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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2022
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Transition Period from _____ to _____ |
COMMISSION FILE NUMBER 0-19687
Synalloy Corporation
(Exact name of registrant as specified in its charter)
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Delaware | | | 57-0426694 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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1400 16th Street, | Suite 270, | | | |
Oak Brook, | Illinois | | | 60523 |
(Address of principal executive offices) | | | (Zip Code) |
| | (804) | 822-3260 | |
| | (Registrant's telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of exchange on which registered |
Common Stock, par value $1.00 per share | SYNL | NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | x |
Smaller reporting company | x | Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
The number of shares outstanding of the registrant's common stock as of August 8, 2022 was 10,259,533
Synalloy Corporation
Table of Contents
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PART I. FINANCIAL INFORMATION |
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Item 1. | | Financial Statements | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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PART II. OTHER INFORMATION |
Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other applicable federal securities laws. All statements that are not historical facts are forward-looking statements. Forward looking statements can be identified through the use of words such as "estimate," "project," "intend," "expect," "believe," "should," "anticipate," "hope," "optimistic," "plan," "outlook," "should," "could," "may" and similar expressions. The forward-looking statements are subject to certain risks and uncertainties, including without limitation those identified below, which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements. The following factors could cause actual results to differ materially from historical results or those anticipated: adverse economic conditions, including risks relating to the impact and spread of and the government’s response to COVID-19; inability to weather an economic downturn; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased costs; raw material availability; financial stability of the Company’s customers; customer delays or difficulties in the production of products; loss of consumer or investor confidence; employee relations; ability to maintain workforce by hiring trained employees; labor efficiencies; risks associated with acquisitions; environmental issues; negative or unexpected results from tax law changes; inability to comply with covenants and ratios required by the Company’s debt financing arrangements; and other risks detailed from time-to-time in Synalloy Corporation's Securities and Exchange Commission filings, including our Annual Report on Form 10-K, which filings are available from the SEC. Synalloy Corporation assumes no obligation to update any forward-looking information included in this release.
Part I - Financial Information
Item 1. Financial Statements
SYNALLOY CORPORATION
Condensed Consolidated Balance Sheets
(in thousands, except par value and share data)
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| (Unaudited) | | |
| June 30, 2022 | | December 31, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 245 | | | $ | 2,021 | |
Accounts receivable, net of allowance for credit losses of $748 and $216, respectively | 63,932 | | | 50,126 | |
Inventories, net | 134,529 | | | 103,249 | |
Prepaid expenses and other current assets | 4,883 | | | 3,728 | |
Assets held for sale | 785 | | | 855 | |
Total current assets | 204,374 | | | 159,979 | |
Property, plant and equipment, net | 42,177 | | | 43,720 | |
Right-of-use assets, operating leases, net | 29,950 | | | 30,811 | |
Goodwill | 12,637 | | | 12,637 | |
Intangible assets, net | 12,940 | | | 14,382 | |
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Deferred charges, net | 253 | | | 302 | |
Other non-current assets, net | 4,110 | | | 4,171 | |
Total assets | $ | 306,441 | | | $ | 266,002 | |
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Liabilities and Shareholders' Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 56,167 | | | $ | 32,318 | |
Accounts payable - related parties | 2 | | | 2 | |
Accrued expenses and other current liabilities | 10,800 | | | 12,407 | |
Current portion of note payable | 871 | | | — | |
Current portion of long-term debt | 2,464 | | | 2,464 | |
Current portion of earn-out liabilities | 415 | | | 1,961 | |
Current portion of operating lease liabilities | 1,061 | | | 1,104 | |
Current portion of finance lease liabilities | 259 | | | 233 | |
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Total current liabilities | 72,039 | | | 50,489 | |
Long-term debt | 65,849 | | | 67,928 | |
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Long-term portion of operating lease liabilities | 31,445 | | | 32,059 | |
Long-term portion of finance lease liabilities | 1,363 | | | 1,414 | |
Deferred income taxes | 1,791 | | | 2,433 | |
Other long-term liabilities | 70 | | | 89 | |
Total non-current liabilities | 100,518 | | | 103,923 | |
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Commitments and contingencies – See Note 13 | | | |
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Shareholders' equity: | | | |
Common stock, par value $1 per share; authorized 24,000,000 shares; issued 11,085,000 shares | 11,085 | | | 11,085 | |
Capital in excess of par value | 46,162 | | | 46,058 | |
Retained earnings | 84,397 | | | 63,080 | |
| 141,644 | | | 120,223 | |
Less: cost of common stock in treasury - 825,570 and 918,471 shares, respectively | 7,760 | | | 8,633 | |
Total shareholders' equity | 133,884 | | | 111,590 | |
Total liabilities and shareholders' equity | $ | 306,441 | | | $ | 266,002 | |
Note: The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date. See accompanying notes to condensed consolidated financial statements.
SYNALLOY CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net sales | $ | 116,202 | | | $ | 83,087 | | | $ | 232,420 | | | $ | 152,865 | |
Cost of sales | 95,329 | | | 69,000 | | | 189,051 | | | 130,043 | |
Gross profit | 20,873 | | | 14,087 | | | 43,369 | | | 22,822 | |
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Selling, general and administrative | 8,634 | | | 8,124 | | | 17,280 | | | 14,993 | |
Acquisition costs and other | 157 | | | — | | | 688 | | | — | |
Proxy contest costs and recoveries | — | | | 632 | | | — | | | 168 | |
Earn-out adjustments | (109) | | | 1,044 | | | (7) | | | 1,270 | |
Asset impairments | — | | | 233 | | | — | | | 233 | |
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Operating income | 12,191 | | | 4,054 | | | 25,408 | | | 6,158 | |
Other expense (income) | | | | | | | |
Interest expense | 407 | | | 353 | | | 810 | | | 739 | |
Loss on extinguishment of debt | — | | | — | | | — | | | 223 | |
Change in fair value of interest rate swaps | — | | | — | | | — | | | (2) | |
Other, net | (23) | | | — | | | (58) | | | 162 | |
Income before income taxes | 11,807 | | | 3,701 | | | 24,656 | | | 5,036 | |
Income tax provision | 750 | | | 815 | | | 3,339 | | | 1,056 | |
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Net income | $ | 11,057 | | | $ | 2,886 | | | $ | 21,317 | | | $ | 3,980 | |
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Net income per common share: | | | | | | | |
Basic | $ | 1.08 | | | $ | 0.31 | | | $ | 2.08 | | | $ | 0.43 | |
Diluted | $ | 1.06 | | | $ | 0.31 | | | $ | 2.05 | | | $ | 0.43 | |
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Weighted average shares outstanding: | | | | | | | |
Basic | 10,244 | | 9,233 | | 10,226 | | | 9,212 | |
Dilutive effect from stock options and grants | 187 | | 98 | | 151 | | | 103 | |
Diluted | 10,431 | | 9,331 | | 10,377 | | | 9,315 | |
See accompanying notes to condensed consolidated financial statements.
SYNALLOY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
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| Six Months Ended June 30, |
| 2022 | | 2021 |
Operating activities | | | |
Net income | $ | 21,317 | | | $ | 3,980 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation expense | 4,208 | | | 3,591 | |
Amortization expense | 1,442 | | | 1,360 | |
Amortization of debt issuance costs | 49 | | | 46 | |
Asset impairments | — | | | 233 | |
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Loss on extinguishment of debt | — | | | 223 | |
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Deferred income taxes | (642) | | | (76) | |
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Earn-out adjustments | (7) | | | 1,270 | |
Payments on earn-out liabilities in excess of acquisition date fair value | (372) | | | — | |
Provision for (reduction of) losses on accounts receivable | 532 | | | (362) | |
Provision for losses on inventories | 1,234 | | | 368 | |
Gain on disposal of property, plant and equipment | (5) | | | (81) | |
Non-cash lease expense | 214 | | | 249 | |
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Change in fair value of interest rate swap | — | | | (2) | |
Issuance of treasury stock for director fees | 364 | | | — | |
Stock-based compensation expense | 452 | | | 456 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (14,339) | | | (12,536) | |
Inventories | (32,442) | | | (5,482) | |
Other assets and liabilities | (1,022) | | | (570) | |
Accounts payable | 23,591 | | | 5,575 | |
Accounts payable - related parties | — | | | 632 | |
Accrued expenses | (1,795) | | | 1,370 | |
Accrued income taxes | 110 | | | 4,751 | |
Net cash provided by operating activities | 2,889 | | | 4,995 | |
Investing activities | | | |
Purchases of property, plant and equipment | (2,330) | | | (563) | |
Proceeds from disposal of property, plant and equipment | 5 | | | 138 | |
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Net cash used in investing activities | (2,325) | | | (425) | |
Financing activities | | | |
Borrowings from long-term debt | 237,938 | | | 38,398 | |
Proceeds from note payable | 967 | | | — | |
Proceeds from exercise of stock options | 161 | | | — | |
Payments on long-term debt | (240,017) | | | (40,269) | |
Payments on note payable | (96) | | | — | |
Principal payments on finance lease obligations | (126) | | | (19) | |
Payments on earn-out liabilities | (1,167) | | | (1,944) | |
Payments for termination of interest rate swap | — | | | (46) | |
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Payments of deferred financing costs | — | | | (165) | |
Net cash used in financing activities | (2,340) | | | (4,045) | |
(Decrease) increase in cash and cash equivalents | (1,776) | | | 525 | |
Cash and cash equivalents at beginning of period | 2,021 | | | 236 | |
Cash and cash equivalents at end of period | $ | 245 | | | $ | 761 | |
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Supplemental Disclosure of Cash Flow Information | | | |
Cash paid for: | | | |
Interest | $ | 699 | | | $ | 620 | |
Income taxes | $ | 3,874 | | | $ | 24 | |
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Noncash Investing Activities: | | | |
Capital expenditures, not yet paid | $ | 336 | | | $ | — | |
See accompanying notes to condensed consolidated financial statements.
SYNALLOY CORPORATION
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)
(in thousands)
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| Three Months Ended June 30, 2022 |
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| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | | | Cost of Common Stock in Treasury | | Total |
| Shares | Amount | | | | | | |
Balance March 31, 2022 | 11,085 | | $ | 11,085 | | | $ | 46,028 | | | $ | 73,340 | | | | | $ | (8,099) | | | $ | 122,354 | |
Net income | — | | — | | | — | | | 11,057 | | | | | — | | | 11,057 | |
Issuance of 32,701 shares of common stock from treasury | — | | — | | | (198) | | | — | | | | | 308 | | | 110 | |
Exercise of stock options for 3,334 shares, net | — | | — | | | 12 | | | — | | | | | 31 | | | 43 | |
Stock-based compensation | — | | — | | | 320 | | | — | | | | | — | | | 320 | |
Balance June 30, 2022 | 11,085 | | $ | 11,085 | | | $ | 46,162 | | | $ | 84,397 | | | | | $ | (7,760) | | | $ | 133,884 | |
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See accompanying notes to condensed consolidated financial statements.
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| Six Months Ended June 30, 2022 |
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| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | | | Cost of Common Stock in Treasury | | Total |
| Shares | Amount | | | | | | |
Balance December 31, 2021 | 11,085 | | $ | 11,085 | | | $ | 46,058 | | | $ | 63,080 | | | | | $ | (8,633) | | | $ | 111,590 | |
Net income | — | | — | | | — | | | 21,317 | | | | | — | | | 21,317 | |
Issuance of 75,783 shares of common stock from treasury | — | | — | | | (348) | | | — | | | | | 712 | | | 364 | |
Exercise of stock options for 17,118 shares, net | — | | — | | | — | | | — | | | | | 161 | | | 161 | |
Stock-based compensation | — | | — | | | 452 | | | — | | | | | — | | | 452 | |
Balance June 30, 2022 | 11,085 | | $ | 11,085 | | | $ | 46,162 | | | $ | 84,397 | | | | | $ | (7,760) | | | $ | 133,884 | |
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See accompanying notes to condensed consolidated financial statements.
Synalloy Corporation
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
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| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | | | Cost of Common Stock in Treasury | | Total |
| Shares | Amount | | | | | | |
Balance March 31, 2021 | 10,300 | | $ | 10,300 | | | $ | 37,668 | | | $ | 43,929 | | | | | $ | (10,321) | | | $ | 81,576 | |
Net income | — | | — | | | — | | | 2,886 | | | | | — | | | 2,886 | |
Issuance of 66,809 shares of common stock from treasury | — | | — | | | (628) | | | — | | | | | 628 | | | — | |
Stock-based compensation | — | | — | | | 269 | | | — | | | | | — | | | 269 | |
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Balance June 30, 2021 | 10,300 | | $ | 10,300 | | | $ | 37,309 | | | $ | 46,815 | | | | | $ | (9,693) | | | $ | 84,731 | |
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See accompanying notes to condensed consolidated financial statements.
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| Six Months Ended June 30, 2021 |
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| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | | | Cost of Common Stock in Treasury | | Total |
| Shares | Amount | | | | | | |
Balance December 31, 2020 | 10,300 | | $ | 10,300 | | | $ | 37,719 | | | $ | 42,835 | | | | | $ | (10,559) | | | $ | 80,295 | |
Net income | — | | — | | | — | | | 3,980 | | | | | — | | | 3,980 | |
Issuance of 92,172 shares of common stock from treasury | — | | — | | | (866) | | | — | | | | | 866 | | | — | |
Stock-based compensation | — | | — | | | 456 | | | — | | | | | — | | | 456 | |
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Balance June 30, 2021 | 10,300 | | $ | 10,300 | | | $ | 37,309 | | | $ | 46,815 | | | | | $ | (9,693) | | | $ | 84,731 | |
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Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unless indicated otherwise, the terms "Company," "we," "us," and "our" refer to Synalloy Corporation and its consolidated subsidiaries.
Note 1: Basis of Presentation
Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included as required by Regulation S-X, Rule 10-01.
These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "Annual Report"). The financial results for the interim periods may not be indicative of the financial results for the entire year.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP required management to make estimates and judgments that affect the amounts reported and disclosed in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
COVID-19 Update
The COVID-19 pandemic and related responses by public health and governmental authorities to contain and combat the outbreak and spread have adversely affected many economic sectors, significantly disrupted the global supply chain and fueled producer price and consumer inflation. During the second quarter and first six months of 2022, aspects of the Company's business continued to be affected by macroeconomic factors related to the COVID-19 pandemic, specifically with labor shortages at our plants and other areas of our business. We continue to experience demand for our products, however, the full extent of the future impact of the COVID-19 pandemic on the Company's operational and financial performance is currently uncertain and will depend on many factors outside of the Company's control.
Accounting Pronouncements Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting." The ASU, and subsequent clarifications, provide practical expedients for contract modification accounting related to the transition away from the London Interbank Offered Rate (LIBOR) and other interbank offering rates to alternative reference rates. The expedients are applicable to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company intends to use the expedients where needed for reference rate transition. The Company continues to evaluate this standard update and does not currently expect a material impact to the Company’s financial statements or disclosures.
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 2: Acquisitions
Acquisition of DanChem Technologies, Inc.
On October 22, 2021, the Company completed the acquisition of DanChem, a contract manufacturer of chemical products located in Danville, Virginia. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805 - "Business Combinations." The preliminary purchase price was $34.1 million including $1.5 million in cash obtained through the acquisition. The purchase price was paid in cash and funded through a drawdown of $34.5 million on the Company’s existing revolving credit facility. Amounts outstanding under the revolving line of credit portion of the facility currently bear interest, at the Company's option, at (a) the Base Rate (as defined in the Credit Agreement) plus 0.50%, or (b) LIBOR plus 150%. See Note 8 for more information on the Company's long-term debt. The table below summarizes the preliminary estimates of fair value of identifiable assets acquired and liabilities assumed in the Acquisition. These preliminary estimates of the fair value are subject to revisions, which may result in an adjustment to the preliminary values presented below.
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(in thousands) | October 22, 2021 |
Cash and cash equivalents | $ | 1,533 | |
Accounts receivable, net of allowance for credit losses of $118 | 5,358 | |
Inventories, net | 1,561 | |
Prepaid expenses and other current assets | 454 | |
Property, plant and equipment, net | 15,697 | |
Right of use asset, operating leases, net | 208 | |
Intangible assets, net | 5,750 | |
Total identifiable assets acquired | 30,561 | |
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Accounts payable | 1,751 | |
Accrued expenses and other current liabilities | 1,622 | |
Current portion of operating lease liabilities | 51 | |
Current portion of finance lease liabilities | 215 | |
Deferred income taxes | 2,542 | |
Long-term portion of operating lease liabilities | 157 | |
Long-term portion of finance lease liabilities | 1,408 | |
Total identifiable liabilities assumed | 7,746 | |
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Net identifiable assets acquired | 22,815 | |
Transaction price | 34,097 | |
Goodwill | $ | 11,282 | |
The Company is in the process of finalizing the value of deferred tax balances and the Company's estimates of these values was still preliminary on June 30, 2022 pending completion of the DanChem pre-acquisition tax returns. Therefore, these provisional amounts are subject to change as the Company continues to evaluate information required to complete the valuations throughout the measurement period, which will not exceed one year from the acquisition date.
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The recognized goodwill is attributable to operational synergies, assembled workforce and growth opportunities and was allocated to the Company's Specialty Chemicals Segment. Substantially all of the goodwill resulting from this acquisition is not expected to be deductible for tax purposes.
Approximately $0.1 million and $0.4 million of one-time, acquisition-related costs, is recognized in acquisition costs and other expenses in the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2022.
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company identified DanChem’s customer relationships, product development know-how, and tradename as finite-lived assets with estimated fair values as of the acquisition date of $5.1 million, $0.5 million, and $0.2 million, respectively. The finite-lived assets are subject to amortization using either an accelerated or straight-line method over 15 years.
Total net sales and operating income for DanChem for the three and six months ended June 30, 2022 were as follows:
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(in thousands) | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 |
Net sales | $ | 8,387 | | $ | 15,861 | |
Operating income | $ | 207 | | $ | 442 | |
Note 3: Revenue Recognition
Revenue is generated primarily from contracts to produce, ship and deliver steel and specialty chemical products. The Company’s performance obligations are satisfied and revenue is recognized when control and title of the contract promised goods or services is transferred to our customers for product shipped or services rendered. Revenues are recorded net of any sales incentives and discounts. Sales tax and other taxes we collect with revenue-producing activities are excluded from revenue. Shipping costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Costs related to obtaining sales contracts are incidental and are expensed when incurred. Because customers are invoiced at the time title transfers and the Company’s right to consideration is unconditional at that time, the Company does not maintain contract asset balances. Additionally, the Company does not maintain material contract liability balances, as performance obligations for substantially all contracts are satisfied prior to customer payment for product. The Company offers industry standard payment terms.
The following table presents the Company's revenues, disaggregated by product group. Substantially all of the Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time.
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| | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Fiberglass and steel liquid storage tanks and separation equipment | | | | | $ | — | | | $ | 550 | | | 113 | | | 691 | |
Heavy wall seamless carbon steel pipe and tube | | | | | 12,094 | | | 11,131 | | | 24,498 | | | 18,949 | |
Stainless steel pipe and tube | | | | | 66,114 | | | 46,360 | | | 128,323 | | | 86,301 | |
Galvanized pipe and tube | | | | | 8,974 | | | 10,056 | | | 22,745 | | | 17,370 | |
Specialty chemicals | | | | | 29,020 | | | 14,990 | | | 56,741 | | | 29,554 | |
Net sales | | | | | $ | 116,202 | | | $ | 83,087 | | | $ | 232,420 | | | $ | 152,865 | |
Note 4: Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 - Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 - Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
•Quoted prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in non-active markets;
•Inputs other than quoted prices that are observable for the asset or liability; and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using model-based techniques, including option pricing models, discounted cash flow models, probability weighted models, and Monte Carlo simulations.
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Level 3: Contingent consideration (earn-out) liabilities
The fair value of contingent consideration ("earn-out") liabilities resulting from the 2018 MUSA-Galvanized acquisition and the 2019 American Stainless acquisition are classified as Level 3. Each quarter-end, the Company re-evaluates its assumptions for all earn-out liabilities and adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are reflected in operating income in the periods in which they are identified. Changes in the fair value of the earn-out liabilities may materially impact and cause volatility in the Company's operating results. The significant unobservable inputs used in the fair value measurement of the Company's earn-out liabilities are the discount rate, timing of the estimated payouts, and future revenue projections. Significant increases (decreases) in any of those inputs would not have resulted in a material difference in the fair value measurement of the earn-out liabilities for the six months ended June 30, 2022.
The following table presents a summary of changes in fair value of the Company's Level 3 earn-out liabilities measured on a recurring basis for the six months ended June 30, 2022:
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(in thousands) | MUSA-Galvanized | | American Stainless | | Total |
Balance December 31, 2021 | $ | 1,106 | | | $ | 855 | | | $ | 1,961 | |
Earn-out payments during the period | (684) | | | (855) | | | (1,539) | |
Changes in fair value during the period | (7) | | | — | | | (7) | |
Balance June 30, 2022 | $ | 415 | | | $ | — | | | $ | 415 | |
For the three and six months ended June 30, 2022, the Company had no unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value instruments.
Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements
The following table summarizes the significant unobservable inputs in the fair value measurement of our contingent consideration (earn-out) liabilities as of June 30, 2022:
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Instrument | Fair Value June 30, 2022 | Principal Valuation Technique | Significant Unobservable Inputs | Range | Weighted Average |
Contingent consideration (earn-out) liabilities | $415 | Probability Weighted Expected Return | Discount rate | - | 5% |
Timing of estimated payouts | 2022 | - |
Future revenue projections | $2.5M | $2.5M |
The weighted average discount rate was calculated by applying an equal weighting to each contingent consideration's (earn-out liabilities) discount rate. The weighted average future revenue projection was calculated by applying an equal weighting of probabilities to each forecasted scenario within the valuation models to determine the probability weighted sales applicable to the contingent consideration (earn-out liabilities).
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
During the three and six months ended June 30, 2022, the Company's only significant measurements of assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition were certain assets classified as held for sale.
Assets Held for Sale
On February 17, 2021 the Board of Directors authorized the permanent cessation of operations at Palmer and the subleasing of the Palmer facility. As of December 31, 2021 the Company permanently ceased operations at the Palmer facility and determined that the remaining asset group met the criteria to be classified as held for sale, and therefore classified the related
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
assets as held for sale on the consolidated balance sheets. The Company determined that the exit from this business did not represent a strategic shift that had a major effect on its consolidated results of operations, and therefore this business was not classified as discontinued operations. As of June 30, 2022, the remaining Palmer assets continue to be classified as held for sale. The results of operations for this business are included within the Metals Segment for all periods presented in this quarterly report. The Company uses observable inputs, such as prices of comparable assets in active markets to determine the fair value of the remaining assets. The Company classifies these fair value measurements as Level 2.
The assets classified as held for sale are as follows:
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Inventory, net | $ | 547 | | | $ | 617 | |
Property, plant and equipment, net | 238 | | | 238 | |
Assets held for sale | $ | 785 | | | $ | 855 | |
The Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the lease of the facility through 2036. The Company currently has a sublease for a portion of the Palmer facility and is actively pursuing a sublease for the remaining portion of the facility. The Company will continue to dispose of the remaining assets throughout fiscal 2022.
During the three and six months ended June 30, 2021, the Company's only significant measurements of assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition were certain long-lived assets. During the three and six months ended June 30, 2021, the Company determined that technology associated with certain long lived assets within the Specialty Chemicals Segment was obsolete and, as a result, recognized a non-cash, pre-tax asset impairment charge of $0.2 million.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, accounts payable and the Company's note payable approximated their carrying value because of the short-term nature of these instruments. The Company's revolving line of credit and long-term debt, which is based on a variable interest rate, are also reflected in the financial statements at carrying value which approximate fair values as of June 30, 2022. See Note 8 for further information on the Company's debt. Note 5: Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods. The components of inventories are as follows:
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Raw materials | $ | 73,255 | | | $ | 48,745 | |
Work-in-process | 29,418 | | | 25,187 | |
Finished goods | 33,992 | | | 30,666 | |
| 136,665 | | | 104,598 | |
Less: inventory reserves | (2,136) | | | (1,349) | |
Inventories, net | $ | 134,529 | | | $ | 103,249 | |
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6: Property, Plant and Equipment
Property, plant and equipment consist of the following:
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Land | $ | 723 | | | $ | 723 | |
Leasehold improvements | 3,388 | | | 4,641 | |
Buildings | 1,475 | | | 53 | |
Machinery, fixtures and equipment | 111,497 | | | 110,127 | |
Construction-in-progress | 3,022 | | | 1,900 | |
| 120,105 | | | 117,444 | |
Less: accumulated depreciation and amortization | (77,928) | | | (73,724) | |
Property, plant and equipment, net | $ | 42,177 | | | $ | 43,720 | |
The following table sets forth depreciation expense related to property, plant and equipment:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Cost of sales | $ | 2,031 | | | $ | 1,713 | | | $ | 4,086 | | | $ | 3,447 | |
Selling, general and administrative | 61 | | | 61 | | | 122 | | | 144 | |
Total depreciation | $ | 2,092 | | | $ | 1,774 | | | $ | 4,208 | | | $ | 3,591 | |
Note 7: Goodwill, Intangible Assets and Deferred Charges
Goodwill
The Company's goodwill balance of $12.6 million as of June 30, 2022 and year ended December 31, 2021 was attributable to the Specialty Chemicals Segment.
Intangible Assets
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions and are amortized over their estimated useful life using either an accelerated or straight-line method over a period of eight to 15 years.
The balance of intangible assets subject to amortization are as follows:
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Intangible assets, gross | $ | 28,876 | | | $ | 28,876 | |
Accumulated amortization of intangible assets | (15,936) | | | (14,494) | |
Intangible assets, net | $ | 12,940 | | | $ | 14,382 | |
Estimated amortization expense related to intangible assets for the next five years are as follows:
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(in thousands) | | | | |
Remainder of 2022 | $ | 1,442 | | | | |
2023 | 1,433 | | | | |
2024 | 1,336 | | | | |
2025 | 1,238 | | | | |
2026 | 1,141 | | | | |
2027 | 1,044 | | | | |
Thereafter | 5,306 | | | | |
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Deferred Charges
Deferred charges represent debt issuance costs and are amortized over their estimated useful lives using the straight-line method over a period of four years.
The balance of deferred charges subject to amortization are as follows:
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Deferred charges, gross | $ | 398 | | | $ | 398 | |
Accumulated amortization of deferred charges | (145) | | | (96) | |
Deferred charges, net | $ | 253 | | | $ | 302 | |
Note 8: Debt
Short-term debt
On June 6, 2022, the Company entered into a note payable in the amount of $1.0 million with an interest rate of 2.77% maturing April 1, 2023. The agreement is associated with the financing of the Company's insurance premium in the current year. As of June 30, 2022, the outstanding balance was $0.9 million.
Long-term debt
Long-term debt consists of the following:
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(in thousands) | June 30, 2022 | | December 31, 2021 |
Revolving line of credit, due January 15, 2025 | $ | 63,849 | | | $ | 65,571 | |
Term loan, due January 15, 2025 | 4,464 | | | 4,821 | |
Total long-term debt | 68,313 | | | 70,392 | |
Less: Current portion of long-term debt | (2,464) | | | (2,464) | |
Long-term debt, less current portion | $ | 65,849 | | | $ | 67,928 | |
The Company and its subsidiaries have a Credit Agreement with BMO Harris Bank, N.A. ("BMO") which provides the Company with a four-year revolving credit facility with up to $150.0 million of borrowing capacity (the "Facility").
The initial borrowing capacity under the Facility totals $110.0 million consisting of a $105.0 million revolving line of credit and a $5.0 million delayed draw term loan. The revolving line of credit includes a $17.5 million machinery and equipment sub-limit which requires quarterly payments of $0.4 million with a balloon payment due upon maturity of the Facility in January 2025. The term loan requires quarterly payments of $0.2 million with a balloon payment due upon maturity of the Facility in January 2025.
We have pledged all of our accounts receivable, inventory, and certain machinery and equipment as collateral for the Credit Agreement. Availability under the Credit Agreement is subject to the amount of eligible collateral as determined by the lenders' borrowing base calculations. Amounts outstanding under the revolving line of credit portion of the Facility currently bear interest, at the Company's option, at (a) the Base Rate (as defined in the Credit Agreement) plus 0.50%, or (b) LIBOR plus 1.50%. Amounts outstanding under the delayed draw term loan portion of the Facility bear interest at LIBOR plus 1.65%. The Facility also provides an unused commitment fee based on the daily used portion of the Facility. The weighted average interest rate per annum was 2.15% as of June 30, 2022.
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries. The Facility contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $7.5 million and (ii) 10% of the revolving credit facility (currently $10.5 million). As of June 30, 2022, the Company was in compliance with all debt covenants.
As of June 30, 2022, the Company had $41.2 million of remaining available capacity under its credit facility.
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 9: Leases
Balance Sheet Presentation
Operating and finance lease amounts included in the unaudited condensed consolidated balance sheet are as follows (in thousands):
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Classification | | Financial Statement Line Item | | June 30, 2022 | | December 31, 2021 |
Assets | | Right-of-use assets, operating leases | | $ | 29,950 | | | $ | 30,811 | |
Assets | | Property, plant and equipment | | 1,605 | | | 1,640 | |
Current liabilities | | Current portion of lease liabilities, operating leases | | 1,061 | | | 1,104 | |
Current liabilities | | Current portion of lease liabilities, finance leases | | 259 | | | 233 | |
Non-current liabilities | | Non-current portion of lease liabilities, operating leases | | 31,445 | | | 32,059 | |
Non-current liabilities | | Non-current portion of lease liabilities, finance leases | | 1,363 | | | 1,414 | |
Total Lease Cost
Individual components of the total lease cost incurred by the Company are as follows:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | $ | 1,043 | | | $ | 1,023 | | | $ | 2,091 | | | $ | 2,046 | |
Finance lease cost: | | | | | | | |
Amortization of right-of-use assets | 69 | | | 11 | | | 136 | | | 20 | |
Interest on finance lease liabilities | 9 | | | 1 | | | 18 | | | 1 | |
Sublease income | (32) | | | — | | | $ | (65) | | | $ | — | |
Total lease cost | $ | 1,089 | | | $ | 1,035 | | | $ | 2,180 | | | $ | 2,067 | |
Reduction in carrying amounts of right-of-use assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line method over the term of the lease including any periods of free rent and are included in selling, general, and administrative expense on the unaudited condensed consolidated statement of operations.
During the fourth quarter of 2021, the Company entered into a sublease agreement with a third party to sublease a portion of the Palmer facility. The sublease agreement continues through the remaining term of the Master Lease Agreement and will expire on September 30, 2036, unless terminated in accordance with the sublease agreement. The sublease provides for an annual base rent of approximately $0.1 million in the first year, which increases on an annual basis by 2.0%. The sublessee is responsible for its pro rata share of certain costs, taxes and operating expenses related to the subleased space. The sublease includes an initial security deposit of $0.1 million.
Future expected cash receipts from the sublease as of June 30, 2022 are as follows:
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(in thousands) | Sublease Receipts |
Remainder of 2022 | $ | 64 | |
2023 | 129 | |
2024 | 132 | |
2025 | 134 | |
2026 | 137 | |
Thereafter | 1,490 | |
Total sublease receipts | $ | 2,086 | |
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Maturity of Leases
The amounts of undiscounted future minimum lease payments under leases as of June 30, 2022 are as follows:
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(in thousands) | Operating | | Finance |
Remainder of 2022 | $ | 1,873 | | | $ | 148 | |
2023 | 3,645 | | | 283 | |
2024 | 3,667 | | | 257 | |
2025 | 3,687 | | | 244 | |
2026 | 3,703 | | | 244 | |
Thereafter | 39,916 | | | 571 | |
Total undiscounted minimum future lease payments | 56,491 | | | 1,747 | |
Imputed interest | 23,985 | | | 125 | |
Present value of lease liabilities | $ | 32,506 | | | $ | 1,622 | |
Lease Term and Discount Rate
| | | | | | | | | | | |
Weighted-average remaining lease term | June 30, 2022 | | December 31, 2021 |
Operating leases | 14.05 years | | 14.43 years |
Finance leases | 6.59 years | | 7.07 years |
Weighted-average discount rate | | | |
Operating leases | 8.30 | % | | 8.30 | % |
Finance leases | 2.28 | % | | 2.27 | % |
During the three and six months ended June 30, 2022, $0.1 million of right-of-use assets were recognized in exchange for new operating lease liabilities.
Note 10: Shareholders' Equity
Share Repurchase Program
On February 17, 2021, the Board of Directors re-authorized the Company's share repurchase program. The previous share repurchase program had a term of 24 months and terminated on February 21, 2021. The share repurchase program allows for repurchase of up to 790,383 shares of the Company's outstanding common stock over 24 months. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. As of June 30, 2022, the Company has 790,383 shares of its share repurchase authorization remaining.
Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 11: Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
(in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Numerator: | | | | | | | | | | | |
Net income | $ | 11,057 | | | $ | 2,886 | | | $ | 21,317 | | | $ | 3,980 | | | | | |
Denominator: | | | | | | | | | | | |
Denominator for basic earnings per share - weighted average shares | 10,244 | | | 9,233 | | | 10,226 | | | 9,212 | | | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Employee stock options and stock grants | 187 | | | 98 | | | 151 | | | 103 | | | | | |
Denominator for diluted earnings per share - weighted average shares | 10,431 | | | 9,331 | | | 10,377 | | | 9,315 | | | | | |
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Net income per share: | | | | | | | | | | | |
Basic | $ | 1.08 | | | $ | 0.31 | | | $ | 2.08 | | | $ | 0.43 | | | | | |
Diluted | $ | 1.06 | | | $ | 0.31 | | | $ | |