Ascent Industries (ACNT) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended June 30, 2020, reflect a decline in total assets and shareholders' equity, a significant net loss, and negative operating cash flow Condensed Consolidated Balance Sheets As of June 30, 2020, total assets decreased to $251.4 million from $257.2 million, while shareholders' equity declined to $98.1 million due to net losses Condensed Consolidated Balance Sheets Summary (in thousands) | Balance Sheet Items (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $147,687 | $147,115 | | Total Assets | $251,424 | $257,197 | | Total Current Liabilities | $40,109 | $40,578 | | Total Liabilities | $153,367 | $150,686 | | Total Shareholders' Equity | $98,057 | $106,511 | Condensed Consolidated Statements of Operations For Q2 2020, net sales fell to $66.1 million, resulting in a $7.0 million net loss, exacerbated by $6.1 million in asset impairments and $2.7 million in proxy contest costs Condensed Consolidated Statements of Operations Summary (in thousands) | Statement of Operations (in thousands) | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $66,136 | $78,778 | $140,833 | $163,582 | | Gross Profit | $4,361 | $7,838 | $11,512 | $16,522 | | Operating (Loss) Income | $(10,674) | $573 | $(11,602) | $17 | | Net Loss | $(6,957) | $(262) | $(8,135) | $(1,189) | | Diluted Loss Per Share | $(0.77) | $(0.03) | $(0.90) | $(0.13) | - Significant expenses in Q2 2020 included $2.7 million in proxy contest costs and $6.1 million in asset impairments, which were not present in 2019[9] Condensed Consolidated Statement of Cash Flows For H1 2020, net cash used in operating activities was $0.2 million, a significant downturn from the $13.2 million provided in the prior year, while investing activities provided $0.8 million Condensed Consolidated Statement of Cash Flows Summary (in thousands) | Cash Flow Activities (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(173) | $13,225 | | Net cash provided by (used in) investing activities | $798 | $(23,232) | | Net cash provided by financing activities | $161 | $7,810 | | Increase (Decrease) in cash | $786 | $(2,197) | Notes to Condensed Consolidated Financial Statements The notes detail the adoption of new accounting standards, a $6.1 million asset impairment, a goodwill impairment risk, a technical debt covenant default, and $2.9 million in proxy contest costs - The company adopted ASU 2016-13 (Credit Losses), recording a cumulative effect adjustment of $0.4 million to Retained Earnings on January 1, 2020[20] - Due to the COVID-19 pandemic's impact, the company recorded asset impairment charges of $6.1 million related to its Palmer business, writing down inventory and long-lived assets[37] - A goodwill impairment test for the Welded Pipe & Tube reporting unit concluded no impairment was necessary, but the estimated fair value exceeded its carrying value by only 1.7%, indicating it is at risk[42] - The company experienced a technical default on its fixed charge coverage ratio covenant as of June 30, 2020, which was addressed through two amendments to its Credit Agreement in July and August 2020[49][84] - Total costs incurred relating to a proxy contest with Privet Fund Management and UPG Enterprises were $2.9 million for the six months ended June 30, 2020[82][83] Management's Discussion and Analysis (MD&A) Management attributes the 16.0% decline in Q2 2020 consolidated net sales primarily to the Metals Segment, while the Specialty Chemicals Segment showed resilience, despite a technical debt covenant default and identified material weakness in internal controls Results of Operations Consolidated net sales for Q2 2020 fell 16.0% to $66.1 million, leading to a $7.0 million net loss, primarily due to asset impairments, proxy contest costs, and metal pricing losses, though Specialty Chemicals operating income more than doubled Segment Performance Summary (in millions) | Performance Summary | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Consolidated Net Sales | $66.1M | $78.8M | | Consolidated Net Loss | $(7.0)M | $(0.3)M | | Metals Segment Sales | $52.0M | $64.5M | | Metals Segment Operating (Loss)/Income | $(9.2)M | $1.2M | | Specialty Chemicals Segment Sales | $14.1M | $14.3M | | Specialty Chemicals Segment Operating Income | $2.0M | $0.9M | - The decline in the Metals Segment was most severe in fiberglass and steel liquid storage tanks, with sales dropping 89.9% in Q2 2020 vs Q2 2019 due to the curtailment of operations and the downturn in the oil and gas industry[96] - The Specialty Chemicals Segment's strong performance was driven by increased production of hand sanitizer and cleaning aids, along with cost-cutting initiatives that improved margins and lowered manufacturing costs[102][103] Non-GAAP Financial Measures The company uses non-GAAP measures like EBITDA and Adjusted EBITDA, with consolidated Adjusted EBITDA for Q2 2020 at $1.9 million, down from $3.4 million in Q2 2019, primarily due to the Metals Segment decline Adjusted EBITDA Summary (in thousands) | Adjusted EBITDA (in thousands) | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Consolidated Adjusted EBITDA | $1,947 | $3,408 | $4,587 | $8,175 | | Metals Segment Adjusted EBITDA | $450 | $3,645 | $3,749 | $9,046 | | Specialty Chemicals Segment Adjusted EBITDA | $2,450 | $1,322 | $3,379 | $2,375 | Liquidity and Capital Resources The company's liquidity was impacted by a $13.4 million decrease in cash from operations in H1 2020, a technical debt covenant default that was subsequently cured, and $0.6 million in stock repurchases - Cash from operating activities decreased by $13.4 million in H1 2020 compared to H1 2019, primarily due to changes in working capital[119][120] - The company notified its bank of a technical default on its fixed charge coverage ratio, which was addressed by amending the credit agreement to adjust the ratio's calculation to include proxy contest costs and the Palmer asset impairment charge[124][126] - During H1 2020, the company purchased 59,617 shares under its stock repurchase program for an aggregate amount of $0.6 million[77][128] Quantitative and Qualitative Disclosures About Market Risk The company reported no material quantitative or qualitative changes in its market risk exposure since the filing of its Annual Report on Form 10-K for the year ended December 31, 2019 - There have been no material changes in market risk exposure since the end of fiscal 2019[136] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of June 30, 2020, due to a material weakness in the control environment, for which a remediation plan is being developed - The CEO and CFO concluded that disclosure controls and procedures were not effective as of the end of the quarter[137] - A material weakness was identified in the company's control environment, stemming from aggregated control deficiencies including improper management tone and delays in reporting a whistleblower complaint to the Audit Committee[140] - A remediation plan is in development, which includes leadership training, aligning job descriptions, improving the ethics hotline process, and enhancing transition processes for new executives and audit committee members[141] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal actions in the ordinary course of business, with no material changes since the 2019 year-end report, and believes outcomes will not have a material adverse effect - There were no material changes in legal proceedings from those disclosed in the Annual Report on Form 10-K for the period ending December 31, 2019[145] Risk Factors The company added several new risk factors, highlighting potential adverse impacts from recent leadership transitions, asset impairment risks, ongoing COVID-19 effects, and potential disruption from activist shareholders - New risk factors were added concerning the management of leadership transitions, including a new CFO and three new Board members[146] - The company identified a risk of impairment to the carrying value of fixed assets, intangible assets, or goodwill, which could adversely affect financial results[147] - A significant new risk factor relates to the adverse effects of global pandemics, specifically COVID-19, on business, financial condition, and cash flows[148] - The potential for negative impacts from the actions of activist shareholders was added as a risk factor[152] Exhibits This section lists the exhibits filed with the report, including amendments to the Rights Agreement and Loan Agreement, CEO/CFO certifications, and XBRL data files - Key exhibits filed include the Third and Fourth Amendments to the company's Loan Agreement with Truist Bank, which addressed the technical debt covenant default[155] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to SEC rules were filed as exhibits[155]