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Item 7. Management’s Discussion and Analysis

2021-03-09 compared with 2020-03-06 · 357 added, 296 removed, 30 unchanged (96% of the section changed)

Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.

Inventory Adjustments and Reserves

At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below our cost.

This would indicate that an adjustment would be required.

During the years ended December 31, 2019 and December 31, 2018 , adjustments of $0.2 million and $0.1 million , respectively, to inventory cost were required by our storage tank facility as lower demand for oil and gas products caused the net realizable value to fall below inventory cost for certain tanks.

Stainless steel, both in its raw material (coil or plate) or finished goods (pipe) state is purchased/sold using a base price plus an additional surcharge which is dependent on current nickel prices.

As raw materials are purchased, it is priced to the Company based upon the surcharge at that date.

When the selling price of the finished pipe is set for the customer, approximately three months later, the then-current nickel surcharge is used to determine the proper selling prices.

A lower of cost or net realizable value ("LCNRV") adjustment is recorded when the Company's inventory cost, based upon a historical nickel price, is greater than the current selling price of that product due to a reduction in the nickel surcharge.

During the years ended December 31, 2019 and December 31, 2018 , no material LCNRV adjustments were required by our Metals Segment.

The Company establishes inventory reserves for:

Estimated obsolete or unmarketable inventory.

As of December 31, 2019 and December 31, 2018 , the Company identified inventory items with no sales or expected sales activity for finished goods or no usage for raw materials for a certain period of time.

For those inventory items that are not currently being marketed and unable to be sold, a reserve was established for 100 percent of the inventory cost less any estimated scrap proceeds.

The Company reserved $0.3 million at December 31, 2019 and December 31, 2018 , respectively.

Estimated quantity losses.

The Company performs an annual physical inventory during the fourth quarter each year.

For those facilities that complete their physical inventory before the end of December, a reserve is established for the potential quantity losses that could occur subsequent to their physical.

This reserve is based upon the most recent physical inventory results.

At December 31, 2019 and December 31, 2018 , the Company had $0.4 million reserved for expected physical inventory quantity losses.

Impairment of Long-Lived Assets

The Company continually reviews the recoverability of the carrying value of long-lived assets.

Long-lived assets are reviewed for impairment when events or changes in circumstances, also referred to as "triggering events", indicate that the carrying value of a long-lived asset or group of assets (the "Assets") may no longer be recoverable.

Triggering events include:

a significant decline in the market price of the Assets;

a significant adverse change in the operating use or physical condition of the Assets;

a significant adverse change in legal factors or in the business climate impacting the Assets' value, including regulatory issues such as environmental actions;

the generation by the Assets of historical cash flow losses combined with projected future cash flow losses;

or the expectation that the Assets will be sold or disposed of significantly before the end of the useful life of the Assets.

Business Combinations

Acquisitions are accounted for using the acquisition method of accounting for business combinations in accordance with GAAP.

Under this method, the total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition.

The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets, if any, acquired and liabilities assumed.

Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is tested for impairment at the reporting unit level, annually in the fourth quarter and whenever circumstances indicate that the carrying value may not be recoverable.

The evaluation of impairment involves using either a step zero qualitative approach or a quantitative approach, if required, as outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350.

The step zero approach allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

If an entity cannot make this determination, then the quantitative approach will be followed.

The quantitative approach involves a comparison of the fair value of the reporting unit in which the goodwill is recorded to its carrying amount.

If the reporting unit's fair value exceeds its carrying value, no impairment loss is recognized.

However, if the reporting unit's carrying value exceeds its fair value, an impairment charge equal to the difference in the carrying value of the goodwill and reporting unit's fair value is recorded.

When the quantitative approach is used, in making our determination of fair value of the reporting unit, we rely on the discounted cash flow method.

This method uses projections of cash flows from the reporting unit.

This approach requires significant judgments including the Company's projected net cash flows, the weighted average cost of capital used to discount the cash flows and terminal value assumptions.

We derive these assumptions used in the testing from several sources.

Many of these assumptions are derived from our internal budgets, which would include existing sales data based on current product lines and assumed production levels, manufacturing costs and product pricing.

We believe that our internal forecasts are consistent with those that would be used by a potential buyer in valuing our reporting units.

The Company performed the quantitative analysis during the fourth quarter of 2019 which resulted in no impairment of the goodwill recognized of $1.4 million for the Specialty Chemicals Segment or the goodwill recognized of $16.2 million for the Metals Segment for the year ended December 31, 2019 .

Earn-Out Liabilities

In connection with the American Stainless acquisition on January 1, 2019, the Company is required to make quarterly earn-out payments to American Stainless for a period of three years following closing.

Pursuant to the asset purchase agreement between ASTI and American Stainless, earn-out payments will equate to six and one-half percent ( 6.5 percent ) of ASTI’s revenue over the three -year earn-out period.

In determining the appropriate discount rate to apply to the contingent payments, the risk associated with the functional form of the earn-out, and the credit risk associated with the payment of the earn-out were all considered.

The fair value of the contingent consideration was estimated by applying the probability weighted expected return method using management's estimates of pounds to be shipped and future price per unit.

Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income

In connection with the MUSA-Galvanized acquisition on July 1, 2018, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube.

The fair value of the contingent consideration was estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit.

In connection with the MUSA-Stainless acquisition on February 28, 2017, the Company is required to make quarterly earn-out payments to MUSA for a period of 4 years following closing, based on actual sales levels of stainless steel pipe and tube (outside diameter of 10 inches or less).

The fair value of the contingent consideration was estimated by applying the Monte Carlo simulation approach using management's estimates of pounds shipped and future price per unit.

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 two-year period ended December 31, 2020.

Unless otherwise noted, all references herein for the years 2020 and 2019 represent the fiscal years ended December 31, 2020 and 2019, respectively.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted in the United States of America.

This discussion and analysis is presented in five sections:

• Business Overview

• Results of Operations and Non-GAAP Financial Measures

• Liquidity and Capital Resources

The Company had cash flows generated by operating activities during 2019 that totaled $28.6 million ;

cash flows used in operating activities in 2018 totaled $ 21.2 million , a year-over-year increase of $49.9 million .

The significant components of those results are as follows:

Net loss for 2019 was $3.0 million .

Add backs for non-cash items include a) depreciation and amortization expense of $11.1 million and b) stock-based compensation expense of $2.1 million , while outflows for non-cash items include c) the earn-out adjustments of $0.7 million , and d) all other non-cash items of $0.8 million .

The prior year amount includes net income of $13.1 million , plus add backs for non-cash items of a) depreciation and amortization of $8.8 million , b

) the earn-out adjustment of $1.4 million and c) an unrealized loss on investments in equity securities of $2.6 million .

Accounts receivable generated $9.7 million of cash from operations during 2019 as days outstanding decreased 10 days in 2019 , decreasing from 52 days at the end of 2018 to 42 days at the end of 2019 .

Inventory generated $20.0 million of cash from operations as inventory levels decreased in 2019 .

The year-over-year decrease was primarily related to efforts to balance inventory with projected business level.

Inventory turns decreased 15% from 1.90 turns at December 31, 2018 , calculated on a three-month average basis, to 1.62 turns at December 31, 2019 .

Accounts payable used $5.3 million of cash from operations in 2019 , excluding the American Stainless acquisition date payable, as increased levels of business activity, which would normally increase the accounts payable balance, were offset by a return to a more normalized accounts payable days outstanding of approximately 31 days at December 31, 2019 compared to 57 days at December 31, 2018 .

Other operating assets and liabilities used $4.2 million of cash from operations in 2019 .

In 2019 , the Company's current assets decreased $20.4 million while current liabilities increased $3.3 million , from the year ended 2018 amounts, which caused working capital for 2019 to decrease by $23.7 million to $106.5 million from the 2018 total of $130.2 million .

The current ratio for the year ended December 31, 2019 , decreased to 3.6:1 compared to the 2018 year-end ratio of 4.5:1 .

The Company used cash from investing activities during 2019 of $25.7 million .

The American Stainless acquisition during the first quarter 2019 used $21.9 million and the Company incurred capital asset purchases of $4.5 million .

The Company used cash from financing activities during 2019 of $4.5 million as the Company borrowed funds during 2019 for the aforementioned acquisition and capital purchases partially offset by repayments of the line of credit.

On October 30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of its asset-based line of credit (the "Line") by $20 million to a maximum of $65 million and extended the maturity date.

Interest under the Credit Agreement is calculated using the One Month LIBOR Rate (as defined in the Credit Agreement), plus a pre-defined spread.

Borrowings under the Credit Agreement are limited to an amount equal to a Borrowing Base calculation (as defined in the Credit Agreement) that includes eligible accounts receivable and inventory.

On June 29, 2018, the Company amended its Credit Agreement with its bank to increase the limit of the Line by $15 million to a maximum of $80 million .

As a result of the amendment, the interest rate on the Line is now calculated using One Month LIBOR plus a spread of 1.65 percent.

None of the other provisions of the Credit Agreement were changed as a result of this amendment.

On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase the Line from $80 million to $100 million and to create a new 5-year term loan in the principal amount of $20 million (the “Term Loan”).

The Term Loan was used to finance the American Stainless acquisition (see Note 15 to the Consolidated Financial Statements).

The Company determined that each refinancing should be accounted for as a debt modification.

The Company incurred lender and third party costs associated with the debt restructuring that were capitalized on the balance sheet while certain other third party costs were expensed.

Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries.

In the Credit Agreement, the Company's bank agreed to release its liens on the real estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 10.

Covenants under the amended 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.

At December 31, 2019 , the Company was in compliance with all debt covenants.

The Company believes that its current liquidity position is sufficient to meet its needs going forward.

• Off-Balance Sheet Arrangements and Contractual Obligations

• Significant Accounting Policies and Estimates

Business Overview

COVID-19 Update

The impact of COVID-19, including changes in consumer behavior, pandemic fears, and market downturns as well as restrictions on business and individual activities has created significant volatility in the global economy and led to reduced economic activity.

There have been extraordinary actions taken by federal, state, and local public health and governmental authorities to contain the spread of COVID-19 and although many restrictions that were in place have eased in many localities, some areas that had previously eased restrictions have reverted to more stringent limitations.

If new strains of COVID-19 develop or sufficient amounts of vaccines are not available or widely administered for a significant period of time, the continued impacts to our business could continue to be material.

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.

During 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 $16.2 million non-cash goodwill impairment charge related to our Metals Segment;

• Continued curtailment of operations at our Palmer facility that has resulted in $4.0 million of operating losses and $6.2 million of non-cash, pre-tax asset impairment charges related to that business;

• 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, 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, including any new potential waves of the virus, new strains of the virus, and the success of vaccination programs, all of which are highly uncertain and cannot be accurately predicted.

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

Goodwill Impairment

During the second quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment 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, thereby requiring the Company to quantitatively evaluate the reporting unit for impairment.

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

During the third quarter of 2020, 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 Welded Pipe and Tube reporting unit had experienced a triggering event resulting in the Company performing another quantitative interim evaluation of goodwill.

As a result of the goodwill impairment evaluation in the third quarter, 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.

Further, continued risks within the stainless steel industrial business, reporting unit operating losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the Welded Pipe and Tube reporting unit had experienced a triggering event in the fourth quarter of 2020, resulting in the Company performing another quantitative interim evaluation of goodwill.

As a result of the goodwill impairment evaluation in the fourth quarter, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value by 24.1% resulting in the remainder of the goodwill attributable to the Welded Pipe and Tube reporting unit being impaired and an additional goodwill impairment charge of $5.5 million.

See Note 5 - Goodwill for further discussion on the Company's goodwill and these impairment charges.

Results of Operations

Comparison of 2020 to 2019 – Consolidated

For the full-year 2019 , net loss totaled $3.0 million , or $0.34 per diluted loss per share.

This compared to full-year 2018 net income of $13.1 million , or $1.48 diluted earnings per share.

Consolidated net sales for the full-year 2020 decreased $49.2 million, or 16 percent, over the full-year 2019 to $256.0 million.

Net sales for the fourth quarter of 2020 decreased $12.0 million, or 18 percent, over the fourth quarter of 2019 to $55.9 million.

The decrease in sales was driven by our Metals Segment, which had a decrease of $46.6 million, or 19 percent, for the full-year of 2020 and a decrease of $10.6 million, or 19 percent, for the fourth quarter of 2020.

For the full-year 2020, net loss totaled $27.3 million, or $3.00 diluted loss per share.

This compared to full-year 2019 net loss of $3.0 million, or $0.34 diluted loss per share.

The full-year 2020 was negatively impacted by:

• Non-cash goodwill impairment in our Welded Pipe and Tube reporting unit of $16.2 million;

• Operating losses at Palmer totaling $4.0 million and $6.2 million in non-cash, pre-tax asset impairment charges;

• 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;

• Costs related to the hotline investigation regarding the accounting for Palmer and other matters of $0.7 million;

• Severance costs of $1.1 million related to the retirement of the former President and CEO.

For the fourth quarter of 2020 the Company recorded a net loss of $8.6 million, or $0.94 diluted loss per share.

This compares to net income of $0.5 million , or $0.06 diluted earnings per share for fourth quarter of 2018 .

The full-year and fourth quarter of 2019 were positively impacted by mark-to-market valuation gains on investments in equity securities totaling $1.9 million and $1.7 million , respectively, compared to a valuation losses of $2.6 million for the full year of 2018 and $2.1 million in the fourth quarter of 2018 , respectively.

The full-year and fourth quarter 2019 operating results include an operating profit of $3.0 million and $0.7 million , respectively, due to ASTI's operations which were acquired in the first quarter of 2019.

The full-year and fourth quarter 2018 operating results include an operating profit of $65,000 and $96,000 , respectively, due to Munhall-Galvanized's operations which were acquired in the third quarter of 2018.

Full-year 2019 consolidated gross profit decreased 40 percent to $30.8 million , or 10 percent of sales, compared to $51.2 million , or 18 percent of sales, in 2018 .

This compares to a net loss of $0.9 million, or $0.10 diluted loss per share for fourth quarter of 2019.

The fourth quarter of 2020 was negatively impacted by:

• Non-cash goodwill impairment in our Welded Pipe and Tube reporting unit of $5.5 million;

• Operating losses at Palmer totaling $0.4 million;

• Severance costs of $1.1 million related to the retirement of the former President and CEO.

Full-year 2020 consolidated gross profit decreased 26 percent to $22.7 million, or nine percent of sales, compared to $30.8 million, or 10 percent of sales, in the full-year 2019.

For the fourth quarter of 2020, consolidated gross profit was $6.1 million, a decrease of 12 percent from the fourth quarter of 2019 of $7.0 million.

Consolidated gross profit was 11 percent of sales for the fourth quarter of 2020 and 10 percent of sales for the same period of 2019.

The decreases in dollars and in percentage of sales were attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2019 to 2018 below.

Consolidated selling, general and administrative expense for 2019 increased by $4.9 million to $32.6 million , or 11 percent of sales, compared to $27.7 million , or 10 percent of sales for 2018 .

These costs increased $0.4 million during the fourth quarter of 2019 to $7.7 million compared to $7.3 million for the same period of 2018 and were 11 percent of sales for the fourth quarter of 2019 compared to 10 percent of sales for the fourth quarter of 2018 .

The most significant dollar increase for both the full year and fourth quarter of 2019 when compared to the same periods of 2018 resulted from higher personnel costs due to annual merit increases and growth-related staffing increases ( $1.6 million higher for the full year and $0.4 million higher for the fourth quarter);

an increase in stock compensation expense related to the vesting of shares under the Company's Long-Term Incentive Program ( $1.3 million higher for the full year and $0.1 million higher for the fourth quarter);

and an increase in amortization expense ( $1.1 million higher for the full year and $0.3 million higher for the fourth quarter).

The inclusion of ASTI's selling, general and administrative expenses added $4.0 million for the year and $0.9 million for the fourth quarter.

Because the American Stainless acquisition occurred in January of 2019, none of ASTI's selling, general, and administrative expenses were included in the prior year.

The remainder of the increase for the year resulted primarily from:

Sales commissions related to higher sales ( $0.7 million higher for the full year and $40,000 higher for the fourth quarter)

Higher professional fees related to work performed for the American Stainless acquisition ( $0.5 million higher for the full year);

In addition, the Company incurred $1.9 million for one-time acquisition costs associated with the 2019 American Stainless acquisition, compared to $1.2 million of acquisition costs in 2018 .

These costs were $0.2 million and $0.3 million for the fourth quarters of 2019 and 2018 , respectively.

These items are discussed in greater detail in the respective sections below.

Comparison of 2018 to 2017 – Consolidated

For the full-year 2018, net income totaled $13.1 million , or $1.48 per diluted earnings per share.

This compared to full-year 2017 net income of $1.3 million , or $0.15 diluted earnings per share.

For the fourth quarter of 2018 the Company recorded net income of $0.5 million , or $0.06 diluted earnings per share.

This compares to net income of $1.0 million , or $0.11 diluted earnings per share for fourth quarter of 2017.

The full-year and fourth quarter of 2018 were negatively impacted by mark-to-market valuation losses on investments in equity securities totaling $2.6 million and $2.1 million , respectively, compared to a valuation gain of $0.3 million for the full year of 2017 and no such gain or loss in the fourth quarter of 2017.

Full-year 2018 consolidated gross profit increased 82 percent to $51.2 million , or 18 percent of sales, compared to $28.1 million , or 14 percent of sales, in 2017.

For the fourth quarter of 2018, consolidated gross profit was $10.3 million , an increase of 34 percent from the fourth quarter of 2017 of $7.7 million .

Consolidated gross profit was 14 percent of sales for the fourth quarter of 2018 and 15 percent of sales for same period of 2017.

The increases in dollars and in percentage of sales were attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2018 to 2017 below.

Consolidated selling, general and administrative expense for 2018 increased by $2.8 million to $27.7 million , or 10 percent of sales, compared to $24.9 million , or 12 percent of sales for 2017.

These costs increased $1.3 million during the fourth quarter of 2018 to $7.3 million compared to $6.0 million for the same period of 2017 and were 10 percent of sales for the fourth quarter of 2018 compared to 11 percent of sales for the fourth quarter of 2017.

The most significant dollar increase for both the full year and fourth quarter of 2018 when compared to the same periods of 2017 resulted from higher incentive based bonuses, increases of $2.0 million and $0.5 million , respectively.

The inclusion of Munhall-Galvanized's selling, general and administrative expenses for the second half and fourth quarter of 2018, added $0.3 million and $0.2 million , respectively.

Because the MUSA-Galvanized

acquisition occurred in July of 2018, none of Munhall-Galvanized's selling, general, and administrative expenses were included in the prior year.

The Company also incurred lower lease expense of $0.4 million related to the inclusion of the Munhall facility into the Master Lease with Store Funding (see Note 10 to the Consolidated Financial Statements).

The remainder of the increase for the year resulted primarily from:

Higher personnel costs due to annual merit increases and growth-related staffing increases ( $0.8 million higher for the full year and $0.3 million higher for the fourth quarter);

Sales commissions related to higher sales ( $0.2 million higher for the full year and $0.2 million higher for the fourth quarter)

In addition, the Company incurred $1.2 million for one-time acquisition costs associated with the 2018 MUSA-Galvanized acquisition and 2019 American Stainless acquisition, compared to $0.8 million of acquisition costs in 2017.

These costs were $0.3 million and $13,000 for the fourth quarters of 2018 and 2017, respectively.

These items will be discussed in greater detail in the respective sections below.

The decreases in dollars was attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2020 to 2019 below.

Consolidated selling, general and administrative expense for the full-year 2020 decreased by $3.9 million to $28.7 million, or 11 percent of sales, compared to $32.6 million, or 11 percent of sales for the full-year 2019.

These costs decreased $0.1 million during the fourth quarter of 2020 to $7.6 million compared to $7.7 million for the same period of 2019 and were 14 percent of sales for the fourth quarter of 2020 compared to 11 percent of sales for the fourth quarter of 2019.

The Company experienced decreased SG&A costs for both the full year and fourth quarter of 2020 when compared to the same periods of 2019 resulting from:

• Decreases in personnel costs related to salaries, commissions and employee benefits ($2.3 million lower for the full-year and $0.5 million lower for the fourth quarter);

• Decreases in travel expense related to the Company's suspension of all non-essential travel in response to the COVID-19 pandemic ($0.9 million lower for the full-year and $0.2 million lower for the fourth quarter);

• Decreases in amortization expense due to the passage of time and write down of intangible assets in the second quarter of 2020 at Palmer ($0.5 million lower for the full-year and $0.2 million lower for the fourth quarter).

The full-year and fourth quarter decreases were offset by:

• Increases in bad debt expense ($0.6 million higher for the full-year and $0.3 million higher for the fourth quarter);

• Increases in stock compensation expense ($0.4 million higher in the fourth quarter), related to the retirement of the former President and CEO;

• Increases in taxes and licenses fees ($0.1 million higher in the fourth quarter).

Consolidated operating loss for the full-year 2020 totaled $31.1 million compared to an operating loss of $1.7 million for the full-year 2019.

For the fourth quarter of 2020, operating loss was $6.9 million compared to an operating loss of $1.8 million

in the fourth quarter of 2019.

Operating losses for the full-year 2020 were primarily attributable to our Metals Segment as discussed in the Metals Segment Comparison of 2020 to 2019 below.

Metals Segment

The following table summarizes operating results from continuing operations for the three years indicated.

The following table summarizes operating results for the two years indicated.

Reference should be made to Note 14 to the consolidated financial statements included in Item 8 of this Form 10-K.

(in thousands)

(in thousands) Amount % Amount %

Net sales $ 204,459 100.0 % $ 251,078 100.0 %

Cost of goods sold 189,103 92.5 % 226,852 90.4 %

Gross profit 15,356 7.5 % 24,226 9.6 %

Selling, general and administrative expense

(Gain) loss on sale-leaseback

Operating income (loss)

17,538 8.6 % 20,534 8.2 %

Asset impairments 6,214 3.0 % — — %

Goodwill impairment 16,203 7.9 % — — %

Operating (loss) income $ (24,599) (12.0) % $ 3,692 1.5 %

Comparison of 2020 to 2019 - Metals Segment

The Metals Segment's net sales totaled $251.1 million for the full year of 2019 , an increase of 13 percent compared to the same period of 2018 .

Net sales for the fourth quarter of 2019 totaled $55.4 million , a decrease of seven percent compared to the fourth quarter 2018 net sales of $59.4 million .

Excluding net sales for ASTI (for the twelve months ended December 31, 2019) and Munhall-Galvanized (for the first six months of 2019), full-year 2019 sales decreased eight percent compared to the same period of 2018 and fourth quarter 2019 sales decreased 20 percent compared to the same period for 2018 , primarily related to a 60% decline in storage tank and vessel sales, loss of value added Heavy Wall volume due to the disclosed outage starting in May 2019, as well as nickel and alloy related pricing declines compared to prior year.

Welded Pipe & Tube Operations net sales from continuing operations increased 21 percent and two percent for the full-year and fourth quarter of 2019 , respectively, when compared to the same periods of the prior year.

Excluding ASTI (for the twelve months ended December 31, 2019) and Munhall-Galvanized (for the first six months of 2019), net sales would have decreased nine percent and 16 percent for the full year and fourth quarter of 2019 , respectively.

The total sales increase for the year resulted from a 49 percent increase in unit volumes partially offset by a 18 percent decrease in average selling price.

For the fourth quarter, unit volumes increased 17 percent while the average selling price decreased 12 percent for 2019 compared to 2018 .

The lower average selling price for the full-year was significantly impacted by the incremental sales of Munhall-Galvanized, as sales of that more commodity galvanized pipe and tube had an unfavorable effect on average selling prices.

Excluding the impact of Munhall-Galvanized, the average selling price of stainless steel pipe and tube decreased 5 percent for the full year of 2019 compared to the full year of 2018 , primarily due to declines in nickel and other alloy related surcharges that impacted realized sales prices.

Seamless heavy-wall carbon steel pipe and tube sales decreased six percent and five percent for the full-year and fourth quarter, respectively, of 2019 compared to the same periods of 2018 .

The full year sales decrease was comprised of a three percent decrease in unit volumes combined with a three percent decrease in average selling price.

For the fourth quarter, unit volumes increased seven percent while average selling prices decreased 11 percent .

Lower pricing was primarily due to product mix and lessening impact of tariff pricing supports in the market, but was also impacted by the overhang of excessive distributor inventories, slowing market demand and reduced mill pricing.

Storage tank sales decreased nine percent and 60 percent for the full-year and fourth quarter, respectively, of 2019 when compared to the same periods for the prior year.

The full-year decrease was comprised of a 22.5 percent increase in the average selling price,

offset by a 25 percent decline in the number of tanks sold.

As of December 31, 2019 , backlog for storage tanks totaled $5.8 million , a decrease of 72 percent over levels as of December 31, 2018 .

For the fourth quarter, the storage tank sales decrease resulted from a 59 percent decrease in the number of tanks sold combined with a 3.5 percent increase in average selling price.

The decrease in both sales levels and backlog is attributable to a significant retrenchment in completion of wells in the Permian Basin during the fourth quarter, as well as stagnant oil prices that are down 20.1 percent from early in the fourth quarter of 2018 and have seen no significant rebound in 2019.

The Metals Segment's operating income decreased $24.1 million to $3.7 million for the full-year 2019 compared to operating income of $27.8 million for 2018 .

Fourth quarter 2019 operating income decreased $4.1 million to $0.6 million compared to operating income of $4.7 million for the fourth quarter of 2018 .

Net sales for the Metals Segment totaled $204.5 million for the full year of 2020, a decrease of 19 percent compared to the same period of 2019.

Net sales for the fourth quarter of 2020 totaled $44.7 million, a decrease of 19 percent compared to the fourth quarter of 2019 net sales of $55.4 million.

During the second quarter of 2020, the Company curtailed operations at its Palmer facility due to the impact of the COVID-19 pandemic on the oil and gas industry and the Permian Basin.

Excluding Palmer, net sales for the full-year and fourth quarter of 2020 decreased 11 percent and 15 percent, respectively.

Welded Pipe & Tube Operations net sales decreased nine percent and 13 percent for the full-year and fourth quarter of 2020, respectively, when compared to the same periods of the prior year.

The total sales decrease for the year resulted from a five percent decrease in unit volumes combined with a three percent decrease in average selling price.

For the fourth quarter of 2020, unit volumes decreased nine percent while the average selling price decreased four percent compared to 2019.

The lower average selling price for the full-year was significantly impacted by the pass through of input and cost changes related to 304 alloy surcharges and a slightly less favorable product mix for stainless steel pipe and tube and the decline in indexed pricing for galvanized pipe and tube.

Seamless heavy-wall carbon steel pipe and tube sales decreased 23 percent and 29 percent for the full-year and fourth quarter, respectively, of 2020 compared to the same periods of 2019.

The full-year sales decrease was comprised of a 15 percent decrease in unit volumes combined with a nine percent decrease in average selling price.

For the fourth quarter, unit volumes decreased 20 percent while average selling prices decreased 11 percent.

Lower pricing was primarily due to a lower mix of energy based sales throughout the year and lower mill pricing while volume was impacted by the on-going impacts of COVID-19 in the oil and gas industry.

As mentioned above, during the second quarter of 2020, the Company curtailed operations at its Palmer facility due to the impact of the COVID-19 pandemic on the oil and gas industry and the Permian Basin.

As a result, storage tank sales decreased 81 percent and 84 percent for the full-year and fourth quarter, respectively, of 2020 when compared to the same periods for the prior year.

The full-year decrease was comprised of a 50 percent decrease in the average selling price and a 61 percent decline in the number of tanks sold.

For the fourth quarter, the storage tank sales decrease resulted from a 90 percent decrease in average selling price offset by a 74 percent increase in unit volumes.

The Metals Segment's operating loss totaled $24.6 million for the full-year 2020 compared to operating income of $3.7 million for 2019.

For the fourth quarter 2020, operating loss was $4.8 million compared to operating income of $0.6 million for the fourth quarter of 2019.

Current year operating results were affected by the following factors:

The addition of ASTI operations as noted above.

The full-year 2019 and fourth quarter of 2019 operating results includes $3.0 million and $0.7 million , respectively, for ASTI operations.

These amounts do not reflect the earn-out adjustment for the year since that expense is not included in the Metals Segment's operating results.

• Non-cash goodwill impairment related to the Welded Pipe and Tube reporting unit totaling $16.2 million.

See Note 5 - Goodwill for further discussion on the Company's goodwill;

• Operating losses at Palmer totaling $4.0 million and $6.2 million in non-cash, pre-tax asset impairment charges related to this business;

• Nickel prices and resulting surcharges for 304 and 316 alloys experienced significant increases and decreases during 2020, with the net result being significant margin reduction as inventories bought at higher surcharge levels were sold during declining pricing periods.

As a result, the full year of 2019 generated a net unfavorable operating impact of $6.4 million related to metal pricing, compared to a period of significantly more favorable indexed nickel prices overall in 2018 , which generated metal pricing gains of $5.0 million .

Year over year changes in volume, pricing and product mix in welded pipe and tube, as noted above, combined for a $13.4 million decline in operating profit margins in 2019 compared to 2018 .

As a result, the full year of 2020 generated a net unfavorable operating impact of $5.3 million related to metal pricing, compared to a net unfavorable operating impact of $6.4 million in 2019;

• Operating income from seamless carbon pipe and tube showed a decline of $2.4 million related to lower volume and pricing noted above;

Selling, general and administrative expense increased $4.6 million , or 29 percent, for the full-year 2019 when compared to 2018 .

This expense category was 8 percent of sales for 2019 and 7 percent of sales for 2018 .

For the fourth quarter, selling, general and administrative expense was $5.1 million ( 9 percent of sales) in 2019 , an increase of $1.0 million from $4.1 million ( 7 percent of sales) for the same period of 2018 .

The dollar increase for both the year and fourth quarter of 2019 when compared to the same periods of 2018 were impacted by the inclusion of ASTI's selling, general and administrative expenses.

Because the American Stainless acquisition occurred in January of 2019, none of ASTI's selling, general and administrative expenses were included in the prior year.

This accounted for $4.0 million and $0.9 million of the full-year and fourth quarter increase in selling, general and administrative costs for 2019.

The remaining changes in selling, general and administrative expense resulted from:

Allocated administrative costs (higher by $1.3 million and $0.2 million for the full-year and fourth quarter, respectively);

Lower incentive bonus expense on a full-year basis by $1.2 million ;

Compensation expenses primarily related to merit increases (higher by $0.2 million on a full-year basis);

Lower amortization expense (lower by $60,000 and $25,000 for the full-year and fourth quarter, respectively)

Comparison of 2018 to 2017 - Metals Segment

The Metals Segment's net sales totaled $222.2 million for the full year of 2018, an increase of 45 percent compared to the same period of 2017.

Net sales for the fourth quarter of 2018 totaled $59.4 million , an increase of 44 percent compared to the fourth quarter 2017 net sales of $41.1 million .

Excluding Munhall-Galvanized, acquired in the third quarter of 2018, full-year 2018 sales increased 38 percent compared to the same period of 2017 and fourth quarter 2018 sales were 31 percent greater than the same period for 2017.

Stainless and galvanized steel pipe net sales from continuing operations increased 58 percent and 61 percent for the full-year and fourth quarter of 2018, respectively, when compared to the same periods of the prior year.

Excluding Munhall-Galvanized, net sales would have increased 46 percent and 41 percent for the full year and fourth quarter of 2018, respectively.

The total sales increase for the year resulted from a 60 percent increase in unit volumes partially offset by a two percent decrease in average selling price.

For the fourth quarter, unit volumes increased 72 percent while the average selling price decreased six percent for 2018 compared to 2017.

The lower average selling price for the full-year and fourth quarter resulted from the incremental sales of Munhall-Galvanized, as their sales of more commodity galvanized pipe and tube had an unfavorable effect on average selling

Excluding the impact of Munhall-Galvanized, the average selling price of stainless steel pipe and tube increased 19 percent and 29 percent for the full year and fourth quarter of 2018, respectively, compared to the same periods of 2017.

Seamless heavy-wall carbon steel pipe and tube sales increased 29 percent and 23 percent for the full-year and fourth quarter, respectively, of 2018 compared to the same periods of 2017.

The full year sales increase was comprised of a six percent increase in unit volumes combined with a 21 percent increase in average selling price.

For the fourth quarter, unit volumes decreased four percent while average selling prices increased 26 percent.

Heavier demand in 2018, primarily related to stable demand in the oil and gas sector, improvements in demand in the general industrial sector, as well as tariff induced price increases, drove the sales increase.

Storage tank sales increased 15 percent and two percent for the full-year and fourth quarter, respectively, of 2018 when compared to the same periods for the prior year.

The full-year increase was comprised of a 25 percent increase in the average selling price, offset by a 15 percent decline in the number of tanks sold.

With a significant portion of the average price increase related to an increase in both size and complexity of tanks being purchased, the decline in units sold relates primarily to throughput capabilities rather than any decline in overall demand.

As of December 31, 2018, backlog for storage tanks totaled $20.7 million , an improvement of 20 percent over levels as of December 31, 2017.

For the fourth quarter, the storage tank sales increase resulted from a 28 percent decrease in the number of tanks sold combined with a 44 percent increase in average selling price.

The results highlight strong demand and activity in the Permian Basis and other Palmer delivery areas, even as West Texas Intermediate ("WTI") pricing and other economic indicators have shown some variability during 2018.

The Metals Segment's operating income increased $22.1 million to $27.8 million for the full-year 2018 compared to operating income of $5.7 million for 2017.

Fourth quarter 2018 operating income increased $1.7 million to $4.7 million compared to operating income of $3.0 million for the fourth quarter of 2017.

Current year operating results were affected by the following factors:

The addition of Munhall-Galvanized operations as noted above.

The full-year 2018 and fourth quarter of 2018 operating results includes $65,000 and $95,000 , respectively, for Munhall-Galvanized operations.

These amounts do not reflect the earn-out adjustment for the year since that expense is not included in the Metals Segment's operating results.

Nickel prices and resulting surcharges for 304 and 316 alloys ended the fourth quarter of 2018 lower than the previous quarter, with surcharges for both alloys decreasing by $0.11 and $0.13 per pound, respectively;

average nickel prices for the quarter generated a net unfavorable operating impact of $0.2 million related to metal pricing, compared to an unfavorable net impact of $1.0 million for the fourth quarter of 2017.

The current quarter’s metal price change loss brought the full year metal price change gain to $5.0 million , compared to the full year 2017 metal price change loss of $2.6 million .

Year over year changes in volume, pricing and product mix, as noted above, combined for a 53 percent improvement in gross profit margins in 2018 compared to 2017.

Operating income from seamless carbon pipe and tube showed a significant 246 percent improvement over the prior year.

Selling, general and administrative expense increased $1.9 million , or 13 percent, for the full-year 2018 when compared to 2017.

This expense category was seven percent of sales for 2018 and nine percent of sales for 2017.

For the fourth quarter, selling, general and administrative expense was $4.1 million ( seven percent of sales) in 2018, an increase of $0.7 million from $3.4 million ( eight percent of sales) for the same period of 2017.

The dollar increase for both the year and fourth quarter of 2018 when compared to the same periods of 2017 were impacted by the inclusion of Munhall-Galvanized's selling, general and administrative expenses.

Because the MUSA-Galvanized acquisition occurred in July of 2018, none of Munhall-Galvanized's selling, general and administrative expenses were included in the prior year.

This accounted for $0.3 million and $0.2 million of the full-year and fourth quarter increase in selling, general and administrative costs for 2018.

The remaining changes in selling, general and administrative expense resulted from:

Higher incentive bonus expense ( $1.2 million higher and $0.2 million higher for the full-year and fourth quarter, respectively);

Lower lease expenses related to the inclusion of the Munhall facility into the Master Lease with Store Funding ( $0.4 million lower for the full year - see Note 10 to the Consolidated Financial Statements);

Allocated administrative costs (higher by $0.4 million and $96,000 for the full-year and fourth quarter, respectively);

Compensation expenses primarily related to merit increases and higher direct sales headcount (higher by $0.7 million and $0.3 million for the full-year and fourth quarter, respectively), which were offset by lower commissions on a full year basis by $0.3 million ;

Higher travel costs (higher by $0.2 million and $67,000 for the full-year and fourth quarter, respectively);

Higher bad debt expense (higher by $0.2 million and $0.2 million for full-year and fourth quarter, respectively);

Lower amortization expense (lower by $63,000 and $10,000 for the full-year and fourth quarter, respectively)

• Year over year changes in volume, pricing and product mix in welded pipe and tube, as noted above, combined for a $0.5 million decline in operating profit margins in 2020 compared to 2019.

Selling, general and administrative expense decreased $3.0 million, or 15 percent, for the full-year 2020 when compared to 2019.

This expense category was nine percent of sales for 2020 and eight percent of sales for 2019.

For the fourth quarter of 2020, selling, general and administrative expense was $3.9 million (nine percent of sales), a decrease of $1.2 million from $5.1 million (nine percent of sales) for the same period of 2019.

The changes in selling, general and administrative expense resulted from:

• Salaries, commissions and employee benefit costs (lower by $1.8 million and $0.5 million for the full-year and fourth quarter, respectively);

• Incentive bonus and stock compensation expense (lower by $1.2 million and $0.9 million for the full-year and fourth quarter, respectively);

• Amortization expense (lower by $0.5 million and $0.2 million for the full-year and fourth quarter, respectively);

• Travel expense related to the Company reducing all non-essential travel in response to the COVID-19 pandemic (lower by $0.5 million and $0.1 million for the full-year and fourth quarter, respectively).

The full-year and fourth quarter decreases were offset by:

• Bad debt expense ($0.7 million and $0.3 million higher for the full-year and fourth quarter, respectively);

• Higher professional fees ($0.2 million higher for the full-year 2020);

• Taxes and Licenses fees ($0.1 million higher for the full-year 2020 and the fourth quarter, respectively).

Specialty Chemicals Segment

The following tables summarize operating results for the three years indicated.

The following tables summarize operating results for the two years indicated.

Reference should be made to Note 14 to the consolidated financial statements included in Item 8 of this Form 10-K.

(in thousands)

(in thousands) Amount % Amount %

Net sales $ 51,541 100.0 % $ 54,090 100.0 %

Cost of goods sold 43,736 84.9 % 46,983 86.9 %

Gross profit 7,805 15.1 % 7,107 13.1 %

Selling, general and administrative expense

(Gain) loss on sale-leaseback

3,772 7.3 % 4,296 7.9 %

Operating income $ 4,033 7.8 % $ 2,811 5.2 %

Comparison of 2020 to 2019 – Specialty Chemicals Segment

Sales for the Specialty Chemicals Segment decreased by 8 percent, or $4.5 million , to $54.1 million for 2019 compared to $58.6 million in 2018 .

For the fourth quarter of 2019 , sales were $12.6 million , representing a 5.5 percent decrease from $13.3 million for the same quarter of 2018 .

For the full year, overall shipped pounds were up three percent on stable volume for contract manufactured products and an eight percent increase in tolled products.

For the fourth quarter of 2019 , pounds shipped decreased four percent .

Overall selling prices decreased 10 percent and one percent for the full-year and fourth quarter, respectively, of 2019 compared to the same periods of 2018 .

Net sales were unfavorably impacted during the full year of 2019 from non-repeat of $2.4 million in opportunistic 2018 asphalt related sales, lower pass-through pricing on lower cost raw materials of $0.8 million , lower conversion revenue of approximately $0.6 million on higher levels of tolled versus full priced product sales, and $0.7 million in lower fourth quarter 2019 sales related to retrenchment in purchases to manage year-end working capital.

The Specialty Chemicals Segment's operating income for the full-year of 2019 decreased 29 percent to $2.8 million .

The fourth quarter of 2019 decreased 35 percent from the prior year quarter to $0.4 million .

During 2019 , gross profit margin held relatively steady to previous 2018 levels, at 13 percent versus 14 percent , respectively.

Lower profit in 2019 is primarily related to lost contribution of approximately $0.9 million on lost asphalt and other sales noted above, as well as a $0.3 million benefit in 2018 from a legal claim settlement that did not repeat in 2019 .

Selling, general and administrative expense decreased $30,584 or 0.7 percent, to $4.30 million in 2019 when compared to 2018 expense of $4.33 million , which represented 8 percent of sales and 7 percent of sales, respectively.

For the fourth quarter, selling, general and administrative expense was $1.0 million ( 8 percent of sales) in 2019 , a decrease of $0.1 million when compared to $1.1 million ( 8 percent of sales) for the same period of 2018 .

The full-year decreases in selling, general and administrative expenses resulted from:

Lower sales commissions ( $0.3 million and $0.1 million lower for the full-year and fourth quarter, respectively);

Lower incentive based bonuses ( $0.1 million and $38,500 lower for the full-year and fourth quarter, respectively);

The full-year decreases were offset by:

Higher wages and benefits ( $62,000 and $13,000 higher for the full-year and fourth quarter, respectively);

Higher professional fees and allocated expenses ( $0.3 million and $56,000 higher for the full-year and fourth quarter, respectively).

Comparison of 2018 to 2017 – Specialty Chemicals Segment

Sales for the Specialty Chemicals Segment increased by 22 percent or $10.4 million to $58.6 million for 2018 compared to $48.2 million in 2017.

For the fourth quarter of 2018, sales were $13.3 million , representing a 14 percent increase from $11.7 million for the same quarter of 2017.

Pounds shipped during the full-year decreased by one percent for 2018 compared to 2017.

For the fourth quarter of 2018, pounds shipped increased eight percent.

Overall selling prices increased 23 percent and six percent for the full-year and fourth quarter, respectively, of 2018 compared to the same periods of 2017.

Net sales were favorably impacted during the full year and fourth quarter of 2018 from the initial ramp up of seven significant customers, a new fire retardant and new asphalt additive customers at our subsidiary, CRI Tolling (a one-time sourcing not planned to repeat in 2019), two new oil and gas customers and two new pulp/paper customers at our subsidiary, MC, and a new product launch from an existing customer at MC.

The Specialty Chemicals Segment's operating income for the full-year of 2018 decreased nine percent to $4.0 million .

Net sales for the Specialty Chemicals Segment decreased five percent, or $2.5 million, to $51.5 million for 2020 compared to $54.1 million in 2019.

For the fourth quarter of 2020, sales were $11.2 million, representing an 11 percent decrease from $12.6 million for the same quarter of 2019.

For the full-year, overall shipped pounds were up flat to prior year on a decrease in volume of four percent for contract manufactured products and a seven percent increase in tolled products.

For the fourth quarter of 2020, pounds shipped increased two percent.

Overall selling prices decreased five percent and 13 percent for the full-year and fourth quarter of 2020, respectively, compared to the same periods of 2019.

Net sales were unfavorably impacted during the full-year of 2020 from downturns in demand due to weak industrial and manufacturing activities related to the COVID-19 pandemic.

The Specialty Chemicals Segment was able to increase production of hand sanitizer and cleaning aids to help offset the reduced production into the oil and gas industry while also implementing cost cutting measures allowing the Segment to generate increased profits on lower sales volume.

The Specialty Chemicals Segment's operating income for the full-year of 2020 totaled $4.0 million compared to operating income of $2.8 million for the full-year 2019.

The fourth quarter of 2020 increased 24 percent from the prior year quarter to $0.5 million.

While the fourth quarter showed modest improvement, the full second-half 2018 operating income results outperformed the prior year second-half by $0.3 million , or 15 percent.

During the second half of 2018, margins were realigned as new higher margin products were added to the portfolio.

However, that strong second-half performance could not overcome a first-half shortfall of $0.7 million , or 26 percent, compared to the prior year , yielding a net decline on both a dollar basis and operating margin percent basis for the full-year.

Selling, general and administrative expense decreased $0.4 million or seven percent, to $4.3 million in 2018 when compared to 2017 expense of $4.7 million , which represented seven percent of sales and ten percent of sales, respectively.

For the fourth quarter, selling, general and administrative expense was $1.1 million (eight percent of sales) in 2018, an increase of $0.2 million when compared to $0.9 million (seven percent of sales) for the same period of 2017.

During 2020, gross profit margin increased as a percentage of net sales over 2019 levels, at 15 percent versus 13 percent, respectively, primarily driven by favorable reductions in shipping costs ($0.1 million), inventory shrinkage ($0.1 million) and favorable manufacturing variance adjustments ($0.7 million) over 2019.

Selling, general and administrative expense decreased $0.5 million or 12 percent, to $3.8 million in 2020 when compared to 2019 expense of $4.3 million, which represented seven percent of sales and eight percent of sales, respectively.

For the fourth quarter, selling, general and administrative expense was $1.1 million (10 percent of sales) in 2020, an increase of $0.1 million when compared to $1.0 million (eight percent of sales) for the same period of 2019.

The full-year decreases in selling, general and administrative expenses resulted from:

Lower wages and benefits in 2018 ( $0.2 million and $38,000 lower for the full-year and fourth quarter, respectively);

Lower professional fees and allocated expenses ( $0.4 million and $0.1 million lower for the full-year and fourth quarter, respectively);

Lower bad debt expenses ( $0.2 million and $15,000 lower for the full-year and fourth quarter, respectively);

A $0.3 million gain related to a legal settlement in 2018;

The full-year decreases were offset by:

Higher sales commissions ( $0.5 million and $0.2 million higher for the full-year and fourth quarter, respectively);

Higher incentive based bonuses ( $0.3 million and $0.2 million higher for the full-year and fourth quarter, respectively).

Comparison of 2019 to 2018 - Corporate

Corporate expenses increased $0.5 million to $8.4 million , or three percent of sales, in 2019 up from $7.9 million , three percent of sales, in 2018 .

The full-year increase resulted primarily from:

Three year Long-Term Incentive Plan performance shares were accrued in the current year, at a cost of $0.7 million ;

Professional fees increased by $0.5 million from the prior year resulting from higher audit and banking fees in the current year;

The full-year increases were partially offset by:

Lower unallocated acquisition costs of $0.7 million related to the American Stainless acquisition, which transaction closed on January 1, 2019.

Interest expense was $3.8 million and $2.2 million for the full-years of 2019 and 2018 , respectively.

The increase was primarily related to higher average debt outstanding in the full year of 2019 , as additional borrowings were primarily related to funds borrowed related to the January 1 American Stainless acquisition, offset during the year by almost $17 million in net inventory and other working capital reductions.

• Salaries, commissions and employee benefits ($0.5 million and $0.1 million lower for the full-year and fourth quarter, respectively);

• Travel expense related to the Company reducing all non-essential travel in response to the COVID-19 pandemic ($0.1 million lower for the full-year 2020);

• Bad debt expense ($0.1 million lower for the full-year 2020).

The full-year and fourth quarter decreases were offset by:

• Incentive bonus expense ($0.1 million and $0.2 million higher for the full-year and fourth quarter, respectively);

• Higher professional fees ($0.1 million higher for the full-year 2020).

Comparison of 2020 to 2019 - Corporate

Corporate expenses increased $1.4 million to $7.9 million , or three percent of sales, in 2018 up from $6.5 million , three percent of sales, in 2017.

The full-year increase resulted primarily from:

Performance based bonuses increased $0.5 million from the prior year.

Pre-defined Adjusted EBITDA targets were achieved in both 2018 and 2017;

Acquisition costs increased $0.4 million from the prior year due to the MUSA-Galvanized acquisition in the third quarter of 2018 (see Note 15 to the Consolidated Financial Statements), as well as fourth quarter costs incurred due to the American Stainless acquisition, which transaction closed on January 1, 2019 (see Note 15 to the Consolidated Financial Statements);

Personnel costs were $0.3 million higher as a result of normal annual rate increases;

Corporate expenses decreased $0.5 million to $7.9 million, or three percent of sales, in 2020 down from $8.4 million, or three percent of sales, in 2019.

The full-year decrease resulted primarily from:

• Travel expense decreased $0.3 million as a result of COVID-19 and the Company's decision to eliminate all non-essential travel;

• Professional fees decreased by $0.2 million from the prior year resulting from lower banking fees in the current year;

• Performance based bonuses decreased $0.2 million due to lower attainment of pre-defined Adjusted EBITDA targets in the year;

• Other corporate overhead expenses decreased $0.6 million driven by lower repair and maintenance expense and lower directors' fees for the year.

The full-year decreases were partially offset by:

• Employee benefit costs increased $0.9 million driven by severance costs of $1.1 million related to the retirement of the former President and CEO.

Interest expense was $2.1 million and $3.8 million for the full-years of 2020 and 2019, respectively.

The increase was primarily related to higher average debt outstanding in the fourth quarter and full year of 2018 , as additional borrowings were primarily related to acquisitions and to support working capital requirements associated with increased business activity.

Contractual Obligations and Other Commitments:

The decrease was primarily related to lower average debt outstanding in the full year of 2020 driven by $10.7 million of working capital reductions in the year.

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 Income (Loss), and Adjusted Diluted Earnings (Loss) 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 interest (including change in fair value of interest rate swap), income taxes, depreciation and amortization.

We define "Adjusted EBITDA" as EBITDA further adjusted for the impact of non-cash and other items we do not consider in our evaluation of ongoing performance.

These items include:

goodwill impairment, asset impairment, gain on lease modification, interest expense (including change in fair value of interest rate swap), income taxes, depreciation, amortization, stock-based compensation, non-cash lease cost, acquisition costs and other fees, proxy contest costs, shelf registration costs, earn-out adjustments, realized and unrealized (gains) and losses on investments in equity securities, retention costs, restructuring and severance 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.

Consolidated EBITDA and Adjusted EBITDA are as follows:

Year Ended December 31,

($ in thousands) 2020 2019

Net loss $ (27,267) $ (3,036)

Interest expense 2,110 3,818

Change in fair value of interest rate swap 51 141

Income taxes (4,706) (727)

Depreciation 7,572 7,578

Amortization 3,028 3,486

EBITDA (19,212) 11,260

Acquisition costs and other 861 1,936

Proxy contest costs 3,105 —

Shelf registration costs — 10

Earn-out adjustments (1,195) (747)

Gain on investments in equity securities (170) (1,873)

Asset impairments 6,214 —

Goodwill impairment 16,203 —

Gain on lease modification (171) —

Stock-based compensation 1,791 2,091

Non-cash lease expense 510 560

Retention expense 235 223

Restructuring and severance costs 1,076 —

Adjusted EBITDA $ 9,247 $ 13,460

% sales 3.6 % 4.4 %

Metals Segment EBITDA and Adjusted EBITDA are as follows:

Year Ended December 31,

($ in thousands) 2020 2019

Metals Segment

Net (loss) income $ (22,388) $ 4,356

Interest expense 11 83

Depreciation 5,855 5,954

Amortization 3,028 3,486

EBITDA (13,494) 13,879

Acquisition costs and other 16 1,381

Earn-out adjustments (1,195) (747)

Asset impairments 6,214 —

Goodwill impairment 16,203 —

Stock-based compensation 303 663

Retention expense — 123

Metals Segment Adjusted EBITDA $ 8,047 $ 15,299

% of segment sales 3.9 % 6.1 %

Specialty Chemicals Segment EBITDA and Adjusted EBITDA are as follows:

Year Ended December 31,

($ in thousands) 2020 2019

Specialty Chemicals Segment

Net income $ 4,046 $ 2,811

Interest expense 9 —

Depreciation 1,552 1,461

EBITDA 5,607 4,272

Stock-based compensation 207 226

Specialty Chemicals Segment Adjusted EBITDA $ 5,814 $ 4,498

% of segment sales 11.3 % 8.3 %

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

Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) per Share are non-GAAP measures and exclude goodwill impairment, asset impairment, gain on lease modification, stock-based compensation, non-cash lease costs, acquisition costs, proxy contest costs, shelf registration costs, earn-out adjustments, realized and unrealized (gains) and losses on investments in equity securities, retention costs and restructuring and severance 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 income (loss) and earnings (loss) per share to adjusted net income (loss) and adjusted earnings (loss) per share is as follows:

Year Ended December 31,

(Amounts in thousands, except per share data) 2020 2019

Loss before income taxes $ (31,973) $ (3,763)

Acquisition costs and other 861 1,936

Proxy contest costs 3,105 —

Shelf registration costs — 10

Earn-out adjustments (1,195) (747)

Gain on investments in equity securities (170) (1,873)

Asset impairments 6,214 —

Goodwill impairment 16,203 —

Gain on lease modification (171) —

Stock-based compensation 1,791 2,091

Non-cash lease expense 510 560

Retention expense 235 223

Restructuring and severance costs 1,076 —

Adjusted loss before income taxes (3,514) (1,563)

Benefit for income taxes at 21% (738) (328)

Adjusted net loss $ (2,776) $ (1,235)

Average shares outstanding, as reported

Basic 9,099 8,983

Diluted 9,099 8,983

Adjusted net loss per common share

Basic $ (0.31) $ (0.14)

Diluted $ (0.31) $ (0.14)

Liquidity and Capital Resources

We closely manage our liquidity and capital resources.

Our liquidity requirements depend on key variables, including level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities and working capital management.

Capital expenditures and share repurchases are a component of our cash flow and capital.

Cash flows were as follows:

Year ended December 31,

(in thousands) 2020 2019

Total cash provided by (used in):

Operating activities 17,978 28,640

Investing activities 994 (25,695)

Financing activities (19,362) (4,539)

Net decrease in cash and cash equivalents $ (390) $ (1,594)

Operating Activities

The decrease in net cash provided by operating activities for the full-year 2020 compared to the full-year 2019 was primarily driven by a net loss of $27.3 million for 2020 compared to a net loss of $3.0 million for 2019, and changes in working capital, driven by accounts receivable and inventory, which increased operating cash flow for 2020 by approximately $14.6 million, compared to an increase of approximately $29.6 million in 2019.

In 2020, accounts receivable and inventory decreased over prior year but at a slower rate.

The decrease in accounts receivable was driven by lower sales and a decrease in days sales outstanding to 45 days as of December 31, 2020 from 46 days as of December 31, 2019.

The decrease in inventory was due to continued inventory rationalization efforts throughout 2020 to enhance the Company's liquidity position during the COVID-19 pandemic and an increase in inventory turns from 1.62 turns as of December 31, 2019 to 1.70 turns as of December 31, 2020.

Investing Activities

Net cash provided by investing activities primarily consists of transactions related to capital expenditures, equity security transactions, and acquisitions.

The increase in cash provided by investing activities for the full-year 2020 compared to cash used in investing activities for the full-year 2019 was primarily due to a decrease in cash outflows related to the American Stainless acquisition in the prior year not in the current year ($21.9 million), an increase in net proceeds from the sale of equity securities in the current year over the prior year ($4.4 million) and decreases in capital expenditures ($0.8 million).

Financing Activities

Net cash used in financing activities primarily consist of transactions related to our long-term debt.

The increase in net cash used in financing activities for the full-year 2020 compared to the full-year 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.

The Company has a $100 million asset-backed revolving Line with a maturity date of December 20, 2021 and a $20 million Term Loan with a maturity date of February 1, 2024.

As of December 31, 2020, the Company had $61.4 million of total borrowings outstanding with its lender, down $14.2 million from the balance as of December 31, 2019.

As of December 31, 2020, the Company had $11.0 million of remaining available capacity under the Line.

See Note 6 - Long-term Debt , in the notes to the 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 current projected needs.

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

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

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

As of December 31, 2020, the Company had a minimum fixed charge coverage ratio of 1.43, a minimum tangible net worth of $67.1 million and was in compliance with all debt covenants.

On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A.

providing the Company with a new four-year revolving credit facility (the "Facility").

The new Credit Agreement provides the Company with up to $150.0 million of borrowing capacity.

The Facility refinances and replaces the Company's previous $100.0 million asset based revolving line of credit with Truist Bank ("Truist"), which was scheduled to mature on December 21, 2021, and the remaining portion of the Company's five-year $20 million term loan with Truist, which was scheduled to mature on February 1, 2024.

The initial borrowing capacity under the Facility totals $110.0 million.

See Note 6 and Note 18 for additional details on this new agreement.

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

Stock repurchase activity was as follows:

Year ended December 31,

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 reviews the financial performance and capital needed to support future growth to determine the amount of cash dividend, if any, which is appropriate.

In 2020 and 2019, no dividends were declared or paid by the Company.

Other Financial Measures

Below are additional financial measures that we believe are important in understanding the Company's liquidity position from year to year.

The metrics are defined as:

Current ratio = current asset divided by current liabilities

Debt to capital = Total debt divided by total capital

Return on average equity = net income divided by the trailing 12-month average of equity

Results of these additional financial measures are as follows:

Year ended December 31,

Current ratio 4.1 3.6

Debt to capital 43% 41%

Return on average equity (29.2)% (2.9)%

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.

As of December 31, 2020, the Company's contractual obligations and other commitments were as follows:

Payment Obligations for the Year Ended

(in thousands)

(in thousands) Total 2021 2022 2023 2024 2025 Thereafter

Revolving credit facility (1)

$ 49,037 $ 49,037 $ — $ — $ — $ — $ —

Term loans (1)

12,333 4,000 4,000 4,000 333 — —

Interest on bank debt 1,284 1,102 131 48 3 — —

1 unchanged sentence

Operating leases 61,682 3,610 3,665 3,699 3,549 3,619 43,540

Current Conditions and Outlook

The Company has limited visibility on the direction of the manufacturing economy in 2020.

Trade with China remains an issue as does the outcome of the Presidential election.

Capital spending is under pressure, particularly in the energy markets.

We do not expect a recession in 2020, but we do anticipate a period of flat to softening demand across our more industrial focused markets.

With this backdrop, over the last 60 days of 2019, we initiated a cost cutting program across the entire Company.

In addition to the work done at our vessel storage business in the fourth quarter, the Company implemented over $6 million in annual cost savings, which will be fully realized in 2020.

The cost reductions cover everything from personnel, raw materials, other manufacturing costs and professional services.

Total $ 124,394 $ 57,769 $ 7,811 $ 7,762 $ 3,893 $ 3,619 $ 43,540

(1) On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A .providing the Company with a new four-year revolving credit facility.

The amounts in the table above do not include the effects of the debt refinance.

See Note 6 and Note 18 for additional details on this new agreement

Critical Accounting Policies and Estimates

Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.

Business Combinations

Acquisitions are accounted for using the acquisition method of accounting for business combinations in accordance with GAAP.

Earn-Out Liabilities

In connection with the American Stainless acquisition, the Company is required to make quarterly earn-out payments to American Stainless for a period of three years following closing equal to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period.

In connection with the MUSA-Galvanized acquisition, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube.

In connection with the MUSA-Stainless acquisition, the Company is required to make quarterly earn-out payments to MUSA for a period of four years following closing, based on actual sales levels of stainless steel pipe and tube (outside diameter of 10 inches or less).

The fair value of the contingent consideration earn-out liabilities are estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit.

Changes to the fair value of the earn-out liabilities are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the consolidated statements of operations and comprehensive loss.

Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is tested for impairment at least on an annual basis.

Goodwill was $1.4 million and $17.6 million as of December 31, 2020 and 2019, respectively.

Impairment of Goodwill

We evaluate the carrying value of goodwill annually as of October 1 and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value.

If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value.

The fair value of the reporting units are estimated using a combination of the discounted cash flow method and the market based approach.

This method uses projections of cash flows from the reporting unit as well as available comparable company information.

This approach requires significant judgments including the Company's projected net cash flows, the weighted average cost of capital used to discount the cash flows and terminal value assumptions.

We derive these assumptions used in the testing from several sources.

We believe that our internal forecasts are consistent with those that would be used by a potential buyer in valuing our reporting units.

Goodwill is considered impaired if the carrying value of the reporting unit exceeds it fair value.

During 2020, goodwill was allocated to the Welded Pipe & Tube reporting unit found within the Metals Segment and the Specialty Chemicals Segment.

During the second quarter, third quarter, and fourth quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit existed and interim goodwill impairment tests were performed.

As a result of these interim impairment tests, the Company recorded goodwill impairment of $16.2 million related to the Welded Pipe and Tube reporting unit.

We conducted our annual impairment test of the Specialty Chemicals Segment as of October 1, 2020 and 2019.

As of December 31, 2020 and 2019, we determined that no impairment of the carrying value of goodwill for this reporting unit was required.

See Note 5 - Goodwill in the notes to the consolidated financial statements included in this report for additional information.

Inventory is stated at the lower of cost or net realizable value.

Cost is determined by either specific identification or weighted average methods.

At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below our cost.

This would indicate that an adjustment would be required.

Factors influencing these adjustments include changes in demand, product life cycle, cost trends and product pricing.

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-K

Item 7. Management’s Discussion and Analysis