Barry D. Newberry
Vice President, Purchasing & HR
Joshua L. Ringley
Vice President, Business Operations &
Logistics
James P. Hertz
Director of Finance
SPECIALTY CHEMICALS
SEGMENT OFFICERS
SYNALLOY CHEMICALS
TN Telephone: (423) 476-6666
SC Telephone: (864) 862-2399
www.synalloychemicals.com
J. Greg Gibson
President
Charles A. Jones (Tony)
Vice President, Sales
Nataly E. Franks
Director of Finance
PALMER OF TEXAS TANKS, INC.
Telephone: (432) 523-5904
www.palmeroftexas.com
E. Kenny Scudder
Vice President, Sales and Marketing
Stacy L. Montague
Vice President, Business Development
SPECIALTY PIPE & TUBE, INC.
OH Telephone: (330) 505-8262
TX Telephone: (713) 676-2891
www.specialtypipe.com
Steven J. Baroff
President & General Manager
K. Dianne Beck
Vice President
Christopher D. Sitka
Vice President
BOARD OF DIRECTORS
Craig C. Bram
Chief Executive Officer & President
Director since 2004
Anthony A. Callander
Upstate Managing Director,
The Hobbs Group
Director since 2012
Committees: Audit & Corporate
Governance
Susan S. Gayner
CEO & President of Parkland Ventures, Inc.
Director since 2016
Committees: Compensation &
Long-Term Incentive & Corporate
Governance
Henry L. Guy
President & CEO of Modern Holding
Incorporated
Director since 2011
Committees: Audit & Compensation &
Long-Term Incentive
Amy J. Michtich
Chief Supply Chain Officer of Molson
Coors Canada
Director since 2014
Committees: Compensation &
Long-Term Incentive & Corporate
Governance
James W. Terry, Jr.
Director of Strategic Investments,
Hollingsworth Funds, Inc.
Director since 2011
Committees: Audit & Compensation &
Long-Term Incentive
Murray H. Wright
Chairman of the Board, Synalloy
Director since 2001
ANNUAL MEETING
The 2018 Annual Meeting of Shareholders
will be held Thursday, May 17, 2018, at
10:00 a.m. EST, online at
www.virtualshareholdermeeting.com/SYNL2018
TRANSFER AGENT & REGISTRAR
American Stock Transfer & Trust Company
Telephone: (800) 937-5449
6201 15th Avenue, Brooklyn, NY 11219
Attention: Shareholder Services
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
KPMG, LLP, Richmond, VA
GENERAL COUNSEL
Robert A. Peay, Attorney at Law, Richmond, VA
Annual Reports, incorporating the Form 10-K, will be provided free of
charge and may be obtained by calling Investor Relations at
(864) 585-3605, e-mail at invrel@synalloy.com or on our website
at www.synalloy.com. The Form 10-K is also available from the
Securities and Exchange Commission’s website at www.sec.gov.
4510 COX ROAD, SUITE 201, RICHMOND, VA 23060 | SYNALLOY.COM