Business context and reporting period
Synalloy Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 29, 2013. It reports two segments: Metals and Specialty Chemicals. Note: the request metadata names ASCENT INDUSTRIES CO., but the filing identifies the registrant as Synalloy Corporation; verify the company identity.
Financial performance
| Metric | Three months ended June 29, 2013 | Six months ended June 29, 2013 |
|---|---|---|
| Net sales | $56.3 million, up 20% | $114.1 million, up 21% |
| Gross profit / margin | $7.1 million / 12.7% | $14.0 million / 12.3% |
| Operating income / margin | $2.8 million / 5.0% | $5.2 million / 4.6% |
| Net income / diluted EPS | $1.9 million / $0.30 | $3.4 million / $0.53 |
| Adjusted EBITDA, non-GAAP | $4.0 million; $0.62 per diluted share | $7.8 million; $1.21 per diluted share |
For the six-month comparison, gross margin was approximately 12.3% versus 11.0%, and net margin approximately 3.0% versus 2.6% in 2012. Results include a $633,000 six-month gain from the change in fair value of the interest-rate swap; the corresponding second-quarter gain was $495,000.
Cash, debt and liquidity
- Operating cash flow was negative $2.2 million for the six months, versus positive $0.3 million in 2012. Investing used $3.0 million, including $3.1 million of capital expenditures; financing provided $4.2 million.
- Cash declined to $143,000 from $1.1 million at year-end. Accounts receivable rose $5.2 million and inventory rose $6.9 million; management cited sales timing, the Bechtel project and expected segment growth. Accounts payable increased $6.9 million and helped fund working capital.
- Debt totaled $44.0 million at June 29 ($2.25 million current and $41.77 million long-term), up from $39.9 million at year-end. Management reported $44.0 million of bank debt outstanding. Interest expense rose to $714,000 from $92,000 for the six-month comparison, primarily due to Palmer acquisition borrowing and business growth.
- Current assets were $102.9 million and current liabilities $29.6 million; the current ratio was about 3.5. The filing does not provide a clear debt-covenant headroom value.
Changes versus the prior comparable period
- Six-month net income rose 39% and diluted EPS increased from $0.38 to $0.53; Adjusted EBITDA increased 49%.
- Metals six-month sales rose 22% and operating income 34%, but excluding Palmer, sales were approximately at prior-year levels. Palmer, acquired August 21, 2012, contributes to 2013 results but not the comparable 2012 periods.
- Specialty Chemicals six-month sales increased 17% and operating income 31%, including additional Ashland defoamer sales that began in the third quarter of 2012.
- Interest expense and SG&A increased; SG&A growth included Palmer costs and higher selling and administrative expenses. Customer-related working-capital needs drove negative operating cash flow.
Outlook, risks and unusual items
- Management expected Bechtel project shipments to remain favorable through the third quarter, with completion early in the fourth quarter of 2013. Metals management cited improving project inquiries, stronger fabrication activity and growing special-alloy demand, while distributor restocking remained constrained by falling nickel prices.
- Management anticipated continued Specialty Chemicals sales improvement into the third quarter and expected operating margins to hold near current levels despite anticipated raw-material price increases. These are expectations, not formal earnings guidance.
- Metals margins faced lower-priced stainless-steel imports from Malaysia, Thailand and Vietnam. The USITC found a reasonable indication of material injury on June 28; management expected a preliminary ruling in October and believed margins could improve, subject to the outcome.
- Declining nickel prices caused inventory losses of approximately $824,000 in the second quarter and $1.389 million in the first six months, lower than comparable 2012 losses. The filing says inventory gains and losses can be volatile.
- Palmer’s contingent earn-out was forecast at $8.5 million in total; the filing reports $2.5 million classified as current and a $5.794 million long-term contingent-consideration balance. Payment depends on EBITDA targets. Management said it did not expect material purchase-price adjustments from specified capital-expenditure items.
- Management reported no known legal matters expected to have a material effect, no material change in risk factors or market-risk exposure, and effective disclosure controls. Palmer internal controls were still being evaluated for inclusion in 2013 testing.
Important facts for investors to verify
- Confirm the registrant identity: the supplied metadata says ASCENT INDUSTRIES CO., while the filing is for Synalloy Corporation.
- Assess whether growth and profitability persist after separating Palmer’s contribution and the swap fair-value gain from recurring performance.
- Monitor cash conversion, receivables and inventory growth, low cash balances, debt levels, and applicable covenant compliance; covenant headroom is not clearly stated here.
- Track the stainless-steel import proceeding, nickel-price effects, Bechtel project completion, and fabrication backlog, reported at $25.6 million at June 29, 2013.
- Review Palmer earn-out assumptions and potential payments, and remember management’s outlook is forward-looking and subject to the risks described in the filing.