Item 7. Management’s Discussion and Analysis
Item 7. 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
• Off-Balance Sheet Arrangements and Contractual Obligations
• Significant Accounting Policies and Estimates
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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; 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, 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.
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Results of Operations
Comparison of 2020 to 2019 – Consolidated
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; and
• 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 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; and
• 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 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); and
• 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; and
• 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
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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 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.
2020 2019
(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
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
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:
• 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;
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• 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 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; and
• 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); and
• 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); and
• 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 two years indicated. Reference should be made to Note 14 to the consolidated financial statements included in Item 8 of this Form 10-K.
2020 2019
(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
3,772 7.3 % 4,296 7.9 %
Operating income $ 4,033 7.8 % $ 2,811 5.2 %
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Comparison of 2020 to 2019 – Specialty Chemicals Segment
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. 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:
• 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); and
• 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); and
• Higher professional fees ($0.1 million higher for the full-year 2020).
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Comparison of 2020 to 2019 - Corporate
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; and
• 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 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.
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Consolidated EBITDA and Adjusted EBITDA are as follows:
Year Ended December 31,
($ in thousands) 2020 2019
Consolidated
Net loss $ (27,267) $ (3,036)
Adjustments:
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 %
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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
Adjustments:
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
Adjustments:
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 %
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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)
Adjustments:
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)
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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.
Cash Flows
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.
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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,
2020 2019
Number of shares repurchased 59,617 —
Average price per share $ 10.65 —
Total cost of shares repurchased $ 636,940 $ —
At the end of each fiscal year, the Board 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:
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Year ended December 31,
2020 2019
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) Total 2021 2022 2023 2024 2025 Thereafter
Obligations:
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 — —
Finance lease 58 20 15 15 8 — —
Operating leases 61,682 3,610 3,665 3,699 3,549 3,619 43,540
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
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 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. 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.
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).
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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
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. 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. 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
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.
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