ASCENT INDUSTRIES CO. annual report, FY2021

Business Context and Reporting Period

This is Synalloy Corporation’s Form 10-K for the fiscal year ended December 31, 2021, not a quarterly filing. The filing identifies Synalloy Corporation (NASDAQ: SYNL); it does not identify Ascent Industries Co. Synalloy operates Metals and Specialty Chemicals segments. Its Metals business includes welded pipe and tube, pipe distribution, and storage tanks; it permanently ceased Palmer tank operations at year-end. The Specialty Chemicals segment includes Manufacturers Chemicals, CRI Tolling, and DanChem, acquired October 22, 2021.

Financial Performance and Liquidity

Sales rose 30.7%, driven by higher average selling prices and shipment volumes, as well as DanChem. Excluding DanChem, sales increased 28.5%. Gross margin improved substantially; management attributed the improvement to higher selling prices and favorable surcharges, partly offset by rising raw-material and freight costs. Metals segment operating income was $33.6 million, versus a $24.6 million loss; Specialty Chemicals operating income declined to $3.7 million from $4.0 million.

Capital expenditures were $1.5 million. Cash and cash equivalents were $2.0 million at year-end. Total debt was $70.4 million, comprising $65.6 million outstanding on the revolving facility and $4.8 million on the term loan; $39.4 million of facility availability remained. The current ratio was 3.3, compared with 4.1 a year earlier. Debt-to-capital was 39%, versus 43%. The Company reported compliance with debt covenants at year-end. Operating and finance lease liabilities totaled approximately $34.8 million.

Material Changes Versus the Prior Year

• Results rebounded from 2020 losses, when Synalloy recorded $16.2 million of goodwill impairment and $6.2 million of asset impairment; neither goodwill impairment nor comparable Metals impairment was recorded in 2021.
• DanChem contributed $5.7 million of sales and $0.6 million of operating income after acquisition. Its preliminary purchase price was $34.1 million, with $11.3 million of goodwill recognized; purchase accounting remained subject to revision.
• The Company refinanced in January 2021 with a new BMO facility and completed a rights offering that raised approximately $10.0 million in December.
• Operating cash flow increased modestly, but higher receivables and inventory used cash as sales and customer demand grew.
• Year-end backlog rose: welded pipe and tube orders were $91.5 million versus $40.8 million; Specialty Chemicals backlog was $12.9 million versus $3.9 million. The filing cautions backlog may not translate directly into future sales.

Outlook, Risks, and Unusual Items

The filing provides no specific revenue or earnings guidance. Management expected existing liquidity to fund operations, debt obligations, and anticipated capital expenditures for the next 12 months, and estimated 2022 capital spending of up to $10.0 million. Management cited improving demand and profitable growth in both segments during 2021, while noting supply-chain, labor, and raw-material constraints.

• Internal controls: Management concluded disclosure controls and internal control over financial reporting were not effective at year-end due to material weaknesses involving entity-level controls, inventory, revenue recognition, and period-end reporting and journal entries. Management reported no material misstatements in 2021 and outlined remediation steps. DanChem was excluded from the controls assessment because it was acquired late in the year.
• Financial statement adjustment: A fourth-quarter out-of-period inventory adjustment increased cost of sales by $2.2 million and reduced 2021 net income by $1.7 million after tax.
• Palmer closure: Operations ceased at December 31, 2021. Synalloy remained responsible for facility lease costs through 2036 and was pursuing subleases.
• Other risks: Exposure includes volatile raw-material, energy, and freight costs; supplier concentration; cyclical demand and competition; customer concentration in Specialty Chemicals (top customer was about 15% of segment sales); union labor and hiring; COVID-19 effects; environmental obligations; and variable-rate debt and LIBOR transition risks.
• Contingencies: Management stated it was not aware of asserted or unasserted matters expected to materially affect financial condition or results. Future environmental costs and Palmer lease/sublease outcomes remain uncertain.

Most Important Facts for Investors to Verify

• Confirm the issuer and security: this filing is for Synalloy Corporation (SYNL), despite the request metadata naming Ascent Industries Co.
• Review the material weaknesses and the Company’s progress remediating controls, particularly for inventory and revenue recognition.
• Assess whether 2021’s margin recovery and higher backlog are sustainable after surcharge, raw-material, and freight effects.
• Track DanChem integration, final purchase-price allocation, and whether anticipated growth and synergies materialize.
• Monitor borrowing-base availability, variable interest costs, covenant headroom, and cash needs alongside the planned 2022 capital spending.
• Evaluate Palmer asset sales and subleasing against the continuing lease obligations, and account for the $1.7 million after-tax inventory adjustment when interpreting earnings.