ASCENT INDUSTRIES CO. 10-Q

Item 2. 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 June 30, 2020 , and June 30, 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. Unless otherwise specified, all comparisons made are to the corresponding period of 2019 . This discussion and analysis is presented in five sections: • Business Overview • Results of Operations and Non-GAAP Financial Measures • Liquidity and Capital Resources • Off-Balance Sheet Arrangements and Contractual Obligations • Significant Accounting Policies and Estimates Business Overview Synalloy Corporation, a Delaware corporation, was incorporated in 1958 as the successor to a chemical manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. The Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060. Unless indicated otherwise, the terms "Synalloy", "Company," "we" "us," and "our" refer to Synalloy Corporation and its consolidated subsidiaries. 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 of Texas Tanks, Inc. ("Palmer"), and Specialty Pipe & Tube, Inc. ("Specialty"). Welded Pipe & Tube Operations manufactures stainless steel, galvanized, ornamental stainless steel tubing, and other alloy pipe and tube. Palmer manufactures liquid storage solutions and separation equipment. Specialty is a master distributor of seamless carbon pipe and tube. The Metals Segment's markets include the oil and gas, chemical, petrochemical, pulp and paper, mining, power generation (including nuclear), water and waste water treatment, liquid natural gas ("LNG"), brewery, food processing, petroleum, pharmaceutical, automotive & commercial transportation, appliance, architectural, and other heavy industries. The Specialty Chemicals Segment operates as one reporting unit which includes Manufacturers Chemicals, LLC ("MC"), a wholly-owned subsidiary of Manufacturers Soap and Chemical Company ("MS&C"), and CRI Tolling, LLC ("CRI Tolling"). The Specialty Chemicals Segment produces specialty chemicals for the chemical, paper, metals, mining, agricultural, fiber, paint, textile, automotive, petroleum, cosmetics, mattress, furniture, janitorial and other industries. MC manufactures lubricants, surfactants, defoamers, reaction intermediaries and sulfated fats and oils. CRI Tolling provides chemical tolling manufacturing resources to global and regional chemical companies and contracts with other chemical companies to manufacture certain, pre-defined products. COVID-19 Update 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. 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. 22 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 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 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). 23 Metals Segment 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) $ % Average selling price (1) Units shipped Fiberglass and steel liquid storage tanks and separation equipment $ (9,209 ) (89.9)% (27.9)% (86.1)% Heavy wall seamless carbon steel pipe and tube (1,044 ) (15.6)% (12.0)% (4.0)% Stainless steel pipe and tube (2,004 ) (4.9)% (4.1)% (0.7)% Galvanized pipe and tube (228 ) (3.6)% (3.2)% (0.5)% Total decrease $ (12,485 ) 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: a. Alloy surcharges decrease of approximately 11% ; offset by, b. Favorable product mix and other competitive pricing, increase of 7% ; and, • 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) Units shipped Fiberglass and steel liquid storage tanks and separation equipment $ (15,619 ) (77.8)% (9.9)% (75.5)% Heavy wall seamless carbon steel pipe and tube (2,317 ) (15.2)% (10.0)% (5.8)% Stainless steel pipe and tube (4,272 ) (4.9)% (6.6)% 1.9% Galvanized pipe and tube (717 ) (5.5)% (8.9)% 3.7% Total decrease $ (22,925 ) 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: a. Alloy surcharges decrease of approximately 2% ; and, b. Base raw material input mill pricing, product mix and other competitive pricing, decrease of 5% ; and, • Galvanized pipe and tube - primarily decline in indexed pricing 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 , 24 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 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). Other Items 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. 25 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: a) 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 ; b) 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 ; c) 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; d) Capital expenditures for the first six months of 2020 were $2.0 million ; and e) 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 (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. 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 discontinued operations, 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: 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. 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. 26 Consolidated EBITDA and Adjusted EBITDA are as follows: Three Months Ended June 30, Six Months Ended June 30, ($ in thousands) 2020 2019 2020 2019 Consolidated Net loss $ (6,957 ) $ (262 ) $ (8,135 ) $ (1,189 ) Adjustments: Interest expense 532 1,010 1,251 2,034 Change in fair value of interest rate swap (4 ) 77 81 124 Income taxes (2,116 ) (142 ) (3,496 ) (548 ) Depreciation 1,989 1,943 3,947 3,832 Amortization 810 819 1,619 1,743 EBITDA (5,746 ) 3,445 (4,733 ) 5,996 Acquisition costs and other 6 32 138 1,672 Proxy contest costs 2,734 — 2,909 — Shelf registration costs — 10 — 10 Earn-out adjustments (827 ) (418 ) (823 ) (401 ) Gain on investments in equity securities (1,092 ) (100 ) (240 ) (373 ) Asset impairments 6,079 — 6,079 — Stock-based compensation 430 237 766 853 Non-cash lease expense 128 151 256 288 Retention expense 235 51 235 130 Adjusted EBITDA $ 1,947 $ 3,408 $ 4,587 $ 8,175 % sales 2.9 % 4.3 % 3.3 % 5.0 % Metals Segment EBITDA and Adjusted EBITDA are as follows: Three Months Ended June 30, Six Months Ended June 30, ($ in thousands) 2020 2019 2020 2019 Metals Segment Net (loss) income $ (7,308 ) $ 1,587 $ (6,381 ) $ 2,986 Adjustments: Interest expense 7 23 11 44 Depreciation 1,559 1,533 3,070 3,014 Amortization 810 819 1,619 1,743 EBITDA (4,932 ) 3,962 (1,681 ) 7,787 Acquisition costs and other — 12 3 1,370 Earn-out adjustments (827 ) (418 ) (823 ) (401 ) Asset impairments 6,079 — 6,079 — Stock-based compensation 130 63 171 210 Retention expense — 26 — 80 Metals Segment Adjusted EBITDA $ 450 $ 3,645 $ 3,749 $ 9,046 % of segment sales 0.9 % 5.7 % 3.3 % 6.7 % 27 Specialty Chemicals Segment EBITDA and Adjusted EBITDA are as follows: Three Months Ended June 30, Six Months Ended June 30, ($ in thousands) 2020 2019 2020 2019 Chemicals Segment Net income $ 1,980 $ 926 $ 2,460 $ 1,539 Adjustments: Interest expense 1 — 9 1 Depreciation 389 370 792 739 EBITDA 2,370 1,296 3,261 2,279 Stock-based compensation 80 26 118 96 Specialty Chemicals Segment Adjusted EBITDA $ 2,450 $ 1,322 $ 3,379 $ 2,375 % of segment sales 17.4 % 9.3 % 12.0 % 8.5 % 28 Adjusted Net (Loss) Income and Adjusted Diluted (Loss) Earnings per Share 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. Adjusted net (loss) income and adjusted diluted (loss) earnings per share should not be considered an alternative to, or a more meaningful indicator of, the Company's net (loss) income or diluted (loss) earnings per share as prepared in accordance with GAAP. The Company's methods of determining this non-GAAP financial measure may differ from the method used by other companies for this or similar non-GAAP financial measures. Accordingly, these non-GAAP measures may not be comparable to the measures used by other companies. 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 June 30, Six Months Ended June 30, (Amounts in thousands, except per share data) 2020 2019 2020 2019 Loss before taxes $ (9,073 ) $ (404 ) $ (11,631 ) $ (1,737 ) Adjustments: Acquisition costs and other 6 32 138 1,672 Proxy contest costs 2,734 — 2,909 — Shelf registration costs — 10 — 10 Earn-out adjustments (827 ) (418 ) (823 ) (401 ) Gain on investments in equity securities (1,092 ) (100 ) (240 ) (373 ) Asset impairments 6,079 — 6,079 — Stock-based compensation 430 237 766 853 Non-cash lease expense 128 151 256 288 Retention expense 235 51 235 130 Adjusted (loss) income before income taxes (1,380 ) (441 ) (2,311 ) 442 (Benefit) provision for income taxes at 21% (290 ) (93 ) (485 ) 93 Adjusted net (loss) income $ (1,090 ) $ (348 ) $ (1,826 ) $ 349 Average shares outstanding, as reported Basic 9,058 8,974 9,066 8,951 Diluted 9,058 8,974 9,066 8,951 Adjusted net (loss) income per common share Basic $ (0.12 ) $ (0.04 ) $ (0.20 ) $ 0.04 Diluted $ (0.12 ) $ (0.04 ) $ (0.20 ) $ 0.04 Liquidity and Capital Resources Summary 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 management strategy which we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation focusing on priorities that support our business and growth. 29 Cash Flows Cash flows from total operations were as follows ($ in thousands): Six Months Ended June 30, 2020 2019 Total cash (used in) provided by: Operating activities $ (173 ) $ 13,225 Investing activities 798 (23,232 ) Financing activities 161 7,810 Net increase (decrease) in cash and cash equivalents $ 786 $ (2,197 ) Operating Activities 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 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 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 Funds generated by operating activities, available cash and cash equivalents and our credit facilities are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations, debt obligations, and anticipated capital expenditures over the next 12 months. 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 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 30 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 We repurchase common stock and pay dividends 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 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. 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 June 30, 2020 , the Company has 790,383 shares of its share repurchase authorization remaining. Stock repurchase activity was as follows: Six Months Ended June 30, 2020 2019 Number of shares repurchased 59,617 — Average price per share $ 10.65 $ — Total cost of shares repurchased $ 636,940 $ — At the end of each fiscal year the Board of Directors reviews the financial performance and capital needed to support future growth to determine the amount of cash dividend, if any, which is appropriate. In 2019, no dividends were declared or paid by the Company. Other Financial Measures 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 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. There has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2019. See our Annual Report on Form 10-K for the year ended December 31, 2019 , for additional information regarding our contractual obligations. 31 Significant Accounting Policies and Estimates We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies , of the Notes to the Consolidated Financial Statements presented in the Annual Report on Form 10-K for the year ended December 31, 2019. 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. Credit Losses on Accounts Receivable The Company maintains an allowance for credit losses on its accounts receivable balances, which represents its best estimate of current expected credit losses over the contractual life of the accounts receivable. Beginning January 1, 2020, when evaluating the adequacy of its allowance for credit losses each reporting period, the Company analyzes 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. 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 This quarterly report includes and incorporates by reference "forward-looking statements" within the meaning of the federal securities laws. All statements that are not historical facts are "forward-looking statements." The words "estimate," "project," "intend," "expect," "believe," "should," "anticipate," "hope," "optimistic," "plan," "outlook," "should," "could," "may" and similar expressions identify forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, including without limitation those identified below, which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements. The following factors could cause actual results to differ materially from historical results or those anticipated: adverse economic conditions; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased costs; raw materials availability; employee relations; ability to maintain workforce by hiring trained employees; labor efficiencies; customer delays or difficulties in the production of products; new fracking regulations; a prolonged decrease in nickel and oil prices; unforeseen delays in completing the integrations of acquisitions; risks associated with mergers, acquisitions, dispositions and other expansion activities; financial stability of our customers; environmental issues; negative or unexpected results from tax law changes; unavailability of debt financing on acceptable terms and exposure to increased market interest rate risk; inability to comply with covenants and ratios required by our debt financing arrangements; ability to weather an economic downturn; loss of consumer or investor confidence, risks relating to the impact and spread of COVID-19 and other risks detailed from time-to-time in the Company's SEC filings. The Company assumes no obligation to update the information included in this report. Item 3. Quantitative and Qualitative Disclosures about Market Risks Information about the Company's exposure to market risk was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019 , which was filed with the SEC on March 6, 2020. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.