Synalloy Corporation — FY2019 Form 10-K
Entity note: The request identifies ASCENT INDUSTRIES CO., but the supplied filing is for Synalloy Corporation (NASDAQ: SYNL). It covers the fiscal year ended December 31, 2019; fourth-quarter figures are also summarized below. Synalloy operates Metals and Specialty Chemicals businesses.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $305.2 million | $280.8 million |
| Gross profit / margin | $30.8 million / 10% | $51.2 million / 18% |
| Operating income (loss) | ($1.7 million) | $21.2 million |
| Net income (loss) | ($3.0 million); diluted EPS ($0.34) | $13.1 million; diluted EPS $1.48 |
| Cash from (used in) operations | $28.6 million | ($21.2 million) |
| Cash and cash equivalents at year-end | $0.6 million | $2.2 million |
| Working capital / current ratio | $106.5 million / 3.6:1 | $130.2 million / 4.5:1 |
| Bank debt at year-end | $75.6 million | $76.4 million |
FY2019 investing cash outflow was $25.7 million, including $21.9 million for the American Stainless Tubing acquisition and $4.5 million in capital expenditures. Financing cash outflow was $4.5 million. The $100 million asset-based revolving facility had $59.2 million drawn and $13.4 million available under the borrowing base at year-end; a $16.3 million term loan was also outstanding. The company reported compliance with debt covenants and no defaults. Long-term debt to capital was 41%, versus 43% in 2018.
Fourth quarter: Sales were $67.9 million versus $72.7 million; gross profit was $7.0 million versus $10.3 million; and net loss was $0.9 million versus net income of $0.5 million in Q4 2018.
Material changes and segment results
- Sales rose 9% year over year, reflecting acquisitions, but profitability deteriorated substantially: gross profit fell 40%, and the company moved from operating and net income to losses.
- Metals: Sales increased 13% to $251.1 million, while segment operating income fell to $3.7 million from $27.8 million. Margin pressure included a $6.4 million unfavorable metal-pricing impact, compared with a $5.0 million gain in 2018, weaker volume/pricing/mix in welded pipe and tube, and a $2.4 million decline in seamless-pipe operating income. The May 2019 outage reduced value-added heavy-wall sales. Storage-tank sales fell 9% for the year and 60% in Q4; year-end tank backlog declined to $5.8 million from $20.7 million.
- Specialty Chemicals: Sales fell 8% to $54.1 million and operating income fell 29% to $2.8 million. Lower sales included the non-repeat of $2.4 million in opportunistic 2018 asphalt-related business and reduced pass-through pricing and conversion revenue.
- The January 1, 2019 American Stainless acquisition contributed $34.5 million of sales and $2.7 million of pretax income. Its reported Metals operating contribution was $3.0 million. The acquisition added $7.8 million of goodwill and a contingent earn-out.
- Operating cash flow improved by $49.9 million, primarily as receivables and inventory released $9.7 million and $20.0 million of cash, respectively. Inventory turns nevertheless declined 15%, from 1.90 to 1.62.
Outlook, risks, and unusual items
Management said visibility into 2020 was limited, anticipated flat to softer demand in industrial markets, and cited pressure on capital spending, particularly in energy. It did not provide quantified financial guidance. A company-wide cost-reduction program initiated in late 2019 was expected to deliver more than $6 million in annual savings, fully realized in 2020.
Reported results included a $1.9 million mark-to-market gain on equity investments in 2019, versus a $2.6 million loss in 2018; these gains and losses affected net results but not operating income. The company also incurred $1.9 million of one-time 2019 acquisition costs. No goodwill impairment was recorded. The company adopted lease-accounting standard ASC 842, recognizing $33.1 million of operating lease liabilities at adoption; year-end operating lease liabilities were $37.3 million. Operating lease commitments totaled $66.6 million undiscounted, largely associated with the long-term Store Capital master lease.
Key risks include cyclical demand and exposure to oil and gas activity, nickel and alloy-price volatility, competition and imports, supplier concentration, and a Specialty Chemicals customer representing 16% of segment revenue. Debt is variable-rate and indexed to LIBOR; the revolving facility matures in December 2021, and the filing discusses uncertainty around the planned LIBOR transition. Environmental, facility-operability, labor, acquisition-integration, and covenant risks are also disclosed. Management stated it was not aware of asserted or unasserted legal matters expected to significantly affect financial condition or results. KPMG issued unqualified opinions on the financial statements and internal controls; management and the auditor excluded acquired ASTI operations from the 2019 internal-control assessment.
Investor facts to verify
- Whether the intended issuer is Synalloy Corporation or ASCENT INDUSTRIES CO.; the supplied filing is Synalloy’s.
- Whether the announced 2020 cost savings were achieved and whether they offset continuing demand and margin pressure.
- Subsequent performance in Metals, particularly metal-price effects, the heavy-wall outage recovery, and tank backlog and oil-and-gas demand.
- Cash generation and borrowing-base availability, especially in light of low cash on hand, debt covenants, and the revolving facility’s 2021 maturity.
- ASTI acquisition integration, earn-out payments, and the effectiveness of controls after ASTI was included in the control assessment.
- Specialty Chemicals customer concentration, long-term lease commitments, and exposure to variable interest rates and the LIBOR transition.