| SYNALLOY CORP 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 "e Forward looking Statements "e above, and "e Managementapstas Discussion and Analysis of Financial Condition and Results of Operations "e in Item 7 below |
| Cyclical Demand |
| 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 &apos products due to economic downturns |
| Other factors causing fluctuation in our customers &apos positions are changes in market demand, capital spending, lower overall pricing due to domestic and international overcapacity, lower priced imports, currency fluctuations, and increases in use or decreases in prices of substitute materials |
| As a result of these factors, our profitability has been and may in the future be subject to significant fluctuation |
| Product Pricing and Raw Material Costs |
| From time-to-time, intense competition and excess manufacturing capacity in the commodity stainless steel industry have resulted in reduced prices, excluding raw material surcharges, for many of our stainless steel products sold by the Metals Segment |
| These factors have had and may have an adverse impact on our revenues, operating results and financial condition |
| Although inflationary trends in recent years have been moderate, during the same period stainless steel raw material costs, including surcharges on stainless steel, have been volatile |
| While we are able to mitigate some of the adverse impact of rising raw material costs, such as passing through surcharges to customers, rapid increases in raw material costs may adversely affect our results of operations |
| Surcharges on stainless steel are also subject to rapid declines which can result in similar declines in selling prices causing a possible marketability problem on the related inventor y as well as negatively impacting revenues and profitability |
| While there has been ample availability of raw materials, there continues to be a significant consolidation of stainless steel suppliers throughout the world which could have an impact on the cost and availability of stainless steel in the future |
| The ability to implement price increases is dependent on market conditions, economic factors, raw material costs, including surcharges on stainless steel, and availability, competitive factors, operating costs and other factors, some of which are beyond our control |
| In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials |
| The Specialty Chemicals Segment uses significant quantities of a variety of specialty and commodity chemicals in its manufacturing processes which are subject to price and availability fluctuations |
| Any significant variations in the cost and availability of our specialty and commodity materials may negatively affect our business, financial condition or results of operations |
| The raw materials we use are generally available from numerous independent suppliers |
| However, some of our raw material needs are met by a sole supplier or only a few suppliers |
| If any supplier that we rely on for raw materials ceases or limits production, we may incur significant additional costs, including capital costs, in order to find alternate, reliable raw material suppliers |
| We may also experience significant production delays while locating new supply sources |
| Purchase prices and availability of these critical raw materials are subject to volatility |
| Some of the raw materials used by this Segment are derived f rom petrochemical-based feedstocks, such as crude oil and natural gas, which have been subject to historical periods of rapid and significant movements in price |
| These fluctuations in price could be aggravated by factors beyond our control such as political instability, and supply and demand factors, including OPEC production quotas and increased global demand for petroleum-based products |
| If suppliers increase the price of critical raw materials, we may not have alternative sources of supply |
| We selectively pass changes in the prices of raw materials to our customers from time-to-time |
| However, we cannot always do so, and any limitation on our ability to pass through any price increases could affect our financial performance |
| We rely upon third parties for our supply of energy resources consumed in the manufacture of our products in both of our Segments |
| The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions |
| These market conditions often are affected by political and economic factors beyond our control |
| Disruptions in the supply of energy resources could temporarily impair the ability to manufacture products for customers |
| Further, increases in energy costs that cannot be passed on to customers, or changes in costs relative to energy costs paid by competitors, has and may continue to adversely affect our profitability |
| We actively compete with companies producing the same or similar products and, in some instances, with companies producing different products designed for the same uses |
| We encounter competition from both domestic and foreign sources in price, delivery, service, performance, product innovation and product recognition and quality, depending on the product involved |
| For some of our products, our competitors are larger and have greater financial resources and less debt than we do |
| As a result, these competitors may be better able to withstand a change in conditions within the industries in which we operate, a change in the prices of raw materials or a change in the economy as a whole |
| Our competitors can be expected to continue to develop and introduce new and enhanced products and more efficient production capabilities, which could cause a decline in market acceptance of our products |
| Current and future consolidation among our competitors and customers also may cause a lo ss of market share as well as put downward pressure on pricing |
| Our competitors could cause a reduction in the prices for some of our products as a result of intensified price competition |
| Competitive pressures can also result in the loss of major customers |
| If we cannot compete successfully, our business, financial condition and consolidated results of operations could be adversely affected |
| Environmental Issues |
| The applicability of numerous environmental laws to our manufacturing facilities could cause us to incur material costs and liabilities |
| We are subject to federal, state, and local environmental, safety and health laws and regulations concerning, among other things, emissions to the air, discharges to land and water and the generation, handling, treatment and disposal of hazardous waste and other materials |
| Under certain environmental laws, we can be held strictly liable for hazardous substance contamination of any real property we have ever owned, operated or used as a disposal site |
| We are also required to maintain various environmental permits and licenses, many of which require periodic modification and renewal |
| Our operations entail the risk of violations of those laws and regulations, and we cannot assure you that we have been or will be at all times in compliance with all of these requirements |
| In addition, these requirements and their enforcement may become more stringent in the future |
| Although we cannot predict the ultimate cost of compliance with any such requirements, the costs could be material |
| Non-compliance could subject us to material liabilities, such as government fines, third-party lawsuits or the suspension of non-compliant operations |
| We also may be required to make significant site or operational modifications at substantial cost |
| Future developments also could restrict or eliminate the use of or require us to make modifications to our products, which could have a significant negative impact on our results of operations and cash flows |
| At any given time, we are involved in claims, litigation, administrative proceedings and investi gations of various types involving potential environmental liabilities, including cleanup costs associated with hazardous waste disposal sites at our facilities |
| We cannot assure you that the resolution of these environmental matters will not have a material adverse effect on our results of operations or cash flows |
| The ultimate costs and timing of environmental liabilities are difficult to predict |
| Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis |
| We could incur significant costs, including cleanup costs, civil or criminal fines and sanctions and third-party claims, as a result of past or future violations of, or liabilities under, environmental laws |
| For additional information related to environmental matters, see Note G to the Consolidated Financial Statements |
| Facilities Operations |
| We are dependent upon the continued safe operation of our production facilities |
| In our Specialty Chemicals Segment, these production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unscheduled downtime and environmental hazards which could result in liability for workplace injuries and fatalities |
| In addition, some of our production facilities are highly specialized, which limits our ability to shift production to other facilities in the event of an incident at a particular facility |
| If a production facility, or a critical portion of a production facility, were temporarily shut down, we likely would incur higher costs for alternate sources of supply for our products |
| We cannot assure you that we will not experience these types of incidents in the future or that these incidents wil l not result in production delays or otherwise have a material adverse effect on our business, financial condition or results of operations |
| Collective Bargaining Agreements |
| Certain of our employees in the Metals Segment are covered by collective bargaining agreements, and the failure to renew these agreements could result in labor disruptions and increased labor costs |
| We have 246 employees represented by unions at the Bristol, Tennessee facility, or 57 percent of the total employees of the Company |
| They are represented by two locals affiliated with the AFL-CIO and one local affiliated with the Teamsters |
| Collective bargaining contracts will expire in February 2009, December 2009 and March 2010 |
| Although we believe that our present labor relations are satisfactory, our failure to renew these agreements on reasonable terms as the current agreements expire could result in labor disruptions and increased labor costs, which could adversely affect our financial performance |
| Financial Risks |
| The limits imposed on us by the restrictive covenants contained in our credit facilities could prevent us from obtaining adequate working capital, making acquisitions or capital improvements, or cause us to lose access to our facilities |
| Our existing credit facilities contain restrictive covenants that limit our ability to, among other things, borrow money or guarantee the debts of others, use assets as security in other transactions, make investments or other restricted payments or distributions, change our business or enter into new lines of business, and sell or acquire assets or merge with or into other companies |
| In addition, our credit facilities require us to meet financial ratios which could limit our ability to plan for or react to market conditions or meet extraordinary capital needs and could otherwise restrict our financing activities |
| Our ability to comply with the covenants and other terms of our credit facilities will depend on our future operating performance |
| If we fail to comply with such covenants and terms, we will be in default and the maturity of the related debt could be accelerated and become immediately due and payable |
| We may be required to obtain waivers from our lender in order to maintain compliance under our credit facilities, including waivers with respect to our compliance with certain financial covenants |
| If we are unable to obtain any necessary waivers and the debt under our credit facilities is accelerated, our financial condition would be adversely affected |
| We may need new or additional financing in the future to expand our business or refinance existing indebtedness |
| If we are unable to access capital on satisfactory terms and conditions, we may not be able to expand our business or meet our payment requirements under our existing credit facilities |
| Our ability to obtain new or additional financing will depend on a variety of factors, many of which are beyond our control |
| We may not be able to obtain new or additional financing because we may have substantial debt or because we may not have sufficient cash flow to service or repay our existing or future debt |
| In addition, depending on market conditions and our financial performance, equity financing may not be available on satisfactory terms or at all |
| We have maintained various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations |
| Our existing property and liability insurance coverages contain exclusions and limitations on coverage |
| From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles and higher premiums, primarily from our Specialty Chemicals operations |
| As a result, in the future our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations |
| Product Development |
| We believe that we must continue to enhance our existing products and to develop and manufacture new products with improved capabilities in order to continue to be a market leader |
| We also believe that we must continue to make improvements in our productivity in order to maintain our competitive position |
| When we invest in new technologies, processes, or production capabilities, we face risks related to construction delays, cost over-runs and unanticipated technical difficulties |
| Our inability to anticipate, respond to or utilize changing technologies could have a material adverse effect on our business and our consolidated results of operations |
| Acquisitions and Dispositions |
| We have historically utilized acquisitions and dispositions in an effort to strategically position our businesses and improve our ability to compete |
| We plan to continue to do this by seeking specialty niches, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic fit of our existing business units |
| We consider acquisition, joint ventures, and other business combination opportunities as well as possible business unit dispositions |
| From time-to-time, management holds discussions with management of other companies to explore such opportunities |
| As a result, the relative makeup of the businesses comprising our Company is subject to change |
| Acquisitions, joint ventures, and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candida tes; the potential loss of key personnel of an acquired business; our ability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction |
| Internal Control |
| Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements |
| Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate |