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Item 2. Management’s Discussion and Analysis

2020-09-03 compared with 2020-05-05 · 153 added, 102 removed, 170 unchanged (60% of the section changed)

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, liquidity, and capital resources during the three months ended March 31, 2020 , and March 31, 2019 .

This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the Annual Report), as well as the condensed consolidated financial statements (unaudited) and notes to the condensed consolidated financial statements (unaudited) contained in this report.

13 unchanged sentences

The Company's business is divided into two reportable operating segments, the Metals Segment and the Specialty Chemicals Segment.

The Metals Segment operates as three reporting units, all International Organization for Standardization ("ISO") certified manufacturers, including Welded Pipe & Tube Operations, a unit that includes Bristol Metals, LLC ("BRISMET") and American Stainless Tubing, LLC ("ASTI"), which began operations effective January 1, 2019 pursuant to the American Stainless acquisition (see Note 13 to the Condensed Consolidated Financial Statements), Palmer, and Specialty Pipe & Tube, Inc.

("Palmer"), and Specialty Pipe & Tube, Inc.

("Specialty").

9 unchanged sentences

We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business, including the impacts to our customers, employees and supply chain.

While COVID-19 did have an adverse effect on our reported results for the first quarter, specifically with the suspension of operations at our Palmer facility, we are unable to predict the ultimate impact it may have on our business, future operations, financial position or cash flows.

The extent that our operations may be impacted by the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the severity of the outbreak and continued actions by government authorities to contain and treat the outbreak.

Through the second quarter of 2020, COVID-19 did have an adverse effect on our reported results and operations, specifically with the continued curtailment of operations at our Palmer facility and $6.1 million of asset impairments related to that business.

There remains significant uncertainty concerning the magnitude of the impact and the duration of the COVID-19 pandemic and as a result, we are unable to predict the ultimate impact it may have on our business, future operations, financial position or cash flows.

The extent that our operations will continue to be impacted by the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the severity of the outbreak and continued actions by government authorities to contain and treat the outbreak.

See Part II - Item 1A, "Risk Factors," included herein for updates to our risk factors regarding risks associated with the COVID-19 pandemic.

Synalloy Corporation

Condensed Consolidated Statement of Shareholders' Equity (Unaudited)

Goodwill Impairment Review

During the second quarter of 2020, as described in Note 5 - Goodwill and Intangible Assets, we tested our goodwill for impairment.

The Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment, with an associated goodwill balance of $16.2 million , existed.

Continued deterioration in macroeconomic conditions, continued risks within the stainless steel industrial business, reporting unit operating losses and a decline in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event.

As a result, the Company quantitatively evaluated the Welded Pipe & Tube reporting unit for impairment.

Fair value of the reporting unit was determined using an income approach.

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

These estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts, including sales growth, gross margins, and operating margins.

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

We corroborated the reasonableness of the estimated reporting unit fair value by reconciling to our enterprise value and market capitalization.

As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was greater than its carrying value by 1.7% and, as such, no goodwill impairment was necessary in the quarter ended June 30, 2020.

We do consider our Welded Pipe & Tube reporting unit's goodwill to be at risk and changes in our future operating results, cash flows, share price, market capitalization, or discount rate used when conducting future goodwill impairment tests could affect the estimated fair values of our reporting unit and may result in a goodwill impairment charge in the future.

For example, we estimate that a 39 basis point increase in the discount rate would result in a goodwill impairment charge of approximately $0.7 million .

Results of Operations

Consolidated Performance Summary

Consolidated net sales for the first quarter of 2020 were $74.7 million representing a decrease of $10.1 million or 11.9% when compared to net sales for the first quarter of 2019 .

The decrease in sales for the first quarter was driven by our Metals Segment,

which had a decrease of $10.4 million over the first quarter of 2019, partially offset by a $0.3 million increase in the Specialty Chemicals Segment.

Changes in operating performance are described in more detail below in the Segment discussions.

For the first quarter of 2020 , the Company recorded a net loss of $1.2 million , or $0.13 diluted loss per share, compared to a net loss of $0.9 million , or $0.10 diluted loss per share for the first quarter of 2019 .

The first quarter of 2020 was negatively impacted by mark-to-market valuation losses on investments in equity securities totaling $0.9 million compared to gains on investment in equity securities of $0.3 million for the first quarter of 2019 , as well as inventory price change losses which, on a pre-tax basis, totaled $0.4 million , compared to a $3.4 million loss in the first quarter of 2019 .

The first quarter of 2020 consolidated gross profit decreased 17.7% to $7.2 million , or 9.6% of sales, compared to $8.7 million , or 10.2% of sales in the first quarter of 2019 .

Consolidated net sales for the second quarter of 2020 were $66.1 million representing a decrease of $12.6 million or 16.0% when compared to net sales for the second quarter of 2019 .

Net sales for the first six months of 2020 were $140.8 million representing a decrease of $22.7 million or 13.9% when compared to the first six months of 2019 .

The decrease in sales for the second quarter and first six months of 2020 was driven by our Metals Segment, which had a decrease of $12.5 million over the second quarter of 2019 and a decrease of $22.9 million over the first six months of 2019 .

For the second quarter of 2020 , the Company recorded a net loss of $7.0 million , or $0.77 diluted loss per share, compared to a net loss of $0.3 million , or $0.03 diluted loss per share for the second quarter of 2019 .

For the first six months of 2020 , the Company recorded a net loss of $8.1 million , or $0.90 diluted loss per share, compared to a net loss of $1.2 million , or $0.13 diluted loss per share for the first six months of 2019 .

The second quarter and first six months of 2020 were positively impacted by mark-to-market valuation gains on investments in equity securities totaling $1.1 million and $0.2 million , respectively, compared to gains on investments in equity securities of $0.1 million and $0.4 million for the second quarter and first six months of 2019 , respectively.

The second quarter and first six months of 2020 were also impacted by $6.1 million in non-cash asset impairment charges related to Palmer and inventory price change losses which, on a pre-tax basis, totaled $3.5 million and $3.9 million , respectively, compared to a $1.8 million loss in the second quarter of 2019 and a $5.2 million loss for the first six months of 2019 .

The second quarter and first six months of 2020 results were also negatively impacted by $2.7 million and $2.9 million , respectively, in costs associated with the Company's proxy contest and election of directors at the 2020 Annual Meeting of Shareholders.

See Note 16, Proxy Contest and Related Costs, in the notes to the unaudited condensed consolidated financial statements for additional information.

The second quarter of 2020 consolidated gross profit decreased 44.4% to $4.4 million , or 6.6% of sales, compared to $7.8 million , or 10.0% of sales in the second quarter of 2019 .

For the first six months of 2020 , consolidated gross profit decreased 30.3% to $11.5 million , or 8.2% of sales, from $16.5 million , or 10.1% of sales in the first six months of 2019 .

The decrease in dollars and percentage of sales were attributable to the Metals Segment as discussed below.

Consolidated selling, general, and administrative expense for the first quarter of 2020 decreased by $1.1 million to $7.8 million or 10.4% of sales compared to $8.9 million , or 10.5% of sales in the first quarter of 2019 .

The most significant decreases for the first quarter of 2020 compared the same period in the prior year resulted from salaries and benefits ( $0.4 million lower in the first quarter);

stock-based compensation ( $0.3 million lower in the first quarter);

professional fees ( $0.1 million lower in the first quarter);

and amortization expense ( $0.1 million lower in the quarter).

Consolidated selling, general, and administrative expense for the second quarter of 2020 decreased by $0.6 million to $7.0 million or 10.7% of sales compared to $7.7 million , or 9.7% of sales in the second quarter of 2019 .

For first six months of 2020 , consolidated selling, general, and administrative expenses decreased $1.7 million , or 10.5% , to $14.8 million compared to $16.6 million in the first six months of 2019 .

The most significant decreases for the second quarter and first six months of 2020 compared the same period in the prior year resulted from salaries and benefits ( $0.7 million lower in the second quarter and $1.0 million lower in the first six months);

travel expenses ( $0.3 million lower in the second quarter and $0.4 million lower in the first six months);

and professional fees ( $0.1 million lower in the second quarter and $0.2 million lower in the first six months).

Metals Segment

The Metals Segment's net sales for the first quarter of 2020 totaled $60.7 million , a decrease of $10.4 million or 14.7% from the first quarter of 2019 .

The most significant factor in the decline relates to a $6.4 million decline in sales for Palmer.

As indicated in our April 2, 2020 press release, production has been curtailed indefinitely due to the COVID-19 pandemic's devastating impact on the global oil and gas industry, including operations in the Permian Basin.

At the time of the curtailment, Palmer had approximately $1.0 million of tanks completed and to be shipped during the second quarter of 2020.

Synalloy will evaluate increasing production at Palmer when the COVID-19 pandemic is over and the oil and gas industry in the Permian Basin returns to normalized pricing and demand levels.

Net sales decrease for the first quarter of 2020 compared to the first quarter of 2019 is summarized as follows:

The Metals Segment's net sales for the second quarter of 2020 totaled $52.0 million , a decrease of $12.5 million or 19.4% from the second quarter of 2019 .

Net sales for the first six months of 2020 totaled $112.7 million , a decrease of $22.9 million or 16.9% from the first six months of 2019 .

Net sales decrease for the second quarter of 2020 compared to the second quarter of 2019 is summarized as follows:

($ in thousands)

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Total decrease

1) Average price increases (decreases) for the first quarter of 2020 as compared to the first quarter of 2019 primarily relate to the following:

Storage tank and vessels - slight product mix change to larger, more complex tanks;

1) Average price decreases for the second quarter of 2020 as compared to the second quarter of 2019 primarily relate to the following:

Fiberglass and steel liquid storage tanks and separation equipment - decline due to curtailment of operations and effects of COVID-19 on oil and gas industry and Permian Basin;

Heavy wall seamless carbon steel pipe and tube - decline based on lower mix of energy based sales, lower mill pricing and lessening impact of 232 tariffs;

Stainless steel pipe and tube - pass through of input and cost changes related to:

Alloy surcharges increase of approximately 5% ;

Alloy surcharges decrease of approximately 11% ;

Favorable product mix and other competitive pricing, increase of 7% ;

Galvanized pipe and tube - primarily decline in indexed pricing

Net sales decrease for the first six months of 2020 compared to the first six months of 2019 is summarized as follows:

($ in thousands)

Average selling price (1)

Fiberglass and steel liquid storage tanks and separation equipment

Heavy wall seamless carbon steel pipe and tube

Stainless steel pipe and tube

Galvanized pipe and tube

Total decrease

1) Average price decreases for the first six months of 2020 as compared to the first six months of 2019 primarily relate to the following:

Fiberglass and steel liquid storage tanks and separation equipment - decline due to curtailment of operations and effects of COVID-19 on oil and gas industry and Permian Basin;

Heavy wall seamless carbon steel pipe and tube - decline based on lower mix of energy based sales, lower mill pricing and lessening impact of 232 tariffs;

Stainless steel pipe and tube - pass through of input and cost changes related to:

Alloy surcharges decrease of approximately 2% ;

Base raw material input mill pricing, product mix and other competitive pricing, decrease of 5% ;

Galvanized pipe and tube - primarily decline in indexed pricing

The Metals Segment's operating income decreased $0.5 million , or 35%, to $0.9 million for the first quarter of 2020 compared to $1.4 million for the first quarter of 2019 .

Current quarter operating results were affected by the following factors:

For nickel prices and resulting surcharges for 304 and 316 alloys, the first quarter of 2020 proved to be a much more favorable environment than the first quarter of 2019, with net metal pricing losses of only $0.4 million , compared to last year's $3.4 million in metal pricing losses.

While the first quarter 2020 surcharges were approximately 18% lower than fourth quarter 2019 levels, committed order book pricing was much more in line with cost of goods sold than what was experienced in the first quarter of 2019.

Operating profits for stainless steel pipe and tube and galvanized pipe and tube operations for the first quarter of 2020, exclusive of $3.6 million in favorable metal pricing related to improved surcharge realization, decreased approximately $2.6 million in the first quarter of 2020 compared to the prior year period.

The net decrease is primarily related to a decline in average pricing (excluding surcharges) of approximately 5.1% , totaling unfavorable $2.7 million in margin and slightly higher operating costs at $0.6 million , offset by an increase in volume of 5.7% , which generated improved margins totaling $0.7 million .

Heavy wall seamless carbon pipe and tube showed an decrease of 7.1% pounds shipped, primarily in general industrial.

In addition, lower pricing realizations in the first quarter lowered the overall average selling price by 8.4% , lowering operating profit by approximately $0.9 million .

We do expect overall seamless carbon pipe volumes to remain comparable to 2019 for the remainder of the current year, with some declines in energy market-based sales offset by continued solar infrastructure and slightly higher general industrial sales.

Profitability of Palmer declined $0.5 million on a 65% reduction in volume related to the previously discussed collapse in oil and gas market demand.

The impact of the decline was substantially mitigated by proactive labor and operating cost reductions during the fourth quarter of 2019 and throughout the first quarter .

Selling, general, and administrative expense decreased $0.8 million , or 13.6% , to $4.8 million for the first quarter of 2020 compared to the first quarter of 2019 .

The most significant decreases for the first quarter of 2020 compared the same period in the prior year resulted from salaries and benefits ( $0.3 million lower in the first quarter);

stock-based compensation ( $0.1 million lower in the quarter);

and amortization expense ( $0.1 million lower in the quarter).

The Metals Segment's operating loss increased $10.3 million , or 867.6% , to $9.2 million for the second quarter of 2020 compared to income of $1.2 million for the second quarter of 2019 .

Operating loss for the first six months of 2020 increased $10.9 million ,

or 407.3% , to $8.2 million from income of $2.7 million in the first six months of 2019 .

As mentioned above, the second quarter and first six months of 2020 were negatively impacted by $6.1 million in non-cash asset impairment charges related to Palmer.

Current quarter operating results were affected by nickel prices and resulting surcharges for 304 and 316 alloys.

The second quarter of 2020 proved to be a much more unfavorable environment than the second quarter of 2019 , with net metal pricing losses of $3.5 million , compared to last year's $1.8 million in metal pricing losses.

Second quarter 2020 surcharges on 304 alloy were approximately 11% lower than second quarter 2019 levels and 2020 surcharges on 316 alloy were 17% lower than the second quarter of 2019 .

More importantly, second quarter 2020 surcharges on 304 and 316 alloys were lower by 19% and 21% , respectively, when compared with the surcharges in place just five months earlier.

Selling, general, and administrative expense decreased 0.3% to $4.8 million for the second quarter of 2020 compared to $4.9 million in the second quarter of 2019 .

For the first six months of 2020 , selling, general, and administrative expenses decreased $0.7 million , or 7.0% , to $9.7 million from $10.4 million for the first six months of 2019 .

The most significant decreases for the second quarter and first six months of 2020 compared the same periods in the prior year resulted from salaries and benefits ( $0.6 million lower in the second quarter and $0.9 million lower in the first six months) and travel expenses ( $0.2 million lower in the second quarter and $0.3 million lower in the first six months).

Specialty Chemicals Segment

Net sales for the Specialty Chemicals Segment in the first quarter of 2020 totaled $14.0 million , representing a $0.3 million , or 2.4% , increase from the first quarter of 2019 .

The increase in net sales during the first quarter is primarily attributable to higher demand for more value added contract manufactured products, with 10% higher average pricing than experienced in the first quarter of 2019.

During the first quarter of 2020 the Specialty Chemicals Segment experienced increased demand from the pulp and paper, asphalt and oil and gas market segments.

Due to the COVID-19 pandemic’s impact on the Household, Industrial & Institutional and Sanitation supply chains, the Segment increased production of hand sanitizer and cleaning aids to help supply critical sanitation products.

Operating income for the Specialty Chemicals Segment for the first quarter of 2020 was $0.5 million , a decrease of $0.1 million , or 24.1% , from the first quarter of 2019 .

The decline in operating income is directly related to slightly unfavorable manufacturing absorption in tolled product manufacturing as a decline in tolled pounds of 15% compared to the first quarter of 2019 generated lower equipment utilization and higher average cost of sales.

Selling, general, and administrative expense decreased $0.1 million , or 11.3% , to $1.1 million for the first quarter of 2020 compared to the first quarter of 2019 driven by decreases in salaries and benefits and stock-based compensation expense.

Unallocated corporate expenses for the first quarter of 2020 decreased $0.3 million , or 12.5% to $2.0 million ( 2.7 percent of sales) compared to $2.3 million ( 2.7 percent of sales) for the same period in the prior year comparative period.

The first quarter decrease resulted primarily from lower stock compensation expense and professional fees in the period.

Interest expense was $0.7 million and $1.0 million for the first quarter of 2020 and 2019 , respectively.

The decrease was related to lower average debt outstanding in the first quarter of 2020 compared to the first quarter of 2019.

The effective tax rate was 54.0% and 30.5% for the three months ended March 31, 2020 and March 31, 2019 , respectively.

The March 31, 2020 effective tax rate was lower than the statutory rate of 21.0% due to discrete tax benefits on our stock compensation plan and tax benefits associated with the CARES Act.

The Company's cash balance decreased $0.6 million to $22,000 as of March 31, 2020 compared to $0.6 million at December 31, 2019 .

Fluctuations affecting cash flows during the three months ended March 31, 2020 were comprised of the following:

Net inventories decreased $1.0 million at March 31, 2020 when compared to December 31, 2019 , mainly due to a favorable balance between first quarter shipments and raw material replenishments.

Inventory turns increased slightly from 1.62 turns at December 31, 2019 , calculated on a three-month average basis, to 1.78 turns at March 31, 2020 ;

Accounts payable increased $5.7 million as of March 31, 2020 as compared to December 31, 2019 , primarily due to higher metal purchases in the first quarter compared to the fourth quarter.

Accounts payable days outstanding were approximately 32 days at March 31, 2020 compared to 31 days at December 31, 2019 ;

Net accounts receivable increased $7.1 million at March 31, 2020 as compared to December 31, 2019 , due primarily to improved business activity, as first quarter sales levels improved by 10% over the fourth quarter of 2019.

Days sales outstanding, calculated using a three-month average basis, was 47 days outstanding at March 31, 2020 and 52 days at December 31, 2019 , respectively;

Capital expenditures for the first three months of 2020 were $0.6 million ;

The Company paid $1.2 million during the first three months of 2020 related to the earn-out liabilities from the 2019 American Stainless, 2018 MUSA-Galvanized and 2017 MUSA-Stainless acquisitions.

The Company had $77.8 million of total borrowings outstanding with its lender as of March 31, 2020 .

That total is up $2.3 million from the balance at December 31, 2019 due primarily to improved business activity, as first quarter sales levels improved by 10% over the fourth quarter of 2019, generating higher accounts receivable by $7.1 million .

That total was offset by lower inventories of $1.0 million and increased accounts payables of $5.7 million .

Covenants under the Credit Agreement include maintaining a minimum fixed charge coverage ratio, maintaining a minimum tangible net worth, and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs.

As of March 31, 2020 , the Company had $18.8 million of remaining available capacity under its line of credit.

The Company was in compliance with all covenants as of March 31, 2020 .

Net sales for the Specialty Chemicals Segment in the second quarter of 2020 totaled $14.1 million , representing a $0.2 million , or 1.1% , decrease from the second quarter of 2019 .

Net sales for the first six months of 2020 totaled $28.2 million , representing a $0.2 million , or 0.6% , increase from the first six months of 2019 .

Pounds shipped in the second quarter of 2020 were up 1.4% over the second quarter of 2019 , with average selling prices declining 2.6% .

Pounds for the first six months of 2020 were down 2.8% , with average selling prices increasing 3.5% .

The relative strength of sales during the second quarter, in the face of the COVID-19 pandemic's impact on the Household, Industrial & Institutional and Sanitation supply chain, is a result of the Segment's increased production of hand sanitizer and cleaning aids to help supply critical sanitation products.

Operating income for the Specialty Chemicals Segment for the second quarter of 2020 was $2.0 million , an increase of $1.1 million , or 113.9% , from the second quarter of 2019 .

Operating income for the first six months of 2020 was $2.4 million , an increase of $0.9 million , or 58.8% , from the first six months of 2019 .

The increase in operating income is directly related to cost cutting and other initiatives that yielded margin improvements of $0.2 million , lower manufacturing costs of $0.6 million and lower selling, general, and administrative expenses of $0.3 million .

Selling, general, and administrative expense decreased $0.3 million , or 27.0% , to $0.7 million for the second quarter of 2020 compared to the second quarter of 2019 .

For the first six months of 2020 , selling, general, and administrative expenses decreased $0.4 million , or 18.5% , to $1.8 million from $2.2 million for the first six months of 2019 .

The most significant decreases for the second quarter and first six months of 2020 compared to the same periods in the prior year resulted from salaries and benefits ( $0.2 million lower for the second quarter and $0.3 million lower in the first six months).

Unallocated corporate expenses for the second quarter of 2020 decreased $0.4 million , or 18.4% , to $1.6 million ( 2.4 percent of sales) compared to $1.9 million ( 2.5 percent of sales) for the same period in the prior year comparative period.

For first six months of 2020 , unallocated corporate expenses decreased $0.6 million , or 15.0% , to $3.6 million from $4.2 million for the first six months of 2019 .

The second quarter and first six months decreases resulted primarily from lower professional fees, incentive bonuses, and travel expenses in the period.

Interest expense was $0.5 million and $1.0 million for the second quarter of 2020 and 2019 , respectively.

The decrease was related to lower average debt outstanding in the second quarter of 2020 compared to the second quarter of 2019 .

The effective tax rate was 23.3% and 30.1% for the three and six months ended June 30, 2020 , respectively, and 35.0% and 31.5% for the three and six months ended June 30, 2019 , respectively.

The June 30, 2020 effective tax rate was higher than the statutory rate of 21.0% due to discrete tax benefits on our stock compensation plan and estimated tax benefits associated with the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was signed into law on March 27, 2020.

The CARES Act includes various income and payroll tax provisions, notably enabling the Company to carry back net operating losses and recover taxes paid in prior years.

Additionally, we recognized a discrete tax benefit related to the costs associated with our public proxy contest.

The Company's cash balance increased $0.8 million to $1.4 million as of June 30, 2020 compared to $0.6 million at December 31, 2019 .

Fluctuations affecting cash flows during the six months ended June 30, 2020 were comprised of the following:

Net inventories decreased $2.9 million at June 30, 2020 when compared to December 31, 2019 , mainly due to the write-down of inventory related to the Palmer business in the second quarter .

Inventory turns increased from 1.62 turns at December 31, 2019 , calculated on a three-month average basis, to 1.75 turns at June 30, 2020 ;

Accounts payable increased $3.7 million as of June 30, 2020 as compared to December 31, 2019 , primarily due to higher metal purchases in the second quarter compared to the fourth quarter.

Accounts payable days outstanding were approximately 32 days at June 30, 2020 compared to 36 days at December 31, 2019 ;

Net accounts receivable increased $1.2 million at June 30, 2020 as compared to December 31, 2019 , due primarily to improved business activity within the Specialty Chemicals Segment in the second quarter compared to the fourth quarter of 2019.

Days sales outstanding, calculated using a six-month average basis, was 46 days outstanding at June 30, 2020 and 50 days at December 31, 2019 , respectively;

Capital expenditures for the first six months of 2020 were $2.0 million ;

The Company paid $2.3 million during the first six months of 2020 related to the earn-out liabilities from the 2019 American Stainless, 2018 MUSA-Galvanized and 2017 MUSA-Stainless acquisitions.

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, Adjusted EBITDA, Adjusted Net (Loss) Income, and Adjusted Diluted Earnings (Loss) Per Share.

EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, and Adjusted Diluted (Loss) Earnings Per Share.

Management believes that these non-GAAP measures provide additional useful information to allow readers to compare the financial results between periods.

5 unchanged sentences

These items include:

discontinued operations, goodwill impairment, interest (including change in fair value of interest rate swap), income taxes, depreciation, amortization, stock option / grant costs, non-cash lease cost, acquisition costs, shelf registration costs, earn-out adjustments, gain on excess death benefit, realized and unrealized (gains) and losses on investments in equity securities, casualty insurance gain, all (gains) losses associated with a Sale-Leaseback, retention costs and other adjustments from net income.

discontinued operations, goodwill impairment, asset impairment, interest (including change in fair value of interest rate swap), income taxes, depreciation, amortization, stock option / grant costs, non-cash lease cost, acquisition costs, proxy contest costs, shelf registration costs, earn-out adjustments, gain on excess death benefit, realized and unrealized (gains) and losses on investments in equity securities, casualty insurance gain, all (gains) losses associated with a Sale-Leaseback, retention costs and other adjustments from net income.

We caution investors 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.

1 unchanged sentence

Consolidated EBITDA and Adjusted EBITDA are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

2 unchanged sentences

Acquisition costs and other

Proxy contest costs

Shelf registration costs

Earn-out adjustments

Loss (gain) on equity securities

Gain on investments in equity securities

Asset impairments

Stock-based compensation

3 unchanged sentences

Metals Segment EBITDA and Adjusted EBITDA are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Metals Segment

Operating income

Net (loss) income

Interest expense

Acquisition costs and other

Earn-out adjustments

Asset impairments

Stock-based compensation

3 unchanged sentences

Specialty Chemicals Segment EBITDA and Adjusted EBITDA are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

Chemicals Segment

Operating income

Acquisition costs and other

Interest expense

Stock-based compensation

2 unchanged sentences

Adjusted Net (Loss) Income and Adjusted Diluted (Loss) Earnings per Share

Adjusted Net (Loss) Income and Adjusted Diluted Earnings (Loss) per Share are non-GAAP measures and exclude discontinued operations, goodwill impairment, stock option / grant costs, non-cash lease costs, acquisition costs, shelf registration costs, earn-out adjustments, gain on excess death benefit, realized and unrealized (gains) and losses on investments in equity securities, casualty insurance gain, all (gains) losses associated with a Sale-Leaseback, and retention costs from net income.

Adjusted Net (Loss) Income and Adjusted Diluted (Loss) Earnings per Share are non-GAAP measures and exclude discontinued operations, goodwill impairment, asset impairment, stock option / grant costs, non-cash lease costs, acquisition costs, proxy contest costs, shelf registration costs, earn-out adjustments, gain on excess death benefit, realized and unrealized (gains) and losses on investments in equity securities, casualty insurance gain, all (gains) losses associated with a Sale-Leaseback, and retention costs from net income.

They also utilize a constant effective tax rate to reflect tax neutral results.

3 unchanged sentences

The reconciliation of net (loss) income and (loss) earnings per share to adjusted net (loss) income and adjusted (loss) earnings per share is as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Amounts in thousands, except per share data)

1 unchanged sentence

Acquisition costs and other

Proxy contest costs

Shelf registration costs

Earn-out adjustments

Loss (gain) on investments in equity securities

Gain on investments in equity securities

Asset impairments

Stock-based compensation

12 unchanged sentences

Cash flows from total operations were as follows ($ in thousands):

Three Months Ended March 31,

Total cash provided by (used in):

Six Months Ended June 30,

Total cash (used in) provided by:

Operating activities

1 unchanged sentence

Financing activities

Decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Operating Activities

The decrease in cash provided by operating activities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily driven by a larger net loss in the first quarter of 2020 compared to the first quarter of 2019, which decreased operating cash flows by $0.3 million , and changes in working capital, driven by increases in accounts receivable, which decreased operating cash flows for the first three months of 2020 by $7.7 million , compared to a decrease of $2.4 million in the first three months of 2019 and increases in accounts payable, which increased operating cash flows $5.7 million in the first three months of 2020 compared to an increase of $4.0 million in the first three months of 2019.

The decrease in cash provided by operating activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily driven by changes in working capital, driven by increases in accounts receivable, which decreased operating cash flows for the first six months of 2020 by $1.9 million , compared to an increase of $0.9 million in the first six months of 2019, increases in inventory which decreased operating cash flows $1.4 million in the first six months of 2020, compared to an increase of $8.6 million in the first six months of 2019 and accrued income taxes, which decreased operating cash flow $3.1 million for the first six months of 2020, compared to a decrease of $1.5 million in the first six months of 2020.

These were partially offset by increases in accounts payable, which increased operating cash flows $3.7 million in the first six months of 2020 compared to an increase of $2.5 million in the first six months of 2019 and $1.0 million in proceeds received from the Company's business interruption insurance related to the heavy wall press outage in 2019.

Investing Activities

Net cash used in investing activities primarily consists of transactions related to capital expenditures and acquisitions.

The decrease in cash used in investing activities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to the American Stainless acquisition in the prior year.

The increase in cash provided by investing activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to a decrease in cash outflows related to the American Stainless acquisition in the prior year and increase in proceeds from the sale of equity securities in the current year over the prior year.

Financing Activities

Net cash provided by financing activities primarily consists of transactions related to our long-term debt.

The decrease in cash provided by financing activities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to borrowings from the Term Loan related to the American Stainless acquisition in the prior year not in the current year.

The decrease in cash provided by financing activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to borrowings from the Term Loan related to the American Stainless acquisition in the prior year not in the current year.

Sources of Liquidity

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We have a $100 million asset-backed revolving Line with a maturity date of December 21, 2021 and a $20 million Term Loan with a maturity date of January 1, 2024.

As of March 31, 2020 , the Company had $18.8 million of remaining available capacity under its Line.

See Note 6, Long-term Debt, in the Notes to the Condensed Consolidated Financial Statements for additional information.

The Company is subject to certain covenants including maintaining a minimum fixed charge coverage ratio, maintaining a minimum tangible net worth, and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs.

At March 31, 2020 , the Company was in compliance with all debt covenants.

As of June 30, 2020 , the Company had $78.6 million of total borrowings outstanding with its lender.

That total is up $3.0 million from the balance at December 31, 2019 .

As of June 30, 2020 , the Company had $7.2 million of remaining available capacity under its Line.

See Note 6, Long-term Debt, in the notes to the unaudited condensed consolidated financial statements for additional information.

The Company is subject to certain covenants including maintaining a minimum fixed charge coverage ratio of not less than 1.25 , maintaining a minimum tangible net worth of not less than $60.0 million , and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs.

The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarter ended June 30, 2020.

To address the technical default, the Company entered into two amendments to its Credit Agreement with its bank subsequent to the end of the quarter.

On July 31, 2020 , the Company entered into the Third Amendment to the Third Amended and Restated Loan Agreement (the "Third Amendment") with its bank.

The Third Amendment amended the definition

of the fixed charge coverage ratio to include the proxy contest costs in the numerator of the ratio calculation.

The amendment is effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020.

Additionally, on August 13, 2020 , the Company entered into the Fourth Amendment to the Third Amended and Restated Loan Agreement (the "Fourth Amendment") with its bank.

The Fourth Amendment amended the definition of the fixed charge coverage ratio to include the lesser of the actual non-cash asset impairment charge related to Palmer, or $6.0 million in the numerator of the ratio calculation.

The a mendment is effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020 .

At June 30, 2020 , the Company had a minimum fixed charge coverage ratio of 1.39 and a minimum tangible net worth of $67.4 million .

Stock Repurchases and Dividends

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On February 21, 2019, the Board of Directors authorized a stock repurchase program for up to 850,000 shares of its outstanding common stock over 24 months .

The shares will be purchased from time to time at prevailing market prices, through open market

or privately negotiated transactions, depending on market conditions.

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 March 31, 2020 , the Company has 790,383 shares of its share repurchase authorization remaining.

As of June 30, 2020 , the Company has 790,383 shares of its share repurchase authorization remaining.

Stock repurchase activity was as follows:

Three Months Ended March 31,

(total cost in thousands)

Six Months Ended June 30,

Number of shares repurchased

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Other Financial Measures

Our current ratio, calculated as current assets divided by current liabilities, was 3.6 at March 31, 2020 and December 31, 2019 , respectively.

Our long-term debt to capital, calculated as long-term debt divided by total capital, was 43% at March 31, 2020 and 41% at December 31, 2019 .

Our return on average equity, calculated as net income divided by the trailing 12-month average of equity, was (1.1)% at March 31, 2020 and (2.9)% at December 31, 2019 , respectively.

Our current ratio, calculated as current assets divided by current liabilities, was 3.7 at June 30, 2020 and 3.6 at December 31, 2019 .

Our long-term debt to capital, calculated as long-term debt divided by total capital, was 45% at June 30, 2020 and 41% at December 31, 2019 .

Our return on average equity, calculated as net income divided by the trailing 12-month average of equity, was (7.9)% at June 30, 2020 and (2.9)% at December 31, 2019 , respectively.

Off-Balance Sheet Arrangements and Contractual Obligations

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We discuss our critical accounting estimates in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations , in the Annual Report on Form 10-K for the year ended December 31, 2019 .

There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2019, except as discussed below with the Company's adoption of ASU 2016-13.

There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2019 , except as discussed below.

Credit Losses on Accounts Receivable

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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.

Changes to the allowance for credit losses are adjusted through bad debt expense, which is

presented within "Selling, general and administrative" operating expenses on the Condensed Consolidated Statement of Operations.

Changes to the allowance for credit losses are adjusted through bad debt expense, which is presented within "Selling, general and administrative" operating expenses on the unaudited condensed consolidated statement of operations.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis