Synalloy (SYNL) is an American manufacturer of stainless steel and alloy pipe, liquid storage tanks, specialty chemicals and is a custom fabricator of piping systems. Its divisions include BRISMET, the largest domestic manufacturer of stainless steel and special alloy welded pipe. BRISMET's major end market users include energy, water, chemical, petrochemical and power industries. It has a 190,000 square foot facility in Bristol, Tennessee. Ancillary subsidiaries include BristolFab and Ram-Fab, custom fabricators of piping systems. BristolFab operates from an 88,000 square foot shop adjacent to BRISMET, while Ram-Fab operates from a 100,000 square foot facility in Crossett, Arkansas. In addition to pipe manufacture and fabrication, Synalloy, a growth oriented outfit, last year acquired Palmer of Texas, a manufacturer of fiberglass and steel liquid storage tanks. Palmer manufactures from a 125,000 square foot facility in Andrews, Texas, the heart of that state's shale oil region.
Besides mechanical products, Synalloy's Manufacturers Chemicals produces lubricants, surfactants, defoamers, reaction intermediaries and sulfated fats and oils. End market users include paper, carpet and textiles, industrial chemicals, metals and mining, agriculture, paint, latex additives, automotive, petroleum and cosmetics industries. Its facilities include a 120,000 square foot manufacturing and warehousing plant in Cleveland, Tennessee, and a 17,500 square foot warehouse in Dalton, Georgia. Earlier this year, Synalloy acquired Color Resources, LLC (C.R.I.) and its 135,000 square foot manufacturing facility to augment Manufacturing Chemicals' production.
The best way for an enterprise to improve profitability is by increasing its sales revenue. The best companies produce revenue year in and year out. In the case of Synalloy, annual revenues have increased over 90 percent since 2009. Over the past five quarters, revenues have held steady in a range between $50 and $57 million. These figures indicate steady growth in revenues with a recent plateau.
Investors need to be aware of the risk a business faces on account of unexpected higher cost of goods sold (COGS). At Synalloy, cost of goods sold has decreased by over three percent between 2009 and 2011 as a percentage of revenue. The annual figure for 2012 saw a slight increase over the previous year, but the lower trend is still in place. This is confirmed over the past four quarters (ending June 29, 2013), in which COGS has trended lower as a percentage of revenue.
Investors also need to know if management is spending efficiently or wasting valuable cash flow. Synalloy's annual selling, general and administrative (SG&A) expenses have declined slightly since 2010 as a percentage of revenue. Over the past four quarters, SG&A expenses have crept up very slightly compared the most recent annual figures. SG&A data demonstrate a moderate degree of managerial efficiency.
Companies with high gross margins will have substantial money remaining to spend on other business operations, such as research and development or marketing. In the case of Synalloy, annual gross margins have increased since 2009. Over the past five quarters, gross margins have continued to increase. These figures signify a modest increasing trend in gross margins.
Operating margins display the effectiveness of the enterprise's control of costs, or whether sales are increasing or decreasing faster than operating costs. At Synalloy, annual operating margins have increased dramatically between 2009 and 2011, and then retreated modestly in 2012. Over the past five quarters, however, operating margins have witnessed a steady increase, almost doubling during the period. Overall data represent a promising increase in Synalloy's operating margins.
An equity's profit margins usually determine whether or not it has advantages over its competition. Companies with high net profit margins have a larger buffer to protect themselves during lean times. Companies with profit margins reflecting a competitive advantage are able to improve their market share during downturns, an advantage that will improve their position in an upturn. Synalloy's annual net income margins have gained ground between 2009 and 2011, while retreating slightly in 2012. Over the past five quarters, net income margins grew steadily to match 2011 annual figures, but the last reporting period saw a decline from this high.
Cash offers protection during lean times, and it also gives enterprises more options for future growth. In the case of Synalloy, its cash position declined sharply from 2009 to 2012. Over the past four quarters, Synalloy's cash position is still poor. Synalloy's aggressive commitment to expansion leaves little in the way of cash.
Investors need to know if a company has too much money tied up in its inventory. If inventory grows faster than sales, it is almost always a sign of deteriorating fundamentals. At Synalloy, inventories, as a percentage of revenue, have been steady since 2009. Over the past three quarters however, inventories have crept up compared to revenue. This suggests that Synalloy is beginning to have excess inventory problems. What is more troubling is that Synalloy reported substantial inventory losses on account of declining nickel prices. Nickel, a key ingredient of stainless steel, is currently bid at about 50 percent of its 2011 highs. Synalloy's dollar losses in inventory have cloaked its increase in physical inventory. The low nickel prices are restraining sales as distributors are waiting for prices to begin to increase before placing large orders.
If a company's collection period is expanding, it could signal problems ahead. The company may be allowing customers to extend their credit in order to recognize greater top-line sales. Synalloy's receivables as a percentage of revenue increased only slightly between 2009 and 2012. Over the past four quarters, however, receivables have increased steadily as a percentage of revenue. This metric warrants close attention in future releases and is a cause for concern.
If a company's current liabilities are large relative to its current assets, that is an indicator that the company has a shortage of working capital and may have trouble paying its immediate bills. If the company's long term liabilities are large relative to its equities, the company is said to be highly leveraged, and may, in a difficult economy, have trouble servicing its debt load. For Synalloy, current liabilities as a percentage of current assets have increased over 20 percent between 2009 and 2012. Over the past five quarters, this figure has increased by about seven percent. Non-current liabilities as a percentage of assets increased nearly 10 times between 2009 and 2012, and the last five quarters have given no indication of its abatement. The increase in Synalloy's liabilities is attributable in large to its acquisition of Palmer. This deal was funded through an increase in its existing credit facility and new long-term debt totaling $22.5 million. An additional $4.74 million in capital expenditure was made in 2012, and much of Synalloy's increased debt this year has been on account of its C.R.I. acquisition.
Cash helps companies expand, develop new products, buy back stock, pay dividends, or reduce debt. Investors tend to prefer companies that produce a net positive cash flow from operating activities. In the case of Synalloy, cash flow from operating activities has been mixed since 2009. 2012 witnessed Synalloy's first positive cash flow in three years. The first two quarters of this year saw this figure return negative.
Investors want to see a company re-invest capital in its business by at least the rate of depreciation expenses each year. Synalloy invested over $30 million in 2012, which makes the combined figure of $8 million in 2010 and 2011 look pale in comparison. The bulk of this figure is account of Synalloy's Palmer acquisition. This year has seen Synalloy return to its previous investment levels with over $4 million invested during the first two quarters.
Cash flow from financing activities is of interest to investors because it illustrates how much cash flow is attributable to obtaining and repaying financing. Synalloy's cash flow from financing activities has increased dramatically between 2009 and 2012. In line with investing activities this year, its cash flow from financing during the first half of 2013 has returned to a more modest level. Again, the bulk of Synalloy's cash flow from financing resulted from the increase in its existing credit facility and new long-term debt incurred with the Palmer acquisition.
Free cash flow signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of business. Free cash flow can be returned to shareholders or invested in new growth opportunities without hurting the existing operations. A company's ability to pay for its own operations and growth signals to investors that it has very strong fundamentals. Synalloy has not had positive free cash flow since 2009. Free cash flow improved from -$11 million in 2010 to -$3 million in 2012, but the first half of this year has seen the number deteriorate to -$5 million.
Much of Synalloy's business is generated from oil drillers in the Permian Basin and Eagle Ford shale areas of Texas. In addition, the company reports strong quoting activity for Canadian oil sands projects. In these arenas, Synalloy's subsidiary BRISMET has the advantage of producing unusually long lengths of pipe without circumferential welds. This can dramatically reduce installation costs for customers as it reduces time consuming and expensive field welding and other associated activities such as inspection. Investors bullish on shale and tar sands extraction might consider Synalloy for their portfolios.
Synalloy's margins were restrained in the first nine months of 2013 by foreign imports. Stainless steel pipe from Malaysia, Vietnam and Thailand was imported at significantly reduced prices. In May, Synalloy, along with several other domestic manufacturers, filed an anti-dumping petition with the U.S. Department of Commerce and the U.S. International Trade Commission. Commissioners spoke favorably to the petition, and a final ruling is expected early in 2014. Additional duties on Vietnamese, Malaysian and Thai stainless steel piping will increase Synalloy's market share domestically.
Synalloy reported a fabrication backlog of $61 million as of the end of September. This figure is staggering in comparison to the reported backlog of $19 million at the end of 2012. At this rate, it would not be surprising to see Synalloy add to its properties.
Despite concerns over its billing period and inventory issues, Synalloy is poised to grow beyond its current frame. This lightly-traded outfit with a modest price-to-earnings ratio of 18, recently announced an increase in its annual dividend payment to $0.26 per share. Its consistent earnings and commitment to expansion make this company an attractive, albeit speculative, long-term growth case among small-cap issues.