ASCENT INDUSTRIES CO

Note 6: Debt

Short-term debt

On June 13, 2023, the Company entered into a note payable in the amount of $0.9 million with an interest rate of 3.70% maturing April 1, 2024. The agreement is associated with the financing of the Company's insurance premium in the current year. As of December 31, 2023, the outstanding balance was $0.4 million.

Credit Facilities

During the first quarter of 2023, the Company entered into an Amended and Restated Credit Agreement with BMO Harris Bank, N.A. ("BMO") to replace LIBOR with the Secured Overnight Funding Rate ("SOFR").

During the fourth quarter of 2023, the Company entered into a Limited Consent, Second Amendment to Credit Agreement and Omnibus Amendment to Loan Documents with BMO Bank N.A. and the other lenders under the Company’s credit facility (the “Credit Facility Amendment”). The Credit Facility Amendment contains a consent for the SPT divestiture, released the lien on the assets of SPT and removed SPT as a loan party. The Credit Facility Amendment also reduced the maximum revolving loan commitment under the credit facility from $105 million to $80 million, and increased the interest rate for the credit facility from SOFR plus an interest rate margin of between 1.60% and 1.70% to SOFR plus an interest rate margin of between 1.85% and 2.10%, depending on average availability under the credit facility and the Company’s consolidated fixed charge coverage ratio. As required by the Credit Facility Amendment, the Company used the proceeds from the SPT divestiture to prepay in full the term loan in the original principal amount of $5 million under the credit facility and used the remaining proceeds to prepay in part the revolving loans under the credit facility.

The borrowing capacity under the credit facility totals $80.0 million consisting of a $80.0 million revolving line of credit which includes a $17.5 million machinery and equipment sub-limit.

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 currently bear interest at (a) the Base Rate (as defined in the Credit Agreement) plus 0.75% or (b) SOFR plus 1.85%. The Credit Agreement also provides an unused commitment fee based on the daily used portion of the credit facility.

The revolving line of credit interest rate was 6.20% and 5.18% as of December 31, 2023 and 2022, respectively. Average borrowings under the revolving line of credit during 2023 and 2022 were $55.6 million and $71.0 million with a weighted average interest rate of 7.22% and 3.67%, respectively.

The term loan interest rate was 6.38% as of December 31, 2022.

The Company made interest payments on all credit facilities of $4.0 million and 2.6 million in 2023 and 2022, respectively.

As of December 31, 2023, the Company hasno principal payments outstanding on long-term debt.

Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries. The Credit Agreement contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $7.5 million and (ii)10% of the revolving credit facility (currently $8.0 million). As of December 31, 2023, the Company was in compliance with all financial debt covenants.

As of December 31, 2023, the Company had $61.8 million of remaining availability under it credit facility.

Note 7: Leases

The Company's portfolio of leases contains both finance and operating leases that relate to real estate and manufacturing equipment. Substantially all of the value of the Company's lease portfolio relates to the Master Lease with Store Master Funding XII, LLC (“Store”), an affiliate of Store Capital Corporation ("Store Capital") that was entered into in 2016 and amended with the American Stainless acquisition in 2019 as well as the sale of land at the Munhall facility in 2020. As of December 31, 2023, operating lease liabilities related to the master lease agreement with Store Capital totaled $30.6 million, or 94% of the total lease liabilities on the consolidated balance sheet.

During the year ended December 31, 2023, the Company entered into new operating lease agreements resulting in an additional $0.5 million of right-of-use assets and lease liabilities.

Balance Sheet Presentation

Operating and finance lease amounts from continuing operations are as follows (in thousands):

Total Lease Cost

Individual components of the total lease cost incurred by the Company are as follows:

1 Includes short term leases, which are immaterial

Reduction in carrying amounts of right-of-use assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line method over the term of the lease including any periods of free rent and are included in selling, general, and administrative expense on the consolidated statements of income (loss).

Maturity of Leases

The amounts of undiscounted future minimum lease payments under leases as of December 31, 2023 are as follows:

Lease Term and Discount Rate

Note 8: Accrued Expenses

Accrued expenses for continuing operations consist of the following:

Note 9: Shareholders' Equity

Authorized shares of common stock were $24.0 million ($1.00 par value) at December 31, 2023 and 2022.

Share Repurchase Program

The share repurchase program allows for repurchase of up to 790,383 shares of the Company's outstanding common stock and expires on February 17, 2025. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. 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, 2023, the Company has 536,871 shares of its share repurchase authorization remaining.

Shares repurchased for the year ended December 31, 2023 and 2022 were as follows:

1 Includes broker fees incurred as part of repurchase transactions

Dividends

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 2023 and 2022, no dividends were declared or paid by the Company.

Note 10: Accounting for Share-Based Payments

Overview of Share-Based Payment Plans

The Company has a number of active and inactive equity incentive plans (the "Incentive Plans") under which the Company has been authorized to grant share-based awards to key employees and non-employee directors. A total of 0.8 million shares have been authorized for grant to key employees and non-employee directors under the Company's currently active Incentive Plans. As of December 31, 2023, there were 0.4 million shares remaining available for grants under the currently active equity Incentive Plans.

The Company recognized share-based compensation expense within SG&A expense on the consolidated statements of income (loss) of $1.1 million and $1.4 million in 2023 and 2022, respectively.

Total unrecognized share-based payment expense for all share-based payment plans was $0.8 million at December 31, 2023, of which $0.6 million is expected to be recognized in 2024, $0.1 million in 2025, and $0.1 million thereafter. This results in these amounts being recognized over a weighted-average period of 1.57 years.

Stock Options

Stock options have terms of 10 years and vest in 20% or 33% increments annually on a cumulative basis, beginningone year after the date of grant, and are assigned an exercise price equal to the average of the high and low common stock price on the day prior to the date of grant. Options are expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period. There wasno compensation expense charged against income for options in 2023. Compensation expense charged against income for options was insignificant for 2022.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. When determining expected volatility, the Company considers the historical volatility of the Company’s stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, based on the options’ expected term. The Company granted no new options in 2023 or 2022.

Transactions related to stock options for the year ended December 31, 2023 are summarized as follows:

1 Includes outstanding vested and nonvested options

Restricted Stock Awards

Restricted stock awards are valued based on the average of the high and low common stock price on the day prior to the date of grant. In general, these awards vest in either 20% or 33% increments annually on a cumulative basis, beginningone year after the date of grant. Certain of these awards vest 100% at the end of athree-year period from the date of grant. In order for the awards to vest, the employee must be in the continuous employment of the Company since the date of the award. Except for death, disability, or qualifying retirement, any portion of an award that has not vested is forfeited upon termination of employment. An employee is not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.

All awards are expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period. The weighted average period over which the restricted stock awards compensation expense is expected to be recognized is 1.54 years.

Transactions related to restricted stock awards for the year ended December 31, 2023 are summarized as follows:

Performance Stock Units

The Company issues performance stock units classified as equity awards which contain market conditions that must be satisfied for an employee to earn the right to benefit from the award. Performance stock units vest upon the achievement of specific thirty-day volume-weighted average price targets of a share of the Company's common stock over a period ofthree years. In order for the awards to vest, the employee must be in the continuous employment of the Company since the date of the award. Except for death, disability, or qualifying retirement, any portion of an award that has not vested is forfeited upon termination of employment. An employee is not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.

The performance stock units are divided into tranches, each one vesting on the date the thirty-day volume-weighted average price of the Company's common stock `meets or exceeds the price target as set forth in the table below:

The fair value of the performance stock units granted with a market performance condition are determined using a Monte Carlo simulation considering historical performance of the Company's stock as well as the probability of attaining the market performance condition determined on the date of grant. Expense is recognized on a straight-line method over the requisite service period. Performance stock units do not have dividend rights. The weighted average period over which the performance stock units compensation expense is expected to be recognized is 1.71 years.

The weighted-average grant-date fair value per unit of performance stock units granted was $0.64 and $3.92 in 2023 and 2022, respectively. There wereno performance stock units vesting in 2023 and 2022.

Transactions related to performance stock units for the year ended December 31, 2023 were as follows:

Inducement Awards

The Company has previously granted stock-based awards to incoming executive officers as incentives to enter into an at-will employment agreement with the Company. These inducement awards were approved by the Compensation Committee of the Board of Directors and did not require shareholder approval in accordance with NASDAQ Rule 5635(c)(4). In accordance with the rule, the only persons eligible to receive incentive awards are individuals not previously an employee or director of the Company.

In general,50% of the inducement awards vest based on the achievement of thirty-day volume weighted average price targets of a Company share of stock and 50% vest on the third anniversary of the grant date. The fair value of the market based portion of inducement awards are determined using a Monte Carlo simulation considering historical performance of the Company's stock as well as the probability of attaining the market condition determined on the date of grant. The fair value of the time based portion of inducement awards are determined based on the average of the high and low common stock price on the day prior to the date of grant. Transactions related to inducement stock awards as of December 31, 2023 were as follows:

There wereno inducement awards that vested in 2023. The total fair value of inducement awards vesting was approximately $0.2 million in 2022 The weighted average period over which inducement award compensation cost is expected to be recognized is 0.51 years.

Non-Employee Director Compensation Plan

Non-employee directors are paid an annual retainer of $115,000. Each non-employee director appointed to serve as a chairperson of a standing board committee receives the following annual retainer: Audit Committee: $10,000; Compensation Committee: $7,500; Nominating and Corporate Governance Committee: $6,000. The committee chairperson retainer is in addition to the board retainer. Each director has the opportunity to elect to receive 100% of the retainer in restricted stock with a minimum of $30,000 of the retainer in restricted stock. The amount of the retainer elected to be paid in restricted stock vests quarterly over aone year period. The number of restricted shares is determined by the average of the high and low sale price of the Company's stock on the day prior to the Annual Meeting of Shareholders. In 2023, the Company issued an aggregate of 27,432 shares of restricted stock to non-employee directors in lieu of $0.3 million of their annual cash retainer fees. The weighted average period over which the non-employee director award compensation expense is expected to be recognized is 1.23 years.

Note 11: Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities from continuing operations are as follows at the respective year ends:

Significant components of the provision for income taxes are as follows:

The reconciliation of income tax computed at the U. S. federal statutory tax rates to income tax expense is:

The Company's effective tax rate for 2023 was less than the U.S. statutory rate of 21% primarily driven by tax benefits associated with non-deductible goodwill impairment. The Company's effective tax rate for 2022 was less than the U.S. statutory rate of 21% primarily driven by tax benefits associated with the closure of Palmer and the release of valuation allowances on certain deferred tax assets, partially offset by state taxes.

The Company made income tax payments of $0.9 million and $7.8 million in 2023 and 2022, respectively. The Company has $10.5 million of U.S. Federal net operating loss carryforwards and $6.6 million of interest limitation carryforwards at the end of 2023 compared to $5.2 million of U.S. Federal net operating loss carryforwards and $2.6 million interest limitation carryforwards at the end of 2022. The Company believes that these carryforwards are more likely than not to be utilized in future periods. The majority of these carryforwards are not subject to expiration.

In addition, on a gross basis the Company had state net operating loss carryforwards of $49.0 million and $37.2 million at the end of 2023 and 2022, respectively. As of the end of 2023, the Company had recognized a state valuation allowance of $1.6 million. This represents a $0.3 million increase year-over-year primarily driven by losses in jurisdictions for which we believe it is not more likely than not to be utilized in future periods. The majority of these losses will expire between the years of 2023 and 2043, while certain losses are not subject to expiration.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to U.S. federal examinations for years before 2020 or state examinations for years before 2019.

The Company had no uncertain tax position activity during 2023 or 2022. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in the provision for income taxes. The Company had no accruals for uncertain tax positions including interest and penalties at the end of 2023.

Note 12: Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

The diluted earnings per share calculations exclude the effect of potentially dilutive shares when the inclusion of those shares in the calculation would have an anti-dilutive effect. The Company had an $0.1 million shares of common stock that were anti-dilutive in 2023. The Company had 0.2 million shares of common stock that were anti-dilutive in 2022.

Note 13: Industry Segments

Ascent Industries Co. hastwo reportable segments: Tubular Products and Specialty Chemicals. The Tubular Products segment includes the operating results of the Company’s plants involved in the production of stainless steel pipe and tube. 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.

On January 1, 2023, the Company changed the grouping of certain immaterial revenue and expenses associated with the ceased Palmer operations. As a result, certain prior period Tubular Products segment results have been reclassified to All Other to be comparable to the current period's presentation. During the second quarter of 2023, the Board of Directors made the decision to permanently cease operations at the Company’s Munhall facility, which was effective August 31, 2023. As a result, certain prior period Tubular Products segment results have been reclassified to remove Munhall's results from continuing operations to discontinued operations. On December 22, 2023, the Company and its wholly-owned subsidiary Specialty Pipe & Tube, Inc. (“SPT”) entered into an Asset Purchase Agreement pursuant to which Ascent and SPT sold substantially all of the assets primarily related to SPT to Specialty Pipe & Tube Operations, LLC, a Delaware limited liability company. The transaction closed on December 22, 2023. As a result, prior period Tubular Products segment results have been reclassified to remove SPT's results from continuing operations to discontinued operations.

The Specialty Chemicals segment includes the operating results of the Company’s plants involved in the production of specialty chemicals. The Specialty Chemicals segment produces 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.

The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measures being operating income and Adjusted earnings (loss) before interest, income taxes, depreciation and amortization. Adjusted earnings (loss) before interest, income taxes, depreciation and amortization excludes certain items that management believes are not indicative of future results.

The accounting principles applied at the operating segment level are the same as those applied at the consolidated financial statement level. Intersegment sales and transfers are eliminated at the corporate consolidation level.

The following table summarizes certain information regarding segments of the Company's continuing operations:

Note 14: Benefit Plans and Collective Bargaining Agreements

The Company has a 401(k) Employee Stock Ownership Plan (the "401(k)/ESOP Plan") covering all non-union employees. Beginning January 1, 2023 the plan was extended to include all non-union and union employees at the Company's Virginia facility. Employees can contribute to the 401(k)/ESOP Plan up to 100% of their wages with a maximum of $22,500 for 2023. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional $7,500 per year for a maximum of $30,000 for 2023. Contributions by the employees are invested in one or more funds at the direction of the employee; however, employee contributions cannot be invested in Company stock. Contributions by the Company are made in accordance with the investment elections made by each participant for his or her deferral contributions. The Company contributes onbehalf of each eligible participant a matching contribution equal to a percentage determined each year by the Board of Directors. For 2023 and 2022 the maximum was 100% of employee contributions up to a maximum of 4% of their eligible compensation. The matching contribution is applied to the employee accounts after each payroll. Matching contributions of approximately $1.0 million were made for 2023 and $0.7 million for 2022. The Company may also make a discretionary contribution, which if made, would be distributed to all eligible participants regardless of whether they contribute to the 401(k)/ESOP Plan. No discretionary contributions were made to the 401(k)/ESOP Plan in 2023 or 2022.

The Company has a 401(k) and Profit Sharing Plan (the "Bristol Plan") covering all employees as part of the United Steel Workers of America, Local Union 4586 Collective Bargaining Agreement (the "Bristol CBA"). Employees can contribute to the Bristol Plan up to 60% of pretax annual compensation, as defined in the Bristol Plan, with a maximum of $22,500 for 2023. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional 7,500 per year for a maximum of 30,000 for 2023. During 2023 and 2022, the Company contributed 4% of a participant's eligible compensation regardless of whether the participants contribute to the Bristol Plan. The Company's contributions were $0.3 million for both 2023 and 2022. Additional profit sharing amounts may also be contributedat the option of the Company's Board of Directors, which if made, would be allocated to participants based on the ratio of the participant's compensation to the total compensation of all participants eligible to participate in the Bristol Plan. No discretionary contributions were made to the Bristol Plan in 2023 or 2022.

During 2022, the Company also maintained a 401(k) Plan (the "Virginia Plan") covering substantially all employees at the Virginia facility. The Company contributed on behalf of each eligible participant a matching contribution equal to a percentage determined each year by the Board of Directors. For 2022 the maximum was 100% of employee contributions up to the first 3% of their eligible compensation and 50% for employee contributions from 3% to 6%. Matching contributions of $0.4 million were made under the Virginia Plan for 2022. The Company also maintains a Collective Bargaining Agreement (the "Virginia CBA") with the United Food and Commercial Workers, Local Union 400 (the "Virginia Union"), which represents employees at the Virginia facility and is required to make additional quarterly contributions for hourly employees who had a hire date prior to June 1, 2013. Additional quarterly matching contributions of approximately $34,734 were made for 2023 and $37,743 for 2022.

The Company maintains a Collective Bargaining Agreement (the "Mineral Ridge CBA") with the United Steel Workers of America, Local Union 4564-07, which represents employees at the Mineral Ridge facility. In connection with the Mineral Ridge CBA, the Company contributes to union-sponsored defined contribution retirement plans. Contributions relating to these plans were $37,818 and $40,835 for 2023 and 2022, respectively. The employees at this facility are covered under the Employee Leasing Services Agreement entered into as part of the sale of Specialty Pipe & Tube, Inc which closed December 22, 2023.

Note 15: Commitments and Contingencies

In October 2021, the Company acquired DanChem Technologies, Inc. ("DanChem"), a specialty chemical manufacturer based in Virginia. In June of 2020, DanChem received a demand letter from Henkel US Operations Corporation (“Henkel”), a former customer, asserting various claims for breach of contract alleging that product supplied by DanChem under four (4) purchase orders in 2018 and 2019 were defective and/or non-conforming and seeking approximately $315,000 in damages. DanChem responded in August 2020 disputing the claims and denying wrongdoing. Henkel was silent almosttwo years and then, in August 2022, sent another demand letter to DanChem asserting similar, if not identical claims, but now seeking alleged damages of approximately $3 million (with the main difference between thetwo demands being Henkel’s new claims for lost profits and other consequential damages). Henkel filed a lawsuit against DanChem in Connecticut state court in October 2022 seeking its newly alleged damages of approximately $3 million. The Company settled the lawsuit with Henkel during the third quarter of 2023.

In addition, from time to time, we are involved in various other legal proceedings arising from the normal course of business activities. We are not presently a party to any other such litigation the outcome of which, we believe, if determined adversely to us, would individually, or taken together, have a material adverse effect on our business, operating results, cash flows, or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. We may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained.

Note 16: Supplemental Financial Information (unaudited)

The following tables present certain unaudited consolidated quarterly financial information for each of the eight quarters ended December 31, 2023. This quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments necessary to state fairly the information for the periods presented.

Note 17: Subsequent Events

The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were available to be issued. Based upon this review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.