Business context and reporting period
This filing is Synalloy Corporation’s unaudited Form 10-Q for the quarter ended September 28, 2013, comparing the three- and nine-month periods with those ended September 29, 2012. The request metadata names ASCENT INDUSTRIES CO., but the filing identifies Synalloy Corporation as the registrant.
Synalloy operates Metals and Specialty Chemicals segments. During the quarter it acquired CRI Tolling and its Fountain Inn, South Carolina facility, adding toll-manufacturing capacity to Specialty Chemicals. Palmer of Texas, acquired in 2012, is included in the Metals segment.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $54.4 million | $50.3 million | $168.5 million | $144.5 million |
| Gross profit / margin | $5.5 million / 10.1% | $5.7 million / 11.3% | $19.5 million / 11.6% | $16.0 million / 11.1% |
| Operating income | $1.14 million | $1.50 million | $6.35 million | $5.14 million |
| Net income | $1.46 million | $0.84 million | $4.84 million | $3.27 million |
| Diluted EPS | $0.23 | $0.13 | $0.75 | $0.51 |
Third-quarter sales rose 8%, while net income rose 73%; nine-month sales and net income increased 17% and 48%, respectively. The nine-month results include Palmer for a longer comparable period in 2013, and the quarter includes a $1.077 million after-tax bargain-purchase gain from CRI. Excluding that gain, reported net income would have been lower; the filing does not provide a direct adjusted net-income figure.
For the quarter, Metals sales grew 13% but segment operating income fell 63% to $477,000. Specialty Chemicals sales declined 4% to $14.0 million while segment operating income increased 3% to $1.58 million. For nine months, both segments increased sales and operating income.
Operating cash flow was a use of $0.81 million in the first nine months, versus a use of $4.21 million in 2012. Investing cash outflow was $8.98 million, including $4.56 million of capital spending and $4.53 million for CRI. Financing provided $8.74 million, mainly from net debt borrowings. Cash fell from $1.09 million at year-end 2012 to $40,473 at September 28, 2013.
At September 28, current assets were $103.9 million and current liabilities $30.1 million; accounts receivable was $36.9 million and inventory $59.5 million. Total debt was approximately $48.5 million, comprising $2.53 million current and $45.99 million long-term. Shareholders’ equity was $77.1 million. Interest expense for nine months increased to $1.08 million from $0.23 million.
Material changes and unusual items
- CRI was acquired in August for a combined stated consideration of $4.55 million, funded with a new term loan and increased line-of-credit borrowings. The acquisition produced a $1.077 million after-tax bargain-purchase gain.
- Metals results were pressured by lower commodity pipe prices, low nickel-related distributor restocking, imports, weak special-alloy shipments, inventory losses, and fabrication costs including a $240,000 claim reserve. Management reported nine-month Metals operating income slightly above the prior year despite the quarterly decline.
- Declining nickel prices generated Metals inventory losses of approximately $1.13 million in Q3 and $2.52 million for nine months, compared with $1.29 million and $3.50 million in the comparable 2012 periods.
- After quarter-end, Synalloy completed a public offering of 2.3 million shares at $15.75 per share, receiving approximately $34.2 million net. It paid off its line of credit on October 1 and planned equipment investments of approximately $5.5 million, with remaining proceeds for general corporate purposes. The filing does not provide post-offering debt or cash balances.
- The company entered a ten-year interest-rate swap at a fixed rate of 4.83% for the new CRI term loan. Hedge accounting was not applied; fair-value changes affect earnings.
Outlook, risks, and contingencies
Management described stronger Metals quoting activity, improving project demand and margins, and a fabrication backlog of $61.7 million at quarter-end, versus $19.3 million at year-end 2012. The Bechtel nuclear project was expected to be completed in Q4 2013; fabrication shipments were ramping up, with quoting focused on late 2014 and early 2015 deliveries. Specialty Chemicals sales were expected to improve into Q4, with margins expected to hold steady despite anticipated raw-material increases. These are management expectations, not guaranteed results.
Key risks include cyclical customer demand and capital spending; low-priced imports and the pending stainless-steel antidumping case; raw-material, nickel, energy and freight volatility; customer and supplier concentration; oil-price and fracking-related exposure at Palmer; project execution and acquisition integration; debt covenant compliance and interest-rate exposure; and environmental, operational, labor, and cyber risks. Management reported no debt covenant defaults at September 28 and no known asserted or unasserted matters expected to materially affect financial condition or results. It considered ordinary-course legal matters not expected to have a material adverse effect. Disclosure controls were deemed effective; CRI internal controls were still being evaluated.
Important facts for investors to verify
- Reconcile reported earnings with the one-time CRI bargain-purchase gain and assess recurring profitability, particularly in Metals.
- Confirm the post-offering debt, cash, and liquidity position after the line-of-credit repayment and planned capital expenditures.
- Track working-capital needs: receivables and inventory rose substantially, while operating cash flow remained negative.
- Monitor the stainless-steel import investigation, nickel-price effects, fabrication backlog conversion, and the anticipated Bechtel project completion.
- Review Palmer’s contingent earn-out exposure: management forecast total payments of $8.5 million; payments depend on future EBITDA.
- Assess whether management’s stated outlook and CRI integration plans were achieved, and review subsequent filings for material changes.