Business context and reporting period
Synalloy Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2018. The filing identifies Synalloy—not Ascent Industries Co.—as the registrant, so investors should verify the company and filing match their intended review. Synalloy operates Metals and Specialty Chemicals segments. The 2018 comparison includes a full quarter of Bristol Metals-Munhall results; the 2017 period included only results after its February 28, 2017 acquisition.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $58.48 million | $42.20 million |
| Gross profit / margin | $11.23 million / 19.2% | $7.40 million / 17.5% |
| Operating income / margin | $5.38 million / 9.2% | $1.16 million / 2.7% |
| Net income | $3.84 million | $0.74 million |
| Diluted EPS | $0.44 | $0.08 |
| Operating cash flow | $(5.61) million | $(6.90) million |
| Capital expenditures | $1.86 million | $1.16 million |
Revenue rose 39% year over year. Metals sales increased 53% to $45.49 million, while Specialty Chemicals sales increased 4% to $12.99 million. Gross and operating margins improved; reported results also reflect the acquired Munhall business and a $313,000 legal-settlement gain in SG&A.
Cash, debt and liquidity
Cash was $18,749 at March 31, 2018, compared with $14,706 at year-end. Operating cash use was driven mainly by increases in accounts receivable and inventory. Cash flow after capital expenditures was approximately negative $7.46 million. The company drew $8.36 million on its line of credit; long-term debt was $34.27 million, up from $25.91 million at December 31, 2017. Current assets were $123.91 million and current liabilities $37.15 million. The filing reports compliance with debt covenants; available borrowing capacity is not clearly stated.
Material changes and management commentary
- Metals operating income rose to $6.02 million from $1.56 million. Management cited higher volume, pricing and product mix, rising nickel surcharges, and Munhall acquisition contribution. Excluding Munhall, Metals sales were up 21%.
- Specialty Chemicals operating income declined to $0.86 million from $1.51 million, attributed primarily to product mix. Management said Q1 margin was 6%, near the low end of its historical quarterly range, and expected approximately 10% for the full year.
- Management reported Bristol Metals backlog of $34.35 million and Palmer backlog of $18.19 million. It said $1.33 million of delayed tank shipments had shipped by the filing date, supporting its Q2 outlook.
- Inventory increased $10.72 million from year-end, mainly in Metals, including stock for a special-alloy order expected to ship in Q2. Receivables increased $6.08 million, while days sales outstanding improved to 47 from 51.
- The company purchased about 105,000 shares of a potential acquisition target for $191,000. It also reported a $154,000 increase in the Munhall earn-out liability based on higher projected shipments and prices.
Outlook, risks and unusual items
Management described Q1 as exceptionally good and said it anticipated 2018 Bristol Metals shipments above 65 million pounds, with annual capacity approaching 110 million pounds. A high-frequency laser mill was acquired for installation at Munhall in Q3. Management also cited potential organic growth from Specialty Chemicals product additions and a possible bolt-on acquisition, with more information expected before the end of Q2. These are forward-looking expectations, not guarantees.
Risks identified include economic and product-demand weakness, competitive pricing, raw-material cost and availability, customer shipment delays, labor constraints, acquisition integration, customer financial health, environmental matters, access to financing, interest-rate exposure and compliance with debt covenants. No material change in market-risk exposure or risk-factor assessment was reported. Management said controls were effective and identified no material control changes. The filing states that ordinary-course legal matters were not expected to have a material adverse effect.
Other notable items: the company adopted revenue-recognition Topic 606 with no reported financial-statement impact; equity-security fair-value accounting produced an $88,296 loss; and management said adoption of the new lease standard was expected to add material right-of-use assets and lease liabilities, with other effects still under evaluation.
Important facts for investors to verify
- Confirm that Synalloy Corporation, rather than Ascent Industries Co., is the intended issuer for this filing summary.
- Check subsequent filings for actual Q2 shipment of the special-alloy order and delayed tanks, and for conversion of the reported backlogs into revenue and cash.
- Review working-capital needs, inventory turns, borrowing capacity and debt covenant headroom given low cash and increased debt.
- Track whether Specialty Chemicals achieves management’s approximate 10% full-year operating-margin expectation.
- Verify developments on the potential bolt-on acquisition, the acquired target shares, and the expected laser-mill installation and production contribution.