Ascent Industries Co. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Ascent, formerly Synalloy Corporation, operates Tubular Products and Specialty Chemicals businesses. The DanChem acquisition, completed in October 2021, contributed to year-over-year comparisons.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $100.2 million | $86.2 million | $332.6 million | $239.0 million |
| Gross profit / margin | $11.6 million / 11.5% | $18.0 million / 20.9% | $54.9 million / 16.5% | $40.8 million / 17.1% |
| Operating income | $1.6 million | $10.7 million | $27.0 million | $16.9 million |
| Net income | $0.6 million | $8.2 million | $21.9 million | $12.2 million |
| Diluted EPS | $0.06 | $0.87 | $2.11 | $1.30 |
| Adjusted EBITDA (non-GAAP) | $5.6 million | $14.8 million | $38.0 million | $29.4 million |
Q3 sales rose 16.2%, primarily on higher average selling prices and DanChem, despite a 16.8% decline in pounds shipped. Excluding DanChem, sales increased 6.6%. Gross profit fell as raw material, freight and other manufacturing costs outpaced pricing. Q3 operating income also faced higher SG&A and corporate costs. For the first nine months, sales increased 39.1% and operating income increased 60.0%; net income included a $1.9 million release of federal deferred-tax valuation allowances.
- Segments, Q3: Tubular Products sales were $72.8 million, up 3.9%, while operating income fell to $4.5 million from $11.7 million. Specialty Chemicals sales were $27.3 million, up 70.2%, while operating income was $1.1 million versus $1.4 million. DanChem contributed $8.3 million of Q3 sales and recorded a $0.7 million operating loss.
- Cash flow, nine months: Operating cash flow was $1.0 million, down from $16.2 million, principally reflecting a $36.1 million inventory cash use amid higher product and freight costs. Investing activities used $3.5 million; financing activities provided $1.0 million. Cash declined by $1.5 million to $0.5 million.
- Liquidity and debt: Current assets were $199.1 million and current liabilities $60.6 million; the reported current ratio was 3.3. Long-term debt was $72.6 million, including $68.3 million drawn on the revolver; an additional $0.6 million insurance-financing note was outstanding. Revolver availability was $36.7 million, and the company was in covenant compliance. Weighted-average borrowing rate was 2.94% at quarter-end. Debt to capital was 35%.
- Other balance-sheet items: Inventories were $137.8 million, up from $103.2 million at year-end. Operating and finance lease obligations totaled $33.8 million.
Outlook, risks and notable items
- No specific earnings or revenue guidance is provided. Management said liquidity sources should fund operations, anticipated capital expenditures and debt obligations over the next 12 months and beyond; it expected up to $3.5 million of capital spending for the remainder of 2022.
- Management cited inflation, raw-material and freight costs, supply-chain constraints, labor shortages and potential demand weakness. It described price increases, productivity work and working-capital discipline as actions to address cost pressures. The company reported no direct Russia or Ukraine exposure but was monitoring broader commodity, fuel and demand effects.
- The January 2025 credit facility is variable-rate and secured by specified company assets; availability depends on eligible collateral. Covenant testing applies if excess availability falls below specified thresholds.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2022 because previously reported material weaknesses in internal control over financial reporting remained unremediated. Remediation was underway, but management said additional time and testing were required to demonstrate effectiveness.
- Palmer of Texas operations had ceased and related assets remained held for sale. The company remained liable under the facility lease through 2036. A fourth-quarter 2022 amended sublease covered the entire facility, with first-year base rent of approximately $0.5 million and 2% annual increases.
- The company reported no known legal matters expected to materially affect its financial condition or results. DanChem purchase accounting remained provisional, including deferred-tax valuations; the filing reported no clear final valuation.
Important facts for investors to verify
- Whether pricing actions can offset input, freight and labor inflation as shipment volumes change.
- Whether inventory and receivables convert to cash and operating cash flow improves after the working-capital outflow.
- Revolver availability, borrowing costs, collateral-based borrowing capacity and continued covenant compliance.
- Progress in remediating the internal-control material weaknesses, particularly controls over revenue, inventory and the close process.
- DanChem’s operating performance and completion of provisional acquisition and tax-accounting estimates.
- Execution and expected lease-cost recovery under the amended Palmer sublease.