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
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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.
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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
Heavy wall seamless carbon steel pipe and tube 7,687 19.0 % 34.4 % (11.5) %
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.
(in thousands) Amount % Amount %
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.
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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.
(in thousands) Amount % Amount %
Selling, general and administrative expense 6,891 6.4 % 5,961 8.8 %
Asset impairment — — % 233 0.3 %
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.
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Consolidated EBITDA and Adjusted EBITDA are as follows:
Year Ended December 31,
Consolidated
Adjustments:
Change in fair value of interest rate swap — (2)
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) —
Retention expense — 500
Restructuring and severance costs 74 1,345
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Tubular Products EBITDA and Adjusted EBITDA are as follows:
Year Ended December 31,
Tubular Products
Adjustments:
Interest expense 1 —
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
% of segment sales 11.7 % 16.1 %
Specialty Chemicals EBITDA and Adjusted EBITDA are as follows:
Year Ended December 31,
Specialty Chemicals
Adjustments:
Interest expense 36 11
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 %
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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,
Total cash provided by (used in):
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.
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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,
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.
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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,
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.
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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.
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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.
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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.
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Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Page
Consolidated Balance Sheets as of December 31, 2022 and 2021 31
Notes to Consolidated Financial Statements 36
Note 1: Summary of Significant Accounting Policies 36
Note 2: Acquisitions 42
Note 3: Revenue Recognition 43
Note 4: Fair Value Measurements 44
Note 5: Property, Plant and Equipment 47
Note 7: Leases 48
Note 8: Accrued Expenses 50
Note 9: Shareholders' Equity 50
Note 10: Accounting for Share-Based Payments 51
Note 11: Income Taxes 54
Note 12: Earnings Per Share 54
Note 13: Industry Segments 56
Note 14: Benefit Plans and Collective Bargaining Agreements 58
Note 15: Commitments and Contingencies 59
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Ascent Industries Co.
Oak Brook, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Ascent Industries Co. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years then ended, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013)] issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 31, 2023, expressed an adverse opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Tax Benefits Associated with Closure of Palmer of Texas Tanks, Inc
As described in Note 11 to the consolidated financial statements, 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 losses on the investment in Palmer of Texas Tanks, Inc. (“Palmer”) and its ultimate wind down and closure. The tax benefits associated with the investment in Palmer which amounted to $5.7 million during the year related to a deduction claimed for the tax basis in the Company’s stock in Palmer.
We identified accounting for the tax benefits associated with the Company’s investment in Palmer as a critical audit matter. Determining the timing of recognition and measurement of the tax benefits associated with Palmer closure required
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significant management judgment, including the determination of whether the tax positions’ technical merits are more likely than not to be sustained in an audit by a taxing authority based on the application and interpretation of the relevant tax laws to the facts of the specific transaction. Auditing these elements involved especially complex auditor judgment due to the nature and extent of audit effort required to address these matters, including the need to involve personnel with specialized skill and knowledge.
The primary procedures we performed to address this critical audit matter included:
•Utilizing personnel with specialized tax knowledge and skill to assist in the following:
•Evaluating the appropriateness of management’s interpretation and application of relevant tax laws in the U.S. and the conclusions within management’s tax opinions, memoranda and other relevant documents.
•Testing the completeness and accuracy of the gross receipts test used to determine the qualification for tax benefits associated with Palmer closure.
•Testing the completeness and accuracy of the outside tax stock basis calculation used to determine the amount of the tax benefits recognized.
•Assessing the appropriateness of the timing of recognition of the tax benefits associated with Palmer closure.
Valuation of goodwill related to the Specialty Chemicals Reporting Unit
As described in Note 1 to the consolidated financial statements, the Company’s goodwill balance was $11.4 million at December 31, 2022, which pertains to its Specialty Chemicals reporting unit. The Company’s evaluation of goodwill for impairment involves comparison of the fair value of the reporting unit to its carrying value. Management conducted an annual quantitative impairment assessment of the Specialty Chemicals reporting unit as of October 1, 2022. During the fourth quarter of 2022, the Company determined potential impairment indicators existed within the Specialty Chemicals reporting unit and therefore, performed another quantitative impairment assessment. The Company determined the fair value of the reporting unit using an equal weighting of the income and market approaches, which required management to make significant estimates and assumptions related to discount rate and forecasts of revenue and profits.
We identified the valuation of goodwill for the Specialty Chemicals reporting unit as a critical audit matter. Auditing management’s impairment assessment is complex and highly judgmental due to the significant estimation required in determining the fair value of the Specialty Chemicals reporting unit. The determination of the fair value of the Specialty Chemicals reporting unit is sensitive to certain assumptions, which are affected by expected future market and economic conditions. Auditing management’s impairment assessment involved especially challenging and subjective auditor judgment due to the uncertainty surrounding future events and the extent of specialized skill required to test certain valuation assumptions.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the reasonableness of assumptions used in the Company’s impairment assessment, including the revenue growth rate and profit margins.
•Testing the accuracy and completeness of the data used by management to develop its projections.
•Utilizing personnel with specialized skills and knowledge in valuation approach and methodologies to assist in: (i) assessing the appropriateness of the fair value methodology, and (ii) evaluating the reasonableness of certain valuation assumptions used, including the discount rate.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2021.
Chicago, Illinois
March 31, 2023
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Ascent Industries Co.
Oak Brook, Illinois
Opinion on Internal Control Over Financial Reporting
We have audited Ascent Industries Co.'s (the "Company's") internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management's statements referring to any corrective actions taken by the Company after the date of management's assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended and the related notes (collectively referred to as "the financial statements") and our report dated March 31, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses were identified regarding the following:
A.Entity Level Activities - Management did not maintain appropriately designed entity-level controls impacting:
•Control Environment: Lack of structure and responsibility, insufficient number of qualified resources due to significant turnover in key personnel leading to insufficient oversight and accountability over the performance of controls;
•Monitoring: Insufficient evaluation and determination as to whether the components of internal control were present and functioning based upon evidence maintained for certain management review controls and activity level controls across a significant portion of the Company's financial statement areas.
B.Control Activities - Management did not have effective policies and procedures or adequate selection and development of effective control activities, which resulted in the following additional material weaknesses:
•Management did not appropriately design and implement controls over the existence, accuracy, completeness, and valuation of inventory.
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•Management did not maintain effectively designed and implemented controls over recorded revenue and accounts receivable, including procedures over the existence and accuracy of data input for price and quantity, review of sales contracts, as well as appropriate allocation of transaction price across identified performance obligations within the Company's contracts with customers.
•Management did not maintain effectively designed and implemented controls to detect potential material misstatements to period-end financial statements through review of account reconciliations and account analyses on a timely basis as well as other aspects of the financial statement preparation and review process. Additionally, management did not maintain effectively designed and implemented controls over the review of journal entries.
•Management did not appropriately design and implement management review controls at a sufficient level of precision around complex accounting areas including goodwill impairment, long-lived asset impairment, and income taxes.
•Management did not fully design, implement and monitor general information technology controls in the areas of user access, cyber-security and segregation of duties for systems supporting many of the Company’s internal control processes. As a result of these segregation of duties deficiencies the related manual business process controls were determined to be ineffective.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 financial statements, and this report does not affect our report dated March 31, 2023 on those financial statements.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Chicago, Illinois
March 31, 2023
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Ascent Industries Co.
Consolidated Balance Sheets
As of December 31, 2022 and 2021
(in thousands, except par value and share data)
Assets
Current assets:
Cash and cash equivalents $ 1,441 $ 2,021
Inventories, net
Prepaid expenses and other current assets 8,982 3,728
Right-of-use assets, operating leases, net 29,224 30,811
Deferred income taxes 1,353 —
Liabilities and Shareholders' equity
Current liabilities:
Accounts payable - related parties — 2
Accrued expenses and other current liabilities 6,560 12,407
Current portion of note payable 387 —
Current portion of long-term debt 2,464 2,464
Current portion of earn-out liability — 1,961
Current portion of operating lease liabilities 1,056 1,104
Current portion of finance lease liabilities 280 233
Long-term portion of operating lease liabilities 30,911 32,059
Long-term portion of finance lease liabilities 1,242 1,414
Deferred income taxes — 2,433
Other long-term liabilities 68 89
Commitments and contingencies – see Note 15
Shareholders' equity:
Total liabilities and shareholders' equity $ 269,043 $ 266,002
See accompanying notes to consolidated financial statements.
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Ascent Industries Co.
Consolidated Statements of Income
For the years ended December 31, 2022 and 2021
(in thousands, except per share data)
Selling, general and administrative expense 34,952 30,144
Proxy contest costs and recoveries — 168
Earn-out adjustments (7) 1,872
Asset impairment — 233
Other (income) and expense
Loss on extinguishment of debt — 223
Change in fair value of interest rate swap — (2)
Income tax provision (benefit) (4,211) 5,253
Net income per common share:
Weighted average number of common shares outstanding:
See accompanying notes to consolidated financial statements.
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Ascent Industries Co.
Consolidated Statements of Cash Flows
For the years ended December 31, 2022 and 2021
(in thousands)
Cash flows from operating activities:
Amortization of debt issuance costs 99 95
Asset impairment — 233
Loss on extinguishment of debt — 223
Earn-out adjustments (7) 1,872
Provision for (reduction of) losses on accounts receivable 1,034 (398)
Provision for losses on inventories 3,052 1,649
Loss (gain) on disposal of property, plant and equipment 27 (848)
Non-cash lease termination loss — 5
Change in fair value of interest rate swap — (2)
Payments for termination of interest rate swap — (46)
Issuance of treasury stock for director fees 364 132
Share-based compensation expense 1,407 799
Changes in operating assets and liabilities:
Other assets and liabilities (12) (55)
Accounts payable - related parties (2) 2
Net cash provided by operating activities 5,577 19,055
Cash flows from investing activities:
Purchases of property, plant and equipment (5,074) (1,497)
Proceeds from disposal of property, plant and equipment 99 1,400
Acquisitions, net of cash acquired — (32,564)
Net cash used in investing activities (4,975) (32,661)
Cash flows from financing activities:
Proceeds from note payable 967 —
Proceeds from the issuance of common stock related to Rights Offering — 10,010
Proceeds from exercise of stock options 175 109
Payments on note payable (580) —
Principal payments on finance lease obligations (266) (92)
Payments on earn-out liabilities (1,292) (3,494)
Repurchase of common stock (1,343) —
Payments of deferred financing costs — (165)
Net cash (used in) provided by financing activities (1,182) 15,391
(Decrease) Increase in cash and cash equivalents (580) 1,785
Cash and cash equivalents at beginning of year 2,021 236
Cash and cash equivalents at end of year $ 1,441 $ 2,021
See accompanying notes to consolidated financial statements.
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Ascent Industries Co.
Consolidated Statements of Cash Flows
For the years ended December 31, 2022 and 2021
(in thousands)
Year Ended December 31,
Supplemental Disclosure of Cash Flow Information 2022 2021
Cash paid for:
Noncash Investing Activities:
Capital expenditures, not yet paid $ 751 $ —
See accompanying notes to consolidated financial statements.
34
Ascent Industries Co.
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2022 and 2021
(in thousands, except share and per share data)
Common Stock Treasury Stock
Share-based compensation — — 799 — — — 799
Share-based compensation — — 1,407 — — 1,407
See accompanying notes to consolidated financial statements.
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Ascent Industries Co.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Ascent Industries Co. is an industrials company focused on the production and distribution of industrial tubular products including stainless steel and galvanized pipe and tube, seamless carbon pipe and tube, and specialty chemicals. Ascent Industries Co. was incorporated in 1958 as the successor to a chemical manufacturing business founded in 1945 known as Blackman Uhler Industries Inc. 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 Company's executive office is located at 1400 16th Street, Suite 270, Oak Brook, Illinois 60523. Unless indicated otherwise, the terms "Ascent", "Company," "we" "us," and "our" refer to Ascent Industries Co. and its consolidated subsidiaries.
The Company's business is divided into two reportable operating segments, Tubular Products and Specialty Chemicals. The Tubular Products segment serves markets through pipe and tube and customers in the appliance, architectural, automotive and commercial transportation, brewery, chemical, petrochemical, pulp and paper, mining, power generation (including nuclear), water and waste-water treatment, liquid natural gas ("LNG"), food processing, pharmaceutical, oil and gas and other industries.
The Specialty Chemicals segment produces specialty products for the pulp and paper, coatings, adhesives, sealants and elastomers (CASE), textile, automotive, household, industrial and institutional ("HII"), agricultural, water and waste-water treatment, construction, oil and gas and other industries.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany transactions and balances have been eliminated.
Use of Estimates - The preparation of the Company's financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment; intangible assets; the fair value of assets or liabilities acquired in a business combination; valuation allowances for receivables, inventories and deferred income tax assets and liabilities; environmental liabilities; liabilities for potential tax deficiencies; and, potential litigation claims and settlements. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying value of assets and liabilities that are readily available from other sources. Actual results may differ from these estimates.
Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains cash levels in bank accounts that, at times, may exceed federally-insured limits.
Accounts Receivable - Accounts receivable from the sale of products are recorded at net realizable value and the Company generally grants credit to customers on an unsecured basis. Substantially all of the Company's accounts receivable are due from companies located throughout the United States. The Company provides an allowance for credit losses for expected uncollectible amounts. The allowance is based upon an analysis of accounts receivable balances with similar risk characteristics on a collective basis, considering factors such as the aging of receivables balances, historical loss experience, current information, and future expectations. Each reporting period, the Company reassesses whether any accounts receivable no longer share similar risk characteristics and should instead be evaluated as part of another pool or on an individual basis. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 to 60 days. Delinquent receivables are written off based on individual credit evaluations and specific circumstances of the customer. Activity in the allowance for credit losses were as follows:
Balance at beginning of period $ 216 $ 496
Current period provision for expected credit losses 1,405 (68)
Deductions from allowance (371) (330)
Acquired allowance — 118
Balance at end of period $ 1,250 $ 216
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Ascent Industries Co.
Notes to Consolidated Financial Statements
Inventories - Inventory is stated at the lower of cost or net realizable value ("LCNRV"). 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. An LCNRV adjustment is recorded when the Company's inventory cost, based upon a historical price, is greater than the current selling price of that product. During the year ended December 31, 2022 and 2021, no significant LCNRV adjustments were required by our Specialty Chemicals segment.
Stainless steel, both in its raw material (coil or plate) or finished goods (pipe and tube) state is purchased/sold using a base price plus an additional surcharge which is dependent on current nickel prices. As raw materials are purchased, it is priced to the Company based upon the surcharge at that date. When the selling price of the finished pipe is set for the customer, approximately three months later, the then-current nickel surcharge is used to determine the proper selling prices. An LCNRV adjustment is recorded when the Company's inventory cost, based upon a historical nickel price, is greater than the current selling price of that product due to a reduction in the nickel surcharge. During the years ended December 31, 2022, LCNRV adjustments of $0.5 million were required by our Tubular Products segment. During the year ended December 31, 2021 no significant LCNRV adjustments were required by our Tubular Products segment.
In addition, the Company establishes inventory reserves for:
•Estimated obsolete or unmarketable inventory - The Company identified inventory items with no sales activity for finished goods or no usage for raw materials for a certain period of time. For those inventory items not currently being marketed and unable to be sold, a reserve was established for 100% of the inventory cost less any estimated scrap proceeds. The Company reserved $3.5 million and $1.1 million as of December 31, 2022 and 2021, respectively.
•Estimated quantity losses - The Company performs an annual physical count of inventory during the fourth quarter each year for all facilities. A reserve is established for the potential quantity losses that could occur subsequent to their physical inventory. This reserve is based upon the most recent physical inventory results. The Company had $0.2 million reserved for physical inventory quantity losses as of December 31, 2022 and 2021, respectively.
Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation is determined based on the straight-line method over the estimated useful life of the assets. Substantially all depreciation is recorded within cost of goods sold on the consolidated statement of income. Leasehold improvements are depreciated over the shorter of their useful lives or the remaining non-cancellable lease term, buildings are depreciated over a range of 10 years to 40 years, and machinery, fixtures and equipment are depreciated over a range of three years to 20 years. The costs of software licenses are amortized over five years using the straight-line method. The Company continually reviews the recoverability of the carrying value of long-lived assets. The Company also reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. When the future undiscounted cash flows of the operation to which the assets relate do not exceed the carrying value of the asset, the assets are written down to fair value.
Business Combinations - Business combinations are accounted for using the acquisition method of accounting. 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. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired, if any, and liabilities assumed. See Note 2 for further discussion on the Company's acquisition of DanChem.
Goodwill - 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. 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.
The quantitative goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. Fair value represents the price a market participant would be willing to pay in a
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Ascent Industries Co.
Notes to Consolidated Financial Statements
potential sale of the reporting unit and is based on a combination of an income approach, based on discounted future cash flows, and a market approach, based on market multiples applied to free cash flow. If the fair value exceeds the carrying value, then no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any impairment identified is included within "goodwill impairment" in the consolidated statements of income.
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. During 2022 and 2021, goodwill was allocated to the Specialty Chemicals reporting unit.
The changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021 were as follows:
(in thousands) Specialty Chemicals
PPA Revisions (1,248)
During the third quarter of 2022, subsequent to the preliminary estimates of fair value of intangible assets acquired and liabilities assumed, management revised the initial estimate of the fair value of property, plant and equipment resulting in an increase of $1.6 million. As a result of this revision, goodwill was decreased by $1.2 million and the Company's deferred tax balances were increased $0.4 million. In addition, the change to the provisional amount resulted in an increase in depreciation expense and accumulated depreciation of $0.2 million of which $0.1 million relates to a previous reporting period.
During the fourth quarter of 2022, subsequent to the preliminary estimates of fair value of intangible assets acquired and liabilities assumed, management finalized the values of deferred tax balances upon completion of the DanChem pre-acquisition tax returns. As a result, within the measurement period, the Company's deferred tax balances were decreased by $40,475 and goodwill was decreased by $40,475.
We conducted our annual impairment test of the Specialty Chemicals reporting unit as of October 1, 2022. The Company performed a discounted cash flow analysis and a market multiple analysis for the Specialty Chemicals reporting unit. 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. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Specialty Chemicals reporting unit was greater than its carrying value and, as such, no goodwill impairment was necessary.
During the fourth quarter of 2022, the Company determined potential indicators of impairment within the Specialty Chemicals reporting unit, with an associated goodwill balance of $11.4 million, existed. Significant decreases in the Company's stock price and performance relative to forecast, collectively, indicated that the reporting unit had experienced a triggering event and the need to perform another quantitative evaluation of goodwill. As a result, the Company quantitatively evaluated the Specialty Chemicals reporting unit for impairment. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Specialty Chemicals reporting unit was above its carrying value and, as such, no goodwill impairment was necessary.
Intangible Assets - Intangible assets consists of customer relationships, trademarks and trade names, and Other and represents the fair value of intellectual, non-physical assets resulting from business acquisitions and are amortized over their estimated useful lives using either an accelerated or straight-line method over a period ranging from eight to 15 years.
38
Ascent Industries Co.
Notes to Consolidated Financial Statements
Amortization expense is recorded in selling, general and administrative expense on the consolidated statements of income. The weighted average amortization period for the customer relationships is approximately 12 years.
The gross carrying amount and accumulated amortization of intangible assets consist of the following:
Definite-lived intangible assets:
The Company recorded amortization expense related to intangible assets of $4.0 million and $2.8 million for 2022 and 2021, respectively.
Estimated amortization expense for the next five fiscal years based on existing intangible assets is as follows:
(in thousands)
Deferred Charges - Deferred charges represent debt issuance costs and are amortized over their estimated useful lives using the straight-line method over a period of four years and is recorded in interest expense on the consolidated statements of income. On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement (the "Credit Agreement") with BMO Harris Bank, N.A ("BMO") providing the Company with a new four-year revolving credit facility and replacing the Company's previous asset based revolving line of credit and term loan with Truist Bank ("Truist"). The Company accounted for this refinance as a debt extinguishment and, as a result, $0.2 million of unamortized debt issuance costs associated with the Company's previously existing bank debt were written off as a loss on extinguishment of debt during the year ended December 31, 2021.
Deferred charges totaled $0.4 million as of December 31, 2022 and 2021, respectively. Accumulated amortization of deferred charges as of December 31, 2022 and 2021 totaled $0.2 million and $0.1 million, respectively.
The Company recorded amortization expense related to deferred charges of $0.1 million for 2022 and 2021.
Long-Lived Asset Impairment - The carrying amounts of long-lived assets are reviewed whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. A potential impairment has occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the use and eventual disposition of the assets are less than the carrying amounts of the assets. An impairment loss is recorded for long-lived assets held-for-use when the carrying amount of the asset is not recoverable and exceeds its fair value.
Long-lived assets that are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria are classified as long-lived assets held-for-sale. An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell. A long-lived asset is not depreciated while its classified as held-for-sale.
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Ascent Industries Co.
Notes to Consolidated Financial Statements
For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used. Until it ceases to be used, the Company continues to classify the asset as held-for-use and test for potential impairment accordingly. If the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, its depreciable life is re-evaluated.
Fair value measurements associated with long-lived asset impairments are included in Note 4 to the consolidated financial statements.
Earn-Out Liabilities - In connection with the 2019 American Stainless acquisition, the Company is required to make quarterly earn-out payments to American Stainless for a period of three years following closing equal to six and one-half percent (6.5%) of ASTI’s revenue over the three-year earn-out period. These quarterly earn-out payments ended in 2022.
In connection with the 2018 MUSA-Galvanized acquisition, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube. These quarterly earn-out payments ended in 2022.
In connection with the 2017 MUSA-Stainless acquisition, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of stainless steel pipe and tube (outside diameter of 10 inches or less). These quarterly earn-out payments ended in 2021.
The fair value of the earn-out liabilities are estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liabilities are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the consolidated statements of income. See Note 4 for additional information on the Company's earn-out liabilities.
Revenue Recognition - Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time or over-time. For certain contracts under which the Company produces product with no alternative use and for which the Company has an enforceable right to payment during the production cycle, product in which the material is customer owned or in which the customer simultaneously consumes the benefits throughout the production cycle, progress toward satisfying the performance obligation is measured using an output method of units produced. Certain customer arrangements consist of bill-and-hold characteristics under which transfer of control has been met (including the passing of title and significant risk and reward of ownership to the customers). Therefore, the customers can direct the use of the bill-and-hold inventory while we retain physical possession of the product until it is shipped to a customer at a point in time in the future.
Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance obligation is based on its standalone selling price and revenue is recognized as each performance obligation is satisfied. The Company generally determines standalone selling prices based on the prices charged to customers using the adjusted market assessment approach or expected cost plus margin. Deferred revenues are recorded when cash payments are received in advance of satisfying the performance obligation, including amounts which are refundable. See Note 3 for additional information on the Company's revenue.
Shipping Costs - Shipping costs are treated as fulfillment activities at the time control and title of the promised good and services rendered are transferred to the customer. Shipping costs of approximately $11.2 million and $9.4 million in 2022 and 2021, respectively, are recorded in cost of goods sold on the consolidated statements of income.
Share-Based Compensation - Share-based payments to employees, including grants of employee stock options, are recognized in the consolidated statements of income as compensation expense (based on their estimated fair values at grant date) generally over the vesting period of the awards using the straight-line method. Any forfeitures of share-based awards are recorded as they occur. See Note 10 for additional information on the Company's accounting for share-based payments.
Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing accounts and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. 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. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
40
Ascent Industries Co.
Notes to Consolidated Financial Statements
Additionally, the Company maintains reserves for uncertain tax provisions, if necessary. See Note 11 for additional information on the Company's income taxes.
Earnings Per Share - Earnings per share of common stock are computed based on the weighted average number of basic and diluted shares outstanding during each period.
Leases - The Company determines whether an arrangement is a lease at contract inception. For leases in which the Company is the lessee, the Company recognizes a right-of-use asset and corresponding lease liability on the consolidated balance sheets equal to the present value of the fixed lease payments over the lease term. Lease liabilities represent an obligation to make lease payments arising from a lease while right-of-use assets represent a right to use an underlying asset during the lease term. The Company does not separate lease and non-lease components for its underlying assets. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.
If readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, the Company's leases generally do not provide a readily determinable implicit rate. When the implicit rate is not determinable, the Company's estimated incremental borrowing rate is utilized, determined on a fully collateralized and fully amortizing basis, to discount lease payments based on information available at lease commencement. The Company determines the appropriate incremental borrowing rate by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. Such adjustments include assuming the Store Capital lease would require two lenders with the secondary lender being secured on a second lien requiring mezzanine rates. Lease costs are recognized on a straight-line basis over the lease term.
Right-of-use assets and operating lease liabilities are remeasured upon certain modifications to leases using the present value of the remaining lease payments and estimated incremental borrowing rate upon lease modification. The difference between the remeasured right-of-use asset and the operating lease liabilities are recognized as a gain or loss within operating expenses. The Company reviews any changes to its lease agreements for potential modifications and/or indicators of impairment of the respective right-of-use asset. Operating leases are included in ROU assets, current portion of operating lease liabilities and long-term portion of operating lease liabilities on the accompanying consolidated balance sheets. Finance leases are included in property, plant and equipment, current portion of finance lease liabilities and long-term portion of finance lease liabilities. See Note 7 for additional information on the Company's leases.
The Company subleases portions of certain properties that are not used in its operations. Sublease income was $0.2 million for 2022. Sublease income was not significant for 2021.
Concentrations of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable. The Company monitors the financial institutions where it invests its cash and cash equivalents as well as performs credit reviews of potential customers when extending credit to purchase and periodic reviews of existing customers to mitigate exposure and risk. The Specialty Chemicals segment has one customer that accounted for approximately 21% of the segment's revenues for 2022 and 15% of the segment's revenues for 2021.
Accounting Pronouncements Not Yet Adopted - In March 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting." The ASU, and subsequent clarifications, provide practical expedients for contract modification accounting related to the transition away from the London Interbank Offered Rate (LIBOR) and other interbank offering rates to alternative reference rates. On December 21, 2022, the FASB issued ASU 2022-06 to defer the sunset date of Topic 848 until December 31, 2024. The Company intends to use the expedients where needed for reference rate transition. The Company continues to evaluate this standard update and does not currently expect a material impact to the Company’s financial statements or disclosures.
41
Ascent Industries Co.
Notes to Consolidated Financial Statements
Note 2: Acquisitions
Acquisition of DanChem Technologies, Inc.
On October 22, 2021, the Company completed the acquisition of DanChem, a contract manufacturer of chemical products located in Danville, Virginia. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805 - "Business Combinations". The preliminary purchase price was $34.1 million including $1.5 million in cash obtained through the acquisition. The purchase price was paid in cash and funded through a drawdown of $34.5 million on the Company’s existing revolving credit facility. Amounts outstanding under the revolving line of credit portion of the facility currently bear interest, at the Company's option, at (a) the Base Rate (as defined in the Credit Agreement) plus 0.50%, or (b) LIBOR plus 1.50%. See Note 6 for more information on the Company's long-term debt.
During the third quarter of 2022, subsequent to the preliminary estimates of fair value of intangible assets acquired and liabilities assumed, management revised the initial estimate of the fair value of property, plant and equipment resulting in an increase of $1.6 million. As a result of this revision within the measurement period, goodwill was decreased by $1.2 million and the Company's deferred tax balances were increased $0.4 million. In addition, the change to the provisional amount resulted in an increase in depreciation expense and accumulated depreciation of $0.2 million of which $0.1 million relates to a previous reporting period.
During the fourth quarter of 2022, subsequent to the preliminary estimates of fair value of intangible assets acquired and liabilities assumed, management finalized the values of deferred tax balances upon completion of the DanChem pre-acquisition tax returns. As a result, within the measurement period, the Company's deferred tax balances were decreased by $40,475 and goodwill was decreased by $40,475.
The table below summarizes the fair value of identifiable assets acquired and liabilities assumed in the Acquisition and the revisions made in 2022:
Cash and cash equivalents $ 1,533 $ 1,533
Accounts receivable, net of allowance for credit losses of $118 5,358 5,358
Prepaid expenses and other current assets 454 454
Right of use asset, operating leases, net 208 208
Accrued expenses and other current liabilities 1,622 1,622
Current portion of operating lease liabilities 51 51
Current portion of finance lease liabilities 215 215
Long-term portion of operating lease liabilities 157 157
Long-term portion of finance lease liabilities 1,408 1,408
42
Ascent Industries Co.
Notes to Consolidated Financial Statements
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The recognized goodwill is attributable to operational synergies, assembled workforce and growth opportunities and was allocated to the Company's Specialty Chemicals segment. Substantially all of the goodwill resulting from this acquisition is not expected to be deductible for tax purposes.
Approximately $0.5 million and $1.0 million of one-time, acquisition-related costs, is recognized in acquisition costs and other expenses in the consolidated statements of income as of December 31, 2022 and 2021, respectively.
The Company identified DanChem’s customer relationships, product development know-how, and tradename as finite-lived assets with estimated fair values as of the acquisition date of $5.1 million, $0.5 million, and $0.2 million, respectively. The finite-lived assets are subject to amortization using either an accelerated or straight-line method over 15 years.
Total net sales and operating income for DanChem for the period from October 22, 2021 through December 31, 2022 were as follows:
Pro Forma Financial Information
The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the acquisition of DanChem as if it had occurred on January 1, 2021:
(unaudited) Year Ended December 31, 2021
(in thousands, except per share data)
Basic net income per common share 2.32
Diluted net income per common share $ 2.29
These unaudited pro forma results include adjustments, such as property, plant and equipment step-up, amortization of acquired intangible assets and interest expense on debt financing in connection with the acquisition.
The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. These results do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.
Note 3: Revenue Recognition
Revenue is generated primarily from contracts to produce, ship and deliver steel and specialty chemical products. The Company’s performance obligations are satisfied and revenue is recognized when control and title of the contract promised goods or services is transferred to our customers for product shipped or services rendered. Sales tax and other taxes we collect with revenue-producing activities are excluded from revenue. Shipping costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Costs related to obtaining sales contracts are incidental and are expensed when incurred. Because customers are invoiced at the time title transfers and the Company’s right to consideration is unconditional at that time, the Company does not maintain contract asset balances. Additionally, the Company does not maintain material contract liability balances, as performance obligations for substantially all contracts are satisfied prior to customer payment for product. The Company offers industry standard payment terms.
43
Ascent Industries Co.
Notes to Consolidated Financial Statements
The following table presents the Company's revenues, disaggregated by product group.
Fiberglass and steel liquid storage tanks and separation equipment $ 411 $ 1,343
Heavy wall seamless carbon steel pipe and tube 48,227 40,539
The Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time or over-time. Performance obligations are supported by contracts with customers, providing a framework for the nature of the distinct goods, services or bundle of goods and services. The timing of satisfying the performance obligation is typically indicated by the terms of the contract. The following table represents the Company's revenue recognized at a point- in-time and over-time.
Note 4: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 - Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 - Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
•Quoted prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in non-active markets;
•Inputs other than quoted prices that are observable for the asset or liability; and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using model-based techniques, including option pricing models, discounted cash flow models, probability weighted models, and Monte Carlo simulations.
The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable, notes payable, earn-out liabilities, revolving line of credit, and long-term debt.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
44
Ascent Industries Co.
Notes to Consolidated Financial Statements
Level 3: Contingent consideration (earn-out) liabilities
The fair value of contingent consideration liabilities ("earn-out") resulting from the 2018 MUSA-Galvanized acquisition and 2019 American Stainless acquisition are classified as Level 3. Each quarter-end, the Company re-evaluates its assumptions for all earn-out liabilities and adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are reflected in operating income in the periods in which they are identified. Changes in the fair value of the earn-out liabilities may materially impact and cause volatility in the Company's operating results. The significant unobservable inputs used in the fair value measurement of the Company's earn-out liabilities are the discount rate, timing of the estimated payouts, and future revenue projections. Significant increases (decreases) in any of those inputs would not have resulted in a material difference in the fair value measurement of the earn-out liabilities for the years ended December 31, 2022 and 2021, respectively.
Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements
The following table summarizes the significant unobservable inputs in the fair value measurement of our contingent consideration (earn-out) liabilities as of December 31, 2021:
Timing of estimated payouts 2022 -
Future revenue projections $9.1M $9.1M
The following table presents a summary of changes in fair value of the Company's Level 3 earn-out liabilities measured on a recurring basis for 2022 and 2021:
(in thousands) MUSA-Galvanized American Stainless Total
Changes in fair value during the period (7) — $ (7)
Balance December 31, 2022 $ — $ — $ —
For the year ended December 31, 2022, the Company had no unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value instruments.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
For the fiscal year ended December 31, 2022 and 2021, the Company's only significant measurements of assets and liabilities at fair value on a non-recurring basis subsequent to their initial recognition were certain long-lived assets, certain assets held for sale and goodwill (see Note 1 to the consolidated financial statements for additional information regarding this Level 3 fair value measurement).
Long-lived assets
The Company reviews the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company assesses performance quarterly against historical patterns, projections of future profitability, and whether it is more likely than not that the assets will be disposed of significantly prior to the end of their estimated useful life for evidence of possible impairment. An impairment loss is recognized when the carrying amount of the asset (disposal) group is not recoverable and exceeds fair value. The Company estimates the fair values of assets subject to long-lived asset impairment based on the Company's own judgments about the assumptions market participants would use in pricing the assets and observable market data, when available. The Company classifies these fair value measurements as Level 3.
45
Ascent Industries Co.
Notes to Consolidated Financial Statements
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. It was determined that a significant change in the use of the assets of the Munhall facility had occurred before the end of their previous useful lives, and therefore, had experienced a triggering event and were evaluated for recoverability. Based on this evaluation of the Munhall assets, it was determined the assets were recoverable and no impairment was recorded, however, certain long-lived assets and intangible assets related to the galvanized pipe and tube operations were written down to their fair value of zero resulting in accelerated depreciation and amortization charges of $0.9 million. Expenses associated with accelerated depreciation are included in depreciation and amortization expense in the consolidated statements of income.
During 2021, the Company determined that technology associated with certain long-lived assets within the Specialty Chemicals segment was obsolete and, as a result, recognized a $0.2 million non-cash, pre-tax asset impairment charge.
Assets Held-for-Sale
On February 17, 2021 the Board of Directors authorized the permanent cessation of operations at Palmer and the subleasing of the Palmer facility. As of December 31, 2021, the Company permanently ceased operations at the Palmer facility and determined that the remaining asset group met the criteria to be classified as held for sale, and therefore classified the related assets as held for sale on the consolidated balance sheets. The Company determined that the exit from this business did not represent a strategic shift that had a major effect on its consolidated results of operations, and therefore this business was not classified as discontinued operations. As of December 31, 2022, the remaining Palmer assets continue to be classified as held for sale with the remaining assets to be disposed of in the first quarter of 2023. The results of operations for this business are included within the Tubular Products segment for all periods presented in this annual report. The Company uses observable inputs, such as prices of comparable assets in active markets to determine the fair value of the remaining assets. The Company classifies these fair value measurements as Level 2.
The assets classified as held for sale as of December 31, 2022 and 2021 are as follows:
Property, plant and equipment, net 182 238
Assets held for sale $ 380 $ 855
The Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the lease of the facility through 2036. During the fourth quarter of 2022, the Company entered into an amended sublease agreement with a third party to sublease the entirety of the Palmer facility. The sublease agreement amends the previous sublease agreement entered into in the fourth quarter of 2021 and continues through the remaining term of the Master Lease Agreement. The sublease will expire on September 30, 2036, unless terminated in accordance with the amended sublease agreement. The sublease provides for an annual base rent of approximately $0.5 million in the first year, which increases on an annual basis by 2.0%. The sublessee is responsible for its pro rata share of certain costs, taxes and operating expenses related to the subleased space. The sublease includes an initial security deposit of $0.1 million.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, accounts payable and the Company's note payable approximated their carrying value because of the short-term nature of these instruments. The Company's revolving line of credit and long-term debt, which is based on a variable interest rate, are also reflected in the financial statements at carrying value which approximates fair value as of December 31, 2022. The carrying amount of cash and cash equivalents are considered Level 1 measurements. The carrying amounts of accounts receivable, accounts payable, note payable, revolving line of credit and long-term debt are considered Level 2 measurements. See Note 6 for further information on the Company's debt.
46
Ascent Industries Co.
Notes to Consolidated Financial Statements
Note 5: Property, Plant and Equipment
Property, plant and equipment consist of the following:
Less accumulated depreciation and amortization (80,708) (73,724)
Property, plant and equipment, net $ 42,346 $ 43,720
The following table sets forth depreciation expense related to property, plant and equipment:
Selling, general and administrative 250 254
Note 6: Debt
Short-term debt
On June 6, 2022, the Company entered into a note payable in the amount of $1.0 million with an interest rate of 2.77% maturing April 1, 2023. The agreement is 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.
Credit Facilities
Less: Current portion of long-term debt (2,464) (2,464)
Long-term debt, less current portion $ 69,085 $ 67,928
The Company and its subsidiaries have a Credit Agreement with BMO Harris Bank N.A. ("BMO") which provides the Company with a four-year revolving credit facility with up to $150.0 million of borrowing capacity (the "Facility").
The initial borrowing capacity under the Facility totals $110.0 million consisting of a $105.0 million revolving line of credit and a $5.0 million delayed draw term loan. The revolving line of credit includes a $17.5 million machinery and equipment sub-limit which requires quarterly payments of $0.4 million with a balloon payment due upon maturity of the Facility in January 2025. The term loan requires quarterly payments of $0.2 million with a balloon payment due upon maturity of Facility in January 2025.
We have pledged all of our accounts receivable, inventory, and certain machinery and equipment as collateral for the Credit Agreement. Availability under the Credit Agreement is subject to the amount of eligible collateral as determined by the lenders' borrowing base calculations. Amounts outstanding under the revolving line of credit portion of the Facility currently bear interest, at the Company's option, at (a) the Base Rate (as defined in the Credit Agreement) plus 0.50%, or (b) LIBOR plus 1.50%. Amounts outstanding under the delayed draw term loan portion of the Facility bear interest at LIBOR plus 1.65%. The Facility also provides an unused commitment fee based on the daily used portion of the Facility. The Credit
47
Ascent Industries Co.
Notes to Consolidated Financial Statements
Agreement includes provisions intended to provide for the replacement of LIBOR with the Secured Overnight Financing Rate ("SOFR") upon the cessation of LIBOR. The Company plans to transition away from LIBOR by June 2023.
The revolving line of credit interest rate was 5.18% and 2.29% as of December 31, 2022 and 2021, respectively. Average borrowings under the revolving line of credit during 2022 and 2021 were $71.0 million and $61.9 million with a weighted average interest rate of 3.67% and 2.23%, respectively.
The term loan interest rate was 6.38% and 1.90% as of December 31, 2022 and 2021, respectively.
The Company made interest payments on all credit facilities of $2.6 million and 1.4 million in 2022 and 2021, respectively.