10-K 1 synl-20161231x10k.htm 10-K Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19687
synalloylogorgba22.jpg
SYNALLOY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
57-0426694
(State of incorporation)
 
(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
 
NASDAQ Global Market
(Title of Class)
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark 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 x  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated Filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No x
Based on the closing price as of June 30, 2016, 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 $63.3 million. Based on the closing price as of March 10, 2017, the aggregate market value of common stock held by non-affiliates of the registrant was $89.7 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 10, 2017 was 8,678,622.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2017 annual shareholders' meeting are incorporated by reference into Part III of this Form 10-K.




Synalloy Corporation
Form 10-K
For Period Ended December 31, 2016
Table of Contents
 
 
 
Page #
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements - KPMG LLP
 
 
Report of Independent Registered Public Accounting Firm - Internal Control - KPMG LLP
 
 
Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements - Dixon Hughes Goodman LLP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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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; 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. On June 3, 1988, the state of incorporation was changed from South Carolina to Delaware. 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. 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; Palmer, located in Andrews, Texas; and Specialty, located in Mineral Ridge, Ohio and Houston, Texas.
BRISMET manufactures welded pipe, 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 quicker

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while minimizing natural gas usage; system improvements in pickling to maintain the proper chemical composition of the pickling acid; and converting the former Bristol Fabrication facility into a heavy wall/quick turn welded pipe production shop by adding a 4,000 ton press along with all necessary ancillary processes.
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 77 percent of total dollar purchases of raw materials, with one supplier furnishing 42 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.
CRI Tolling was acquired by the Company in 2013. CRI Tolling had underutilized manufacturing capacity which allowed the Specialty Chemicals Segment to expand production from MC's Cleveland, Tennessee facility to further penetrate existing markets, as well as develop new ones, including those in the energy industry, and provides redundant production capabilities for key products. The Company invested approximately $3,500,000 in equipment at CRI Tolling during 2014. The new equipment provided CRI Tolling with production capabilities similar to those currently in place at MC's facility and increased the production capacity of the Specialty Chemicals Segment by 60 percent.

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The Specialty Chemicals Segment maintains three 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 46 percent of total purchases are from its top eleven 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.
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 eleven 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 2016 or 2014.
Specialty Chemicals Segment – Specialty chemicals are sold directly to various industries nationwide by five full-time outside sales employees and eleven manufacturers' representatives. The Specialty Chemicals Segment has one customer that accounted for approximately 25 percent of the segment's revenues for 2016 and the same customer accounted for 31 percent of revenues for 2015 and 2014. The concentration of sales to this customer declined in 2016 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 nine 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 are 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.

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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 with negative projected cash flows 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 is structured as an asset purchase and excludes galvanized product 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, equipment and a non-compete agreement. In accordance with the agreement, on December 9, 2016, BRISMET entered into an escrow agreement and deposited $3,000,000 into the escrow fund. This deposit is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet. The deposit was remitted to MUSA at the close of the transaction and was reflected as a credit against the purchase price. Since the transaction closed on February 28, 2017, the purchase accounting is not complete as of the time of this filing. 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.
On November 21, 2014, the Company entered into a Stock Purchase Agreement with The Davidson Corporation, a Delaware corporation ("Davidson"), to purchase all of the issued and outstanding stock of Specialty. The purchase price for the all-cash acquisition was $31,500,000. Davidson had the potential to receive earn-out payments up to a total of $5,000,000 if Specialty achieved targeted sales revenue over a two-year period following closing. Sales revenues did not reach minimum earn-out levels. Therefore, Davidson did not receive any earn-out payments. The purchase price for the acquisition was funded through a combination of cash on hand, a new term loan with the Company's bank and an increase to the Company's credit facility. The financial results for Specialty are reported as a part of the Company's Metals Segment.
On August 29, 2014, the Company completed the sale of all of the issued and outstanding membership interests of its wholly owned subsidiary, Ram-Fab, LLC, a South Carolina limited liability company ("Ram-Fab"), to a subsidiary of Primoris Services Corporation. The transaction was valued at less than $10 million, which consideration included cash at closing, Synalloy's ability to receive potential future earn-out payment(s) and the retention of specified Ram-Fab current assets. The Company did not receive any earn-out payments due to the profitability realized by Primoris on the job that was in process at the time of sale. The Company realized a one-time charge in the third quarter of 2014 of $1,996,000 for costs associated with the sale plus a $947,000 charge to write off the Company's investment in Ram-Fab. These charges, along with all non-recurring revenues and expenses associated with Ram-Fab are included in the respective consolidated financial statements as discontinued operations. Ram-Fab was reported as a part of the Metals Segment.
On June 27, 2014, the Company completed the planned closure of the Bristol Fabrication unit of Synalloy Fabrication, LLC ("Bristol Fab"). Bristol Fab's collective bargaining agreement with the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada Local Union No. 538 (the "Union") expired on February 15, 2014. After lengthy negotiations with the Union, Bristol Fab was unable to reach an agreement. Also, upon closure of the operation, the Company was legally obligated to pay a withdrawal liability to the Union's pension fund of over $1.9 million. The Company realized pre-tax charges in the second quarter of 2016, fourth quarter of 2015 and second quarter of 2014 of $150,000, $1,902,000 and $6,988,000, respectively, for costs associated with the closure of Bristol Fab. These costs, along with all non-recurring revenues and expenses associated with Bristol Fab, are included in the respective consolidated financial statements as discontinued operations. Bristol Fab was reported as a part of the Metals Segment.
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.

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Research and Development Activities
The Company spent approximately $603,000 in 2016, $548,000 in 2015 and $531,000 in 2014 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 commodity pipe sales in the Metals Segment. However, backlogs are important in the Metals Segment's steel and fiberglass tank operations since tanks are produced only after orders are received. Its backlog of open orders were $9,878,000 and $9,964,000 at the end of 2016 and 2015, respectively.
Employee Relations
At December 31, 2016, the Company had 412 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 and Mineral Ridge, Ohio facilities, is 132, or 32 percent of the Company's employees. They are represented by two locals affiliated with the United Steelworkers. Collective bargaining contracts for the Steelworkers will expire in June 2017 and July 2019.
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, 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.


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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 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, 2016, nine suppliers furnished approximately 77 percent of our total dollar purchases of raw materials, with one supplier providing 42 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 4 percent of total purchases were made from our top eleven suppliers during the year ended December 31, 2016. 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 25 percent of revenues for 2016 and the same customer accounted for approximately 31 percent of revenues for 2015 and 2014. The concentration of sales to this customer declined in 2016 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 2016 or 2014. 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.

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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 by 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 profit 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 inventory gains. Conversely, if the price of nickel steadily decreases over time, as it did from 2009 to 2013, the Metals Segment suffers inventory losses. Low nickel prices weighted heavily on stainless steel pipe sales throughout most of 2016, with only late year increases having some minor favorable impacts during the fourth quarter. This resulted in average nickel prices being down 19 percent for the full year of 2016 and up 14 percent for the fourth quarter 2016, when compared to the same periods of the prior year. We will incur inventory 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.

The Company began hedging its nickel exposure during 2016. The program may not eliminate all of 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.


8



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:

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.

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

9



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, 2016, we had 132 employees represented by unions at our Bristol, Tennessee and Mineral Ridge, Ohio facilities, which is 32 percent of the aggregate number of Company employees. These employees are represented by two local unions affiliated with the United Steelworkers (the “Steelworkers Union"). The collective bargaining contracts for the Steelworkers Unions will expire in June 2017 and July 2019. Although we believe that our present labor relations are satisfactory, our failure to renew these agreements on reasonable terms as the current agreements expire could result in labor disruptions and increased labor costs, which could adversely affect our financial performance.

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, 2016. 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.


10



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 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 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, and Christopher D. Sitka, Vice President of Specialty, employees may resign from the Company at any time and seek employment elsewhere, subject to certain non-competition restrictions for a one-year period. 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 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.


11



Our results of operations could be adversely affected by goodwill impairments. Goodwill must be tested at least annually for impairment, and more frequently when circumstances indicate likely impairment. Goodwill is considered impaired to the extent that its carrying amount exceeds its implied fair value. An impairment of goodwill could have a substantial negative effect on our profitability. The Company performed the step zero qualitative test during the fourth quarter of 2016 which resulted in no goodwill impairment for the year ended December 31, 2016.

Our results of operations could be adversely affected by intangible asset impairments. As a result of our acquisitions, we had approximately $12,309,000 of intangible assets on our balance sheet as of December 31, 2016. Intangible assets are amortized over their estimated useful lives using either an accelerated or straight-line method. Intangibles are reviewed for impairment when events or changes in circumstances indicate the carrying value of the intangible asset or group of assets may no longer be recoverable. An impairment of intangible assets could have a substantial negative effect on our profitability.

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.

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 operations 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

12



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 control 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.

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.

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 8K. The parcel of land in Mineral Ridge, OH, the corporate headquarters located in Richmond, VA, and the shared service center located in Spartanburg, SC were excluded from this transaction and continue to be leased by the Company from other parties.
Location
 
Principal Operations
 
Building Square Feet
 
Land Acres
Bristol, TN
 
Manufacturing stainless steel pipe
 
275,000
 
73.1
Cleveland, TN
 
Chemical manufacturing and warehousing facilities
 
143,000
 
18.8
Fountain Inn, SC
 
Chemical manufacturing and warehousing facilities
 
136,834
 
16.9
Andrews, TX
 
Manufacturing liquid storage solutions and separation equipment
 
122,662
 
19.6
Houston, TX
 
Cutting facility and storage yard for heavy walled pipe
 
29,821
 
10.0
Mineral Ridge, OH
 
Cutting facility and storage yard for heavy walled pipe
 
12,000
 
12.0
Mineral Ridge, OH
 
Storage yard for heavy walled pipe
 
 
4.6
Richmond, VA
 
Corporate headquarters 
 
5,911
 
Spartanburg, SC
 
Office space for corporate employees and shared service center
 
4,858
 
Augusta, GA
 
Chemical manufacturing (1)
 
 
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 525 common shareholders of record at March 10, 2017. The Company's common stock trades on the NASDAQ Global Market under the trading symbol SYNL. As a result of the Board's review of financial performance and capital needed to support future growth, no dividends were declared or paid in 2016. The Company's credit agreement restricts the payment of dividends indirectly through a minimum fixed charge coverage covenant. The Company paid a $0.30 cash dividend on December 8, 2015 and a $0.30 cash dividend on December 9, 2014. 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.
 
 
2016
 
2015
Quarter
 
High
 
Low
 
High
 
Low
1st
 
$
10.07

 
$
6.42

 
$
18.49

 
$
14.25

2nd
 
8.50

 
7.25

 
15.00

 
13.25

3rd
 
9.68

 
6.56

 
13.79

 
7.92

4th
 
11.70

 
8.57

 
10.55

 
6.20

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.
syn-2015010_chartx13414a02.jpg
*$100 invested on 12/31/11 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
 
 
12/11
 
12/12
 
12/13
 
12/14
 
12/15
 
12/16
Synalloy Corporation
 
$
100.00

 
$
141.90

 
$
154.75

 
$
180.75

 
$
73.42

 
$
116.86

Russell 2000
 
100.00

 
116.35

 
161.52

 
169.43

 
161.95

 
196.45

NASDAQ Non-Financial
 
100.00

 
117.61

 
166.99

 
194.19

 
205.76

 
221.55

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 5, 2016, the Company issued an aggregate of 40,991 shares of restricted stock to non-employee directors in lieu of $330,000 of their annual cash retainer fees. Issuance of these shares was not registered under the Securities Act of 1933 based on the exemption provided by Section 4(2) thereof because no public offering was involved.
The Company also issued 21,133 shares of common stock in 2016 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
 
(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
January 1, 2016 - January 31, 2016
 

 
$

 

 
899,600

February 1, 2016 - February 29, 2016
 

 
$

 

 
899,600

March 1, 2016 - March 31, 2016
 
29,500

 
$
8.61

 
29,500

 
870,100

April 1, 2016 - April 30, 2016
 

 
$

 

 
870,100

May 1, 2016 - May 31, 2016
 

 
$

 

 
870,100

June 1, 2016 - June 30, 2016
 

 
$

 

 
870,100

July 1, 2016 - July 31, 2016
 

 
$

 

 
870,100

August 1, 2016 - August 31, 2016
 

 
$

 

 
870,100

September 1, 2016 - September 30, 2016
 
 
 
$

 

 
870,100

October 1, 2016 - October 31, 2016
 

 
$

 

 
870,100

November 1, 2016 - November 30, 2016
 

 
$

 

 
870,100

December 1, 2016 - December 31, 2016
 

 
$

 

 
870,100

Total
 
29,500

 
 
 
29,500

 
 
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 is no guarantee on the exact number of shares that will be purchased by the Company and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. The Stock Repurchase Plan will expire 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)
 
2016
 
2015(c)
 
2014 (a)
 
2013
 
2012
Operations (b)
 
 
 
 
 
 
 
 
 
Net sales
$
138,566

 
$
175,460

 
$
199,505

 
$
196,751

 
$
166,162

Gross profit
16,904

 
25,319

 
32,929

 
19,798

 
19,733

Selling, general & administrative expense(e)
22,673

 
21,938

 
16,530

 
15,987

 
12,399

Goodwill impairment

 
17,158

 

 

 

Operating (loss) income(e)
(8,246
)
 
(13,031
)
 
16,098

 
3,547

 
7,334

Net (loss) income - continuing operations
(6,994
)
 
(10,269
)
 
12,619

 
2,898

 
3,983

Net (loss) income - discontinued operations
(99
)
 
(1,251
)
 
(7,157
)
 
(1,137
)
 
252

Net (loss) income
(7,093
)
 
(11,520
)
 
5,462

 
1,761

 
4,235

Financial Position
 
 
 
 
 
 
 
 
 

Total assets(d), (e)
138,638

 
149,043

 
187,633

 
163,068

 
148,299

Working capital(d)
64,732

 
58,304

 
64,580

 
74,988

 
65,919

Long-term debt, less current portion(e)
8,804

 
23,410

 
27,039

 
20,713

 
37,385

Shareholders' equity
88,593

 
95,154

 
109,454

 
106,098

 
71,774

Financial Ratios
 
 
 
 
 
 
 
 
 

Current ratio(d),(e)
3.0:1

 
3.2:1

 
2.6:1

 
4.0:1

 
3.6:1

Gross profit to net sales (b)
12
 %
 
14
 %
 
17
%
 
10
%
 
12
%
Long-term debt to capital(e)
9
 %
 
20
 %
 
20
%
 
16
%
 
34
%
Return on average assets (b), (d), (e)
(4
)%
 
(6
)%
 
7
%
 
2
%
 
3
%
Return on average equity (b)
(7
)%
 
(10
)%
 
12
%
 
3
%
 
6
%
Per Share Data (Income/(Loss) – Diluted) 
 
 
 
 
 
 
 
 
 

Net (loss) income - continuing operations
$
(0.81
)
 
$
(1.18
)
 
$
1.45

 
$
0.42

 
$
0.62

Net (loss) income - discontinued operations
(0.01
)
 
(0.14
)
 
(0.82
)
 
(0.16
)
 
0.04

Net (loss) income
(0.82
)
 
(1.32
)
 
0.63

 
0.25

 
0.66

Dividends declared and paid

 
0.30

 
0.30

 
0.26

 
0.25

Book value
10.22

 
11.02

 
12.57

 
12.21

 
11.29

Other Data
 
 
 
 
 
 
 
 
 

Depreciation and amortization (b), (e)
$
6,695

 
$
6,634

 
$
5,132

 
$
4,625

 
$
2,952

Capital expenditures (b)
3,044

 
10,905

 
8,066

 
5,648

 
4,542

Employees at year end
412

 
411

 
464

 
670

 
597

Shareholders of record at year end
527

 
540

 
575

 
619

 
669

Average shares outstanding - diluted
8,650

 
8,710

 
8,715

 
6,947

 
6,394

Stock Price
 
 
 
 
 
 
 
 
 

Price range of common stock
 
 
 
 
 
 
 
 
 

High
$
11.70

 
$
18.49

 
$
18.84

 
$
17.38

 
$
14.97

Low
6.42

 
6.20

 
13.14

 
12.53

 
10.21

Close
10.95

 
6.88

 
17.67

 
15.53

 
13.49

(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. Concurrently, amortization expense is reclassified from amortization expense (included in selling, general, administrative expense) to interest expense.

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 allowances for doubtful accounts of approximately $82,000 as of December 31, 2016, 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. As of December 31, 2016 and December 31, 2015, an adjustment 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 finished pipe is ultimately sold to the customer approximately five months later, the then-current nickel surcharge is used to determine the proper selling prices. A lower of cost or market 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. A $43,000 and $1,237,000 adjustment was required at December 31, 2016 and December 31, 2015, respectively, for reductions in nickel surcharge. At December 31, 2016, an adjustment of $93,000 was required by our storage tank facility as lower demand for oil and gas products caused selling prices to fall below inventory cost for certain tanks. No adjustment was needed at December 31, 2015 for tank inventory.
The Company establishes inventory reserves for:
Estimated obsolete or unmarketable inventory. As of December 31, 2016 and December 31, 2015, 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 $697,000 and $658,000 at December 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, the Company had $269,000 and $24,000, respectively, reserved for 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 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.

18



Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations in accordance with 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 two-step 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 two-step approach will be followed. The initial step of the two-step quantitative approach of the goodwill impairment test 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 and the second step, which is a calculation of the impairment, is not performed. 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 the implied fair value of the goodwill is recorded. Implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to the assets and liabilities of the reporting unit as if it had been acquired in a business combination. The excess of the fair value of the reporting unit over the amounts allocated to assets and liabilities is the implied fair value of goodwill. The Company performed the step zero qualitative test during the fourth quarter of 2016 which resulted in no impairment of the goodwill recognized of $1,355,000 for the Specialty Chemicals Segment for the year ended December 31, 2016.
When the two-step quantitative approached 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.
Liquidity and Capital Resources
Cash flows provided by continuing operating activities during 2016 and 2015 totaled $5,301,000 and $17,312,000, respectively, a reduction of cash flows of $12,011,000. Net income from continuing operations generated $2,073,000 in cash flows for 2016 after adding back depreciation and amortization expense of $6,695,000 and the loss on the sale of property, plant and equipment resulting from the sale-leaseback of $2,372,000, a decrease of $6,553,000 from $8,626,000 for 2015. In addition to adding back depreciation and amortization, the prior year amount also added back the goodwill impairment charge and deducted the gain on the earn-out liability which did not recur in 2016. Accounts receivable from continuing operations used cash of $37,000 during 2016 as sales increased three percent for the last two months of the year when compared to the same period of the prior year. Accounts receivable days outstanding, calculated on a three-month average basis, decreased two days during 2016, decreasing from 53.6 days at the end of 2015 to 51.5 at the end of 2016. Inventory generated $2,033,000 of cash as year-over-year inventory levels decreased to correspond with lower sales volumes. Inventory turns, calculated on a three-month average basis, were relatively unchanged, increasing to 1.90 turns at the end of 2016 from 1.89 turns at the end of 2015. Accounts payable favorably affected cash flows from continuing operations by $4,419,000 in 2016 entirely in the Metals Segment as BRISMET purchased a large amount of inventory in December to obtain favorable pricing for an order that is scheduled to ship in early 2017 combined with increased inventory purchases for Palmer and Specialty to support projected 2017 sales levels. Also, accounts payable days outstanding at year-end 2016 was increased by approximately seven days to 52 days. Finally, the change in other assets and accrued expenses resulted mainly from an $11,000,000 non-cash 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. The Company is completely indemnified by the former shareholders of Palmer and, accordingly, a corresponding indemnified receivable was also recorded. This litigation is more fully described in Note 13.
Cash flows provided by continuing operating activities during 2015 and 2014 totaled $17,312,000 and $28,104,000 respectively, a decrease in cash flows of $10,792,000. Cash flows in 2015 were generated from net income from continuing operations totaling $8,626,000 after adding back depreciation and amortization expense of $6,634,000, the goodwill impairment charge of $17,158,000

19



and deducting the gain on the earn-out liability of $4,897,000, a decrease from the prior year of $5,588,000. Accounts receivable from continuing operations generated $11,381,000 cash during 2015 as sales decreased 27 percent for the fourth quarter of 2015 compared to the fourth quarter of 2014. Accounts receivable days outstanding remained relatively stable, decreasing from 54.9 days at the end of 2014 to 53.6 days at the end of 2015. Accounts payable negatively affected cash flows from continuing operations by $9,122,000 in 2015 as the significant inventory purchases made during the fourth quarter of 2014 in the Metals Segment, which increased the 2014 year-end accounts payable balance, were paid during 2015. Accounts payable days outstanding was consistent at 45 days for both years. Accrued income taxes generated $3,037,000 as the Company received excess tax deposits when the 2014 tax returns were filed. In prior year, these excess payments would have been applied to the subsequent year tax deposits. A decrease in inventory generated $4,173,000 of cash during 2015. This resulted from selling the incremental inventory purchased by the Metals Segment at the end of 2014 combined with a Company directive to lower inventory levels during 2015. Inventory turns, calculated on a three month basis, decreased from 3.16 turns at the end of 2014 to 1.89 turns at the end of 2015. The 2015 calculation includes Specialty's values which, by definition of being a master pipe distributor, has a lower turnover rate.
In 2016, the Company's current assets and current liabilities increased $12,407,000 and $5,979,000, respectively, from the year ended 2015 amounts, which caused working capital for 2016 to increase by $6,428,000 to $64,732,000 from the 2015 total of $58,304,000. The current ratio for the year ended December 31, 2016, decreased to 3.0:1 from the 2015 year-end ratio of 3.2:1.
The Company generated cash from investing activities during 2016 of $17,673,000. During the fourth quarter 2016, a $3,000,000 escrow deposit was made in conjunction with the Marcegaglia USA acquisition, which will be used to offset total funds due at closing. The sale-leaseback transaction, which is discussed in Note 12 to the Consolidated Financial Statements included in Item 8 of this Form 10-K, resulted in net proceeds of $21,925,000. Financing activities during 2016 used cash of $19,459,000 as the proceeds from the sale-leaseback transaction was used to pay down long-term debt. No dividends were declared during 2016.
In connection with the Specialty acquisition discussed in Note 18 to the Consolidated Financial Statements included in Item 8 of this Form 10-K, on November 21, 2014, the Company modified its Credit Agreement to increase the limit of the current revolving line of credit (the "Line") by $15,000,000 to a maximum of $40,000,000, and extended the maturity date to November 21, 2017. The Total Funded Debt to EBITDA ratio (as defined in the Credit Agreement), tangible net worth floor (as defined in the Credit Agreement), and Total Liabilities to Tangible Net Worth ratio (as defined in the Credit Agreement) were changed as a result of this modification. None of the other provisions of the Credit Agreement were changed as a result of this modification. Interest on the Credit Agreement is calculated using the One Month LIBOR (as defined in the Credit Agreement), plus a pre-defined spread, based on the Company's Total Funded Debt to EBITDA ratio (as defined in the Credit Agreement).
The Credit Agreement modification on November 21, 2014, also provided for a five-year term loan (the "Specialty note"), expiring November 21, 2019, in the amount of $10,000,000 that required equal monthly payments of $166,667, plus interest, calculated using the One Month LIBOR (as defined in the Credit Agreement), plus a pre-defined spread, based on the Company's Total Funded Debt to EBITDA ratio (as defined in the Credit Agreement). On August 31, 2016, the balance of this note was refinanced and consolidated into the Line as part of the amendment to the Credit Agreement discussed below.
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 the existing line of credit, the Palmer note, and the Specialty note in the aggregate amount of approximately $24,200,000. The maturity date of the Line is February 28, 2019. Interest on the Line is calculated using the One Month LIBOR Rate (as defined in the Credit Agreement), plus a pre-defined spread. Borrowings under the Line 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 evaluated this transaction in accordance with Accounting Standards Codification ("ASC") 470-50-40-10 and ASC 470-50-40-21 and 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 ("PSA"), as described in Note 12. 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. At December 31, 2016, the Company was in compliance with all debt covenants.
Results of Operations
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

20



recorded a net loss from continuing operations of $1,435,000, 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 for one-time acquisition costs associated with the Marcegaglia USA acquisition in 2016 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.
Comparison of 2015 to 2014 – Consolidated
For the full-year 2015, the net loss from continuing operations totaled $10,269,000, or $1.18 loss per share. This compared to full-year 2014 net earnings from continuing operations of $12,619,000, or $1.45 per share. For the fourth quarter of 2015 the Company recorded a net loss from continuing operations of $17,717,000, or $2.04 loss per share. This compares to net earnings from continuing operations of $1,409,000, or $0.16 per share for fourth quarter of 2014.The fourth quarter and full-year 2015 results were impacted by a fourth quarter 2015 pretax charge of $17,158,000, representing the impairment of goodwill for two Metals Segment business units, Palmer and Specialty. The non-cash charge represents the application of ASC Topic 350 requiring (at least annual) impairment assessments of goodwill recorded by our business units. This assessment involves a comparison of the book value of the business units to fair value determined through analysis of management’s financial projections, as well as consideration of our market capitalization. The results of the impairment analysis were significantly impacted by the Company’s stock price of $6.88 per share at December 31, 2015. A more detailed description of the accounting assessment is provided below.
Consolidated gross profit from continuing operations decreased 23 percent to $25,319,000 in 2015, compared to $32,929,000 in 2014, and, as a percent of sales, decreased to 14 percent of sales in 2015 compared to 17 percent of sales in 2014. For the fourth quarter of 2015, consolidated gross profit from continuing operations was $3,424,000, a decrease of 58 percent from the fourth quarter of 2014 of $8,247,000. Consolidated gross profit from continuing operations was ten percent of sales for the fourth quarter of 2015 and 17 percent of sales for same period of 2014. The decreases in dollars and in percentage of sales were attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2015 to 2014 below. Consolidated selling, general and administrative expense from continuing operations for 2015 increased by $5,409,000 to $21,938,000, or 13 percent of sales, compared to $16,529,000, or eight percent of sales for 2014. These costs increased $1,203,000 during the fourth quarter of 2015 compared to the same period of 2014 and were 16 percent of sales for the fourth quarter 2015 compared to nine percent of sales for the fourth quarter of 2014. The dollar increase for both the year and fourth quarter of 2015 when compared to the same periods of 2014 resulted primarily from the inclusion of Specialty's selling, general and administrative expenses for the entire year and quarter for 2015. Since Specialty was acquired in November 2014, only a portion of their selling, general, and administrative expenses were included in the prior year. This accounted for $3,746,000 and $561,000 of the annual and fourth quarter increase in selling, general and administrative costs for 2015. The remainder of the increase resulted from higher professional fees and increased salaries and wages, partly offset by lower incentive based bonuses and sales commissions. In addition, the Company incurred $500,000 for one-time acquisition costs associated with the Specialty acquisition in 2015 compared to $302,000 of one-time acquisition costs associated with this acquisition in 2014. These costs were $46,000 and $305,000 for the fourth quarters of 2015 and 2014, respectively. All of these items will be discussed in greater detail in the respective sections below.

21



Metals Segment – The following table summarizes operating results from continuing operations and backlogs 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.
 
2016
 
2015
 
2014
(in thousands)
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
90,215

 
100.0
 %
 
$
114,908

 
100.0
 %
 
$
134,304

 
100.0
%
Cost of goods sold
82,676

 
91.6
 %
 
100,077

 
87.1
 %
 
112,486

 
83.8
%
Gross profit
7,539

 
8.4
 %
 
14,831

 
12.9
 %
 
21,818

 
16.2
%
Selling, general and administrative expense
12,360

 
13.7
 %
 
12,009

 
10.5
 %
 
8,307

 
6.2
%
Goodwill impairment

 
 %
 
17,158

 
14.9
 %
 

 
%
Business interruption proceeds

 
 %
 
(1,246
)
 
(1.1
)%
 

 
%
Loss on sale-leaseback
2,166

 
2.4
 %
 

 
 %
 

 
%
Operating (loss) income
$
(6,987
)
 
(7.7
)%
 
$
(13,090
)
 
(11.4
)%
 
$
13,511

 
10.1
%
Year-end backlog - Storage tanks
$
9,878

 
 
 
$
9,964

 
 
 
$
12,229

 
 

 
Comparison of 2016 to 2015 – Metals Segment
The Metals Segment 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 Basis and other Palmer of Texas 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.

22



d)
As a result of continued low nickel prices during 2016, the Company experienced inventory margin compression of approximately $5,751,000 and $194,000 for the full-year and fourth quarter of 2016. This compares to inventory margin compression 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).
Comparison of 2015 to 2014 – Metals Segment
The Metals Segment sales from continuing operations decreased 14 percent for the full-year 2015 as compared to the same period of 2014 and sales for the fourth quarter of 2015 totaled $22,420,000, a decrease of 30 percent compared to 2014 results. The following factors resulted in the decreased sales in 2015. Storage tank sales decreased 38 percent and 50 percent for the year and fourth quarter, respectively, of 2015 when compared to the same periods of 2014. The decrease in storage tank sales for the year and fourth quarter of 2015 when compared to the same periods of 2014 resulted from a decrease in demand for storage tank products due to lower oil prices in 2015 combined with a fire occurring at the facility in late April. The Company was adequately insured for the fire and the proceeds from business interruption insurance payments for May through October were recorded in the operating income section of the Consolidated Statements of Operations. The facility was 100 percent operational at the end of the third quarter of 2015.
Incremental sales of heavy-walled carbon steel pipe and tube products attributable to the Company's November 21, 2014 acquisition of Specialty, accounted for incremental sales of $15,489,000 and $753,000 for the year and fourth quarter, respectively, of 2015.
Stainless steel pipe sales from continuing operations decreased 23 percent and 31 percent for the year and fourth quarter, respectively, of 2015 when compared to the prior year. The pipe sales decrease for the year resulted from an eleven percent decrease in average unit volumes and a twelve percent decrease in average selling prices. The Metals Segment's commodity unit volumes for the year of 2015 decreased twelve percent while non-commodity unit volumes decreased approximately eight percent. Selling prices for commodity pipe decreased approximately eight percent while selling prices for non-commodity pipe decreased 20 percent. The non-commodity price decrease was largely attributable to mix differences between the years.
The pipe sales decrease for the fourth quarter of 2015 resulted from an approximate twelve percent decrease in average unit volumes combined with an approximate 20 percent decrease in average selling prices. In the fourth quarter 2015, the Metals Segment's commodity unit volumes decreased approximately one percent while non-commodity unit volumes decreased approximately 33 percent. Selling prices for commodity pipe decreased 28 percent while selling prices for non-commodity pipe increased one percent.
The sales decreases resulted from low nickel prices in 2015. Decreasing nickel surcharges reduced the price per pound of stainless steel pipe along with delaying re-stocking purchases from the distributors. Also, imports of stainless steel pressure pipe from India have increased at prices well below market prices in the United States. These unfairly traded imports have hurt the domestic industry's sales volumes, pricing and profits. On September 20, 2015, the Company joined three other stainless steel pipe manufacturers and petitioned the Department of Commerce ("DOC") and the U.S. International Trade Commission ("ITC") to apply antidumping and countervailing duties of imports of welded stainless pressure pipe from India. Even though the Company has been successful in past unfair trade proceedings, this case in pending and there is no assurance that this action will result in a favorable outcome to the petitioners.
Operating income from continuing operations for the entire year and fourth quarter of 2015 when compared to the same periods of 2014 was impacted by the following four factors:
a)
The inclusion of the operating results of Specialty for the full year of 2015 compared to one month in 2014. Excluding the goodwill impairment charge which is described below, Specialty had an operating income of $1,611,000 and an operating loss of $90,000 for the full-year and fourth quarter 2015, respectively, compared to $505,000 of operating income for both the full-year and fourth quarter 2014;
b)
Continued low oil and gas prices 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;

23



c)
The dumping of welded stainless pressure pipe from India resulted in lower sales, as well as margin compression during 2015; and
d)
As a result of a continued drop in nickel prices during 2015, the Company experienced inventory losses of approximately $8,079,000 and $2,363,000 for the full-year and fourth quarter 2015, respectively. This compares to inventory losses of approximately $107,000 and $228,000, respectively, for the same periods of 2014.
Selling, general and administrative expense from continuing operations increased $3,702,000, or 45 percent in 2015 when compared to 2014. This expense category was ten percent of sales for 2015 and six percent of sales for 2014. The increase resulted from including selling, general and administrative expenses for Specialty for the entire year for 2015 compared to only six weeks in 2014. These higher costs amounted to $3,746,000.
The fire at the storage tank facility in late April 2015 shut down the fiberglass fabrication area of the facility resulting in financial losses. These losses were offset by business interruption insurance proceeds of $1,246,000 and $189,000, for the full-year and fourth quarter 2015, respectively.
As a result of the required annual (or more frequent) multi-step analysis to determine whether or not the book value of goodwill is impaired, the Company recognized a pre-tax charge of $17,158,000 representing the combined value of goodwill impairments for the Company's Specialty and Palmer reporting units. During the Company’s performance of the first step in this process the Company employed a discounted cash flow methodology based on management’s financial projections to estimate the fair value of its business units. The results of the discounted cash flow analysis preliminarily indicated that the calculated fair value of the business units was in excess of the book value (including goodwill). However, the Company also considered the large decline in its share price and was required to analyze the difference between fair value determined using market capitalization as its basis, compared to fair value determined using the previously described discounted cash flow method. With the share price decline, the Company's market capitalization at the end of 2015 was less than $60,000,000. This was down from $164,000,000 at the end of 2014. Due to the decline in market capitalization of over $100,000,000 during 2015, the Company's analysis concluded there is an impairment to the goodwill for Specialty and Palmer, both with the most significant exposure to declines in the oil and gas market. While this represents a permanent impairment, it is based on stock pricing dynamics that we do not believe currently reflect the future value of the two impacted business units. In 2015, both businesses were EBITDA positive, during a period we believe represents the bottom of the market for the oil and gas segments of their business. In addition, both businesses have maintained or gained market share, and stand ready to support our customer base when those markets inevitably rebound.
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.
 
2016
 
2015
 
2014
(Amounts in thousands)
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
48,351

 
100.0
%
 
$
60,552

 
100.0
%
 
$
65,201

 
100.0
%
Cost of goods sold
38,884

 
80.4
%
 
50,064

 
82.7
%
 
54,089

 
83.0
%
Gross profit
9,467

 
19.6
%
 
10,488

 
17.3
%
 
11,112

 
17.0
%
Selling, general and administrative expense
4,579

 
9.5
%
 
4,823

 
8.0
%
 
4,982

 
7.6
%
Loss on sale-leaseback
206

 
0.4
%
 

 
%
 

 
%
Operating income
$
4,682

 
9.7
%
 
$
5,665

 
9.4
%
 
$
6,130

 
9.4
%
 
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
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.

24



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 2015 to 2014 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment decreased seven percent from 2014 totaling $60,552,000 for 2015 compared to $65,201,000 in 2014. For the fourth quarter of 2015, sales were $13,145,000, representing a 20 percent decrease from the same quarter of 2014. Pounds shipped during the full-year increased by six percent for 2015 compared to 2014. For the fourth quarter of 2015, pounds shipped decreased ten percent. The annual increase resulted from the ramping up of the BioBased Technologies LLC project in early 2015 offset partially by lower chemical sales into the oil and gas market. Overall selling prices decreased twelve percent and eleven percent for the full-year and fourth quarter, respectively, of 2015 compared to the same periods of 2014. The change in lower selling prices from 2014 on a year-to-date basis is primarily due to lower raw materials costs. While this negatively impacts the Company's top line sales, this is significantly offset by lower input costs.
The Specialty Chemicals Segment's operating income for the full-year of 2015 decreased eight percent to $5,665,000. The fourth quarter of 2015 decreased 23 percent from the prior year quarter to $1,040,000. The decrease in operating income resulted from lower sales, primarily associated with weak demand from the oil and gas sector, combined with higher repairs and maintenance, utilities, waste disposal and depreciation expenses. Tolled products continue to outperform management's acquisition projections and had a positive impact on profitability during the full year of 2015.
Selling, general and administrative expense decreased $165,000 or three percent in 2015 when compared to 2014, which represented eight percent of sales for both periods. For the fourth quarter, selling, general and administrative expense was $1,071,000 in 2015, a decrease of $198,000 when compared to the same period of 2014. These decreases resulted from lower sales commissions in 2015 ($405,000 and $151,000 lower for the full-year and fourth quarter, respectively) and lower incentive based bonuses ($191,000 and $93,000 lower for the full-year and fourth quarter, respectively). For the full-year of 2015, these costs were slightly offset by higher salaries and wages (up $396,000).
Unallocated Income and Expense
Reference should be made to Note 15 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K, for the schedule that includes these items.
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.

25



Acquisition costs of $106,000 for 2016 and $500,000 for 2015 resulted from costs associated with the MUSA and Specialty acquisitions. See Note 18 and Note 22.
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.
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 costs associated with the sale-leaseback transaction for 2016 is as follows:
 
4th Quarter
 
Full-Year
Metals Segment Operating (Income) Loss
$
(60,000
)
 
$
2,166,000

Specialty Chemicals Segment Operating (Income) Loss
(24,000
)
 
206,000

Unallocated Corporate Expenses
64,000

 
165,000

     Total incremental costs
$
(20,000
)
 
$
2,537,000

Comparison of 2015 to 2014 – Corporate
Corporate expenses for 2015 were $5,106,000, or three percent of sales from continuing operations, compared to $3,241,000, or two percent of sales from continuing operations for 2014, an increase of $1,865,000, or 58 percent. The twelve month increase resulted primarily from:
Professional fees increased $1,302,000 from the prior year resulting from the change in the Company's Independent Registered Public Accounting Firm in addition to additional services obtained surrounding income tax provision review, Sarbanes-Oxley compliance, registration statement filing and SEC comment letter response;
Personnel costs were $515,000 higher than the prior year as additional personnel were added to strengthen the Company's corporate staff combined with normal annual rate increases;
Performance based bonuses decreased $427,000 from the prior year due to lower current year profitability;
Travel expenses were $192,000 higher than the prior year in order to provide the necessary oversight to our various facilities; and
Directors' fees increased $125,000 as an additional director was added during 2015 along with increases to the annual retainer during 2015.
It should be noted that $765,000 of these are costs that are not expected to recur in 2016 and beyond.
Acquisition costs of $500,000 during the total year of 2015 mainly represent professional fees associated with the Specialty acquisition.
Interest expense increased to $1,353,000 for 2015 compared to $1,092,000 for 2014. The higher interest expense in 2015 is due to a full year of borrowings on the Company's line of credit plus the additional fixed term bank debt associated with the Specialty acquisition in November 2014. Also, unallocated corporate expenses increased by $42,000 for the change in fair value of the interest rate swap contracts, compared to an increase of $426,000 for the full-year 2014.
During 2014 and 2015, management reviewed the earn-out reserves for the Palmer and Specialty acquisitions and determined there was no likelihood the minimum threshold sales target would be achieved. As a result, the Company recorded favorable adjustments to earn-out payment liabilities totaling $4,897,000 and $3,476,000 for the full years 2015 and 2014, respectively.
In the fourth quarter of 2015 the Company received final proceeds from settlement of the insurance claim for the fire at Palmer and booked a casualty insurance gain of $923,000. That amount represents the value of insurance payments exceeding the net book value of assets damaged in the loss. The favorable casualty gain adjustment was recorded at the parent company level.

26



Other income of $135,000 for the twelve months of 2015 represents life insurance proceeds received in excess of cash surrender value for a former officer of the Company.
Contractual Obligations and Other Commitments
As of December 31, 2016, the Company's contractual obligations and other commitments were as follows:
(Amounts in thousands)
 
 
Payment Obligations for the Year Ended
 
Total
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Revolving credit facility
$
8,804

 
$

 
$

 
$
8,804

 
$

 
$

 
$

Interest on bank debt
481

 
231

 
231

 
19

 

 

 

Capital lease
125

 
71

 
23

 
23

 
8

 

 

Operating leases
47,208

 
2,252

 
2,309

 
2,309

 
2,309

 
2,275

 
35,754

  Deferred compensation (1)
200

 
21

 
21

 
21

 
21

 
17

 
99

Total
$
56,818

 
$
2,575

 
$
2,584

 
$
11,176

 
$
2,338

 
$
2,292

 
$
35,853

(1) 
For a description of the deferred compensation obligation, see Note 8 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Current Conditions and Outlook
The 2017 and 2018 years offer the potential for significant recovery for all of Synalloy’s operating businesses. The Company recently closed on the purchase of the stainless steel pipe assets of MUSA. These assets in combination with BRISMET, creates the largest domestic producer of welded stainless steel pipe in North America. The Company will spend the balance of 2017 integrating the two units and looks forward to realizing cost savings and pursuing opportunities for increased revenue. The prospect of rising commodity prices, both oil and nickel, should continue to benefit the Metals Segment businesses over the next several years. Capital spending in the downstream energy markets, along with infrastructure spending should increase demand for all of the Metals Segment's products.
The Specialty Chemicals Segment has an excellent pipeline of new product opportunities the Company expects to enhance performance as it moves into the second quarter of this year. One recent example is the Company signed a three-year contract to supply a fire retardant product used in the manufacture of telephone and computer cable and expect production to commence in June. This product will be produced at CRI Tolling.

Item 7A Quantitative and Qualitative Disclosures about Market Risks
The Company is exposed to market risks from adverse changes in interest rates. 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, 2016
$8,804,000 under a revolving line of credit with an availability of $30,466,000, expiring on February 28, 2019 with a variable interest rate of 2.62 percent.
An interest rate swap contract with a notional amount of $12,750,000 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 $31,000.

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, 2016 and December 31, 2015
 
2016
 
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
62,873

 
$
391,424

Accounts receivable, less allowance for doubtful accounts of $82,000 and $247,000, respectively
18,028,946

 
17,946,119

Inventories, net
 
 
 
Raw materials
31,973,073

 
34,821,694

Work-in-process
9,897,857

 
5,096,515

Finished goods
18,928,579

 
23,897,426

Total inventories
60,799,509

 
63,815,635

Prepaid expenses and other current assets
7,272,569

 
2,704,958

Indemnified contingencies - see Note 13
11,339,888

 
238,278

Total current assets
97,503,785

 
85,096,414

 
 
 
 
Cash value of life insurance

 
1,500,781

Property, plant and equipment, net
27,324,092

 
46,294,271

Goodwill
1,354,730

 
1,354,730

Intangible assets, net
12,308,838

 
14,745,825

Deferred charges, net and other non-current assets
146,618

 
51,469

 
 
 
 
Total assets
$
138,638,063

 
$
149,043,490

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
16,684,508

 
$
12,265,930

Accrued expenses
16,087,434

 
9,992,868

Current portion of long-term debt

 
4,533,908

Total current liabilities
32,771,942

 
26,792,706

 
 
 
 
Long-term debt, less unamortized debt issuance costs of $0 and $135,915, respectively
8,804,206

 
23,409,886

Long-term deferred gain, sale-leaseback
6,267,623

 

Deferred income taxes
1,609,492

 
3,016,954

Other long-term liabilities
592,245

 
669,650

 
 
 
 
Shareholders' equity
 
 
 
Common stock, par value $1 per share - authorized 24,000,000 shares; issued 10,300,000 shares
10,300,000

 
10,300,000

Capital in excess of par value
34,714,206

 
34,476,240

Retained earnings
57,936,533

 
65,029,474

 
102,950,739

 
109,805,714

Less cost of common stock in treasury - 1,630,690 and 1,663,314 shares, respectively
14,358,184

 
14,651,420

Total shareholders' equity
88,592,555

 
95,154,294

Commitments and contingencies – see Note 13

 

 
 
 
 
Total liabilities and shareholders' equity
$
138,638,063

 
$
149,043,490

 


See accompanying notes to consolidated financial statements.
28



Consolidated Statements of Operations
Years ended December 31, 2016, December 31, 2015 and January 3, 2015
 
2016
 
2015
 
2014
Net sales
$
138,565,782

 
$
175,460,438

 
$
199,504,628

 
 
 
 
 
 
Cost of sales
121,661,303

 
150,141,663

 
166,575,146

 
 
 
 
 
 
Gross profit
16,904,479

 
25,318,775

 
32,929,482

 
 
 
 
 
 
Selling, general and administrative expense
22,672,872

 
21,937,988

 
16,529,438

Acquisition related costs
106,227

 
499,761

 
301,715

Business interruption proceeds

 
(1,246,024
)
 

Goodwill impairment

 
17,158,249

 

Loss on sale-leaseback
2,371,778

 

 

Operating (loss) income
(8,246,398
)
 
(13,031,199
)
 
16,098,329

Other (income) and expense
 

 


 
 

Interest expense
932,572

 
1,352,806

 
1,150,940

Change in fair value of interest rate swap
12,997

 
41,580

 
425,543

Specialty and Palmer earn-out adjustments

 
(4,897,448
)
 
(3,476,197
)
Casualty insurance gain

 
(923,470
)
 

Other, net

 
(134,389
)
 
(6,744
)
(Loss) income before income taxes
(9,191,967
)
 
(8,470,278
)
 
18,004,787

   (Benefit from) provision for income taxes
(2,198,000
)
 
1,799,000

 
5,386,000

 
 
 
 
 
 
Net (loss) income from continuing operations
(6,993,967
)
 
(10,269,278
)
 
12,618,787

 
 
 
 
 
 
Net loss from discontinued operations, net of tax
(99,334
)
 
(1,251,058
)
 
(7,156,524
)
 
 
 
 
 
 
Net (loss) income
$
(7,093,301
)
 
$
(11,520,336
)
 
$
5,462,263

 
 
 
 
 
 
Net (loss) income per common share from continuing operations:
 
 
 
 
 
Basic
$
(0.81
)
 
$
(1.18
)
 
$
1.45

Diluted
$
(0.81
)
 
$
(1.18
)
 
$
1.45

 


 


 


Net loss per diluted common share from discontinued operations:
 

 
 

 
 

Basic
$
(0.01
)
 
$
(0.14
)
 
$
(0.82
)
Diluted
$
(0.01
)
 
$
(0.14
)
 
$
(0.82
)



See accompanying notes to consolidated financial statements.
29



Consolidated Statements of Shareholders' Equity
 
Common Stock
 
Capital in Excess of
Par Value
 
Retained Earnings
 
Cost of Common Stock in Treasury
 
Total
Balance at December 28, 2013
$
10,300,000

 
$
33,657,714

 
$
76,337,597

 
$
(14,197,198
)
 
$
106,098,113

 
 
 
 
 
 
 
 
 
 
Net income

 

 
5,462,263

 

 
5,462,263

Payment of dividends, $0.30 per share

 

 
(2,632,537
)
 

 
(2,632,537
)
Issuance of 14,522 shares of common stock from the treasury

 
(8,341
)
 

 
127,881

 
119,540

Stock options exercised for 7,980 shares, net

 
40,844

 

 
1,173

 
42,017

Employee stock option and grant compensation

 
364,157

 

 

 
364,157

Balance at January 3, 2015
10,300,000

 
34,054,374

 
79,167,323

 
(14,068,144
)
 
109,453,553

 
 
 
 
 
 
 
 
 
 
Net loss

 

 
(11,520,336
)
 

 
(11,520,336
)
Payment of dividends, $0.30 per share

 

 
(2,617,513
)
 

 
(2,617,513
)
Issuance of 26,118 shares of common stock from the treasury

 
(102,237
)
 

 
231,290

 
129,053

Stock options exercised for 666 shares, net

 
2,408

 

 
5,894

 
8,302

Employee stock option and grant compensation

 
521,695

 

 

 
521,695

Purchase of 100,400 shares of common stock

 

 

 
(820,460
)
 
(820,460
)
Balance at December 31, 2015
10,300,000

 
34,476,240

 
65,029,474

 
(14,651,420
)
 
95,154,294

 
 
 
 
 
 
 
 
 
 
Net loss

 

 
(7,093,301
)
 

 
(7,093,301
)
Dividend on stock grant forfeiture

 

 
360

 

 
360

Issuance of 62,124 shares of common stock from the treasury

 
(221,507
)
 

 
547,125

 
325,618

Employee stock option and grant compensation

 
459,473

 

 

 
459,473

Purchase of 29,500 shares of common stock

 

 

 
(253,889
)
 
(253,889
)
Balance at December 31, 2016
$
10,300,000

 
$
34,714,206

 
$
57,936,533

 
$
(14,358,184
)
 
$
88,592,555



See accompanying notes to consolidated financial statements.
30



Consolidated Statements of Cash Flows
Years ended December 31, 2016, December 31, 2015 and January 3, 2015
 
2016
 
2015
 
2014
Operating activities
 
 
 
 
 
Net (loss) income
$
(7,093,301
)
 
$
(11,520,336
)
 
$
5,462,263

Income from discontinued operations, net of tax
99,334

 
1,251,058

 
7,156,524

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 

 
 

 
 

Depreciation expense
4,235,203

 
4,356,911

 
3,724,757

Amortization expense
2,459,787

 
2,277,480

 
1,407,149

Non-cash interest expense on debt issuance costs
72,290

 
120,521

 
59,246

Goodwill impairment

 
17,158,249

 

Deferred income taxes
(1,407,462
)
 
150,462

 
796,916

Earn-out adjustments

 
(4,897,448
)
 
(3,476,197
)
(Reduction of) provision for losses on accounts receivable
(45,151
)
 
60,855

 
72,100

Provision for losses on inventories
983,505

 
2,003,885

 
2,548,196

Loss (gain) on sale of property, plant and equipment
2,294,917

 
(18,277
)
 
26,800

Amortization of gain on sale-leaseback
(83,569
)
 

 

Deferred rent adjustment on sale-leaseback
101,633

 

 

Casualty insurance gain

 
(923,470
)
 

Change in cash value of life insurance
1,502

 
(82,504
)
 
(39,093
)
Change in fair value of interest rate swap
(277,430
)
 
41,581

 
425,543

Change in environmental reserves
140,520

 
(25,000
)
 
(50,000
)
Issuance of treasury stock for director fees
330,000

 
118,762

 
110,501

Employee stock option and grant compensation
459,473

 
521,695

 
364,157

Dividend on stock grant forfeiture
360

 

 

Changes in operating assets and liabilities:
 

 
 

 
 

Accounts receivable
(37,676
)
 
11,380,941

 
3,448,709

Inventories
2,032,621

 
4,173,337

 
(3,298,982
)
Other assets and liabilities
(11,531,707
)
 
(718,787
)
 
(1,164,297
)
Accounts payable
4,418,578

 
(9,122,368
)
 
7,820,957

Accrued expenses
9,441,925

 
(2,034,303
)
 
3,995,534

Accrued income taxes
(1,294,557
)
 
3,038,362

 
(1,287,007
)
Net cash provided by continuing operating activities
5,300,795

 
17,311,606

 
28,103,776

Net cash (used in) provided by discontinued operating activities
(3,843,137
)
 
(849,974
)
 
785,249

Net cash provided by operating activities
1,457,658

 
16,461,632

 
28,889,025

Investing activities
 

 
 

 
 

Purchases of property, plant and equipment
(3,044,411
)
 
(10,905,230
)
 
(8,065,992
)
Proceeds from sale of property, plant and equipment
22,215,362

 
21,500

 
8,000

MUSA escrow deposit
(3,000,000
)
 

 

Acquisition of Specialty

 

 
(31,490,433
)
Cash received from Specialty acquisition

 

 
12,960

Proceeds from casualty insurance

 
1,219,048

 

Proceeds from life insurance policies
1,502,283

 
720,518

 

Net cash provided by (used in) continuing investing activities
17,673,234

 
(8,944,164
)
 
(39,535,465
)
Net cash provided by discontinued investing activities

 

 
3,139,106

Net cash provided by (used in) investing activities
17,673,234

 
(8,944,164
)
 
(36,396,359
)
Financing activities
 

 
 

 
 

Net borrowings from line of credit
6,928,640

 
990,929

 
884,637

Borrowings from long-term debt

 

 
10,000,000

Payments on long-term debt
(26,068,228
)
 
(4,700,570
)
 
(2,533,903
)
Payments on capital lease obligation
(65,966
)
 
(13,355
)
 

Proceeds from exercised stock options

 
8,302

 
42,017

Dividends paid

 
(2,617,513
)
 
(2,632,537
)
Purchase of common stock
(253,889
)
 
(820,460
)
 

Net cash (used in) provided by financing activities
(19,459,443
)
 
(7,152,667
)
 
5,760,214

(Decrease) increase in cash and cash equivalents
(328,551
)
 
364,801

 
(1,747,120
)
Cash and cash equivalents at beginning of year
391,424

 
26,623

 
1,773,743

Cash and cash equivalents at end of year
$
62,873

 
$
391,424

 
$
26,623


See accompanying notes to consolidated financial statements.
31



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. On June 3, 1988, the state of incorporation was changed from South Carolina to Delaware. 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 pipe, 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; 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 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.
Accounting Period
On December 31, 2015, the Company elected to change its fiscal year from a 52-53 week year ending the Saturday nearest to December 31 to a calendar year ending December 31 effective with fiscal year 2015. The Company made this change prospectively and did not adjust operating results for prior periods. Fiscal year 2016 and 2015 ended on December 31, 2016 and December 31, 2015, respectively, having 52 weeks. Fiscal year 2014 ended on January 3, 2015 having 53 weeks.
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 collections 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. Adjustments were required by our Metals Segment for the years ended December 31, 2016 and December 31, 2015, 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

32



at that date. When the finished pipe is ultimately sold to the customer approximately five months later, the then-current nickel surcharge is used to determine the proper selling prices. An 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. A $43,000 and $1,237,000 adjustment was required at December 31, 2016 and December 31, 2015, respectively, for reductions in nickel surcharge. At December 31, 2016, an adjustment of $93,000 was required by our storage tank facility as lower demand for oil and gas products caused selling prices to fall below inventory cost for certain tanks. No reserve was required at our storage tank facility at December 31, 2015.
The Company establishes inventory reserves for:
Estimated obsolete or unmarketable inventory. As of December 31, 2016 and December 31, 2015, 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 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 $697,000 and $658,000 at December 31, 2016 and December 31, 2015, 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 most recent physical inventory results. At December 31, 2016 and December 31, 2015, the Company had $269,000 and $24,000, 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. Land improvements and 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 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 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.
The Company evaluates goodwill for impairment by performing a qualitative evaluation and a two-step quantitative test, if required, which involves comparing the estimated fair value, based on a discounted cash flow model, of the associated reporting unit to its carrying value, including goodwill. The Company performed the step zero qualitative test during the fourth quarter of 2016 which resulted in no goodwill impairment for the year ended December 31, 2016. For the fourth quarter of 2015 the Company performed the two-step quantitative test and recorded an impairment charge of approximately $17,158,000 for the year ended December 31, 2015. See Note 4 for further details on the Company's evaluation of goodwill impairment.
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 for the year ended December 31, 2016 as the Company had no term debt outstanding. For the year ended December 31, 2015, unamortized debt issuance costs are included in long term debt. Intangible assets are amortized over their estimated useful lives using either an accelerated or straight-line method. Debt issuance costs are amortized on a weighted average basis utilizing the outstanding balance for each debt facility. Other 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 twelve years. Deferred charges and intangible assets totaled $20,708,000

33



and $20,572,000 at December 31, 2016 and December 31, 2015, respectively. Accumulated amortization of deferred charges and intangible assets as of December 31, 2016 and December 31, 2015 totaled $8,253,000 and $5,775,000, respectively. Estimated amortization expense for the next five fiscal years based on existing deferred charges and intangible assets is: 2017 - $2,393,000, 2018 - $2,228,000, 2019 - $2,056,000; 2020 - $1,897,000; 2021 - $1,807,000; and thereafter - $2,074,000. The Company recorded amortization expense of $2,460,000, $2,277,000 and $1,407,000 for 2016, 2015 and 2014, respectively.
Revenue Recognition
Revenue from product sales is recognized at the time ownership of goods transfers to the customer and the earnings process is complete, which is typically on the date the inventory is shipped to the customer.
Shipping Costs
Shipping costs of approximately $4,488,000, $5,155,000 and $5,705,000 in 2016, 2015 and 2014, respectively, are recorded in cost of goods sold.
Research and Development Expenses
The Company incurred research and development expense of approximately $603,000, $548,000 and $531,000 in 2016, 2015 and 2014, 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. 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 reserves for uncertain tax provisions in accordance with Accounting Standards Codification ("ASC") 740. See Note 10 for more information.
Earnings Per Share of Common Stock
Earnings per share of common stock are computed based on the weighted average number of shares outstanding during each period; see Note 14.
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 relate to purchase accounting adjustments which included the measurement of earn-out liabilities, estimating the fair value of the reporting units in testing goodwill for impairment, estimating the fair value of the interest rate swaps and providing disclosures of the fair values of financial instruments.

34



Financial instruments, such as cash, accounts receivable, accounts payable and the credit facility revolver are stated at their carrying value, which is a reasonable estimate of fair value; see Note 2.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, primarily for testing goodwill for impairment, determining proper period-end balances for 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.
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 ASU 2014-09: retrospectively for each prior reporting period presented or retrospectively with the cumulative effect of initial application recognized at the date of initial application. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations," to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," to clarify guidance for identifying performance obligations and licensing implementation. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," to clarify and improve the guidance for certain aspects of Topic 606. ASU 2015-14, "Deferral of the Effective Date," defers the required implementation date of ASU 2014-09 for public business entities from annual reporting periods beginning after December 15, 2016 to annual reporting periods beginning after December 15, 2017. The company plans to adopt the new guidance in the first quarter of 2018 and is currently assessing when and which method it will choose for adoption, and is evaluating the impact of the adoption on its consolidated results of operations and financial position.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which modifies the consolidation model for reporting organizations under both the variable interest model and the voting interest model. The ASU is generally expected to reduce the number of situations where consolidation was required; however, in certain circumstances, the ASU may result in companies consolidating entities previously unconsolidated. The ASU requires all legal entities to re-evaluate previous consolidation conclusions under the revised model and is effective for periods beginning after December 15, 2015. Effective January 1, 2016, the Company adopted the provisions of this ASU. There was no effect on the Company's consolidated financial statements.

35



In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which changes the presentation of debt issuance costs. This ASU requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Previously, capitalized debt issuance costs were presented as an asset on the consolidated balance sheets. ASU 2015-03 was effective for fiscal years beginning after December 15, 2015. In June 2015, the FASB issued 2015-15, "Interest - Imputation of Interest," to address the presentation of debt issuance costs related to line of credit arrangements to be presented as an asset and amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. Effective January 1, 2016, the Company adopted the provisions of ASU 2015-03 and ASU 2015-15 and there was no material effect on the Company's consolidated financial statements. As a result of implementation, the Company reclassified unamortized debt issuance costs from "Deferred charges, net and other non-current assets" to "Long-term debt, less unamortized debt issuance costs" on the consolidated balance sheet as of December 31, 2015. At December 31, 2016, as the Company had no term debt outstanding, the debt issuance costs for the current revolving line of credit are presented as "Deferred charges, net and other non-current assets" on the consolidated balance sheet. Also, amortization expense originally recorded as "Selling, general and administrative expenses" related to debt acquisition costs for the twelve-month periods ending December 31, 2016, 2015 and 2014 was reclassified as "Interest expense" on the consolidated statements of operations.
In July 2015, the FASB issued 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which reduces the cost and complexity of accounting for inventory. This ASU requires an entity measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. ASU 2015-11 is effective for periods beginning after December 15, 2016. The Company elected to early adopt the provisions of this ASU in the quarterly period ending September 30, 2016. The implementation of this ASU did not have a material effect on the Company's consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Measurement-Period Adjustments," which requires an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU requires the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date. The amendments in this ASU also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Effective January 1, 2016, the Company adopted the provisions of this ASU. There was no effect on the Company's consolidated financial statements.
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 requires lessees to recognize lease contracts with a term greater than one year on the balance sheet, while recognizing expenses on the income statement in a manner similar to current guidance. For lessors, the update makes targeted changes to the classification criteria and the lessor accounting model to align the guidance with the new lessee model and revenue guidance. ASU 2016-02 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 ASU 2016-02 to add material right-of-use assets and lease liabilities to the consolidated balance sheets, 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." 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 is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company did not elect to early adopt the provisions of this ASU and is currently evaluating the impact ASU 2016-09 will have on its consolidated financial statements.
Reclassifications
Customer rebates payable of $158,000 were reclassified from accounts receivable to accrued expenses on the accompanying consolidated balance sheet for the period ended December 31, 2015. This reclassification had no material effect on previously reported financial position, results of operations or shareholders' equity.


36



Note 2 Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, cash value of life insurance, 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, 2016 and December 31, 2015, the carrying amount for cash and cash equivalents, accounts receivable, accounts payable and borrowings under the Company's line of credit, which are based on variable interest rates, approximates their fair value. The carrying amount for cash value of life insurance and long-term debt at December 31, 2015 approximated their fair values.
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 $31,000 and a liability of $40,000 at December 31, 2016 and December 31, 2015, respectively. During the third quarter of 2016, the swap contract entered into on September 3, 2013 was settled and as result had no value at December 31, 2016. The fair value of this interest rate swap contract was a liability of $206,000 at December 31, 2015. The interest rate swaps were priced using discounted cash flow techniques which are corroborated by using non-binding market prices. Changes in the swaps' fair value were 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. These are classified as Level 2 as they are not actively traded and are valued using pricing models that use observable market inputs. See Note 17 for further discussion of interest rate swaps.
The earn-out liability payments resulting from the acquisitions of Palmer and Specialty are classified as Level 3. The amount of the total earn-out liability to the prior owners of Palmer was determined using management's best estimate of Palmer's EBITDA for the three-year earn-out period which would determine the amount of the ultimate payment to be made. The amount of the total earn-out liability due to the prior owner of Specialty was determined using management's best estimate of Specialty's revenues for the two-year earn-out period which determined the amount of the ultimate payment to be made. Factors such as volume increases, selling price increases and inflation were used to develop a base projection. The Company believed additional costs would be required at Palmer to improve employee turnover, safety, internal controls, etc. These estimated costs were deducted in order to determine projected Palmer's EBITDA. The Company's cost of borrowing at that time was used to determine the present value of these expected payments. Each quarter-end, the Company re-evaluated its assumptions and adjustments to the estimated present value of the expected payments to be made, if required.
During the three months ended June 28, 2014, the Company reviewed the Palmer earn-out reserve for the second and third year payments and determined the EBITDA threshold target of $5,825,000 for the period from August 22, 2013 to August 21, 2014 ("Year 2") would not be attained, and therefore, the earn-out payment of $2,500,000 for Year 2 was not made to the former Palmer shareholders. Also, the Company did not expect Palmer to meet the EBITDA threshold target of $6,825,000 during the final twelve month earn-out period, which was used in the earn-out calculation for year three. However, it was expected to reach the minimum $5,825,000 threshold and the earn-out reserve was adjusted accordingly. As a result, the Company adjusted the earn-out liability to the present value of the Company's current estimates by recognizing a gain of approximately $3,476,000 during the second quarter of 2014.

During the three months ended April 4, 2015, the Company reviewed the Palmer earn-out reserve for the third year payment and determined the EBITDA minimum threshold of $5,825,000 would not be attained. As a result, the remaining earn-out liability to the former shareholders of Palmer was reduced to zero and a gain of approximately $2,483,000 was recognized during the first quarter of 2015. The earn-out period expired August 21, 2015 and no earn-out payments were made for the third year.

During the second quarter 2015, the Company adjusted the preliminary estimate of the earn-out liability to the former owner of Specialty by approximately $2,419,000. Based on the heavy dependence on the energy sector by Specialty's Houston location and as a result of continued evaluation by the Company, the preliminary estimate was revised and goodwill was adjusted accordingly for the final estimate.

During the third quarter 2015, the Company completed its revenue projections during its 2016 planning processes. As a result, the Company determined the fair value of the earn-out liability was zero and reduced the remaining earn-out liability by recognizing a gain of approximately $2,414,000 during the third quarter 2015 and remained at zero for the period December 31, 2015. There were no changes in the estimated fair value of Specialty's earn-out liability during 2016. The earn-out period expired on November 22, 2016 with no earn-out payment made to the previous owners of Specialty.

37



The following table presents a summary of changes in fair value of the Company's Level 3 liabilities measured on a recurring basis for 2015:
 
 
Level 3 Inputs
Balance at January 3, 2015
 
$
7,256,387

Interest expense charged during the year
 
60,096

Reduction due to the finalization of Specialty's beginning balance sheet
 
(2,419,035
)
Change in the fair value of Specialty's earn-out liability
 
(2,414,115
)
Change in the fair value of Palmer's earn-out liability
 
(2,483,333
)
Balance at December 31, 2015
 
$

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 in the years ended December 31, 2016 or December 31, 2015. There have also been no changes in the fair value methodologies used by the Company during the years ended December 31, 2016 or December 31, 2015.


Note 3 Property, Plant and Equipment
Property, plant and equipment consist of the following: 
 
2016
 
2015
Land (1)
$
62,916

 
$
1,819,736

Land improvements(1)
120,915

 
852,976

Buildings (1)
641,526

 
24,631,349

Machinery, fixtures and equipment
66,099,880

 
61,928,770

Machinery and equipment under capital lease
199,767

 
107,287

Construction-in-progress
5,418,397

 
7,158,098

 
72,543,401

 
96,498,216

Less accumulated depreciation
45,219,309

 
50,203,945

Property, plant and equipment, net
$
27,324,092

 
$
46,294,271

 
(1) On September 30, 2016, the Company completed the sale of substantially all of its real estate properties (land, land improvements and buildings) to Store Funding. Concurrently, the Company leased back all real properties sold to Store Funding (see Note 12).
The Company recorded depreciation expense from continuing operations of $4,235,000, $4,357,000, and $3,725,000 for 2016, 2015 and 2014, respectively. Accumulated depreciation includes $25,300 and $5,400 at December 31, 2016 and December 31, 2015, 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 changes in the carrying amount of goodwill by segment for the year ended December 31, 2015 was as follows: 
 
Specialty Chemicals Segment
 
Metals Segment
 
Total
Balance at January 3, 2015
$
1,354,730

 
$
21,895,471

 
$
23,250,201

Specialty inventory adjustment

 
(2,318,187
)
 
(2,318,187
)
Reduction due to the finalization of Specialty's beginning balance sheet

 
(2,419,035
)
 
(2,419,035
)
Impairment charge

 
(17,158,249
)
 
(17,158,249
)
Balance at December 31, 2015
$
1,354,730

 
$

 
$
1,354,730

Balance at December 31, 2016
$
1,354,730

 
$

 
$
1,354,730



38



Goodwill represents the excess of the purchase price over the fair value of the net assets of businesses acquired.
During the second quarter 2015, the Company finalized the purchase price allocation for the Specialty acquisition relating to two matters. Additional information was obtained surrounding the proper lifespan of Specialty's steel pipe. As a result, the fair value of the inventory increased and goodwill decreased by approximately $2,318,000. Additionally, the Company adjusted the earn-out liability to the former owner of Specialty by approximately $2,419,000.
Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter and whenever events or circumstances indicate the carrying value may not be recoverable. The evaluation of goodwill impairment involves using either a qualitative or quantitative approach as outlined in ASC Topic 350. The Company completed its annual goodwill impairment evaluation using the step zero qualitative approach during the fourth quarter of 2016 and the two-step quantitative analysis during the fourth quarter of 2015.
For the year ended December 31, 2016, the goodwill impairment test resulted in no goodwill impairment of the remaining goodwill of $1,355,000 recognized on the consolidated balance sheet for the Specialty Chemicals Segment
In the first step of the analysis, for the period ended December 31, 2015, the Company compared the estimated value of each reporting unit to its carrying value, including goodwill. The fair value of the reporting units was determined based on discounted cash flow methodologies. The fair value of all reporting units exceeded the carrying value. However, the Company noted substantial compression of the Company's stock price during 2015 resulting in a significant gap between the market capitalization of the Company, which has been increased by an estimated control premium of 35 percent, compared to the fair value of the Company determined using the discounted cash flow methodologies mentioned previously. As a result, invested equity, which is market capitalization plus interest rate debt, was allocated to each reporting unit and compared to the respective net assets. This step indicated sufficient cushion ($26,573,000) in the Specialty Chemicals Segment to support the recorded goodwill but indicated potential impairment of the goodwill recorded for the Metals Segment. Therefore, the second step of the analysis was performed where the implied fair value of goodwill was determined for the Specialty and Palmer reporting units. BRISMET was not included in the Step 2 analysis since it does not have any goodwill. The implied fair value of goodwill represents the excess of fair value of the reporting unit over the fair value amounts assigned to all of the tangible and intangible assets of the reporting unit as if it were to be acquired in a business combination. Any amount remaining after this allocation represents the implied fair value of goodwill. The implied fair value of the respective reporting units' goodwill was then compared to the carrying value of the goodwill and any excess of carrying value over the implied fair value represents the non-cash impairment charge. The results of the second step analysis showed that the implied fair value of goodwill was zero for the Palmer and Specialty reporting units. Therefore, in 2015, the Company recorded a goodwill impairment charge of $17,158,000 for the Palmer and Specialty operations. As a result of the goodwill impairment charge, there is no goodwill remaining within the Metals Segment, and goodwill remaining on the consolidated balance sheet at December 31, 2015 is $1,355,000 for the Specialty Chemicals Segment.
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 are similarly affected as a result of declining commodity prices. As discussed above, this compression 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. The valuation of goodwill for the second step of the goodwill impairment analysis is considered a Level 3 fair value measurement, which means that the valuation of the assets and liabilities reflect the Company's own assumptions about the assumptions that the market participants would use in pricing the assets and liabilities.


39



Note 5 Long-term Debt 
 
2016
 
2015
$45,000,000 Revolving line of credit, due February 28, 2019
$
8,804,206