Ascent Industries Co. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in millions of dollars unless stated otherwise. The company reports Tubular Products and Specialty Chemicals; Munhall results are presented as discontinued operations.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales, continuing operations | $56.1 | $78.2 | $184.2 | $246.5 |
| Gross profit / margin | $6.0 / 10.7% | $14.1 / 18.0% | $16.4 / 8.9% | $55.7 / 22.6% |
| Operating income (loss), continuing operations | $(12.8) | $4.7 | $(17.9) | $29.5 |
| Net income (loss), including discontinued operations | $(17.9) | $0.6 | $(37.8) | $21.9 |
| Adjusted EBITDA, continuing operations | $0.9 | $8.2 | $0.8 | $38.9 |
Continuing-operations diluted loss per share was $1.26 for Q3 and $1.82 for the first nine months; total diluted loss per share, including discontinued operations, was $1.77 and $3.72, respectively. Interest expense was $1.1 million in Q3 and $3.2 million year to date, up from $0.8 million and $1.6 million in 2022, primarily due to higher interest rates.
Cash flow, debt and liquidity
- For the first nine months, continuing-operations operating cash flow was $4.1 million, investing cash outflow was $2.7 million, and financing cash outflow was $19.4 million. Total operating cash flow, including discontinued operations, was $21.5 million; discontinued operations contributed $17.4 million.
- Cash was $0.7 million at September 30, 2023. Total long-term debt was $53.0 million, down $18.5 million from year-end 2022; a separate insurance-premium note payable had $0.6 million outstanding. The credit facility’s weighted-average interest rate was 7.20%.
- Unused credit-facility capacity was $41.8 million. The company reported compliance with financial covenants and said available liquidity was sufficient for operations, anticipated capital spending and debt obligations. The facility matures January 15, 2025; $2.5 million of long-term debt and the $0.6 million note payable are due within 12 months.
- Capital expenditures were $2.7 million for the nine-month period; management expected up to $1.0 million of capital spending for the remainder of 2023. The company repurchased 95,955 shares for $0.9 million year to date, with 584,024 shares remaining under authorization.
Material changes and operating developments
- Q3 sales declined 28.3%; nine-month sales declined 25.3%. Management attributed the declines primarily to lower shipped volumes (down 23.2% in Q3 and 21.5% year to date) and lower average selling prices (down 6.4% and 3.8%). Lower volume, increased raw-material and labor costs, and weaker gross margins drove the deterioration in results.
- Tubular Products Q3 sales fell 28.7% to $36.1 million, and operating income fell to $1.7 million from $7.6 million. Specialty Chemicals Q3 sales fell 26.6% to $20.1 million; its $11.5 million operating loss included an $11.4 million goodwill impairment.
- The Specialty Chemicals reporting unit’s estimated fair value was 27.6% below carrying value, resulting in the full $11.4 million goodwill write-off. Management cited macroeconomic pressures, business risks, operating losses and sales below forecast.
- The company decided to permanently cease Munhall operations around August 31, 2023 and classified the business as discontinued operations. Munhall recorded $8.7 million of asset impairments in the first nine months, including $2.4 million in Q3; its nine-month net loss was $19.3 million. Assets held for sale were $9.0 million at quarter-end.
- Management said it was making progress toward stabilizing the business and improving profitability, while continuing to address inflation, raw-material and labor costs, and customer inventory reductions. No specific earnings or sales guidance was provided.
Risks, contingencies and other notable matters
- Management identified macroeconomic volatility, inflation, raw-material costs and availability, labor constraints, reduced demand and customer inventory management as ongoing pressures. Variable-rate borrowing increases exposure to interest-rate changes.
- The company remains obligated for the Munhall facility lease through 2036 and is pursuing a sublease. Continuing-operations lease liabilities totaled approximately $32.9 million. Palmer lease obligations also extend through 2036, with an amended sublease in place.
- The company settled Henkel’s lawsuit against acquired subsidiary DanChem during Q3; settlement terms were not disclosed. Management reported no other litigation expected to have a material adverse effect, while noting ordinary-course legal matters remain.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2023 because previously reported material weaknesses in internal control over financial reporting remained unremediated. Remediation efforts include strengthening accounting, review, inventory, revenue, period-end reporting and IT controls.
Most important facts for investors to verify
- Whether sales volumes, pricing and gross margins stabilize, particularly in Tubular Products and Specialty Chemicals.
- Whether the Specialty Chemicals impairment assumptions remain reasonable and whether further impairment or operating losses arise.
- Munhall exit costs, asset-sale progress and the financial impact of lease obligations through 2036.
- Credit-facility availability, covenant headroom, variable interest expense and refinancing plans before the January 2025 maturity.
- Progress in remediating material weaknesses and whether controls are tested and found effective.
- The cash-flow contribution from discontinued operations and the sustainability of working-capital cash generation.