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 and nine months ended September 30, 2020, and September 30, 2019, respectively. 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 23 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. We are an essential business and remain open in all locations, adhering to the health guidelines to operate safely provided by our government officials and the U.S. Centers for Disease Control and Prevention. Throughout the COVID-19 pandemic, our first priority has been to safeguard the health of our employees. This includes restricting outside personnel and visitors as well as requiring a face covering when a visitor is on-site, creating space between work areas for employees, providing ample PPE and cleaning supplies in our offices and manufacturing plants, restricting travel, and having formal policies for mitigation in the event of cases of illness. Through the third quarter of 2020, COVID-19 has had an adverse effect on our reported results and operations. The Company has seen wide ranging impacts partially attributable to COVID-19 that have included: • A $10.7 million non-cash goodwill impairment charge related to our Metals Segment; • Continued curtailment of operations at our Palmer facility that has resulted in $3.6 million of operating losses through the third quarter of 2020 and $6.1 million of asset impairments related to that business; and, • Technical defaults of our debt covenants in the second and third quarter of 2020 and the need to obtain waivers for compliance. There remains significant uncertainty concerning the magnitude of the impact and the duration of the COVID-19 pandemic. We believe that, at a minimum, customer demand in the COVID-19 environment will continue to be lower in the fourth quarter of 2020 in comparison to the prior year fourth quarter and the manufacturing sector will continue to face challenges over the next several quarters. Given that, 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. 24 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. During the third 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 declines in the Company's stock price, reporting unit operating losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event and the need to perform another quantitative interim evaluation of goodwill. As a result, the Company quantitatively evaluated the Welded Pipe & Tube reporting unit for impairment. Fair value of the reporting unit was determined using a combination of an income approach and a market-based approach with equal weighting applied to each approach. The income approach utilized the estimated discounted cash flows expected to be generated by the reporting units assets while the market-based approach utilized comparable company information. 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. 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 below its carrying value by 9.7% resulting in a goodwill impairment charge of $10.7 million for the quarter ended September 30, 2020. We do consider the remainder of 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 95 basis point increase in the discount rate would result in an additional goodwill impairment charge of approximately $5.5 million and the remaining goodwill attributable to the Metals Segment to be impaired. 25 Results of Operations Consolidated Performance Summary Consolidated net sales for the third quarter of 2020 were $59.3 million representing a decrease of $14.4 million or 19.5% when compared to net sales for the third quarter of 2019. Net sales for the first nine months of 2020 were $200.1 million representing a decrease of $37.1 million or 15.6% when compared to the first nine months of 2019. The decrease in sales for the third quarter and first nine months of 2020 was driven by our Metals Segment, which had a decrease of $13.0 million over the third quarter of 2019 and a decrease of $36.0 million over the first nine months of 2019. For the third quarter of 2020, the Company recorded a net loss of $10.5 million, or $1.16 diluted loss per share, compared to a net loss of $1.0 million, or $0.11 diluted loss per share for the third quarter of 2019. The third quarter of 2020 was negatively impacted by: • Non-cash goodwill impairment in our Metals Segment of $10.7 million; • Operating losses at Palmer totaling $0.9 million; • Inventory price change losses which, on a pre-tax basis, totaled $1.6 million; • Proxy contest costs of $0.2 million related to the Company's proxy contest and election of directors at the 2020 Annual Meeting of Shareholders; and • Costs related to the hotline investigation regarding the accounting for Palmer and other matters $0.7 million, found within acquisition costs and other. For the first nine months of 2020, the Company recorded a net loss of $18.7 million, or $2.06 diluted loss per share, compared to a net loss of $2.1 million, or $0.24 diluted loss per share for the first nine months of 2019. The first nine months of 2020 were negatively impacted by: • Non-cash goodwill impairment in our Metals Segment of $10.7 million; • Operating losses at Palmer totaling $3.6 million and $6.1 million in non-cash, pre-tax asset impairment charges; • Inventory price change losses, which on a pre-tax basis totaled $5.5 million, compared to a $5.7 million loss for the first nine months of 2019; • Proxy contest costs of $3.1 million related to the Company's proxy contest and election of directors at the 2020 Annual Meeting of Shareholders; and • Costs related to the hotline investigation regarding the accounting for Palmer and other matters of $0.7 million, found within acquisition costs and other. The third quarter of 2020 consolidated gross profit decreased 31.5% to $5.0 million, or 8.4% of sales, compared to $7.3 million, or 9.9% of sales in the third quarter of 2019. For the first nine months of 2020, consolidated gross profit decreased 30.7% to $16.5 million, or 8.2% of sales, from $23.8 million, or 10.0% of sales in the first nine 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 third quarter of 2020 decreased by $2.1 million to $6.3 million or 10.6% of sales compared to $8.4 million, or 11.4% of sales in the second quarter of 2019. For first nine months of 2020, consolidated selling, general, and administrative expenses decreased $3.8 million, or 15.4%, to $21.1 million compared to $24.9 million in the first nine months of 2019. The most significant decreases for the third quarter and first nine months of 2020 compared the same period in the prior year resulted from salaries and benefits ($0.8 million lower in the third quarter and $1.8 million lower in the first nine months); travel expenses ($0.3 million lower in the third quarter and $0.7 million lower in the first nine months); stock compensation expense ($0.6 million lower in the third quarter and $0.7 million lower in the first nine months); and amortization expense ($0.2 million lower in the third quarter and $0.3 million lower in the first nine months). Metals Segment The Metals Segment's net sales for the third quarter of 2020 totaled $47.1 million, a decrease of $13.0 million or 21.7% from the third quarter of 2019. Net sales for the first nine months of 2020 totaled $159.8 million, a decrease of $36.0 million or 18.4% from the first nine months of 2019. 26 Net sales decrease for the third quarter of 2020 compared to the third quarter of 2019 is summarized as follows: ($ in thousands) $ % Average selling price (1) Units shipped Fiberglass and steel liquid storage tanks and separation equipment $ (5,014) (90.3)% (76.7)% (61.8)% Heavy wall seamless carbon steel pipe and tube (2,527) (31.7)% (7.8)% (26.1)% Stainless steel pipe and tube (3,762) (9.2)% 6.3% (13.9)% Galvanized pipe and tube (1,738) (31.0)% (6.9)% (24.1)% Total decrease $ (13,041) 1) Average price decreases for the third quarter of 2020 as compared to the third 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 and lower mill pricing; • Stainless steel pipe and tube - pass through of input and cost changes related to - 304 Alloy surcharges increase of approximately 3% and a more favorable product mix; and, • Galvanized pipe and tube - primarily decline in indexed pricing Net sales decrease for the first nine months of 2020 compared to the first nine months of 2019 is summarized as follows: ($ in thousands) $ % Average selling price (1) Units shipped Fiberglass and steel liquid storage tanks and separation equipment $ (20,634) (80.5)% (30.5)% (72.4)% Heavy wall seamless carbon steel pipe and tube (4,844) (20.8)% (9.1)% (12.8)% Stainless steel pipe and tube (8,034) (6.3)% (2.0)% (4.1)% Galvanized pipe and tube (2,455) (13.2)% (7.8)% (5.1)% Total decrease $ (35,967) 1) Average price decreases for the first nine months of 2020 as compared to the first nine 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 and lower mill pricing; • Stainless steel pipe and tube - pass through of input and cost changes related to - 304 Alloy surcharges decrease of approximately 1% and a slightly less favorable product mix; and, • Galvanized pipe and tube - primarily decline in indexed pricing The Metals Segment's operating loss increased $12.0 million, or 2,672.1%, to $11.6 million for the third quarter of 2020 compared to income of $0.4 million for the third quarter of 2019. Operating loss for the first nine months of 2020 increased $22.9 million, or 733.1%, to $19.8 million from income of $3.1 million in the first nine months of 2019. As mentioned above, the first nine months of 2020 were negatively impacted by a non-cash goodwill impairment charge of $10.7 million as well as $6.1 million in non-cash asset impairment charges related to Palmer. Current quarter operating results were also affected by nickel prices and resulting surcharges for 304 and 316 alloys. The third quarter of 2020 proved to be a much more unfavorable environment than the third quarter of 2019, with net metal pricing losses of $1.6 million, compared to last year's $0.6 million in metal pricing losses. Third quarter 2020 surcharges on 304 alloy were approximately 2.7% higher than third quarter 2019 levels and 2020 surcharges on 316 alloy were 10.3% lower than the third quarter of 2019. 27 Selling, general, and administrative expense decreased 20.6% to $4.0 million for the third quarter of 2020 compared to $5.0 million in the third quarter of 2019. For the first nine months of 2020, selling, general, and administrative expenses decreased $1.8 million, or 11.4%, to $13.7 million from $15.4 million for the first nine months of 2019. The most significant decreases for the third quarter and first nine months of 2020 compared the same periods in the prior year resulted from salaries and benefits ($0.5 million lower in the third quarter and $1.5 million lower in the first nine months); travel expenses ($0.2 million lower in the third quarter and $0.4 million lower in the first nine months); and amortization expense ($0.2 million lower in the third quarter and $0.3 million lower in the first nine months). Specialty Chemicals Segment Net sales for the Specialty Chemicals Segment in the third quarter of 2020 totaled $12.2 million, representing a $1.3 million, or 9.9%, decrease from the third quarter of 2019. Net sales for the first nine months of 2020 totaled $40.3 million, representing a $1.2 million, or 2.8%, decrease from the first nine months of 2019. Pounds shipped in the third quarter of 2020 were down 2.0% over the third quarter of 2019, with average selling prices declining 8.5%. Pounds for the first nine months of 2020 were down 2.4%, with average selling prices decreasing 0.6%. The U.S. specialty chemical industry continues to face significant downturns in demand due to weak industrial and manufacturing activities related to the COVID-19 pandemic. However, during the first nine months of 2020, the Specialty Chemicals Segment was able to demonstrate relative strength in sales by increasing production of hand sanitizer and cleaning aids to offset reduced production into the oil and gas industry. Additionally, the Specialty Chemicals Segment’s cost cutting efforts have generated a decrease in selling, general and administrative costs of $0.2 million and $0.6 million for the third quarter and first nine months of 2020, respectively. These cost cutting measures have allowed the Specialty Chemicals Segment to generate increased profits on lower sales volume. Operating income for the Specialty Chemicals Segment for the third quarter of 2020 was $1.1 million, an increase of $0.2 million, or 25.4%, from the third quarter of 2019. Operating income for the first nine months of 2020 was $3.5 million, an increase of $1.1 million, or 47.0%, from the first nine months of 2019. Selling, general, and administrative expense decreased $0.2 million, or 20.3%, to $0.9 million for the third quarter of 2020 compared to the third quarter of 2019. For the first nine months of 2020, selling, general, and administrative expenses decreased $0.6 million, or 19.1%, to $2.7 million from $3.3 million for the first nine months of 2019. The most significant decreases for the third quarter and first nine months of 2020 compared to the same periods in the prior year resulted from salaries and benefits ($0.2 million lower for the third quarter and $0.5 million lower in the first nine months). Other Items Unallocated corporate expenses for the third quarter of 2020 decreased $0.9 million, or 35.6%, to $1.5 million (2.6 percent of sales) compared to $2.4 million (3.2 percent of sales) for the same period in the prior year comparative period. For first nine months of 2020, unallocated corporate expenses decreased $1.5 million, or 22.5%, to $5.1 million from $6.6 million for the first nine months of 2019. The third quarter and first nine months decreases resulted primarily from lower professional fees, stock compensation expense and travel expenses in the period. Interest expense was $0.5 million and $0.9 million for the third quarter of 2020 and 2019, respectively. The decrease was related to lower average debt outstanding in the third quarter of 2020 compared to the third quarter of 2019. The effective tax rate was 19.4% and 10.6% for the three months ended September 30, 2020 and 2019, respectively. The September 30, 2020 effective tax rate was approximately equal to the U.S. statutory rate of 21.0%. The effective tax rate was 24.4% and 23.6% for the nine months ended September 30, 2020 and 2019, respectively. The September 30, 2020 effective tax rate was higher than the statutory rate of 21.0% due to discrete tax benefits over the costs associated with our public proxy contest, asset impairments at our Palmer facility, goodwill impairment over our Metals Segment and benefits from our stock compensation plan. Additionally, we recognized 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. The September 30, 2019 effective tax rate was approximately equal to the U.S. statutory tax rate of 21%. The Company's cash balance decreased $0.4 million to $0.2 million as of September 30, 2020 compared to $0.6 million at December 31, 2019. Fluctuations affecting cash flows during the nine months ended September 30, 2020 were comprised of the following: 28 a) Net inventories decreased $9.2 million at September 30, 2020 when compared to December 31, 2019, mainly due to efforts to balance inventory with projected business levels and 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 September 30, 2020; b) Accounts payable decreased $1.6 million as of September 30, 2020 as compared to December 31, 2019, primarily due to the reduction of payables at the curtailed Palmer operations. Accounts payable days outstanding were approximately 32 days at September 30, 2020 compared to 36 days at December 31, 2019. Accounts payable days outstanding using a three-month average basis was approximately 38 days at September 30, 2020; c) Net accounts receivable decreased $1.9 million at September 30, 2020 as compared to December 31, 2019, due primarily to the reduction of receivables at the curtailed Palmer operations. Days sales outstanding, calculated using a nine-month average basis, was 47 days outstanding at September 30, 2020 and 51 days at December 31, 2019, respectively. Days sales outstanding using a three-month average basis was approximately 54 days at September 30, 2020; d) Capital expenditures for the first nine months of 2020 were $2.8 million; and e) The Company paid $3.2 million during the first nine 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, gain on lease modification, 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. 29 Consolidated EBITDA and Adjusted EBITDA are as follows: Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2020 2019 2020 2019 Consolidated Net loss $ (10,539) $ (954) $ (18,674) $ (2,143) Adjustments: Interest expense 452 944 1,703 2,977 Change in fair value of interest rate swap (16) 21 65 145 Income taxes (2,530) (112) (6,026) (660) Depreciation 1,805 1,858 5,752 5,690 Amortization 705 871 2,324 2,614 EBITDA (10,123) 2,628 (14,856) 8,623 Acquisition costs and other 656 90 807 1,763 Proxy contest costs 207 — 3,105 — Shelf registration costs — — — 10 Earn-out adjustments (146) (1,242) (969) (1,643) Loss/(gain) on investments in equity securities 69 180 (170) (193) Asset impairments — — 6,079 — Goodwill impairment 10,748 — 10,748 — Gain on lease modification (171) — (171) — Stock-based compensation 270 908 1,036 1,760 Non-cash lease expense 130 144 386 432 Retention expense — 51 235 181 Adjusted EBITDA $ 1,640 $ 2,759 $ 6,230 $ 10,933 % sales 2.8 % 3.7 % 3.1 % 4.6 % 30 Metals Segment EBITDA and Adjusted EBITDA are as follows: Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2020 2019 2020 2019 Metals Segment Net (loss) income $ (11,417) $ 1,671 $ (17,798) $ 4,658 Adjustments: Interest expense — 20 11 64 Depreciation 1,387 1,461 4,457 4,476 Amortization 705 872 2,324 2,614 EBITDA (9,325) 4,024 (11,006) 11,812 Acquisition costs and other — 1 3 1,371 Earn-out adjustments (146) (1,242) (969) (1,643) Asset impairments — — 6,079 — Goodwill impairment 10,748 — 10,748 — Stock-based compensation 78 195 249 405 Retention expense — 26 — 106 Metals Segment Adjusted EBITDA $ 1,355 $ 3,004 $ 5,104 $ 12,051 % of segment sales 2.9 % 5.0 % 3.2 % 6.2 % Specialty Chemicals Segment EBITDA and Adjusted EBITDA are as follows: Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2020 2019 2020 2019 Chemicals Segment Net income $ 1,061 $ 846 $ 3,521 $ 2,386 Adjustments: Interest expense — — 9 1 Depreciation 378 355 1,170 1,094 EBITDA 1,439 1,201 4,700 3,481 Stock-based compensation 59 108 178 204 Specialty Chemicals Segment Adjusted EBITDA $ 1,498 $ 1,309 $ 4,878 $ 3,685 % of segment sales 12.3 % 9.7 % 12.1 % 8.9 % 31 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, gain on lease modification, 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 September 30, Nine Months Ended September 30, (Amounts in thousands, except per share data) 2020 2019 2020 2019 Loss before taxes $ (13,069) $ (1,066) $ (24,700) $ (2,803) Adjustments: Acquisition costs and other 656 90 807 1,763 Proxy contest costs 207 — 3,105 — Shelf registration costs — — — 10 Earn-out adjustments (146) (1,242) (969) (1,643) Loss/(gain) on investments in equity securities 69 180 (170) (193) Asset impairments — — 6,079 — Goodwill impairment 10,748 — 10,748 — Gain on lease modification (171) — (171) — Stock-based compensation 270 908 1,036 1,760 Non-cash lease expense 130 144 386 432 Retention expense — 51 235 181 Adjusted loss before income taxes (1,306) (935) (3,614) (493) (Benefit) for income taxes at 21% (274) (196) (759) (104) Adjusted net loss $ (1,032) $ (739) $ (2,855) $ (389) Average shares outstanding, as reported Basic 9,105 8,995 9,079 8,969 Diluted 9,105 8,995 9,079 8,969 Adjusted net loss per common share Basic $ (0.11) $ (0.08) $ (0.31) $ (0.04) Diluted $ (0.11) $ (0.08) $ (0.31) $ (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 32 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. Cash Flows Cash flows from total operations were as follows ($ in thousands): Nine Months Ended September 30, 2020 2019 Total cash (used in) provided by: Operating activities $ 5,970 $ 17,927 Investing activities 1,708 (23,999) Financing activities (8,141) 4,105 Net increase (decrease) in cash and cash equivalents $ (463) $ (1,967) Operating Activities The decrease in cash provided by operating activities for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily driven by a net loss of $18.7 million for the first nine months of 2020 compared to a net loss of $2.1 million for the first nine months of 2019, changes in working capital, driven by decreases in accounts receivable, which increased operating cash flows for the first nine months of 2020 by $1.4 million, compared to an increase of $2.8 million in the first nine months of 2019, decreases in inventory which increased operating cash flows $4.6 million in the first nine months of 2020, compared to an increase of $12.2 million in the first nine months of 2019 and accrued income taxes, which decreased operating cash flow $4.0 million for the first nine months of 2020, compared to a decrease of $1.3 million in the first nine months of 2020. These were partially offset by changes in accounts payable, which decreased operating cash flows $1.6 million in the first nine months of 2020 compared to an decrease of $0.9 million in the first nine 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 provided by investing activities primarily consists of transactions related to capital expenditures, equity transactions, and acquisitions. The increase in cash provided by investing activities for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to a decrease in cash outflows related to the American Stainless acquisition in the prior year and an increase in proceeds from the sale of equity securities in the current year over the prior year. Financing Activities Net cash used in financing activities primarily consists of transactions related to our long-term debt. The increase in cash used in financing activities for the nine months ended September 30, 2020 compared to cash provided by financing activities for the nine months ended September 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 February 1, 2024. As of September 30, 2020, the Company had $71.3 million of total borrowings outstanding with its lender. That total is down $4.2 million from the balance at December 31, 2019. As of September 30, 2020, the Company had $7.5 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. 33 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 second 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 . The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarter ended September 30, 2020. To address the technical default, the Company entered into an amendment to its Credit Agreement with its bank subsequent to the end of the third quarter. On October 23, 2020, the Company entered into the Fifth Amendment to the Third Amended and Restated Loan Agreement (the "Fifth Amendment") with its bank. The Fifth Amendment amended the definition of the fixed charge coverage ratio to include in the numerator (i) the calculation of losses from the suspended operations of Palmer in the amount of $1,560,000, which is effective for the quarter ended June 30, 2020 and for the directly following three quarters after June 30, 2020, (ii) the calculation of losses from the suspended operations of Palmer in the amount of $740,000, which is effective for the quarter ended September 30, 2020 and for the directly following three quarters after September 30, 2020, and (iii) the extraordinary expenses related to the investigation of a whistleblower complaint in the amount of $636,000, which is effective for the quarter ended September 30, 2020 and for the directly following three quarters after September 30, 2020. At September 30, 2020, the Company had a minimum fixed charge coverage ratio of 1.47 and a minimum tangible net worth of $67.7 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 September 30, 2020, the Company has 790,383 shares of its share repurchase authorization remaining. Stock repurchase activity was as follows: Nine Months Ended September 30, 2020 2019 Number of shares repurchased 59,617 — Average price per share $ 10.65 $ — Total cost of shares repurchased $ 636,940 $ — 34 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 3.9 at September 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 September 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 (10.8)% at September 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. 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. Leases The Company determines whether an arrangement is a lease at contract inception. For leases in which the Company is the lessee, the Company recognizes a right-of-use asset and corresponding lease liability on the accompanying unaudited condensed consolidated balance sheets equal to the present value of the fixed lease payments over the lease term. Lease with an initial term of 12 months or less are not recorded on the unaudited condensed consolidated balance sheets. Lease liabilities represent an obligation to make lease payments arising from a lease while right-of-use assets represent a right to use an underlying asset during the lease term. As the Company's leases generally do not have an implicit rate, the Company uses its incremental borrowing rate to determine the present value of fixed lease payments based on information available at the lease commencement date. Lease cost is recognized on a straight-line basis over the lease term. Right-of-use assets and operating lease liabilities are remeasured upon certain modifications to leases using the present value of the remaining lease payments and estimated incremental borrowing rate upon lease modification. The difference between the remeasured right-of-use asset and the operating lease liabilities are recognized as a gain or loss within operating expenses. 35 The Company reviews any changes to its lease agreements for potential modifications and/or indicators of impairment of the respective right-of-use asset. 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.