Business context and reporting period
This is Synalloy Corporation’s unaudited Form 10-Q for the quarter ended September 29, 2012, with comparisons to the quarter ended October 1, 2011 and the nine-month periods then ended. The supplied request identifies ASCENT INDUSTRIES CO.; the filing itself identifies Synalloy Corporation, so the company identity should be verified.
Synalloy reports Metals and Specialty Chemicals segments. On August 21, 2012, it acquired Palmer of Texas, a manufacturer of storage tanks and separation equipment; Palmer’s results are included in Metals.
Financial performance and position
| Metric | Three months ended Sep. 29, 2012 | Prior-year quarter | Nine months ended Sep. 29, 2012 | Prior-year period |
|---|---|---|---|---|
| Net sales | $50.27 million | $46.19 million | $144.52 million | $130.33 million |
| Gross profit / margin | $5.68 million / 11.3% | $3.63 million / 7.9% | $16.04 million / 11.1% | $16.31 million / 12.5% |
| Operating income | $2.10 million | $0.93 million | $5.79 million | $7.56 million |
| Net income | $0.84 million | $0.57 million | $3.27 million | $4.78 million |
| Diluted EPS | $0.13 | $0.09 | $0.51 | $0.75 |
Quarterly sales rose about 9% and net income about 48%; nine-month sales rose about 11%, while net income fell about 32%. Nine-month operating cash flow was negative $4.21 million, versus negative $6.90 million in the prior period. Investing cash flow was negative $29.37 million, including $27.61 million paid for Palmer; financing provided $33.47 million.
At September 29, cash was $5,588, current assets were $93.93 million and current liabilities were $25.53 million. Total bank debt was approximately $42.19 million, compared with $8.65 million of long-term debt at year-end 2011. Shareholders’ equity was $72.18 million. The filing reports compliance with debt covenants.
Material changes and key drivers
- Metals nine-month operating income declined 42% to $4.31 million, despite higher sales; lower nickel prices caused inventory losses of approximately $3.50 million in the first nine months. Metals’ third-quarter sales were down 1% year over year, while operating income increased to $1.28 million.
- Specialty Chemicals third-quarter sales increased 42% to $14.69 million and operating income rose 124% to $1.54 million. Management attributed improvement to higher production of defoamer for a global chemical customer, stronger contract and textile/carpet sales, and product-mix and cost initiatives.
- The Palmer acquisition added goodwill of approximately $22.29 million in preliminary purchase accounting. The company estimated $8.5 million of potential earn-outs, recorded at a discounted present value of $8.15 million; $2.5 million was classified as current. Purchase accounting and working-capital adjustments remained preliminary.
- Palmer was funded partly by a $22.5 million, 10-year term loan and increased revolving credit. The term loan requires monthly principal payments of $187,500 and bears LIBOR plus 2.25%. A 10-year interest-rate swap fixed the rate at 3.74%; changes in swap fair value are recorded in earnings, not hedge accounting.
Outlook, risks and contingencies
No formal earnings guidance is provided. Management said Palmer was expected to be immediately accretive and estimated an annual contribution of approximately $0.30 per share at its current revenue level. It also estimated approximately $250,000 of additional Palmer acquisition costs in the fourth quarter. These are management expectations, not guarantees.
Management cited relatively strong demand for manufactured pipe, but excess fabrication capacity and margin pressure. It noted that customers may delay purchases as nickel surcharges decline. Key disclosed risks include oil-price declines and fracking restrictions affecting Palmer’s tank demand, acquisition integration and projected results, goodwill impairment, raw-material costs and availability, debt covenant compliance, interest-rate exposure, and environmental and cyber risks. The company disclosed ordinary-course legal matters and environmental contingencies; management was not aware of other asserted or unasserted matters expected to significantly affect financial condition or results.
Subsequent to quarter-end, on October 22, 2012, the revolving facility limit was temporarily increased from $25 million to $30 million for one year to finance inventory for a Nuclear Facility project. Management stated the limit would revert to $25 million on October 22, 2013. Management also said disclosure controls were effective; Palmer internal-control testing was planned for 2013.
Important facts for investors to verify
- Confirm the filing entity: the supplied metadata says ASCENT INDUSTRIES CO., but the 10-Q names Synalloy Corporation.
- Assess Metals’ sensitivity to nickel-price-driven inventory losses and the sustainability of segment margins.
- Track Palmer integration, preliminary purchase-price allocation, earn-out assumptions and actual performance against management’s accretion estimate.
- Review debt maturities, borrowing-base availability, covenant headroom, and the effect of the temporary revolver increase and interest-rate swap.
- Monitor working-capital use and liquidity: cash was minimal and operating cash flow remained negative during the nine-month period.