Ascent Industries (ACNT) - 2022 Q4 - Annual Report

Part I Business The company operates in Tubular Products and Specialty Chemicals, exiting its galvanized pipe business while managing a significant order backlog decrease - The company operates through two main segments: Tubular Products (stainless steel, galvanized, and carbon pipe/tube) and Specialty Chemicals (defoamers, surfactants, lubricating agents)[7] - In Q4 2022, the company decided to exit the galvanized steel pipe and tube business at its Munhall facility, with operations expected to cease in the first half of 2023[9] - The Specialty Chemicals segment has significant customer concentration, with one customer accounting for 21% of the segment's revenue in 2022, up from 15% in 2021[16] Order Backlog (Year-End) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Tubular Products | $49.8 million | $91.5 million | | Specialty Chemicals | $10.4 million | $12.9 million | - As of December 31, 2022, the company had 698 full-time employees, with 48% represented by unions under collective bargaining agreements expiring between 2023 and 2024[24] Risk Factors The company faces material risks from industry cyclicality, customer concentration, supply chain volatility, and material weaknesses in internal controls - The business is susceptible to cyclical demand, intense competition, and overproduction by foreign producers, which can negatively impact pricing and profitability[30][31][32] - A significant portion of Specialty Chemicals sales depends on a few customers; in 2022, the top 15 customers accounted for 67% of revenue[33] - The company is exposed to supply chain risks, including volatility in raw material prices and availability, and potential loss of key suppliers[34][35][36] - As of December 31, 2022, 48% of the company's employees (334) were unionized under agreements expiring between 2023 and 2024, posing a risk of labor disruptions[51] - The company has identified material weaknesses in its internal controls over financial reporting, which could affect investor confidence and report accuracy[63] Unresolved Staff Comments There are no unresolved staff comments - None[67] Properties The company operates several manufacturing plants and facilities, primarily leased, which are considered adequate for current operational needs Principal Properties Overview | Location | Principal Operations | Segment | Leased or Owned | | :--- | :--- | :--- | :--- | | Munhall, PA | Manufacturing stainless steel pipe | Tubular Products | Leased | | Bristol, TN | Manufacturing stainless steel pipe | Tubular Products | Leased | | Cleveland, TN | Chemical manufacturing and warehousing | Specialty Chemicals | Leased | | Fountain Inn, SC | Chemical manufacturing and warehousing | Specialty Chemicals | Leased | | Danville, VA | Chemical manufacturing and warehousing | Specialty Chemicals | Owned | | Troutman, NC | Manufacturing ornamental stainless steel tube | Tubular Products | Leased | - Substantially all of the value of the Company's leased plants and facilities relate to the Master Lease with Store Master Funding XII, LLC[67] Legal Proceedings Information regarding legal proceedings is detailed in Note 15 to the Consolidated Financial Statements - For a discussion of legal proceedings, see Note 15 to the Consolidated Financial Statements[68] Mine Safety Disclosures This item is not applicable to the company - Not applicable[68] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ (ACNT), no dividends were paid, and 80,204 shares were repurchased in Q4 2022 - The company's common stock trades on the NASDAQ Global Market under the symbol ACNT; no dividends were declared or paid in 2022 or 2021[72] Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2022 | — | $ — | | Nov 2022 | 34,403 | $11.00 | | Dec 2022 | 45,801 | $10.30 | | Total Q4 | 80,204 | $10.60 | - The Board of Directors re-authorized the share repurchase program, extending it to February 17, 2025[74] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated net sales grew 23.7% to $414.1 million in 2022, though operating cash flow decreased and material weaknesses were identified Executive Overview In 2022, the company rebranded to Ascent Industries Co, grew sales 23.7% to $414.1 million, and decided to exit its galvanized pipe business - Effective August 10, 2022, the company changed its corporate name from Synalloy Corporation to Ascent Industries Co[77] Fiscal 2022 Financial Highlights | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $414.1M (+23.7%) | $334.7M | | Net Income | $22.1M | $20.2M | | Diluted EPS | $2.12 | $2.14 | - The company made a strategic decision to exit its galvanized pipe and tube operations, resulting in a $0.9 million charge in Q4 2022[83] - The company repurchased 110,404 shares for $1.3 million during 2022[84] Results of Operations Consolidated 2022 sales rose 23.7% to $414.1 million on higher prices, but gross margin fell to 13.7% due to increased costs Consolidated Results of Operations (in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $414,147 | $334,715 | | Gross Profit | $56,533 | $60,766 | | SG&A Expense | $34,952 | $30,144 | | Operating Income | $20,388 | $27,348 | Tubular Products Segment Results (in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $306,605 | $267,238 | | Gross Profit | $43,084 | $51,397 | | Operating Income | $27,607 | $33,561 | Specialty Chemicals Segment Results (in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $107,542 | $67,477 | | Gross Profit | $13,862 | $9,850 | | Operating Income | $6,971 | $3,656 | Non-GAAP Financial Measures Consolidated Adjusted EBITDA decreased to $36.0 million in 2022 from $44.3 million in 2021, driven by a decline in the Tubular Products segment - The company uses EBITDA and Adjusted EBITDA as key non-GAAP measures to evaluate performance, excluding items like acquisition and restructuring costs[96][97] Consolidated Adjusted EBITDA Reconciliation (in thousands) | Line Item | 2022 | 2021 | | :--- | :--- | :--- | | Net income | $22,066 | $20,245 | | EBITDA | $33,314 | $37,323 | | Adjusted EBITDA | $36,021 | $44,308 | | % of sales | 8.7% | 13.2% | Segment Adjusted EBITDA (in thousands) | Segment | 2022 Adjusted EBITDA | 2021 Adjusted EBITDA | | :--- | :--- | :--- | | Tubular Products | $35,760 | $42,963 | | Specialty Chemicals | $11,771 | $6,548 | Liquidity and Capital Resources Operating cash flow decreased to $5.6 million in 2022 due to working capital changes, while total debt stood at $71.5 million Cash Flow Summary (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Cash from Operating Activities | $5,577 | $19,055 | | Cash used in Investing Activities | ($4,975) | ($32,661) | | Cash (used in) provided by Financing Activities | ($1,182) | $15,391 | - The decrease in operating cash flow was primarily driven by a $13.8 million use of cash for inventory and a $10.3 million use of cash for accounts payable[103] - As of December 31, 2022, the company had $71.5 million in total outstanding debt and $37.6 million of remaining availability under its credit facility[108] Key Financial Ratios | Ratio | 2022 | 2021 | | :--- | :--- | :--- | | Current ratio | 5.1 | 3.3 | | Debt to capital | 34% | 39% | | Return on average equity | 18.0% | 21.1% | Material Cash Requirements from Contractual and Other Obligations Material cash requirements include $71.5 million in debt and $33.5 million in lease obligations, with $6.0 million budgeted for 2023 capital spending - Material cash requirements include debt obligations on a revolving credit facility ($67.4 million) and a term loan ($4.1 million)[114] - Operating and finance lease obligations totaled $33.5 million, with $1.3 million payable within 12 months[115] - Capital spending in fiscal 2023 is expected to be as much as $6.0 million[115] Critical Accounting Policies and Estimates Critical accounting estimates involve business combinations, goodwill impairment testing, inventory valuation, and deferred tax asset recoverability - Business combination accounting requires significant estimates to allocate purchase price to acquired assets and liabilities based on fair value[117][118] - Goodwill is tested for impairment annually on October 1; the 2022 test for the Specialty Chemicals reporting unit indicated no impairment was required[120][122] - Inventory reserves for obsolescence increased by $2.4 million to $3.5 million in 2022[123][124] - A valuation allowance of $1.7 million was recorded against certain state and local deferred tax assets as of December 31, 2022[127][131] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, this information is not required - The Company is a smaller reporting company and is not required to provide the information required by this Item[131] Financial Statements and Supplementary Data The auditor issued an adverse opinion on internal controls due to material weaknesses but an unqualified opinion on the financial statements - The independent auditor, BDO USA, LLP, issued an adverse opinion on the Company's internal control over financial reporting as of December 31, 2022[136][148] - Critical audit matters identified were the accounting for tax benefits and the valuation of goodwill for the Specialty Chemicals reporting unit[140][143] - Material weaknesses were identified in entity-level controls and specific control activities including inventory, revenue, and IT general controls[152][153][154] Consolidated Financial Highlights (in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $269,043 | $266,002 | | Total Liabilities | $134,784 | $154,412 | | Total Shareholders' Equity | $134,259 | $111,590 | | Income Statement | | | | Net Sales | $414,147 | $334,715 | | Net Income | $22,066 | $20,245 | | Diluted EPS | $2.12 | $2.14 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants - None[282] Controls and Procedures Management concluded disclosure controls were not effective as of year-end 2022 due to multiple material weaknesses in internal control - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to identified material weaknesses in internal control[283] - Material weaknesses were identified in Entity Level Activities, attributed to insufficient qualified resources and a lack of effective monitoring[286][287] - Additional material weaknesses were found in Control Activities related to inventory, revenue recognition, period-end financial reporting, complex accounting, and IT general controls[288] - Management's remediation plan includes providing training, realigning roles, and enhancing or designing new controls across the affected areas[290] Other Information This item is not applicable - Not applicable[292] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[292] Part III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the 2023 Proxy Statement, which identifies John P. Schauerman as an audit committee financial expert - Information for this item is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders[293] - The Board of Directors has determined that John P. Schauerman is an 'audit committee financial expert' serving on the Audit Committee[295] Executive Compensation Details concerning executive compensation are incorporated by reference from the 2023 Proxy Statement - Information for this item is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[296] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2023 Proxy Statement - Information for this item is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders[298] Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 118,142 | $13.66 | 668,523 | | Not approved by security holders | — | — | — | | Total | 118,142 | $13.66 | 668,523 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information for this item is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders[300] Principal Accounting Fees and Services Information on accounting fees and pre-approval policies is incorporated by reference from the 2023 Proxy Statement - Information for this item is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders[301] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the report, including details on valuation and qualifying accounts - This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K[304] Schedule II - Valuation and Qualifying Accounts (in thousands) | Description | Beginning Balance (2022) | Charged to Cost and Expenses | Deductions | Ending Balance (2022) | | :--- | :--- | :--- | :--- | :--- | | Inventory reserves | $1,272 | $3,052 | $(627) | $3,697 | Form 10-K Summary No summary is provided for Form 10-K - None[307]