ASCENT INDUSTRIES CO. quarterly report, Q2 FY2016

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Filing summary

Entity and period: The supplied filing is Synalloy Corporation’s Form 10-Q for the quarter ended June 30, 2016—not a filing for ASCENT INDUSTRIES CO. Investors should verify the company and filing before relying on this summary. Comparisons are with the three and six months ended July 4, 2015; the company says the fiscal-calendar change had an insignificant effect on comparability.

Financial results

  • Revenue: Second-quarter net sales were $34.9 million, down 30% year over year; first-half sales were $71.2 million, down 30%.
  • Profit and margins: Second-quarter gross profit was $4.0 million (11.5% gross margin), versus $8.4 million (16.8%) a year earlier. Operating loss was $1.7 million, versus operating income of $3.2 million. Net loss was $1.7 million, including a $99,000 loss from discontinued operations. The statement of operations reports continuing-operations loss per share of $0.18; MD&A reports $0.19, a discrepancy to verify. First-half gross profit was $8.7 million (12.2% margin), versus $17.4 million (17.0%); operating loss was $2.6 million versus income of $6.3 million, and net loss was $3.0 million versus net income of $6.1 million.
  • Segments: Second-quarter Metals sales fell 35% to $22.1 million and the segment recorded a $1.6 million operating loss, versus $2.8 million income. Specialty Chemicals sales fell 21% to $12.8 million; operating income declined 19% to $1.3 million. Chemicals operating margin improved to 10.3% from 9.7%.
  • Cash flow: First-half operating cash flow was $1.7 million, including $2.2 million from continuing operations and $539,000 used in discontinued operations. Investing activities used $138,000, including $1.7 million of capital spending and $1.5 million received from surrendering life-insurance policies. Financing activities provided $218,000. Cash increased by $1.8 million to $2.2 million.
  • Liquidity and debt: Current assets were $86.9 million and current liabilities $26.0 million. Total bank debt was $28.4 million ($4.5 million current and $23.9 million long-term); cash was $2.2 million. The revolving-credit maximum was reduced from $40 million to $30 million. The filing does not clearly state revolver availability at quarter-end.
  • Other balance-sheet measures: Total assets were $147.5 million, down from $149.0 million at year-end 2015. Inventory declined $4.3 million to $59.5 million. Shareholders’ equity was $92.4 million.

Material changes and drivers

  • Management attributed the Metals downturn primarily to weaker oil-and-gas and industrial demand, lower nickel prices, and reduced stainless-steel pipe shipments and selling prices. First-half nickel prices averaged 37% below the prior-year period; nickel-related inventory margin compression was approximately $3.0 million, versus $3.5 million in the first half of 2015.
  • Specialty Chemicals sales were affected by customer in-sourcing, delayed new-product ramp-ups, lower shipment volumes, and lower billed material values for oil-based products. Management said the lower sales level drove the decline in segment operating income.
  • First-half results also compare against a prior-year period that included a $2.5 million favorable Palmer earn-out adjustment and $480,000 of business-interruption insurance proceeds in operating results.

Outlook, risks, and unusual items

  • Outlook: The filing gives no numerical earnings or revenue guidance. Management noted recent improvement in nickel prices and stainless-pipe surcharges but said it had not translated into increased distribution sales; project activity remained weak, with no expected change in the second half. Management said oil prices would need to stabilize above $55 per barrel for storage-tank and carbon seamless-pipe demand to return to normal. It remained optimistic about the Specialty Chemicals new-product pipeline.
  • Debt covenant: Synalloy was out of compliance with its total-funded-debt-to-EBITDA covenant at March 31, 2016, received a bank waiver, and amended the credit agreement to permit nickel-price-loss add-backs in future tests while reducing the revolver cap to $30 million. It reported compliance with all covenants at June 30 and expected to remain compliant under revised calculations.
  • Contingency: A lawsuit involving discontinued Synalloy Fabrication was settled for $3.1 million. The company paid $2.5 million in June and accrued the remaining $600,000 for September; the settlement adjustment is included in discontinued operations.
  • Other notable items: The company repurchased 29,500 shares for $254,000 during the first half. It implemented a new ERP system at BRISMET, materially changing the nature and type of internal financial controls; management said the transition was expected to be completed in 2016. Management reported disclosure controls were effective and said there were no material changes in risk-factor assessments.
  • Risks: The filing highlights exposure to oil and nickel prices, demand and pricing pressures, raw-material costs and availability, customer delays, competition, acquisitions, environmental matters, interest rates, financing availability, and debt-covenant compliance.

Important facts to verify

  1. Confirm that Synalloy Corporation, rather than ASCENT INDUSTRIES CO., is the intended issuer.
  2. Resolve the second-quarter continuing-operations loss-per-share discrepancy: $0.18 in the financial statements versus $0.19 in MD&A.
  3. Verify quarter-end revolver borrowings and remaining availability; the filing states the $30 million facility limit but does not clearly give unused capacity.
  4. Review the revised debt-covenant calculations and the company’s ability to remain compliant if nickel prices or operating results weaken.
  5. Track settlement payment of the remaining $600,000 and the demand, pricing, and new-product trends described in management’s outlook.