Business context and reporting period
Synalloy Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019. Its businesses are reported in Metals and Specialty Chemicals. The filing includes American Stainless Tubing (ASTI), acquired January 1, 2019; year-to-date comparisons also reflect the 2018 MUSA-Galvanized acquisition for the first six months of 2019. Acquisition-inclusive growth therefore differs from underlying performance.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $73.6m | $77.8m | $237.2m | $208.2m |
| Gross profit | $7.3m | $14.0m | $23.8m | $41.0m |
| Gross margin | 9.9% | 18.0% | 10.0% | 19.7% |
| Operating income | $0.1m | $7.5m | $0.1m | $17.7m |
| Net income (loss) | ($1.0m) | $5.0m | ($2.1m) | $12.5m |
| Diluted EPS | ($0.11) | $0.56 | ($0.24) | $1.42 |
- Sales and earnings: Q3 sales decreased 5.3%; excluding ASTI, management reported a 16.2% decrease. Nine-month sales rose 14.0%, but fell 5.0% excluding ASTI and MUSA-Galvanized. Net results deteriorated sharply in both comparisons.
- Segments: Q3 Metals sales were $60.1m and operating income was $0.45m, versus $61.0m and $8.0m. Specialty Chemicals sales were $13.5m and operating income was $0.85m, versus $16.8m and $1.35m.
- Cash flow: Nine-month operating cash flow was $17.9m, compared with cash used of $14.3m in 2018. Investing used $24.0m, including $21.9m for ASTI; financing provided $4.1m. Capital expenditures were $2.8m. Cash declined to $0.25m from $2.22m at year-end.
- Debt and liquidity: Borrowings from the lender totaled $83.1m at September 30; $16.9m remained available under the line of credit. The company reported compliance with debt covenants. Current assets were $160.8m and current liabilities $46.1m.
- Balance sheet changes: Total assets rose to $272.1m from $228.4m, reflecting the acquisition and adoption of lease accounting. Operating lease liabilities were $37.5m; operating right-of-use assets were $36.1m. Shareholders’ equity was $107.0m.
Material changes, outlook, and risks
- Management attributed Metals’ profit decline to unfavorable metal-price timing, lower selling prices, and weaker profitability in welded stainless and galvanized operations. Q3 inventory price changes were a $0.6m pretax loss versus a $1.6m gain in the prior-year quarter; nine-month results included a $5.7m loss versus a $5.1m gain.
- Reported pretax effects of other significant Q3 items totaled about $1.6m, including $0.7m of long-term incentive plan expense, more than $0.6m of medical stop-loss claims, and $0.3m of heavy-wall press outage impact. Management anticipated a further $0.4m outage impact in Q4 and had filed an insurance claim.
- Management expected recent surcharge increases to improve order-book pricing, with most benefit anticipated in Q1 2020 because of shipment timing. It expected energy-market sales to remain low for the rest of 2019 and slightly lower general-industrial sales in Q4 due to seasonal patterns. No formal earnings or revenue guidance was provided.
- Specialty Chemicals sales were affected by nonrecurring 2018 asphalt-additive volume and lower raw-material costs that reduced customer pricing. The company also cited competition and pricing, demand, raw-material availability and costs, acquisition integration, interest-rate and financing risks, and covenant compliance among forward-looking risks.
- Earn-out fair-value changes reduced operating expense by $1.6m for the first nine months, but the filing notes that valuation changes may create significant earnings volatility. The ASTI earn-out was contingent on revenue and remained part of the company’s liabilities.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said ordinary-course legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported.
Most important facts for investors to verify
- Whether underlying Metals pricing, margins, and shipment volumes stabilize, and whether the forecast surcharge benefit materializes in Q1 2020.
- Whether cash generation and the low cash balance remain adequate given debt service, lease payments, and acquisition-related earn-outs.
- The sustainability of covenant compliance and availability under the asset-based credit line.
- The actual Q4 cost and timing of the heavy-wall press outage, including any insurance recovery.
- How ASTI performs against acquisition expectations and how contingent earn-out valuations affect reported results.
- The effects of the lease-accounting transition and other nonrecurring items when comparing periods.