Business context and reporting period
This is Synalloy Corporation’s unaudited Form 10-Q for the three months ended March 31, 2016. The filing identifies Synalloy Corporation as the registrant; this differs from the request metadata naming ASCENT INDUSTRIES CO. The company reports Metals and Specialty Chemicals segments. Its prior-year comparison quarter ended April 4, 2015, following a change to a calendar fiscal year; the filing says the difference in quarter-end dates had an insignificant effect on results.
Financial results and liquidity
| Metric | Q1 2016 | Prior-year quarter |
|---|---|---|
| Net sales | $36.31 million | $51.65 million |
| Gross profit / margin | $4.72 million / 13.0% | $8.94 million / 17.3% |
| Operating income (loss) / margin | $(0.85) million / (2.4)% | $3.13 million / 6.1% |
| Net income (loss) | $(1.37) million; $(0.16) per diluted share | $3.64 million; $0.42 per diluted share |
| Cash from operations | $(2.19) million | $(11.01) million |
Cash was $0.26 million at quarter-end, down from $0.39 million at December 31, 2015. Total current assets were $85.84 million and current liabilities were $23.59 million. Bank debt was approximately $31.07 million; the balance sheet reports $4.53 million current and $26.41 million long-term debt, net of issuance costs. Capital expenditures were $0.72 million. The company repurchased 29,500 shares for approximately $0.25 million.
Changes and segment performance
Sales fell 30% year over year. Metals sales declined 32% to $23.96 million, and the segment moved from $3.12 million operating income to a $0.77 million operating loss. Management cited weak oil-and-gas demand, lower nickel prices, lower volumes and selling prices, and the absence of prior-year large-pipe project work. Nickel margin compression was approximately $1.42 million in the quarter, versus $1.03 million in the prior-year quarter.
Specialty Chemicals sales decreased 24% to $12.35 million, while operating income fell 17% to $1.21 million. The segment’s operating margin nevertheless rose to 9.8% from 9.0%. Lower shipments, customer products moved in-house, delayed new-product ramp-ups, a customer-supplied raw-material shortage, and lower oil-related selling prices affected results. Consolidated SG&A increased 4% to $5.57 million and equaled 15% of sales, compared with 10% a year earlier.
Outlook, risks and contingencies
Management estimated approximately $5 million of additional nickel margin compression from inventory held at December 31, 2015, beyond the first-quarter impact. It reported that stainless pipe bookings in April exceeded $6 million, nearly half of first-quarter bookings, and expected Specialty Chemicals results to improve during the remainder of the year, particularly in the second half; more than 14 million pounds of annual volume were committed to begin production over the next 90 days. Management said oil-related tank and seamless carbon-pipe activity could return to more normal levels when oil reached $60 per barrel, while noting signs of increased Permian Basin activity if prices stabilized above $50. These are forward-looking expectations, not guarantees.
The company was out of compliance with its Total Funded Debt to EBITDA covenant at March 31, 2016, attributed to nickel-price losses. On May 4, its bank waived the breach and amended the covenant to allow nickel-price-loss add-backs for future test periods, while reducing the maximum revolving credit line from $40 million to $30 million. Management expected compliance under the revised calculation. Risks include commodity prices, demand, raw-material availability and costs, customer and production issues, financing and covenant compliance, and environmental and legal matters.
A customer obtained summary judgment on liability in a suit against discontinued Synalloy Fabrication; the amount of damages remained unresolved. The company had increased its facility-closing liability in 2015 for estimated claim costs, with no change in the first quarter. Management said it was not aware of other matters expected to materially affect financial condition or results.
Most important facts to verify
- Confirm the issuer identity: the filing is for Synalloy Corporation, not ASCENT INDUSTRIES CO.
- Review the amended credit agreement, revised $30 million revolver limit, covenant calculations and available borrowing capacity.
- Assess the estimated additional $5 million nickel-related margin compression and sensitivity to nickel and oil prices.
- Track whether April stainless-pipe bookings and committed Specialty Chemicals volume convert to shipments, revenue and profit.
- Monitor the unresolved damages in the customer lawsuit and any resulting liability or cash impact.