Business context and reporting period
The supplied filing is Synalloy Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017; it does not identify Ascent Industries Co. as the registrant. Synalloy reports Metals and Specialty Chemicals segments. Its Metals business includes stainless and carbon steel pipe and tube and storage tanks. The quarter includes operations acquired from Marcegaglia USA (MUSA) on February 28, 2017.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $51.51 million, up 48% year over year | $93.71 million, up 32% |
| Gross profit / margin | $8.18 million / 15.9%; prior year $4.00 million / 11.5% | $15.58 million / 16.6%; prior year $8.72 million / 12.2% |
| Operating income (loss) | $1.51 million; prior year loss $1.73 million | $2.67 million; prior year loss $2.59 million |
| Net income (loss) | $0.83 million; prior year loss $1.68 million | $1.53 million; prior year loss $3.05 million |
| Diluted EPS | $0.10; prior year loss $0.19 | $0.18; prior year loss $0.35 |
At June 30, cash was $52,707, current assets $124.33 million, and current liabilities $42.13 million. Long-term debt was $33.05 million, up from $8.80 million at year-end 2016; the company drew $24.24 million on its credit line during the first half. It reported compliance with debt covenants and a fixed-charge coverage ratio of 3.15 against a 1.10 minimum.
Cash used in operating activities was $5.57 million in the first half, compared with $2.22 million provided in the prior-year period. Investing activities used $18.62 million, including $11.95 million for the MUSA acquisition, $3.83 million for available-for-sale securities, and $2.83 million of capital expenditures. Financing activities provided $24.17 million, principally from line-of-credit borrowings. Receivables and inventory increased $12.19 million and $5.28 million, respectively, in operating cash-flow changes.
Material changes and management commentary
- Metals sales rose 77% in the quarter and 49% in the first half. The segment moved from operating losses to operating income of $2.36 million for the quarter and $3.92 million for the half. Higher shipment volumes, including MUSA, and improved inventory pricing contributed; first-half inventory pricing change was a $0.72 million benefit versus a $4.30 million negative impact in 2016. Specialty-alloy demand remained weak, and stainless margins were affected by product mix.
- Specialty Chemicals sales fell 3% for the quarter and 1% for the half. A customer loss reduced sales by approximately $0.5 million in the quarter and $2.1 million in the half, partly offset by new business and other demand. First-half segment operating income increased 4% to $2.65 million.
- The MUSA acquisition had a preliminary purchase-price allocation of approximately $14.95 million. Its Munhall facility contributed $7.30 million of second-quarter revenue and $0.21 million of pretax earnings. A four-year earn-out has minimum aggregate payments of $3.0 million and no stated maximum; its June 30 fair value was approximately $4.75 million. The purchase accounting remains subject to final valuation.
- Management expects Metals order activity and pricing to remain at current levels or modestly higher, supported in part by recent nickel and WTI price strength. It expects Specialty Chemicals profit growth in the second half as production of a new fire-retardant business ramps up. These are forward-looking expectations, not guarantees.
Risks, contingencies, and unusual items
- A customer lawsuit against Palmer resulted in an approximately $8.6 million judgment plus interest and approximately $1.04 million in attorneys’ fees. A settlement was executed June 30, 2017, but release of the judgment depended on former Palmer shareholders satisfying specified financial conditions, expected around September 1, 2017. Synalloy reported that it and Palmer would not fund the settlement under the contractual indemnity; the filing retained an approximately $11.06 million indemnified-contingency asset at June 30.
- Key risks include demand and pricing competition, raw-material prices and availability, customer financial condition and delays, acquisition integration, access to financing and interest-rate exposure, debt covenant compliance, and environmental and product-liability matters. Management said it knew of no other matters expected to materially affect financial condition or results.
- The company held 225,000 shares of a publicly traded potential acquisition target, valued at $4.39 million at June 30. A $0.37 million after-tax unrealized gain was recorded in other comprehensive income, not earnings.
- Acquisition-related costs were $0.75 million for the first half in operating expenses; management also reported acquisition costs in cost of sales, bringing first-half costs associated with the acquisition to approximately $1.00 million. The Munhall facility was excluded from management’s internal-control assessment because it was acquired during the first quarter.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for Synalloy Corporation, not Ascent Industries Co.
- Track the MUSA purchase-price valuation and earn-out exposure, including final goodwill and intangible-asset allocations.
- Assess whether operating cash flow improves as receivables and inventory convert to cash, and monitor reliance on credit-line borrowing.
- Verify completion of the Palmer litigation settlement conditions and release of the judgment and indemnified receivable.
- Compare management’s second-half outlook with actual Metals demand, commodity prices, specialty-alloy mix, and the fire-retardant business ramp.