Filing and reporting period
The supplied filing is Synalloy Corporation’s Form 10-K for the fiscal year ended December 29, 2012 (52 weeks), filed March 12, 2013. The request identifies Ascent Industries Co.; that company name does not match the registrant named in this filing. This is an annual report, not a standalone fourth-quarter filing.
Synalloy operated through Metals (stainless/alloy pipe and fabrication, plus storage tanks) and Specialty Chemicals. Palmer of Texas Tanks was acquired on August 21, 2012 and contributed 19 weeks of results to the year.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $197.7 million | $170.6 million |
| Gross profit / margin | $21.9 million / 11% | $21.1 million / 12% |
| Operating income | $7.8 million | $8.8 million |
| Net income | $4.2 million | $5.8 million |
| Diluted EPS | $0.66 | $0.91 |
| Cash from (used in) operations | $1.6 million | $(3.9) million |
| Capital expenditures | $4.7 million | $3.2 million |
Fourth-quarter 2012 sales were $53.1 million and net income was $965,000, compared with $40.2 million and $1.0 million, respectively, in fourth-quarter 2011.
At year-end, cash was $1.1 million, working capital was $65.9 million, and the current ratio was 3.6:1 (4.1:1 in 2011). Debt totaled approximately $39.9 million: $18.1 million drawn on a $30 million revolving facility and $21.75 million remaining on a term loan. Undrawn revolver availability was approximately $11.9 million. Shareholders’ equity was $71.8 million. The company reported compliance with debt covenants.
Material changes versus prior year
- Sales rose 16%, reflecting Palmer’s inclusion, increased Metals volumes and higher Specialty Chemicals shipments. Net income declined 27% and diluted EPS fell from $0.91 to $0.66.
- Metals sales increased 15%, but segment operating income fell to $6.1 million from $9.3 million. The company cited nickel-related inventory losses of approximately $4.6 million in 2012 versus $1.6 million in 2011, lower average selling prices, and unusually favorable 2011 fabrication-job billings.
- Specialty Chemicals sales rose 20% and operating income increased to $4.8 million from $2.2 million, supported by additional defoamer production and improved facility utilization. The 2011 comparison included an $817,000 receivables reserve charge.
- Palmer’s acquisition increased assets and borrowing. The reported purchase price after working-capital adjustment was $27.0 million; the cash-flow statement reports $27.9 million paid, including acquisition-related cash amounts. A further earn-out of up to $10.5 million was possible; management estimated $8.5 million, recorded at a present value of $8.2 million.
- Operating cash flow improved from a substantial outflow to a modest inflow, but remained below capital spending. Year-end inventory rose to $50.2 million from $43.1 million.
Outlook, risks and unusual items
Management expected 2013 capital spending of approximately $4.8 million and stated that cash, operating cash flow and available borrowings were expected to be sufficient for debt service and planned capital needs. No formal revenue or earnings guidance was provided. Management described improving project inquiries and demand for specialty alloys, expected further Specialty Chemicals benefit from a full year of added defoamer production, and anticipated strong tank sales while oil drilling activity continued. It also planned to improve Palmer production efficiency. Fabrication backlog was $19.3 million, down from $22.7 million a year earlier; approximately 80% was expected to be completed in 2013.
- Key exposures include cyclical customer capital spending, competition and pricing pressure, volatile nickel and other input costs, and excess fabrication capacity. Management reported 2012 nickel-related inventory losses of approximately $4.6 million.
- Palmer demand is exposed to oil prices and potential hydraulic-fracturing regulation. The company also cited acquisition integration, financing covenant, interest-rate, environmental, and workforce risks.
- One Specialty Chemicals customer represented 28% of that segment’s 2012 revenue. Four suppliers provided about 79% of Metals raw-material purchases.
- Environmental remediation reserves totaled $640,000. A Specialty Chemicals customer sued over $134,000 in invoices and counterclaimed for $3 million in damages; management said it considered the counterclaims baseless. The filing states the outcome was pending.
- Palmer was excluded from management’s and the auditor’s 2012 internal-control assessment; Palmer represented 30.3% of year-end assets and 6.4% of annual sales. Management otherwise assessed controls as effective, and the auditor gave unqualified opinions on the financial statements and assessed controls.
- Acquisition-related costs were $881,000. The company also recorded a $450,000 liability for the interest-rate swap; the term loan’s variable rate was hedged at a 3.74% fixed rate, but hedge accounting was not applied.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is for Synalloy Corporation, not Ascent Industries Co.
- Assess whether Palmer meets the earn-out targets and whether acquisition integration and expected synergies materialize; the estimated earn-out is subject to quarterly reassessment.
- Track Metals margins and nickel-price inventory effects, plus fabrication backlog, capacity utilization and project profitability.
- Monitor Specialty Chemicals’ dependence on its major customer and the sustainability of defoamer-driven growth.
- Review debt availability, covenant headroom, cash conversion, working-capital needs and scheduled debt payments.
- Follow Palmer’s internal-control testing, environmental remediation and the pending customer litigation.