ASCENT INDUSTRIES CO. quarterly report, Q2 FY2018

Business context and reporting period

This is Synalloy Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing identifies the registrant as Synalloy Corporation, not ASCENT INDUSTRIES CO.; verify that this is the intended filing.

Synalloy operates Metals and Specialty Chemicals segments. The filing reports results in U.S. dollars and compares them with the corresponding 2017 periods.

Financial performance and position

• Q2 sales grew 40%; six-month sales grew 39%. Q2 gross margin was approximately 21.9%, versus 15.9% a year earlier; operating margin was approximately 10.1%, versus 2.9%.
• Metals segment sales increased 44% in Q2 and 48% for the first six months. Specialty Chemicals sales rose 25% in Q2 and 14% for six months.
• Cash and cash equivalents were $18,950 at June 30, 2018, versus $14,706 at year-end 2017. Operating cash flow was negative $12.7 million for the first six months, compared with negative $5.6 million in 2017; investing cash flow was negative $14.1 million and financing cash flow positive $26.8 million.
• Current assets were $150.7 million and current liabilities $38.4 million. Working capital was approximately $112.3 million, including $90.6 million of inventory.
• Long-term debt was $53.9 million, up from $25.9 million at year-end. The asset-based credit line was increased to an $80 million maximum; its rate is one-month LIBOR plus 1.65%. The company reported compliance with debt covenants.

Material changes and unusual items

• Profit improved substantially alongside higher sales, pricing, volume, and product mix in Metals. Management reported a 57% year-over-year improvement in Metals gross profit margins for Q2.
• Results include the Bristol Metals-Munhall stainless pipe and tube business acquired in February 2017. Its contribution to reported growth is therefore not wholly organic.
• A $2.3 million Q2 charge ($2.5 million for six months) from remeasuring the acquisition-related earn-out reduced pretax income. The liability rose to $6.1 million at June 30, partly reflecting projected sales growth and plans to add ornamental stainless products.
• Working capital absorbed cash: receivables increased $12.7 million and inventories $18.4 million from year-end. Management attributed the inventory rise mainly to higher stainless surcharges and replacement costs and replenishment of carbon pipe inventory.
• Acquisition-related costs were reported as $734,249 for the first six months, with the MD&A also presenting costs across operating expense and cost of sales.
• The company adopted revenue-recognition Topic 606 in 2018 with no reported financial-statement impact. Adoption of the new equity-investment standard moved $10,864 from accumulated other comprehensive loss to retained earnings.

Outlook, risks, and contingencies

• Management expected Specialty Chemicals annual operating performance of approximately 10% of sales, citing anticipated higher volumes against a largely fixed cost base; the segment reported 7% in Q2 and described its historical quarterly range as 5%–12%.
• Backlog at June 30 was $35.5 million at BRISMET and $23.0 million at Palmer of Texas, respectively 50% and 28% above the comparable prior-year quarter-end levels.
• On July 1, 2018, the company completed the acquisition of MUSA’s galvanized tube assets and operations for $10.4 million, funded through the credit facility. The amount had been placed in escrow at June 30; purchase accounting was not complete when the filing was prepared.
• On August 7, the board approved an annual dividend of $0.25 per share, payable in December 2018.
• Management cites risks including demand and pricing competition, raw-material prices and availability, customer and production delays, acquisition integration, customer financial condition, labor, oil and nickel price changes, environmental matters, financing availability, interest-rate exposure, and debt-covenant compliance. It reported no known claims expected to materially affect results and no material change in previously disclosed risk factors.
• The company entered a 20-year lease for the Munhall facility, with two 10-year renewal options. It expects the forthcoming lease-accounting standard to add material right-of-use assets and lease liabilities; its evaluation was ongoing.

Important facts for investors to verify

• Confirm the issuer identity: the supplied filing is for Synalloy Corporation, despite the request metadata naming ASCENT INDUSTRIES CO.
• Assess how much sales and earnings growth reflects acquired operations versus organic volume, pricing, and mix, and whether the Q2 shipment timing benefit recurs.
• Review the earn-out valuation assumptions and potential future payments, given the material Q2 remeasurement charge.
• Monitor operating cash flow, receivables, inventory turns, and borrowing needs as growth and the galvanized acquisition affect working capital.
• Check post-close results and final purchase accounting for the July 1 galvanized-asset acquisition, as well as capacity under the expanded credit line and covenant headroom.
• Evaluate whether the Specialty Chemicals margin outlook and announced dividend are supported by subsequent operating performance and cash generation.