ASCENT INDUSTRIES CO. quarterly report, Q1 FY2019

Business context and reporting period

This is Synalloy Corporation’s unaudited Form 10-Q for the three months ended March 31, 2019. The request metadata names ASCENT INDUSTRIES CO., but the filing identifies the registrant as Synalloy Corporation; verify the intended company. Synalloy operates Metals and Specialty Chemicals segments. Results include the July 2018 MUSA-Galvanized acquisition and the January 1, 2019 acquisition of American Stainless Tubing (ASTI).

Financial performance and liquidity

MetricQ1 2019Q1 2018 / comparison
Net sales$84.8 million$58.5 million; up 45%
Gross profit / margin$8.7 million / 10.2%$11.2 million / 19.2%
Operating income (loss)$(0.6) million$5.2 million
Net income (loss)$(0.9) million; $(0.10) per diluted share$3.8 million; $0.44 per diluted share
Operating cash flow$6.1 million provided$5.6 million used
Capital expenditures$1.0 million$1.9 million
Cash$0.6 million at March 31$2.2 million at December 31, 2018

Total borrowings were $91.5 million at quarter-end, up $15.1 million during the quarter. The company reported $25.2 million of remaining availability under its $100 million asset-based line and compliance with debt covenants. Current assets were $172.0 million and current liabilities $49.4 million. Operating lease liabilities were $37.8 million; adoption of ASC 842 added substantial lease assets and liabilities to the balance sheet.

Material changes and drivers

  • Sales growth reflected acquisitions and organic gains: excluding ASTI and MUSA-Galvanized, sales increased 17.6% year over year. Metals sales rose 56%, while Specialty Chemicals sales rose 5%.
  • Metals operating income fell to $1.4 million from $6.0 million. Management attributed a $5.8 million year-over-year unfavorable swing to metal pricing, including lower nickel surcharges versus 2018. ASTI purchase accounting reduced first-quarter operating income by $1.4 million, including a $1.147 million acquired-inventory fair-value step-up in cost of sales. Higher volume and product mix contributed $2.8 million of incremental operating profit.
  • Specialty Chemicals operating income was $0.6 million, up 9% excluding a $313,000 favorable legal-claim gain in Q1 2018; management said results met expectations for the seasonally low quarter.
  • Interest expense rose to $1.0 million from $0.3 million, mainly due to higher acquisition and working-capital borrowings. Corporate expenses increased 54% to $2.3 million. ASTI contributed $9.5 million of sales and $0.1 million of pretax income; MUSA-Galvanized contributed $6.7 million of sales and $0.3 million of pretax income.

Outlook, risks, and unusual items

The filing provides no numerical full-year guidance. Management said some pressure on seamless-pipe margins from tariffs, distributor inventories, and lower-margin project work may moderate as the year progresses. Risks identified include economic and demand weakness, competition and pricing, raw-material costs and availability, acquisition integration, customer financial health, interest rates and debt covenant compliance, and environmental and labor matters.

ASTI’s purchase-price allocation remains preliminary and may be adjusted; the acquisition created $7.0 million of goodwill and a $10.0 million customer-list intangible. ASTI also has a three-year revenue-based earn-out, valued at $6.2 million at quarter-end. Earn-out fair-value estimates may add volatility to operating results. The company adopted ASC 842 on January 1, recording a $4.6 million cumulative-effect increase to equity related to the prior sale-leaseback accounting. A board-authorized repurchase program permits purchases of up to 850,000 shares over 24 months; no shares were repurchased in the quarter. Management reported effective disclosure controls and no material change in risk-factor assessment; it did not identify legal matters expected to materially affect the company.

Important facts for investors to verify

  • Confirm the issuer: the supplied filing is for Synalloy Corporation, not ASCENT INDUSTRIES CO.
  • Assess whether organic sales growth and segment margins can offset lower metal-price benefits and acquisition-related costs.
  • Review debt capacity, variable-rate exposure, covenant headroom, lease commitments, and the effect of the acquisitions on liquidity.
  • Monitor completion of ASTI’s purchase-price allocation and changes in its earn-out valuation and payments.
  • Compare subsequent results with management’s expectation that certain seamless-pipe margin pressures may ease.