Scope in the first quarter: NAM lifts the U.S. engine, but cash is still the test

Company Overview

Scope opened 2026 with a first quarter that looks strong on the first screen: NIS 611.6 million of revenue, NIS 71.6 million of operating profit and NIS 50.3 million of net profit. That is a clear improvement versus both the parallel quarter and the weak fourth quarter of 2025. But the quality of the quarter is not decided only by the revenue jump. It is decided by who financed that jump, how much of it came from NAM, and what was left in cash after the expansion.

The company is a master distributor of metals, engineering plastics and technical products. Its economics are not those of a simple importer that buys goods and resells them. It carries more than 80,000 shelf items, supplies about 95% of Israeli orders within 24 hours, extends credit to customers and finances inventory that takes 3 to 6 months to arrive from overseas. That means the same advantage is also the bottleneck: availability, breadth of inventory and speed of delivery create a real operating moat, but they require inventory and receivables on the balance sheet before cash comes back.

The first quarter updates the open question from the previous annual analysis. At that point, the test was whether the weak fourth quarter was temporary and whether NAM would become a high-quality growth engine or another layer of working capital. The current answer is partial. Sales and profit recovered, NAM already contributed NIS 41.1 million of revenue and NIS 3.3 million of consolidated net profit, and the U.S. engine accelerated. Still, operating cash flow was only NIS 6.5 million against NIS 50.3 million of net profit, while liquidity declined to NIS 355.7 million from NIS 510.5 million at the end of 2025.

The early filter is straightforward. What works now: the U.S. and Korea operation, already 59.0% of revenue and 53.1% of operating profit in the quarter, moved up another step. What is still missing: gross margin stayed around 30.4%, below the parallel quarter, and the gap between earnings and cash has not closed. What the market may miss: NAM is not only adding sales. It also brought receivables, inventory, customer relationships, contingent consideration and an additional working-capital-related payment into the balance sheet. The acquisition is already working in accounting terms, but it still has to prove that it will not weigh on Hadco’s cash cycle.

The First-Quarter Economic Map

Events and Triggers

NAM is no longer a post-balance-sheet event. It is inside the numbers. On January 31, 2026, Hadco acquired all of North American Metals, a Texas company that has operated for about 40 years in the distribution of steel products and specialty metals to the oil and gas industry. The quarter shows an actual cash payment of USD 24.2 million, up to USD 6 million more subject to EBITDA targets over the two years after closing, and an additional USD 2.5 million subject to working capital adjustments. In shekel terms, the business combination table shows a purchase cost of NIS 97.6 million, including NIS 75.0 million of cash paid, NIS 14.9 million of contingent consideration and NIS 7.7 million of payables for working capital adjustments.

That figure changes how the quarter should be read. Since consolidation, NAM contributed NIS 41.1 million to revenue, NIS 8.4 million to gross profit and NIS 3.3 million to net profit. Of the consolidated revenue increase of NIS 111.7 million versus the parallel quarter, NAM explains about 36.8%. So the quarter is not only an acquisition, because there was growth even without NAM. But the acquisition is already large enough to affect the interpretation of all the numbers.

The U.S. engine gained both volume and a new end market. U.S. and Korea revenue rose to NIS 360.8 million from NIS 265.9 million in the parallel quarter, a 35.7% increase. In dollars, the move was even sharper: USD 115.6 million versus USD 73.6 million. The shekel’s appreciation still weakened the reported shekel growth, but demand and the U.S. business expansion were strong enough to show up even in the reporting currency.

Israel benefited from defense demand, but did not improve profitability. Israeli revenue rose only 2.4% to NIS 160.9 million. The company attributes part of demand support to orders from defense bodies and their subcontractors, offset by weaker sales to other customers hurt by the security situation. That is a positive local trigger, but not a deep change. Operating profit in Israel fell to NIS 23.2 million from NIS 28.1 million, so the local market is not where the quarter truly improved.

Romania and India add a small option layer. In Romania, laser-cutting equipment purchased in the fourth quarter of 2025 was installed during the first quarter, following an investment of about EUR 1.2 million, as part of expanding value-added cutting services. In India, revenue doubled to NIS 8.0 million and gross profit rose to NIS 3.0 million. These are not the numbers that will decide the year, but they support the broader picture of a company trying to sell more service and processing, not only metal inventory.

The dividend signals confidence, but it complicates the cash picture. In March 2026 the company paid a dividend of NIS 26.5 million, or NIS 2 per share. That distribution looks reasonable against quarterly net profit of NIS 50.3 million, but less comfortable against operating cash flow of NIS 6.5 million and a quarterly NIS 134.2 million decline in cash and cash equivalents. This is not a liquidity problem. It is a capital allocation choice that keeps the focus on cash, not only earnings.

Efficiency, Profitability and Competition

The first quarter shows real operating improvement, but not a clean improvement in gross profitability. Revenue rose 22.3% versus the parallel quarter, gross profit rose 16.1%, and operating profit rose 22.9%. As a result, gross margin fell to 30.4% from 32.0%, while the operating margin stayed similar and even improved slightly to 11.7%. The distinction matters: the company did not sell at a better gross margin. It used a higher revenue base more efficiently.

Selling, general and administrative expenses rose to NIS 114.3 million from NIS 101.9 million in the parallel quarter. But as a share of revenue they fell to 18.7% from 20.4%. The improvement is also clear versus the fourth quarter, when the expense ratio was about 20.4%. This is the positive side of the quarter. The company consolidated NAM, absorbed higher payroll and transport costs in the U.S. and higher sales and administrative expenses in Israel, and still improved operating leverage.

The yellow flag sits one layer earlier, in gross profit. In Israel, gross profit rose only to NIS 56.2 million from NIS 55.6 million, with sales almost unchanged. In the U.S. and Korea, gross profit rose to NIS 104.0 million from NIS 82.0 million, but gross margin fell to 28.8% from 30.8%. Management also attributes the decline in gross margin to a change in the mix of products sold. This is not a footnote. If growth comes through products or customers with lower profitability, the market gets a higher revenue base, but not necessarily a higher-quality earnings base.

NAM illustrates the issue. NAM’s gross profit contribution was NIS 8.4 million on NIS 41.1 million of revenue, a gross margin of about 20.3%. That is below the consolidated gross margin. On the other hand, it contributed NIS 3.3 million to net profit in two months of consolidation, so it does not look like an acquisition that brings only empty volume. The right conclusion is an intermediate one: NAM adds a new end market and is already profitable, but if it becomes a larger layer, its margin quality will need to improve or integrate with Hadco’s purchasing and logistics advantages.

The U.S. Platform Is Carrying the Group

The geographic split shows where value was created in the quarter. U.S. and Korea contributed NIS 360.8 million of revenue and NIS 38.0 million of operating profit. Israel contributed NIS 160.9 million of revenue and NIS 23.2 million of operating profit. Europe contributed NIS 81.9 million of revenue and NIS 9.0 million of operating profit, while India is still small but profitable.

The year-on-year movement is even sharper. Operating profit in the U.S. and Korea rose 65.3%. In Israel, it fell 17.3%. This is no longer a company where Israel is the profit core and overseas activity is an add-on. Israel still matters, especially because of the service infrastructure, customers and operating base, but the rate of change now sits overseas.

Competition Is Not Only About Price

The company operates in a competitive market, and Israeli customers approach several suppliers in parallel. But the model is not based only on a low price. It sells availability, credit, cutting, sawing, customer inventory management and fast delivery. That service moat can support demand even in a competitive period, but the balance-sheet price is clear: NIS 970.6 million of inventory and NIS 504.2 million of receivables at the end of March 2026.

That explains the gap between an operationally strong company and a cash-light company. The company is strong because it carries broad inventory. It is cash-heavy for the same reason. In a quarter in which the U.S. engine grew, the question is not only how fast it can sell. The question is how much inventory and customer credit it needs to keep selling at that pace.

Cash Flow, Debt and Capital Structure

The relevant cash frame here is all-in cash flexibility: how much cash was left after operating activity, investments, acquisition spending, dividend, lease payments and debt repayments. This is not normalized maintenance cash generation, because the quarterly filing does not separate maintenance CAPEX from growth CAPEX. On this all-in basis, the first quarter was very profitable in the income statement, but heavy in cash.

Net profit was NIS 50.3 million, but operating cash flow was NIS 6.5 million. That is an improvement from NIS 1.4 million in the parallel quarter, but still weak conversion relative to earnings. The main explanation is receivables: customers absorbed NIS 67.9 million of cash flow, while other receivables absorbed another NIS 12.2 million. The decline in inventory contributed only NIS 0.8 million inside the cash-flow statement, and higher suppliers and payables offset only part of the gap.

This gap does not mean the company is in a liquidity squeeze. It does mean growth still needs financing. Cash, short-term investments and marketable securities fell to NIS 355.7 million from NIS 510.5 million at the end of 2025. Net financial liabilities rose by NIS 122.2 million. The current ratio declined to 3.10 from 3.48, and the quick ratio declined to 1.54 from 1.80. These are still comfortable ratios, but the quarterly direction is clear.

NAM Bought Growth and Assets That Need Funding

The NAM acquisition was not only a cash payment. It brought NIS 37.9 million of receivables, NIS 49.3 million of inventory, NIS 6.6 million of property and equipment, NIS 9.2 million of right-of-use assets, NIS 11.8 million of customer relationships and NIS 13.4 million of goodwill into the balance sheet. Against these, the company recognized NIS 17.2 million of suppliers, a NIS 9.2 million lease liability and other liabilities. This is exactly what a distribution acquisition looks like: the value sits in customers, inventory and customer relationships, not in a passive financial asset.

For investors, NAM will be tested through two measures at once. The first is whether it continues to generate net profit like it did during the first two months of consolidation. The second is whether its inventory and receivables settle into a reasonable cash cycle. An acquisition that adds NIS 41.1 million of revenue in two months can look excellent in the income statement. But if it requires too much inventory and customer credit, it brings back the company’s old question: how much working capital is needed to buy each shekel of growth.

The Quarter’s All-In Cash Picture

Operating cash flow of NIS 6.5 million did not cover the quarter’s main uses. The company invested NIS 14.3 million in property and equipment, NIS 2.0 million in intangible assets, paid NIS 75.0 million for NAM, repaid NIS 56.9 million of long-term loans, paid NIS 1.8 million of lease principal and distributed NIS 26.5 million as a dividend. Against that, short-term credit rose by a net NIS 28.5 million and a net NIS 13.2 million was released from deposits. The final result was a NIS 134.2 million decline in cash and cash equivalents, including a negative exchange-rate effect of NIS 7.3 million.

This was a quarter in which the balance sheet funded the expansion. It was not a quarter in which the activity had already paid for it. That is not a criticism of the acquisition itself. A strategic acquisition almost always consumes cash before it proves its full contribution. But it is a clear checkpoint: if operating cash flow stays in single-digit millions while the company keeps distributing cash and repaying debt, the growth will look less comfortable.

Debt Is Still Managed, but the Cash Buffer Is Smaller

The company complies with all required financial covenants, and the quarterly filing does not signal bank pressure. About 79% of consolidated credit bears fixed interest and about 21% bears floating interest, so interest rate risk is not the only or main risk for the coming quarter. Net finance expenses also declined to NIS 5.9 million from NIS 6.7 million in the parallel quarter, partly because of fair-value gains on financial assets and interest income on deposits.

Still, liquidity quality is not identical to the headline number. In Israel, the company holds NIS 125 million of long-term bank deposits for which entitlement to the full interest is obtained only if the deposits are held to maturity. At the end of March, accrued interest on these deposits was NIS 32.2 million, but interest income was recognized at the reduced rate of NIS 17.3 million. That does not make the cash position problematic, but it is a reminder that not every liquidity component is equivalent to fully free cash.

Outlook

Four first-quarter findings should lead the forward read.

First, Q1 showed that the weak fourth quarter of 2025 has not, for now, become the new base. Revenue rose to NIS 611.6 million, operating profit rose to NIS 71.6 million, and net profit rose to NIS 50.3 million. That is a positive answer to one of the main questions left open after the end of 2025.

Second, part of that answer came from an acquisition and not only from the existing business. NAM contributed roughly one third of the improvement in revenue and gross profit versus the parallel quarter, and it was consolidated only from February. The next quarter will therefore carry another comparison layer: whether NAM’s contribution expands, and whether it improves profit or mainly lifts volume.

Third, gross margin did not return to the level of the parallel quarter. It stayed around 30.4%, very close to the fourth quarter and below the first quarter of 2025. If gross margin does not rise, further operating improvement will depend mainly on higher volume and expense discipline.

Fourth, cash flow still did not confirm earnings. Operating cash flow of NIS 6.5 million against net profit of NIS 50.3 million means the cash test from 2025 has not closed. It has simply moved into the next quarters.

2026 Is an Integration Proof Year

Management presents NAM as a strategic move that opens a new market in oil and gas. That can be true, especially if Hadco uses its customer base, purchasing and logistics platform to expand the activity without overloading the balance sheet. But the year that has opened here is not a full breakout year. It is a proof year: the company has to show that the acquisition converts into profit, that new inventory does not inflate beyond need, and that the acquired customer relationships justify the amount recognized as an intangible asset.

The Hadco read will be sharper from the next quarter. In Q1, Hadco including Korea and NAM sold NIS 350.2 million, versus NIS 254.7 million in the parallel quarter. Excluding NAM’s contribution, growth was still strong. That is positive. But Hadco is also the layer now carrying NAM, Korea, the Chicago expansion and most of the group’s revenue growth. As that engine grows, every mistake in inventory, customer credit or pricing becomes faster and more material.

FX and Metal Prices Can Still Shift the Read

The shekel’s appreciation continued to moderate shekel revenue growth. The company does not hedge its liabilities to foreign suppliers, and at the end of March it had no open derivative or forward positions. In Israel, 14.91% of sales are linked to foreign currency, and the company has net dollar-linked assets of NIS 93.3 million. The mechanics remain complex: a stronger shekel reduces supplier liabilities, but also lowers inventory value and hurts sales and gross profit when that inventory is realized.

At the same time, average aluminum and nickel prices did not change materially during the first quarter, and steel prices were stable. That helps explain why the quarter was not driven by a metal-price spike. But NIS 970.6 million of inventory means any sharp and rapid fall in metal prices can still reach the income statement through gross profit and inventory provisions.

What the Market Will Look For Next

The event that could quickly improve the interpretation is a quarter in which operating cash flow jumps while U.S. growth continues. The event that would weaken it is another quarter in which profit looks good, but receivables, inventory and acquisitions absorb most of the cash.

Risks

Growth That Depends on Working Capital

The main risk is not weak demand. It is growth that keeps requiring more funding before the cash returns. At the end of March, receivables were NIS 504.2 million and inventory was NIS 970.6 million. NAM added receivables and inventory, while the existing activity still needs broad inventory to supply quickly. If customer days lengthen or inventory remains high after NAM is integrated, profit may continue to look better than cash flow.

Lower Gross Margin in the Growth Engine

The U.S. and Korea operation leads growth, but its gross margin is below Israel’s and declined versus the parallel quarter. NAM itself entered at about 20.3% gross margin during its first consolidation period. If Hadco improves purchasing, distribution and pricing terms, that can change. If not, the largest engine will keep growing with lower gross margin, and the company will need to compensate through operating costs and execution.

Unhedged Currency Exposure

The company does not hedge supplier liabilities through derivatives. Its policy is to update shekel prices according to the dollar exchange rate, but that does not eliminate timing gaps for inventory ordered months before sale. A stronger shekel can therefore continue to hurt revenue and gross profit when inventory is sold, even if it reduces supplier liabilities. This point already appeared in the broader analysis of the stronger shekel’s impact, and the first quarter did not close it.

NAM Integration and Contingent Consideration

The NIS 14.9 million contingent liability reflects a scenario in which NAM meets profitability targets. That is positive if the targets are achieved through clean, profitable activity. But it also reminds investors that the acquisition is not fully closed economically. Working capital adjustments, provisional fair-value measurement and the period of up to 12 months for final measurement leave room for accounting and cash-flow changes.

Metal-Price Risk

High inventory is an operating advantage, but it is also an exposure to aluminum, nickel and steel prices. Some metal price movements do not pass immediately into product prices, and there is a lag between ordering goods and receiving them. If metal prices fall quickly, the company could hold inventory purchased under less favorable conditions. The first quarter did not show a material move in average aluminum and nickel prices, but the size of the inventory keeps the risk central.

Low Short Interest Is Not Proof of the Thesis

Short data does not signal unusual pressure. At the end of April 2026, short interest was about 0.03% of float and SIR was 0.1, well below the sector averages of 0.49% short float and 1.358 SIR. That means the market is not expressing aggressive skepticism through a short position. It does not mean the operating test has been solved. Here the data mainly removes noise: if the next reports surprise, the surprise will come from cash flow, NAM and margins, not from an existing short squeeze setup.

Conclusions

The first quarter of 2026 improves the operating picture. Sales recovered, net profit rose, the U.S. and Korea became an even stronger engine, and NAM is already contributing to the report. The central constraint remains the same one that appeared at the end of 2025: growth still has to prove that it can turn into cash and not only into a higher revenue base.

The short version is this: the company opened the year more profitable and operationally stronger, but it has not yet received cash-flow confirmation that the U.S. expansion funds itself.

What changed from the previous cycle is clear. The weak fourth quarter currently looks more like a specific slowdown than a new base, and NAM moved from a future event to an asset generating revenue and profit. But the counter-thesis also became slightly stronger: anyone who argued that working-capital concerns were overstated can point to higher net profit and operating cash flow that is better than in the parallel quarter. Anyone looking for full cash proof has not received it yet.

The strongest counter-thesis is that the market may be too harsh on cash flow. In a quarter that included an acquisition, a dividend, debt repayments and balance-sheet changes, a cash decline is not necessarily a sign of weakness. In addition, financial ratios remain comfortable, the company complies with covenants, and the U.S. activity is growing even without NAM’s full contribution. That is a serious argument.

The market reaction over the short to medium term will be decided by three things: whether NAM continues contributing to profit, whether gross margin stops eroding, and whether operating cash flow moves closer to net profit. Another quarter of high earnings and low cash flow will keep the stock inside a working-capital test. A quarter in which the U.S. continues growing and cash flow improves could shift the interpretation quickly.

Why does this matter at the business-quality level? In an inventory-heavy distributor, high-quality growth is not measured only by how much was sold. It is measured by how much inventory and customer credit the company needs in order to sell, and how quickly profit returns to the cash account. In the first quarter, the company showed demand and a strong U.S. engine. Now it has to show that the engine is not too cash-hungry.