Ascent Industries Co. — FY2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it does not provide a clear standalone fourth-quarter results summary. Ascent, formerly Synalloy Corporation, operates two segments: Tubular Products, which makes and distributes steel pipe and tube, and Specialty Chemicals. DanChem, acquired in October 2021, contributed to Specialty Chemicals results throughout 2022.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $414.1 million | $334.7 million |
| Gross profit / margin | $56.5 million / 13.7% | $60.8 million / 18.2% |
| Operating income / margin | $20.4 million / 4.9% | $27.3 million / 8.2% |
| Net income | $22.1 million | $20.2 million |
| Diluted earnings per share | $2.12 | $2.14 |
| Adjusted EBITDA | $36.0 million (8.7% of sales) | $44.3 million (13.2% of sales) |
| Cash from operating activities | $5.6 million | $19.1 million |
- Sales rose 23.7%, driven by a 42.2% increase in average selling prices and DanChem, partly offset by a 14.0% decline in pounds shipped. Excluding DanChem, sales increased 16.1%.
- Tubular Products sales were $306.6 million, up 14.7%; operating income fell to $27.6 million from $33.6 million. Specialty Chemicals sales were $107.5 million, up 59.4%; operating income rose to $7.0 million from $3.7 million. DanChem generated $32.3 million in 2022 sales and $0.1 million in operating income.
- At year-end, cash was $1.4 million; total borrowings were $71.5 million, with $37.6 million of remaining revolver availability. The company reported compliance with debt covenants. Debt is primarily variable-rate and the credit facility matures in January 2025.
- Current ratio was 5.1, versus 3.3; debt-to-capital was 34%, versus 39%. Operating and finance lease liabilities totaled approximately $33.5 million.
- Capital expenditures were $5.1 million. The company repurchased 110,404 shares for approximately $1.3 million and paid no dividends.
Material changes, outlook, and risks
- Despite higher sales and net income, gross profit declined 7.0% and operating income fell 25.4%, as raw-material and freight inflation compressed margins. SG&A increased to $35.0 million from $30.1 million.
- Operating cash flow declined mainly due to working-capital movements, including higher inventory and lower accounts payable. Inventory was $114.5 million at year-end, up from $103.2 million.
- Management and the Board decided to exit galvanized pipe and tube production at Munhall; winding down was underway, with cessation expected in the first half of 2023. The decision resulted in $0.9 million of accelerated depreciation and amortization.
- Palmer’s operations had ceased by year-end 2021; remaining assets were held for sale and expected to be disposed of in early 2023. The company remains responsible for the facility lease through 2036, while a sublease extends to September 2036.
- The effective tax rate was a benefit of 23.6%, principally reflecting a $5.7 million tax benefit related to Palmer’s closure and the release of certain deferred-tax valuation allowances. This benefit materially supported reported net income.
- Management expects 2023 capital spending of up to $6.0 million and believes liquidity will fund operations, planned investment, and debt obligations. No specific revenue or earnings guidance was provided. The company anticipated a one-percent excise tax on net share repurchases beginning in 2023.
- Key risks include cyclical demand and competitive pricing, raw-material and freight cost volatility, customer concentration in Specialty Chemicals (one customer represented 21% of segment revenue), union contract renewals, variable-rate debt and covenant requirements, and environmental and operational exposures. Backlog declined year over year: Tubular Products $49.8 million versus $91.5 million; Specialty Chemicals $10.4 million versus $12.9 million. The filing cautions backlog may not predict sales.
- The financial-statement auditor issued an unqualified opinion, but management and the auditor concluded internal control over financial reporting was ineffective, with material weaknesses involving entity-level controls, inventory, revenue and receivables, period-end reporting, complex accounting, and IT controls. Management described remediation plans; the auditor issued an adverse opinion on internal control.
- The filing states management was unaware of asserted or unasserted matters expected to materially affect financial condition or results. No goodwill impairment was recorded, although the Specialty Chemicals reporting unit underwent a second impairment assessment after potential indicators arose.
Important facts for investors to verify
- Progress and effectiveness of remediation for the material weaknesses, particularly controls over revenue, inventory, and financial reporting.
- Whether higher selling prices can offset input-cost pressures as shipment volumes and reported backlogs have declined.
- Cash conversion and working-capital trends, including inventory reserves and the ability to generate operating cash flow.
- Debt availability, variable-rate interest expense, covenant headroom, and refinancing or repayment plans ahead of the January 2025 maturity.
- Realization of the Palmer tax benefit, completion of asset dispositions, and continuing lease obligations; also monitor the galvanized-operation wind-down and related costs.
- Specialty Chemicals customer concentration and the performance and integration economics of DanChem.