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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 116 added, 115 removed, 240 unchanged (49% of the section changed)

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Executive Overview

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.

There have been a number of strategic changes that have occurred throughout 2023, including the permanent cessation of operations and closure of the Munhall facility and the sale of substantially all of assets of Specialty Pipe & Tube, Inc.

("SPT"), which are discussed below.

These strategic changes have been implemented to allow the Company to focus on core competencies that drive growth and long-term value creation for our shareholders.

As a result of these decisions, Munhall and SPT results have been reclassified from the Tubular Products segment and are reflected as discontinued operations in all periods presented.

The discussion and analysis of our results of operations refers to continuing operations only unless noted.

Consolidated net sales decreased 26.3%, or $68.8 million, compared to 2022 driven by decreases in average selling price and pounds shipped.

Consolidated net loss increased to $34.2 million in 2023, compared to net income of $17.6 million in 2022.

Diluted loss per share increased to $3.37 for the full-year 2023 compared to diluted earnings per share of $1.69 for the full-year 2022.

For 2023, cash flows from operating activities were $6.6 million, with $2.9 million used for capital expenditures.

During the year, we also repurchased 143,108 shares for $1.3 million through our share repurchase program as part of our continued efforts to create sustainable value for our shareholders.

Munhall Closure

During the second quarter of 2023, the Board of Directors of the Company made the decision to permanently cease operations at Munhall effective on or around August 31, 2023.

This strategic decision is part of the Company’s ongoing efforts to consolidate manufacturing to drive an increased focus on its core operations and to improve profitability while driving operational efficiencies.

As a result of this decision, the Company incurred asset impairment charges of $8.8 million related to the write down of inventory to net realizable value and the impairment of long-lived assets as well as $2.8 million in increased reserves on accounts receivable and other current assets at the facility during the year ended December 31, 2023.

Divestiture of Specialty Pipe & Tube, Inc.

On December 22, 2023, the Company and its wholly-owned subsidiary Specialty Pipe & Tube, Inc.

(“SPT”) entered into an Asset Purchase Agreement pursuant to which Ascent and SPT sold substantially all of the assets primarily related to SPT to Specialty Pipe & Tube Operations, LLC, a Delaware limited liability company.

The consideration for the transaction was approximately $55 million of cash proceeds subject to certain closing adjustments.

The transaction closed on December 22, 2023.

The sale of SPT is a tremendous value-creating outcome for Ascent shareholders while greatly reducing the complexity associated with our tubular operations and allowing our tubular leadership and operational teams to focus on core competencies that best position the Company for long-term growth.

The transaction also provided the Company the ability to significantly reduce its debt, while providing additional available capital to pursue growth opportunities within our focused businesses.

The Company recognized a pre-tax gain on the sale of the SPT assets of $26.3 million.

Goodwill Impairment Review

During the third quarter of 2023, as described in Note 1 - Summary of Significant Accounting Policies , we tested our goodwill for impairment.

The Company determined potential indicators of impairment existed within the Specialty Chemicals reporting unit.

Macroeconomic conditions and pressures, increased risks within the broader specialty chemicals business, reporting unit operating losses and a decline in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event and the need to perform a quantitative evaluation of goodwill.

The Company performed a discounted cash flow analysis and a market multiple analysis for the Specialty Chemicals reporting unit to determine the reporting unit's fair value.

The discounted cash flow analysis included management assumptions for expected sales growth, capital expenditures and overall operational forecasts while the market multiple analysis included historical and projected performance, market capitalization, volatility and multiples for industry peers.

Determining the fair value of the reporting unit and allocation of that fair value to individual assets and liabilities within the reporting unit to determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions.

Any changes in the judgments, estimates, or assumptions could produce significantly different results.

As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Specialty Chemicals reporting unit was below its carrying value by 27.6% resulting in a goodwill impairment charge of $11.4 million for the year ended December 31, 2023.

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.

We experienced challenges in 2023 related to ongoing economic factors driving volatility in global markets.

Inflationary pressures have negatively impacted our revenue, operating margins and net income in 2023, including increased costs of labor, raw materials and freight.

During the year, we also experienced reduced demand from inventory management measures being pursued by our customers driving reductions in volume.

The ongoing factors driving volatility in global markets that could impact our business' earnings and cash flows include, but are not limited to, the misalignment of supply and demand for labor, 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 and extreme weather, 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, however, if these inflationary and demand pressures continue, our revenue, gross and operating margins and net income will be impacted in 2024.

In February 2022, the United States announced targeted economic sanctions on Russia in response to the military conflict in Ukraine.

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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

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 2023 to 2022 – 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.

Consolidated net sales for the full-year 2023 decreased $68.8 million, or 26.3%, over the full-year 2022 to $193.2 million.

The decrease in net sales was primarily driven by a 8.5% decrease in average price coupled with a 18.7% decrease in pounds shipped.

Full-year 2023 consolidated gross profit decreased 96.5% to $1.5 million, or 0.8% of sales, compared to $43.3 million, or 16.5% of sales, in the full-year 2022.

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.

The decrease in dollars and percentage of sales for the full-year 2023 were attributable to the decrease in pounds shipped and average selling price.

Consolidated selling, general and administrative expense (SG&A) for the full-year 2023 decreased $0.9 million to $26.7 million compared to $27.6 million for the full-year 2022.

SG&A as a percentage of sales was 13.8% of sales for 2023 and 10.6% of sales for 2022.

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;

• 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;

• 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.

• decrease in incentive bonus driven by lower attainment of performance goals in the current year over the prior year;

• decrease in repair and maintenance expenses;

• decreases in other expenses primarily driven by decreases in salaries, wages and benefits, share-based compensation, amortization expense, bad debt expense and utilities

The full-year decreases were partially offset by:

• Increases in professional fees;

• Increases and taxes and licenses.

Consolidated operating loss for the full-year 2023 totaled $37.4 million compared to operating income of $14.5 million for the full-year 2022.

The operating loss increase for the full-year 2023 was primarily driven by aforementioned decrease in pounds shipped and average selling price.

Comparison of 2023 to 2022 - 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

Net sales for the Tubular Products segment totaled $109.5 million for the full year of 2023, a decrease of 28.9% compared to the full-year 2022.

The decrease in net sales was primarily driven by a 21.4% decrease in pounds shipped and a 9.2% decrease in average selling price.

SG&A expense decreased $0.6 million, or 7.3%, for the full-year 2023 when compared to 2022.

SG&A as a percentage of sales was 6.9% of sales for 2023 and 5.3% of sales for 2022.

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 changes in SG&A expense were primarily driven by decreases in salaries, wages and benefits and lower travel expense partially offset by increases in taxes and licenses expense.

Operating loss for the full-year 2023 totaled $11.2 million compared to operating income of $22.2 million for the full-year 2022.

The operating loss increase for the full-year 2023 was primarily driven by aforementioned decreases in pounds shipped and lower selling price as well as higher material costs.

The following table summarizes operating results for the two years indicated.

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7,536 6.9 % 8,132 5.3 %

Operating income $ 27,607 9.0 % $ 33,561 12.6 %

Operating (loss) income $ (11,210) (10.2) % $ 22,182 14.4 %

Comparison of 2023 to 2022 – 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.

Net sales for the Specialty Chemicals segment decreased 22.2%, or $23.9 million, to $83.6 million for 2023 compared to $107.5 million in 2022.

The decrease in net sales was primarily driven by a 17.3% decrease in pounds shipped and a 4.3% decrease in average selling prices.

SG&A expense increased by $0.1 million, or 1.1%, to $7.0 million in 2023 compared to $6.9 million in 2022.

SG&A as a percentage of sales increased to 8.3% in 2023 from 6.4% in 2022.

The changes in SG&A expense were primarily driven by increases in salaries, wages and benefits and professional fees partially offset by lower incentive bonus and amortization expense.

Operating loss for the full-year 2023 totaled $12.6 million compared to operating income of $7.0 million for the full-year 2022.

The increase in operating loss was primarily driven by aforementioned decreases in pounds shipped and lower selling price

The following tables summarize operating results for the two years indicated.

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6,966 8.3 % 6,891 6.4 %

Asset impairment — — % 233 0.3 %

Operating income $ 6,971 6.5 % $ 3,656 5.4 %

Acquisition costs and other 12 — % — — %

Goodwill impairment 11,389 13.6 % — — %

Operating (loss) income $ (12,558) (15.0) % $ 6,971 6.5 %

Comparison of 2023 to 2022 - 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.

Corporate expenses decreased $1.1 million to $12.9 million in 2023 down from $13.9 million in 2022.

The full-year decrease resulted primarily from decreases in salaries, wages and benefit, stock-based compensation, incentive bonuses due to lower attainment of performance goals, as well as decreases in other corporate overhead.

The decreases were partially offset by increases in professional fees related to accounting, tax and other advisory related costs, taxes and licenses and insurance expenses.

Interest expense was $4.2 million and $2.7 million for the full-years of 2023 and 2022, respectively.

The increase was primarily driven by higher average debt outstanding and increasing interest rates in 2022 compared to 2021.

The increase was primarily driven by higher interest rates in 2023 compared to 2022.

As discussed in Note 6 , the Company used the proceeds from the SPT divestiture to prepay in full the term loan in the original principal amount of $5 million under the Company's credit facility and used the remaining proceeds to prepay in part the revolving loans under the credit facility.

The Company has no debt outstanding as of December 31, 2023.

The Company's effective tax rate for 2023 was less than the U.S.

statutory rate of 21% primarily driven by tax benefits associated with non-deductible goodwill impairment.

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.

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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 "EBITDA" as earnings before interest, 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.

goodwill impairment, asset impairment, gain on lease modification, stock-based compensation, non-cash lease cost, acquisition costs and other fees, shelf registration costs, loss on extinguishment of debt, earn-out adjustments, retention costs and restructuring and severance costs from net (loss) 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.

Consolidated EBITDA and Adjusted EBITDA are as follows:

Consolidated EBITDA and Adjusted EBITDA from continuing operations are as follows:

Year Ended December 31,

($ in thousands) 2023 2022

Net income $ 22,066 $ 20,245

Net (loss) income from continuing operations $ (34,151) $ 17,578

Interest expense 4,238 2,742

Change in fair value of interest rate swap — (2)

Income taxes (6,924) (5,568)

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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

Goodwill impairment 11,389 —

Gain on lease modification — (2)

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% sales (8.2) % 9.8 %

Tubular Products EBITDA and Adjusted EBITDA are as follows:

Tubular Products EBITDA and Adjusted EBITDA from continuing operations are as follows:

Year Ended December 31,

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Tubular Products

Net income $ 27,644 $ 31,893

Interest expense 1 —

Net (loss) income from continuing operations $ (11,210) $ 22,182

Depreciation 2,274 2,500

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EBITDA (8,065) 25,633

Acquisition costs and other 96 —

Earn-out adjustments (7) 1,872

Stock-based compensation 58 46

Non-cash lease expense 118 —

Retention expense 8 —

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Specialty Chemicals

Net income $ 6,935 $ 3,589

Net (loss) income $ (12,619) $ 6,935

Interest expense 74 36

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Acquisition costs and other 12 —

Asset impairment — 233

Goodwill impairment 11,389 —

Stock-based compensation 8 41

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Our existing cash, cash equivalents, and credit facilities balances may fluctuate during 2024.

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.

Cash from operations could also be affected by various risks and uncertainties 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 were as follows:

Cash flows from continuing operations were as follows:

Year ended December 31,

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Financing activities (73,169) (374)

Net (decrease) increase in cash and cash equivalents $ (580) $ 1,785

Net decrease in cash and cash equivalents $ (69,410) $ (8,931)

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.

The increase in cash provided by operating activities for the year ended December 31, 2023 compared to cash used in operating activities in the year ended December 31, 2022 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.

Inventory increased operating cash flows for the year ended December 31, 2023 by approximately $12.2 million compared to a decrease of approximately $13.7 million for 2022, while accounts payable increased operating cash flows by approximately $1.6 million for the year ended December 31, 2023 compared to an decrease of approximately $6.3 million for the year ended December 31, 2022.

The increase in operating cash flows from inventory is primarily due to lower inventory turns year over year while the increase in accounts payable is primarily driven by a slight increase in days payables outstanding.

Accounts receivable increased operating cash flow by approximately $6.8 million compared to a decrease of $0.3 million driven by lower sales in the current year partially offset by slightly higher days sales outstanding.

In addition to the working capital changes, changes in income taxes increased cash flows by approximately $3.1 million compared to cash used in operations of approximately $7.9 million in 2022.

This was driven by the receipt of a cash refund from the Company's 2022 tax return.

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.

The decrease in cash used in investing activities for the full-year 2023 compared to cash used in investing activities for the full-year 2022 was primarily driven by a decrease 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.

The increase in net cash used in financing activities for the full-year 2023 compared to the full-year 2022 was primarily due to the repayment of the Company's asset backed line of credit and delayed draw term loan in the fourth quarter of 2023 driven by the sale of substantially all of the assets of SPT.

Short-term Debt

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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.

During the fourth quarter of 2023, the Company entered into a Limited Consent, Second Amendment to Credit Agreement and Omnibus Amendment to Loan Documents with BMO Bank N.A.

and the other lenders under the Company’s credit facility (the “Credit Facility Amendment”).

The Credit Facility Amendment contained a consent for the SPT divestiture, released the lien on the assets of SPT and removed SPT as a loan party.

The Credit Facility Amendment also reduced the maximum revolving loan commitment under the credit facility from $105 million to $80 million, and increased the interest rate for the credit facility from SOFR plus an interest rate margin of between 1.60% and 1.70% to SOFR plus an interest rate margin of between 1.85% and 2.10%, depending on average availability under the credit facility and the Company’s consolidated fixed charge coverage ratio.

As required by the Credit Facility Amendment, the Company used the proceeds from the SPT divestiture to prepay in full the term loan in the original principal amount of $5 million under the credit facility and used the remaining proceeds to prepay in part the revolving loans under the credit facility.

As of December 31, 2023, the Company had no borrowings outstanding with its lender due to the repayment of the Company's asset backed line of credit and delayed draw term loan in the fourth quarter of 2023 driven by the sale of substantially all of the assets of SPT.

As of December 31, 2023, the Company had $61.8 million of remaining availability under its 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 $8.0 million).

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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 share repurchase program allows for repurchase of up to 790,383 shares of the Company's outstanding common stock and expires on 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.

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Profitability Ratio:

• Return on average equity ("ROAE") = net income divided by the trailing 12-month average of equity.

• Return on average equity ("ROAE") = net (loss) 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.

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As of December 31, 2023, 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.

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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.

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• 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.

Additionally, we make estimates and assumptions regarding the inputs used to perform a quantitative assessment of our goodwill, if necessary, and the Company will perform a discounted cash flow analysis and a market multiple analysis.

The discounted cash flow analysis includes management assumptions for expected sales growth, capital expenditures and overall operational forecasts.

The market multiple analysis includes historical and projected performance, market capitalization, volatility and multiples for industry peers.

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.

In the third quarter of 2023, the Company determined potential indicators of impairment within the Specialty Chemicals segment and performed a quantitative evaluation of goodwill.

As a result, it was concluded that the estimated fair value of the Specialty Chemicals reporting unit was below its carrying value by 27.6% resulting in a goodwill impairment charge of $11.4 million.

As of December 31, 2023, the Company's goodwill balance is $0.

See Note 1 for further discussion on the Company's goodwill.

Inventory is stated at the lower of cost or net realizable value.

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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.

We record an obsolete inventory reserve for identified aged inventory items with slow or no sales activity for finished goods or slow or no usage for raw materials for a certain period of time.

For those inventory items, a reserve is established for a percentage of the inventory cost less any estimated scrap proceed and is based on our current knowledge with respect to inventory levels, sales trends and historical experience.

During 2023, our reserve increased approximately $2.8 million to $5.6 million as of December 31, 2023.

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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.

During 2023, the inventory shrink reserve had a $0.4 million increase in response to estimated shrinkage rates based on results from previous physical inventories.

Our inventory reserve for estimated shrinkage was $0.5 million as of December 31, 2023.

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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.

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.

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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.

We have provided valuation allowances as of December 31, 2023, aggregating to $1.6 million, net of federal benefit, against certain state and local net operating loss carryforwards and other deferred tax assets.

As of December 31, 2023, the Company has no liability for unrecognized income tax benefits.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis