Synalloy Corporation — Q3 2016 Form 10-Q
Filing identity: The supplied filing is for Synalloy Corporation, not Ascent Industries Co. It covers the quarter and nine months ended September 30, 2016; comparative 2015 periods ended October 3, 2015. The company operates Metals and Specialty Chemicals segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $34.30 million | $38.08 million | $105.52 million | $139.89 million |
| Gross profit | $4.50 million | $4.54 million | $13.22 million | $21.89 million |
| Gross margin | 13.1% | 11.9% | 12.5% | 15.7% |
| Operating income (loss) | $(3.77) million | $(0.12) million | $(6.35) million | $6.19 million |
| Net income (loss) | $(2.61) million | $1.36 million | $(5.66) million | $7.45 million |
| Continuing-operations EPS | $(0.30) | $0.16 | $(0.64) | $0.85 |
- Q3 sales fell 10%; nine-month sales fell 25%. Metals segment sales declined 3% in Q3 and 26% year to date; Specialty Chemicals sales declined 20% and 22%, respectively.
- Metals recorded operating losses of $3.24 million in Q3 and $5.66 million year to date, versus losses of $0.55 million and operating income of $5.40 million in the comparable 2015 periods. Specialty Chemicals remained profitable, with operating income of $1.19 million in Q3 and $3.72 million year to date, both lower year over year.
- Cash from continuing operations was $2.30 million for the nine months, but discontinued operations used $3.94 million, resulting in total operating cash outflow of $1.64 million. Investing activities provided $21.60 million, principally from property-sale proceeds; financing used $20.10 million, primarily for debt repayment. Cash decreased $0.13 million to $0.26 million.
- At September 30, total assets were $126.58 million, current assets $84.84 million, current liabilities $19.44 million, and shareholders’ equity $89.86 million. Working capital was approximately $65.41 million. Bank debt was $8.44 million; cash was $0.26 million.
Changes, unusual items, and liquidity
- Results were pressured by weaker end-market demand, lower volumes, lower selling prices, and nickel-related inventory margin compression of approximately $1.19 million in Q3 and $5.38 million year to date. Low oil and gas prices and low nickel prices weighed on Metals; Specialty Chemicals cited customer insourcing, delayed product ramps, and lower oil-based product prices.
- Q3 and nine-month operating results included a $2.46 million loss on the September 30 sale-leaseback. The company sold properties for $22.0 million, received approximately $21.93 million net, and used proceeds to repay debt. It leased the properties back under a 20-year initial term; first-year rent is $1.89 million, with future minimum payments disclosed through 2020 and thereafter.
- On August 31, the company established a $45 million asset-based revolving facility, maturing February 28, 2019, at one-month LIBOR plus 1.85%. It refinanced existing credit facilities and term loans. Borrowings are subject to a borrowing base and covenants, including a minimum fixed-charge coverage ratio beginning in Q4 2016 and a capital-expenditure limit.
- The company settled a discontinued-operation customer lawsuit for $3.1 million, paying $2.5 million in June and the remaining $0.6 million in September. The filing says other ordinary-course claims are not expected to have a material adverse effect, but outcomes cannot be predicted with certainty.
- SG&A rose 11% in Q3 and 4% year to date; as a share of sales, it was 17% in Q3 and 16% year to date. The 2015 comparisons benefited from $4.90 million in Specialty and Palmer earn-out gains that did not recur in 2016, and from business-interruption insurance proceeds.
Outlook, commentary, and risks
Management said it believed 2016 marked the bottom for both segments and cited activity that could support improved 2017 results. Metals tank bookings in Q3 were 34% above the average of the prior four quarters; management also reported a roughly $4.7 million LNG project order for delivery in late Q1 2017 and opened a Shanghai sales office to pursue special-alloy sales. For Specialty Chemicals, management projected new products could drive 2017 volume growth of just under 10% across two facilities and reported year-to-date EBITDA margins of 14%, versus 12% a year earlier. These are forward-looking statements, not guaranteed outcomes.
Key risks include continued weakness in oil, gas, nickel, or industrial markets; pricing and raw-material exposure; customer delays or financial weakness; competition; financing availability, interest rates, and compliance with debt covenants; and acquisition, integration, environmental, and regulatory risks. Management reported disclosure controls were effective. New ERP systems at two subsidiaries materially changed their financial-reporting controls; the company was continuing control adjustments and expected the transition to be completed in 2016.
Important facts for investors to verify
- Confirm the registrant and ticker: this source identifies Synalloy Corporation, despite the request metadata naming Ascent Industries Co.
- Check whether management’s expected 2017 recovery, tank bookings, LNG order delivery, and Chemicals volume growth materialized.
- Track borrowing-base availability, fixed-charge coverage compliance, capital spending, and debt levels under the new facility.
- Assess the ongoing cost and obligations of the 20-year sale-leaseback, including rent escalators and future lease payments.
- Monitor segment volumes, selling prices, inventory nickel margins, and cash generation; reported cash was only $0.26 million at quarter end.
- Review the discontinued-operation lawsuit settlement and ERP-related control transition for any subsequent developments.