Ascent Industries (ACNT) - 2019 Q4 - Annual Report

Part I Business Synalloy Corporation operates two main segments, Metals and Specialty Chemicals, manufacturing diverse products and pursuing growth through reinvestment and acquisitions - The company is organized into two reportable operating segments: - Metals Segment: Comprises three reporting units: Welded Pipe & Tube Operations (BRISMET and ASTI), Palmer of Texas Tanks, and Specialty Pipe & Tube, serving industries like oil and gas, chemical, power generation, and automotive[6] - Specialty Chemicals Segment: Operates as one reporting unit (Manufacturers Chemicals and CRI Tolling), producing specialty chemicals and providing tolling services for a wide range of industries[6] - The Metals Segment has a high concentration of raw material suppliers, with 10 suppliers accounting for approximately 87% of purchases and one supplier providing 34%, though materials are believed to be readily available from other sources[14] - The Specialty Chemicals Segment has one major customer that accounted for approximately 16% of the segment's revenues in both 2019 and 2018[24] Order Backlog at Year-End (Metals Segment) | Product Line | 2019 (in millions) | 2018 (in millions) | | :--- | :--- | :--- | | Welded Stainless Steel Pipe | $35.4 | $31.2 | | Tanks | $5.8 | $20.7 | - As of December 31, 2019, the company had 606 employees, with 247 (41%) represented by unions affiliated with the United Steelworkers[36] Risk Factors The company faces significant risks from cyclical customer industries, intense competition, volatile raw material prices, supplier concentration, oil price sensitivity, restrictive debt covenants, and operational liabilities - Market and Economic Risks: - The cyclical nature of customer industries (e.g., oil and gas, chemical) creates uncertainty and potential for significant profit fluctuations[41] - Intense competition from domestic and foreign producers could force lower pricing and reduce profitability[42] - A substantial or extended decline in oil prices could adversely affect demand for tanks and pipes from the Palmer and Specialty units[51] - Supply Chain and Customer Risks: - The Metals Segment relies on a few key suppliers, with one supplier providing 34% of raw materials in 2019[45] - The Specialty Chemicals Segment has one customer that accounted for 16% of its revenue in 2019 and 2018[46] - Fluctuations in the price and availability of raw materials, such as nickel for the Metals Segment and petrochemicals for the Specialty Chemicals Segment, can adversely impact financial performance[47] - Financial and Credit Risks: - The company's credit facility contains restrictive covenants (e.g., minimum fixed charge coverage ratio) that could limit its operational and financial flexibility[66] - The company's debt is indexed to LIBOR, and the planned phase-out of LIBOR by the end of 2021 could increase financing costs[87] - Operational and Regulatory Risks: - Operations are subject to numerous environmental, health, and safety laws, which could lead to significant liabilities and capital expenditures[55] - A portion of the workforce (41%) is unionized, and failure to renew collective bargaining agreements could lead to labor disruptions[64] - Potential new regulations related to hydraulic fracturing ("fracking") could reduce demand for storage tanks and heavy-walled pipe[76] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[88] Properties The company operates major plants across several states, with a significant portion of its properties sold and leased back under a long-term master lease agreement amended to include recent acquisitions Major Operating Facilities | Location | Principal Operations | Building Square Feet | Land Acres | | :--- | :--- | :--- | :--- | | Munhall, PA | Manufacturing stainless steel pipe | 284,000 | 20.0 | | Bristol, TN | Manufacturing stainless steel pipe | 275,000 | 73.1 | | Cleveland, TN | Chemical manufacturing and warehousing | 143,000 | 18.8 | | Fountain Inn, SC | Chemical manufacturing and warehousing | 136,834 | 16.9 | | Andrews, TX | Manufacturing liquid storage solutions | 122,662 | 19.6 | | Troutman, NC | Manufacturing ornamental stainless steel tubing | 106,657 | 26.5 | | Statesville, NC | Manufacturing ornamental stainless steel tubing | 83,000 | 26.8 | - The company sold its real estate properties in Tennessee, South Carolina, Texas, and Ohio to Store Master Funding XII, LLC in 2016 and concurrently leased them back, with the master lease amended to include facilities acquired in Munhall, PA, and Troutman/Statesville, NC[90] Legal Proceedings Information regarding legal proceedings is provided in Note 11 to the Consolidated Financial Statements - For a discussion of legal proceedings, see Note 11 to the Consolidated Financial Statements[92] Mine Safety Disclosures This item is not applicable to the company - Not applicable[92] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Synalloy's common stock trades on Nasdaq under SYNL, with no dividends declared or shares repurchased in 2019 - The company's common stock trades on the Nasdaq Global Market under the symbol SYNL[94] Quarterly Common Stock Prices | Quarter | 2019 High | 2019 Low | 2018 High | 2018 Low | | :--- | :--- | :--- | :--- | :--- | | 1st | $16.80 | $12.45 | $15.50 | $12.11 | | 2nd | $19.65 | $14.00 | $21.35 | $13.63 | | 3rd | $17.17 | $16.25 | $24.80 | $19.20 | | 4th | $16.02 | $11.45 | $23.01 | $12.60 | - No dividends were declared or paid in 2019, following a cash dividend of $0.25 per share in 2018 and $0.13 per share in 2017[94] - The company did not repurchase any of its equity securities during the year ended December 31, 2019[100] Selected Financial Data The company's five-year selected financial data shows significant performance fluctuations, including a net loss of $3.0 million in 2019, a reversal from prior year's net income Five-Year Selected Financial Data (in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $305,168 | $280,841 | $201,148 | $138,566 | $175,460 | | Gross profit | $30,773 | $51,237 | $28,081 | $16,904 | $25,319 | | Operating (loss) income | $(1,708) | $21,237 | $2,057 | $(8,246) | $(13,031) | | Net (loss) income | $(3,036) | $13,097 | $1,341 | $(7,093) | $(11,520) | | Diluted EPS | $(0.34) | $1.48 | $0.15 | $(0.82) | $(1.32) | | Total assets | $257,197 | $228,399 | $159,874 | $138,638 | $149,043 | | Shareholders' equity | $106,511 | $102,484 | $89,700 | $88,593 | $95,154 | Management's Discussion and Analysis of Financial Condition and Results of Operations Synalloy's 2019 financial performance declined significantly to a net loss of $3.0 million, primarily due to the Metals Segment, despite improved operating cash flow, with management anticipating flat demand and initiating cost-cutting for 2020 Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in areas such as inventory reserves, impairment testing of assets and goodwill, business combinations, and quarterly revaluation of earn-out liabilities - The company establishes inventory reserves for obsolete/unmarketable inventory ($0.3 million at year-end 2019) and for estimated physical quantity losses ($0.4 million at year-end 2019)[109][110] - Goodwill is tested for impairment annually using a quantitative discounted cash flow method, with the fourth quarter 2019 analysis resulting in no impairment for either the Specialty Chemicals ($1.4 million goodwill) or Metals ($16.2 million goodwill) segments[114][115] - Earn-out liabilities from the American Stainless, MUSA-Galvanized, and MUSA-Stainless acquisitions are re-valued quarterly, with changes in fair value recorded in the Consolidated Statements of Operations[116][117] Liquidity and Capital Resources The company's liquidity improved in 2019 with $28.6 million in operating cash flow, primarily from working capital reductions, supported by a $100 million asset-based credit line, and compliance with all debt covenants - Cash flow from operations was a source of $28.6 million in 2019, compared to a use of $21.2 million in 2018, primarily due to a $20.0 million decrease in inventory and a $9.7 million decrease in accounts receivable[118][119][120] - Working capital decreased by $23.7 million to $106.5 million in 2019, and the current ratio decreased from 4.5:1 in 2018 to 3.6:1 in 2019[122] - The company's credit facility includes a $100 million asset-based line of credit and a $20 million term loan, with the company in compliance with all debt covenants at year-end 2019[126][129] Results of Operations Consolidated results sharply declined in 2019 to a net loss of $3.0 million, primarily driven by reduced operating income in both the Metals and Specialty Chemicals segments and increased interest expense Consolidated Performance Summary | Metric | 2019 (in millions) | 2018 (in millions) | | :--- | :--- | :--- | | Net (Loss) Income | $(3.0) | $13.1 | | Diluted (Loss) EPS | $(0.34) | $1.48 | | Gross Profit | $30.8 | $51.2 | | Gross Margin | 10% | 18% | Metals Segment Performance | Metric | 2019 (in millions) | 2018 (in millions) | | :--- | :--- | :--- | | Net Sales | $251.1 | $222.2 | | Operating Income | $3.7 | $27.8 | | Operating Margin | 1.5% | 12.5% | - The Metals Segment's operating income decline was driven by a $6.4 million unfavorable impact from metal pricing (compared to a $5.0 million gain in 2018), a $13.4 million decline in welded pipe and tube margins, and a $2.4 million decline in seamless carbon pipe and tube income[146][147] Specialty Chemicals Segment Performance | Metric | 2019 (in millions) | 2018 (in millions) | | :--- | :--- | :--- | | Net Sales | $54.1 | $58.6 | | Operating Income | $2.8 | $4.0 | | Operating Margin | 5.2% | 6.8% | Contractual Obligations and Other Commitments As of December 31, 2019, total contractual obligations were $150.6 million, primarily comprising operating leases, revolving credit, and term loans, with a significant portion due in 2021 Contractual Obligations as of December 31, 2019 (in thousands) | Obligation Type | Total | Due in 2020 | Due in 2021 | Due in 2022-2023 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Revolving credit facility | $59,221 | $— | $59,221 | $— | $— | | Term loans | $16,333 | $4,000 | $4,000 | $8,000 | $333 | | Operating leases | $66,622 | $3,562 | $3,635 | $7,236 | $52,189 | | Total | $150,554 | $11,635 | $70,823 | $15,568 | $52,522 | Current Conditions and Outlook Management anticipates flat to softening demand in 2020, particularly in energy markets, and has initiated a cost-cutting program expected to yield over $6 million in annual savings - The company anticipates flat to softening demand in 2020, especially in energy and industrial markets[173] - A cost-cutting program was initiated in late 2019, targeting over $6 million in annual savings to be fully realized in 2020[173] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from variable interest rates on its debt, partially mitigated by a swap, and from nickel price volatility affecting its Metals Segment, with no active nickel hedges at year-end 2019 - The company is exposed to interest rate risk on its variable-rate debt, which includes a $59.2 million revolving line of credit and a $16.3 million term loan as of December 31, 2019[176] - An interest rate swap with a notional amount of $6.0 million is used to fix the interest rate on a portion of the term loan at 3.74%[176] - The company is exposed to nickel price volatility, which affects the cost of raw materials and the selling price of its stainless steel products, with no nickel hedge contracts in place at year-end 2019[174][178] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019, including balance sheets and statements of operations, with an unqualified opinion from KPMG LLP on both the financials and internal controls - Includes the audited Consolidated Balance Sheets as of December 31, 2019 and 2018[202] - Includes the audited Consolidated Statements of Operations and Comprehensive (Loss) Income for the three years ended December 31, 2019[204] - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[186][192] - The company adopted the new lease accounting standard (ASC 842) on January 1, 2019, resulting in the recognition of $33.1 million in operating lease liabilities and $32.2 million in right-of-use assets on the balance sheet[188][240] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[366] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, excluding recent acquisitions from the scope - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[366] - Management's assessment of internal control over financial reporting excluded the ASTI facilities acquired in January 2019, which represented approximately 14% of the Metals Segment's assets[180] Other Information This item is not applicable - Not applicable[367] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the audit committee and code of conduct, is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the 2020 Proxy Statement[368] - The company has a Code of Conduct applicable to its senior financial officers, available on its website[369] - The Board of Directors has determined that Anthony A Callander is an "audit committee financial expert" serving on the Audit Committee[371] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders - Required information is incorporated by reference from the 2020 Proxy Statement[372] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2020 Proxy Statement, detailing outstanding options and securities available for future issuance under equity compensation plans - Required information on security ownership is incorporated by reference from the 2020 Proxy Statement[374] Equity Compensation Plan Information as of December 31, 2019 | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 51,746 | $14.38 | 215,823 | | Not approved by security holders | — | — | — | | Total | 51,746 | $14.38 | 215,823 | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders - Required information is incorporated by reference from the 2020 Proxy Statement[377] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders - Required information is incorporated by reference from the 2020 Proxy Statement[378] Part IV Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including consolidated financial statements, schedules, and a comprehensive index of exhibits - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K[380] Form 10-K Summary The company has not provided a summary under this item - None[382]