ASCENT INDUSTRIES CO. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the fiscal years ended December 31, 2022 and 2021. Unless otherwise noted, all references herein for the years 2022 and 2021 represent the fiscal years ended December 31, 2022 and 2021, respectively. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted in the United States of America. This discussion and analysis is presented in five sections: • Executive Overview • Results of Operations and Non-GAAP Financial Measures • Liquidity and Capital Resources • Material Cash Requirements from Contractual and Other Obligations • Critical Accounting Policies and Estimates Executive Overview Name Change On August 5, 2022, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Certificate of Incorporation to change our corporate name from Synalloy Corporation to Ascent Industries Co., effective August 10, 2022 . The rebrand to Ascent represents our commitment to unlocking the potential of our industrial manufacturing portfolio and embodies the considerable progress that we have made and our growth prospects into the future. Macroeconomic Events Economic activity continues to be impacted by ongoing factors driving volatility in global markets including the misalignment of supply and demand for labor, transportation and logistic services, energy, raw materials and other inputs, the inflation of (or unavailability of) raw material inputs and transportation and logistics services, currency fluctuations, rising interest rates, extreme weather and the evolution of the novel coronavirus disease ("COVID-19"). The ongoing factors driving volatility in global markets that could impact our business' earnings and cash flows include, but are not limited to, the factors discussed above, the purchasing of commodities and relative commodity prices. The Company continues efforts to offset these inflationary pressures and continues to take action to improve working capital and evaluate other opportunities to maintain and improve financial performance in the short and long term. In February 2022, the United States announced targeted economic sanctions on Russia in response to the military conflict in Ukraine. This conflict and the associated sanctions have disrupted the global economy, causing heightened cybersecurity risks, supply chain challenges, higher energy costs, and an exacerbation of existing inflationary pressures. As our operations are located in North America, we have no direct exposure to Russia and Ukraine, however, we are actively monitoring the broader economic impact of the crisis, especially the potential impact on commodity and fuel prices, and the potential decreased demand for our products. The Inflation Reduction Act of 2022 was signed into law during the third quarter of 2022 and included provisions for an alternative minimum tax and a one percent excise tax on share repurchases. We anticipate being subject to the excise tax beginning in 2023 and continue to evaluate other provisions of the Inflation Reduction Act for their impact on our business. Fiscal 2022 Highlights Consolidated net sales increased 23.7%, or $79.4 million, compared to 2021 driven by increases in average selling price and the Company's acquisition of DanChem in the fourth quarter of 2021, partially offset by a decrease in pounds shipped. Excluding the DanChem acquisition, net sales increased 16.1%, or $52.8 million, over 2021. Consolidated net income increased to $22.1 million in 2022, compared to net income of $20.2 million in 2021. Earnings per share decreased to $2.12 diluted earnings per share for the full-year 2022 compared to $2.14 diluted earnings per share in 14 Table of Contents 2021. Excluding the DanChem acquisition, consolidated net income increased to $22.0 million and diluted earnings per share increased to $2.11 per share. For 2022, cash flows from operating activities were $5.6 million, with $5.8 million used for capital expenditures. Fiscal 2022 represented a year of solid financial performance for the Company with continued execution of our strategy and transformation efforts. Both of our segments contributed to the success of the Company in 2022, delivering solid financial results along with quality and reliability for our customers. During the year we continued to make progress on our transformation efforts and strategic priorities by investing in upgrades and new equipment at our facilities to further enhance and improve manufacturing processes, continued to focus on operational efficiencies within our facilities and continued efforts to maximize our working capital use. As part of these efforts, during the fourth quarter of 2022, the Company began a strategic reassessment of certain operations to drive an increased focus on its core operations and to continue to improve overall performance and operating profitability. As a result of this reassessment, management and the Board of Directors decided to pursue an exit of the Company's galvanized pipe and tube operations at its Munhall facility, resulting in accelerated depreciation and amortization charges of $0.9 million within our Tubular Products segment in the fourth quarter of 2022. We believe this will position the Company to focus on its most profitable operations enhancing and building efficiencies while further increasing long-term profitability. The DanChem acquisition continues to drive growth as we continue to integrate the business with the existing portfolio. Full-year 2022 results include $32.3 million in net sales and $0.1 million in operating income attributable to the operations acquired in the fourth quarter of 2021. During the year, we also repurchased 110,404 shares for $1.3 million through our share repurchase program as part of our continued efforts to create sustainable value for our shareholders. Results of Operations Comparison of 2022 to 2021 – Consolidated Consolidated net sales for the full-year 2022 increased $79.4 million, or 23.7%, over the full-year 2021 to $414.1 million. The increase in net sales was primarily driven by a 42.2% increase in average price partially offset by a 14.0% decrease in pounds shipped. Excluding DanChem, net sales increased $52.8 million, or 16.1%, to $381.9 million driven by a 44.0% increase in average selling price partially offset by a 18.9% decrease in pounds shipped. Full-year 2022 consolidated gross profit decreased 7.0% to $56.5 million, or 13.7% of sales, compared to $60.8 million, or 18.2% of sales, in the full-year 2021. The decrease in dollars and percentage of sales for the full-year 2022 were attributable to increasing raw material and freight costs. Consolidated selling, general and administrative expense (SG&A) for the full-year 2022 increased by $4.8 million to $35.0 million compared to $30.1 million for the full-year 2021. SG&A as a percentage of sales was 8.4% of sales for 2022 and 9.0% of sales for 2021. The changes in SG&A expense were primarily driven by: • Increases in professional fees primarily driven by accounting, tax and other advisory related costs; • Increases in amortization expense primarily driven by DanChem acquisition related intangibles; • Increases in repairs and maintenance costs in our facilities; • Increases in travel expenses; and, • Increases in other expenses primarily driven by increases in share-based compensation, bad debt expense, utilities, and insurance. The full-year increases were partially offset by: • Decreases in incentive bonus expense primarily driven by lower attainment of performance goals in the current year over the prior year; and, • Decreases in taxes and licenses in the current year compared to the prior year. Consolidated operating income for the full-year 2022 totaled $20.4 million compared to operating income of $27.3 million for the full-year 2021. The operating income decrease for the full-year 2022 was primarily driven by aforementioned increasing raw material and freight costs and increased SG&A expenses. 15 Table of Contents Comparison of 2022 to 2021 - Tubular Products Net sales for the Tubular Products segment totaled $306.6 million for the full year of 2022, an increase of 14.7% compared to the full-year 2021. The increase in net sales was primarily driven by a 45.3% increase in average selling prices partially offset by a 20.3% decrease in pounds shipped. The net sales increase (decrease) for the full-year 2022 compared to the full-year 2021 is summarized as follows: (in thousands) $ % Average Selling Price Units Shipped Fiberglass and steel liquid storage tanks and separation equipment $ (932) (69.4) % 29.6 % (78.1) % Heavy wall seamless carbon steel pipe and tube 7,687 19.0 % 34.4 % (11.5) % Stainless steel pipe and tube 36,242 19.4 % 32.9 % (10.2) % Galvanized pipe and tube (3,630) (9.4) % 49.4 % (39.3) % Total increase $ 39,367 SG&A expense decreased $2.4 million, or 13.2%, for the full-year 2022 when compared to 2021. SG&A as a percentage of sales was 5.0% of sales for 2022 and 6.7% of sales for 2021. The changes in SG&A expense were primarily driven by decreases in incentive bonus primarily driven by lower attainment of performance goals in the current year over the prior year and lower allocated costs in the current year compared to the prior year. The full-year decreases were partially offset by increases in travel and bad debt expenses. Operating income decreased to $27.6 million for the full-year 2022 compared to operating income of $33.6 million for the full-year 2021. The operating income decrease for the full-year 2022 was primarily driven by increased raw material and freight costs. The following table summarizes operating results for the two years indicated. Reference should be made to Note 13 to the consolidated financial statements included in Item 8 of this Form 10-K. 2022 2021 (in thousands) Amount % Amount % Net sales $ 306,605 100.0 % $ 267,238 100.0 % Cost of goods sold 263,521 85.9 % 215,841 80.8 % Gross profit 43,084 14.1 % 51,397 19.2 % Selling, general and administrative expense 15,477 5.0 % 17,836 6.6 % Operating income $ 27,607 9.0 % $ 33,561 12.6 % Comparison of 2022 to 2021 – Specialty Chemicals Net sales for the Specialty Chemicals segment increased 59.4%, or $40.1 million, to $107.5 million for 2022 compared to $67.5 million in 2021. The increase in net sales was primarily driven by a 52.2% increase in average selling prices partially offset by a 3.1% decrease in pounds shipped. Excluding DanChem, net sales increased $13.5 million, or 21.8%, to $75.2 million driven by a 45.2% increase in average selling prices partially offset by a 16.3% decrease in pounds shipped. SG&A expense increased $0.9 million or 15.6%, to $6.9 million in 2022 when compared to 2021. Excluding DanChem, SG&A expense decreased $3.2 million, or 62.1% compared to 2021. SG&A as a percentage of sales decreased to 6.5% in 2022 from 8.8% in 2021. The changes in SG&A expense were primarily driven by increases in amortization expense related to DanChem acquisition related intangibles and incentive bonuses due to higher attainment of performance goals. The increases were partially offset by lower allocated costs in the current year compared to the prior year and decreases in salaries, wages and benefits. Operating income increased to $7.0 million for the full-year 2022 compared to operating income of $3.6 million for the full-year 2021. The increase in operating income was primarily driven by the aforementioned increases in average selling prices partially offset increases in SG&A expense. 16 Table of Contents The following tables summarize operating results for the two years indicated. Reference should be made to Note 13 to the consolidated financial statements included in Item 8 of this Form 10-K. 2022 2021 (in thousands) Amount % Amount % Net sales $ 107,542 100.0 % $ 67,477 100.0 % Cost of goods sold 93,680 87.1 % 57,627 85.4 % Gross profit 13,862 12.9 % 9,850 14.6 % Selling, general and administrative expense 6,891 6.4 % 5,961 8.8 % Asset impairment — — % 233 0.3 % Operating income $ 6,971 6.5 % $ 3,656 5.4 % Comparison of 2022 to 2021 - Corporate Corporate expenses increased $6.2 million to $13.0 million, or 3.1% of sales, in 2022 up from $6.8 million, or 2.0% of sales, in 2021. The full-year increase resulted primarily from decreases in allocated costs in the current year over the prior year, increases in professional fees related to accounting, tax and other advisory related costs, share-based payment expense partially offset by decreases in salaries, wages and benefits and incentive bonus due to lower attainment of performance goals. Interest expense was $2.7 million and $1.5 million for the full-years of 2022 and 2021, respectively. The increase was primarily driven by higher average debt outstanding and increasing interest rates in 2022 compared to 2021. The Company's effective tax rate for 2022 was less than the U.S. statutory rate of 21% primarily driven by tax benefits associated with the closure of Palmer and the release of valuation allowances on certain deferred tax assets, partially offset by state taxes. Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States ("GAAP"), we use the following non-GAAP financial measures: EBITDA and Adjusted EBITDA. Management believes that these non-GAAP measures are useful because they are key measures used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions as well as allow readers to compare the financial results between periods. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP. EBITDA and Adjusted EBITDA We define "EBITDA" as earnings before interest (including change in fair value of interest rate swap), income taxes, depreciation and amortization. We define "Adjusted EBITDA" as EBITDA further adjusted for the impact of non-cash and other items we do not consider in our evaluation of ongoing performance. These items include: goodwill impairment, asset impairment, gain on lease modification, stock-based compensation, non-cash lease cost, acquisition costs and other fees, proxy contest costs and recoveries, shelf registration costs, loss on extinguishment of debt, earn-out adjustments, realized and unrealized (gains) and losses on investments in equity securities and other investments, retention costs and restructuring and severance costs from net income. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. 17 Table of Contents Consolidated EBITDA and Adjusted EBITDA are as follows: Year Ended December 31, ($ in thousands) 2022 2021 Consolidated Net income $ 22,066 $ 20,245 Adjustments: Interest expense 2,742 1,486 Change in fair value of interest rate swap — (2) Income taxes (4,211) 5,253 Depreciation 8,722 7,547 Amortization 3,995 2,794 EBITDA 33,314 37,323 Acquisition costs and other 1,200 1,001 Shelf registration costs 12 — Proxy contest costs and recoveries — 168 Loss on extinguishment of debt — 223 Earn-out adjustments (7) 1,872 Loss on investments in equity securities and other investments — 363 Asset impairment — 233 Gain on lease modification (2) — Stock-based compensation 1,016 799 Non-cash lease expense 414 481 Retention expense — 500 Restructuring and severance costs 74 1,345 Adjusted EBITDA $ 36,021 $ 44,308 % sales 8.7 % 13.2 % 18 Table of Contents Tubular Products EBITDA and Adjusted EBITDA are as follows: Year Ended December 31, ($ in thousands) 2022 2021 Tubular Products Net income $ 27,644 $ 31,893 Adjustments: Interest expense 1 — Depreciation 4,814 5,485 Amortization 3,092 2,721 EBITDA 35,551 40,099 Acquisition costs and other 96 — Earn-out adjustments (7) 1,872 Stock-based compensation 100 129 Retention expense — 500 Restructuring and severance costs 20 363 Tubular Products Adjusted EBITDA $ 35,760 $ 42,963 % of segment sales 11.7 % 16.1 % Specialty Chemicals EBITDA and Adjusted EBITDA are as follows: Year Ended December 31, ($ in thousands) 2022 2021 Specialty Chemicals Net income $ 6,935 $ 3,589 Adjustments: Interest expense 36 11 Depreciation 3,846 1,932 Amortization 903 73 EBITDA 11,720 5,605 Acquisition costs and other — 61 Asset impairment — 233 Stock-based compensation 41 165 Non-cash lease expense 2 — Restructuring and severance costs 8 484 Specialty Chemicals Adjusted EBITDA $ 11,771 $ 6,548 % of segment sales 10.9 % 9.7 % 19 Table of Contents Liquidity and Capital Resources We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities and working capital management. Capital expenditures and share repurchases are a component of our cash flow and capital. Sources of Liquidity Funds generated by operating activities supplemented by our available cash and cash equivalents and our credit facilities are our most significant sources of liquidity. As of December 31, 2022, we held $1.4 million of cash and cash equivalents, as well as $37.6 million of remaining available capacity on our revolving line of credit. Our existing cash, cash equivalents, and credit facilities balances may fluctuate during 2023. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, continued effects of the pandemic and other risks detailed in Item 1A - Risk Factors of this report. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures as well as repay our debt obligations as they become due over the next 12 months and beyond. Cash Flows Cash flows were as follows: Year ended December 31, (in thousands) 2022 2021 Total cash provided by (used in): Operating activities 5,577 19,055 Investing activities (4,975) (32,661) Financing activities (1,182) 15,391 Net (decrease) increase in cash and cash equivalents $ (580) $ 1,785 Operating Activities The decrease in cash provided by operating activities for the year ended December 31, 2022 compared to cash provided by operating activities in the year ended December 31, 2021 was primarily driven by changes in working capital. Changes in working capital can vary significantly depending on factors such as the timing of inventory production and purchases, customer payments of accounts receivable and payments to vendors in the regular course of business. Inventory decreased operating cash flows for the year ended December 31, 2022 by approximately $13.8 million compared to a decrease of approximately $18.9 million for 2021, while accounts payable decreased operating cash flows by approximately $10.3 million for the year ended December 31, 2022 compared to an increase of approximately $10.8 million for the year ended December 31, 2021. The increase in inventory is primarily due to product cost and freight inflation over the prior year, partially offset by slightly higher inventory turns year-over-year while the decrease in accounts payable is primarily driven by a decrease in days payables outstanding. Accounts receivable increased operating cash flow by approximately $4.0 million compared to a decrease of $16.2 million driven by higher sales in the current year partially offset by slightly lower days sales outstanding. Investing Activities Net cash used in investing activities primarily consists of transactions related to capital expenditures, proceeds from the disposal of property, plant and equipment and acquisitions. The decrease in cash used in investing activities for the full-year 2022 compared to cash used in investing activities for the full-year 2021 was primarily driven by an increase in cash outflows related to the DanChem acquisition in the prior year not in the current year partially offset by an increase in capital expenditures in the current year over the prior year. Financing Activities Net cash used in financing activities primarily consist of transactions related to our long-term debt. The increase in net cash used in financing activities for the full-year 2022 compared to net cash provided by financing activities in the full-year 2021 was primarily due to increased borrowings against the Company's asset backed line of credit driven by the acquisition of DanChem in the prior year not in the current year and proceeds received from the Company's Rights Offering in the fourth quarter of 2021 that were not received in 2022. 20 Table of Contents Short-term Debt The Company has a note payable in the amount of $1.0 million with an annual interest rate of 2.77% maturing April 1, 2023, associated with the financing of the Company's insurance premium in the current year. As of December 31, 2022, the outstanding balance was $0.4 million. Long-term Debt The Company and its subsidiaries have a Credit Agreement with BMO providing the Company with a four-year revolving credit facility, maturing on January 15, 2025, and providing the Company with up to $150.0 million of borrowing capacity. As of December 31, 2022, the Company had $71.5 million of total borrowings outstanding with its lender, an increase of $1.2 million from the balance at December 31, 2021. As of December 31, 2022, the Company had $37.6 million of remaining availability under it credit facility. The Facility contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $7.5 million and (ii) 10% of the revolving credit facility (currently $10.5 million). As of December 31, 2022, the Company was in compliance with all financial debt covenants. See Note 6 in the notes to the consolidated financial statements for additional information on the Company's line of credit. Stock Repurchases and Dividends We may repurchase common stock and pay dividends from time to time pursuant to programs approved by our Board of Directors. The payment of cash dividends is also subject to customary legal and contractual restrictions. Our capital allocation strategy is to first fund operations and investments in growth and then return excess cash over time to shareholders through share repurchases and dividends. On December 20, 2022, the Board of Directors re-authorized the Company's share repurchase program. The previous share repurchase program had a term of 24 months and was set to expire on February 17, 2023. The share repurchase program allows for repurchase of up to 790,383 shares of the Company's outstanding common stock and extends to February 17, 2025. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. As of December 31, 2022, the Company has 679,979 shares of its share repurchase authorization remaining. Shares repurchased for the year ended December 31, 2022 and 2021 were as follows: Year ended December 31, 2022 2021 Number of shares repurchased 110,404 — Average price per share $ 12.16 $ — Total cost of shares repurchased $ 1,345,540 $ — At the end of each fiscal year, the Board reviews the financial performance and capital needed to support future growth to determine the amount of cash dividend, if any, which is appropriate. In 2022 and 2021, no dividends were declared or paid by the Company. 21 Table of Contents Other Financial Measures Below are additional financial measures that we believe are important in understanding the Company's liquidity position from year to year. The metrics are defined as: Liquidity Measure: • Current ratio = current asset divided by current liabilities. The current ratio will be determined by the Company using generally accepted accounting principles, consistently applied. Leverage Measure: • Debt to capital = Total debt divided by total capital. The debt to capital ratio will be determined by the Company using generally accepted accounting principles, consistently applied. Profitability Ratio: • Return on average equity ("ROAE") = net income divided by the trailing 12-month average of equity. The ROAE will be determined by the Company using generally accepted accounting principles, consistently applied. Results of these additional financial measures are as follows: Year ended December 31, 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 As of December 31, 2022, our material cash requirements for our known contractual and other obligations were as follows: • Debt Obligations and Interest Payments - Outstanding obligations on our revolving credit facility and term loan were $67.4 million and $4.1 million, respectively, with $2.5 million payable within 12 months. The interest payments on our remaining borrowings will be determined based upon the average outstanding balance of our borrowings and the prevailing interest rate during that time. See Note 6 for further detail of our debt and the timing of expected future payments. • Operating and Finance Leases - The Company enters into various lease agreements for real estate and manufacturing equipment used in the normal course of business. Operating and finance lease obligations were $33.5 million, with $1.3 million payable within 12 months. See Note 7 for further detail of our lease obligations and the timing of expected future payments. The Company has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on the Company's financial position, revenues, results of operations, liquidity, or capital expenditures. We expect capital spending in fiscal 2023 to be as much as $6.0 million. Critical Accounting Policies and Estimates The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 1 to the consolidated financial statements included herein. We believe the following accounting policies affect the most significant estimates and management judgments used in the preparation of the Company's consolidated financial statements. 22 Table of Contents Business Combinations Description Business combinations are accounted for using the acquisition method of accounting in accordance with GAAP. Under this method, the total consideration transferred to consummate the business combination is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the transaction. Judgments and uncertainties involved in the estimate The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets, if any, acquired and liabilities assumed. Fair value determinations involve significant assumptions about highly subjective variables, including future cash flows, discount rates, and expected business performance. There are also different valuation models and inputs for each component, the selection of which requires considerable judgment. Our estimates and assumptions may be based, in part, on the availability of listed market prices or other transparent market data. These determinations will affect the amount of amortization expense recognized in future periods as well the allocation of goodwill, if any, attributable to the transaction. Effect if actual results differ from assumptions We base our fair value estimates on assumptions we believe are reasonable, but recognize the assumptions are inherently uncertain. Depending on the size of the purchase price of a particular acquisition, the mix of intangible assets acquired and expected business performance, the purchase price allocation could be materially impacted by applying a different set of assumptions and estimates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Goodwill Description Goodwill is the excess of the purchase price over the fair value of identifiable assets acquired, less fair value of liabilities assumed, in a business combination. The Company reviews goodwill for impairment at the reporting unit level, which is the operating segment level or one level below the operating segment level. A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. Goodwill is not amortized but is evaluated for impairment at least annually on October 1 or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable. The evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If, after assessing qualitative factors, we determine it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is performed. Judgments and uncertainties involved in the estimate We make various estimates and assumptions about our goodwill, including whether any potential impairment events have occurred. Examples of such events or changes in circumstances, many of which are subjective in nature, include the following: • Significant negative industry or economic trends; • A significant change in the use of the acquired assets or our strategy; • A significant divestiture or other disposition activity; • A significant decrease in the market value of the asset; • A significant change in legal factors or the business climate that could affect the value of the asset; and • A change in segment by one or more reporting unit Additionally, we make estimates and assumptions regarding the inputs used to perform a quantitative assessment of our goodwill, if necessary. The Company performed a discounted cash flow analysis and a market multiple analysis. The discounted cash flow analysis included management assumptions for expected sales growth, capital expenditures and overall operational forecasts. The market multiple analysis included historical and projected performance, market capitalization, volatility and multiples for industry peers. 23 Table of Contents Effect if actual results differ from assumptions We have not made any material changes in our methodology used to determine whether potential impairment events have occurred or any material changes in the estimates and assumptions used in our quantitative goodwill impairment testing. During 2022, goodwill was allocated to the Company's Specialty Chemicals segment and as of December 31, 2022, we determined that no impairment of the carrying value of goodwill for this reporting unit was required. In the event that our estimates vary from actual results, we may record additional impairment losses, which could be material to our results of operations. Inventory Description Inventory is stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods. At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below our cost. This would indicate that an adjustment would be required. We record an obsolete inventory reserve for identified finished goods with no sales activity and raw materials with no usage. This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience. During 2022, our reserve increased approximately $2.4 million to $3.5 million as of December 31, 2022. We also record an inventory reserve for the estimated shrinkage (quantity losses) between physical inventories. This reserve is based upon the most recent physical inventory results. During 2022, the inventory shrink reserve had an immaterial increase in response to estimated shrinkage rates based on results from previous physical inventories. Our inventory reserve for estimated shrinkage was $0.2 million as of December 31, 2022. Judgments and uncertainties involved in the estimate We do not believe that our inventories are subject to significant risk of obsolescence in the near term and we have the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in demand, product life cycle, cost trends, product pricing or a deterioration in product quality could result in the need for additional reserves. Likewise, changes in the estimated shrink reserve may be necessary, based on the timing and results of physical inventories. We also apply judgment in the determination of levels of obsolete inventory and assumptions about net realizable value. Effect if actual results differ from assumptions We have not made any material changes in the methodology used to establish our reserves for obsolete inventory or inventory shrinkage during the past two fiscal years. However, it is possible that actual results could differ from recorded reserves. For instance, a 10% change in the amount of products considered obsolete would have decreased net earnings by $2.7 million for 2022. A 10% change in the estimated shrinkage rate would not have had a material impact on net earnings for 2022. Income Taxes Description In determining income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax expense, the resultant tax liabilities and the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when realization of the benefit of deferred tax assets is not deemed to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize net tax benefits under the recognition and measurement criteria of FASB ASC Topic 740, Income Taxes, which prescribes requirements and other guidance for financial statement recognition and measurement of positions taken or expected to be taken on tax returns. We record interest and penalties, if any, related to uncertain tax positions as a component of income tax expense. 24 Table of Contents Judgments and uncertainties involved in the estimate We assess on a tax jurisdictional basis the likelihood that our deferred tax assets can be recovered. If recovery is not more likely than not (a likelihood of less than 50 percent), the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to ultimately be recoverable. In this process, certain relevant criteria are evaluated including: the amount of income or loss in prior years, the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years that can be used to absorb net operating losses and credit carry backs, future expected taxable income and prudent and feasible tax planning strategies. Changes in taxable income, market conditions, tax laws and other factors may change our judgment regarding whether we will be able to realize the deferred tax assets. These changes, if any, may require material adjustments to the net deferred tax assets and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made. The utilization of certain deferred tax assets is dependent on the amount and timing of taxable income that we will ultimately generate in the future and other factors, such as changes in tax laws. We also assess the likelihood that our tax reporting positions will ultimately be sustained. To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion, or all, of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes in tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made. We have provided valuation allowances as of December 31, 2022, aggregating to $1.7 million against certain state and local net operating loss carryforwards and other deferred tax assets. As of December 31, 2022, the Company has no liability for unrecognized income tax benefits. Effect if actual results differ from assumptions Although management believes that the estimates and judgments discussed herein are reasonable, actual results could differ, which could result in income tax expense or benefits that could be material. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company is a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and is not required to provide the information required by this Item. 25 Table of Contents