Business context and reporting period
This is Synalloy Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2018, covering the three and nine months ended that date. The filing describes two segments: Metals and Specialty Chemicals. The requested company metadata says ASCENT INDUSTRIES CO., but the filing identifies Synalloy Corporation as the registrant; verify the issuer identity.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $77.8 million | $54.6 million | $208.2 million | $148.3 million |
| Gross profit | $14.0 million | $4.8 million | $41.0 million | $20.4 million |
| Gross margin | 18.0% | 8.9% | 19.7% | 13.8% |
| Operating income (loss) | $7.5 million | ($1.8) million | $17.7 million | $0.8 million |
| Net income (loss) | $5.0 million | ($1.2) million | $12.5 million | $0.3 million |
| Diluted EPS | $0.56 | ($0.14) | $1.42 | $0.04 |
Q3 operating margin was 9.7% versus a loss margin of 3.2% a year earlier; nine-month operating margin was 8.5% versus 0.6%. Interest expense was $0.6 million for Q3 and $1.3 million for the nine months, up from $0.3 million and $0.7 million, respectively.
Cash used in operating activities was $14.3 million for the first nine months, compared with $2.0 million used in 2017, primarily reflecting higher receivables and inventory. Investing cash outflow was $19.8 million, including $10.4 million for the MUSA-Galvanized acquisition and $5.0 million for equity securities. Financing provided $36.0 million, largely from $36.9 million of net line-of-credit borrowings. Cash was $1.9 million at September 30, 2018.
Current assets were $180.2 million and current liabilities $61.9 million, for working capital of $118.3 million and a current ratio of about 2.9. Long-term debt was $62.8 million; the asset-based credit line had an $80 million limit, with $16.7 million of remaining availability. The company reported compliance with its debt covenants. Capital expenditures were $4.5 million in the nine-month period.
Material changes and drivers
- Sales rose 42% in Q3 and 40% year to date. Metals sales increased 42% and 46%, respectively; Specialty Chemicals sales increased 45% and 24%.
- Metals operating income improved to $8.0 million in Q3 from a $1.3 million loss, and to $23.1 million year to date from $2.7 million. Management cited better volume, pricing and mix, strong project-related demand, and a $1.6 million favorable quarterly impact from metal pricing.
- Specialty Chemicals Q3 operating income rose 18% to $1.4 million, although operating margin fell to 8% from 10%, primarily due to product mix and lower material margins.
- The July 1 MUSA-Galvanized acquisition contributed $6.5 million of sales but only $9,859 of pretax income through September 30. Its preliminary purchase-price allocation included $3.5 million of goodwill; valuation remains subject to adjustment. MUSA-Stainless, acquired in 2017, also contributed to year-over-year growth.
- Inventory increased $43.9 million and receivables $20.9 million from year-end 2017. Debt and interest expense increased as borrowing supported acquisition costs and working-capital needs.
Outlook, risks and unusual items
The filing provides no numerical earnings or revenue guidance. Management cited favorable end-market demand and project orders, new customer and product contributions in Specialty Chemicals, and acquisition integration as relevant factors. Risks include economic and competitive conditions, demand and pricing, raw-material cost and availability, acquisition integration, customer financial health, interest rates, debt availability and covenant compliance, and regulatory or environmental matters.
Other notable items include $1.1 million of 2018 acquisition costs through September; $2.2 million of nine-month earn-out fair-value adjustments, which can create earnings volatility; and a $0.25-per-share dividend declared for payment in December 2018, recorded as a $2.2 million liability. The company also recorded a $0.5 million Q3 loss on equity securities. A new 20-year lease for the Munhall facility has minimum payments totaling approximately $60.9 million over the disclosed schedule. Management reported no known contingencies expected to materially affect results and no material change in risk factors.
Important facts for investors to verify
- Confirm the issuer: the supplied metadata names ASCENT INDUSTRIES CO., while the filing is for Synalloy Corporation.
- Assess whether operating cash outflows and the large inventory build can reverse as working capital converts to cash.
- Review borrowing capacity, interest costs, covenant headroom and the effect of the dividend and future acquisition earn-out payments on liquidity.
- Monitor the final purchase accounting and operating performance of MUSA-Galvanized, including the earn-out assumptions and integration progress.
- Evaluate whether Metals’ improved margins and Specialty Chemicals’ customer-driven growth are sustainable, given commodity-price, mix and demand risks.