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Item 7. Management’s Discussion and Analysis

2022-03-29 compared with 2021-03-09 · 238 added, 245 removed, 142 unchanged (77% of the section changed)

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

This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity, and capital resources during the two-year period ended December 31, 2020.

This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity, and capital resources during the fiscal years ended December 31, 2021 and December 31, 2020.

Unless otherwise noted, all references herein for the years 2021 and 2020 represent the fiscal years ended December 31, 2021 and 2020, respectively.

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This discussion and analysis is presented in five sections:

• Business Overview

• Executive Overview

• Results of Operations and Non-GAAP Financial Measures

• Liquidity and Capital Resources

• Off-Balance Sheet Arrangements and Contractual Obligations

• Significant Accounting Policies and Estimates

Business Overview

• Material Cash Requirements from Contractual and Other Obligations

• Critical Accounting Policies and Estimates

Executive Overview

Fiscal 2021 Highlights

Consolidated net sales increased 30.7%, or $78.7 million, compared to 2020 driven by increases in average selling price and pounds shipped as well as the Company's acquisition of DanChem, which is discussed in more detail below and in Note 2 of the notes to the consolidated financial statements.

Excluding the DanChem acquisition, net sales increased 28.5%, or $73.0 million, over 2020.

Consolidated net income increased to $20.2 million in 2021, compared to a net loss of $27.3 million in 2020.

Earnings per share increased to $2.14 diluted earnings per share for the full-year 2021 compared to $2.98 diluted loss per share in 2020.

Excluding the DanChem acquisition, consolidated net income increased to $19.6 million and earnings per share increased to $2.08 diluted earnings per share.

For 2021, cash flows from operating activities were $19.1 million, with $1.5 million used for capital expenditures.

Throughout 2021, the Company experienced profitable growth across both business segments.

In our Metals Segment, robust commodity pricing and improved throughput drove strong growth while in our Specialty Chemicals Segment customer demand and increased volumes helped to offset labor and raw materials constraints and drive growth in the segment.

During the fourth quarter of 2021, the Company announced it acquired DanChem, a leading full-service specialty chemicals contract manufacturing organization located on an owned 55-acre campus in Danville, Virginia.

The DanChem facility boasts the largest fleet of horizontal reactors in the industry and produces a broad array of diversified products with a stable customer base.

The addition of DanChem will enable the Company to bolster its chemical operations while providing significant opportunities to grow into new end-markets with a wide array of commercial offerings.

DanChem positions the Company as one of the largest specialty chemical contract manufacturers in the U.S.

and enhances the Company’s ability to be a preferred acquirer for companies within the industry while continuing to strategically grow the specialty chemicals business through:

• The Acceleration of Product Development Capabilities – DanChem brings leading engineering and process development capabilities with a demonstrated track record of rapidly developing products for commercialization.

• The Expansion of Process Offerings – DanChem’s production plants and horizontal reactors drastically accelerate the long-term investment plans of Synalloy Chemicals, providing differentiated assets, rail access and meaningful site acreage for continued expansion.

• A Larger Presence in Target End-Markets and Applications – DanChem brings additional customer relationships in target markets, including CASE (coatings, adhesives, sealants and elastomers), additives, industrial and agricultural chemistries.

Full-year 2021 results include $5.7 million in net sales and $0.6 million in operating income attributable to the DanChem operations acquired in the fourth quarter of 2021.

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.

The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantine and shelter-in-place orders.

The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets.

The COVID-19 pandemic and the measures taken in response have affected and could future materially impact the Company's business, results of operations and financial condition, as well as the Company's stock.

The Company has seen wide ranging impacts partially attributable to COVID-19 to date, including an adverse impact on our reported results and operations in 2020 and impacts to our supply chain in 2021.

However, throughout 2021, economic conditions have improved, leading to increased demand for our products and positive operating results.

The Company has also taken a number of steps to continue to improve its financial position throughout 2021 including :

• refinancing and expanding its revolving line of credit with a new lender to give the Company more favorable terms and increased liquidity;

• making the decision to permanently cease operations at the curtailed Palmer facility as of December 31, 2021 and to sublease the facility;

• divesting the Company's ownership interest in N845BB Partners, LLC.

The extent of the continuing impact of the COVID-19 pandemic on the Company's operational and financial performance is uncertain and will depend on many factors outside the Company's control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments and the imposition of protective public safety measures.

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 2021 to 2020 – 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;

• 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;

• 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);

• 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

Consolidated net sales for the full-year 2021 increased $78.7 million, or 30.7%, over the full-year 2020 to $334.7 million.

The increase in net sales was primarily driven by a 19.5% increase in average price and a 9.1% increase in pounds shipped.

Excluding DanChem, net sales increased $73.0 million, or 28.5%, to $329.0 million driven by a 18.5% increase in average selling price and a 8.1% increase in pounds shipped.

Full-year 2021 consolidated gross profit increased 168.3% to $60.8 million, or 18.2% of sales, compared to $22.7 million, or 8.8% of sales, in the full-year 2020.

The increase in dollars and percentage of sales for the full-year 2021 were attributable to increased selling prices and a continued favorable surcharge market environment partially offset by increasing raw material and freight costs.

Consolidated selling, general and administrative expense (SG&A) for the full-year 2021 increased by $1.4 million to $30.1 million compared to $28.7 million for the full-year 2020.

SG&A as a percentage of sales was 9.0% of sales for 2021 and 11.2% of sales for 2020.

The changes in SG&A expense were primarily driven by:

• Increases in incentive bonus expense of $1.3 million primarily driven by higher attainment of performance goals in the current year over the prior year;

• Increases in personnel costs related to salaries, commissions and employee benefit costs of $1.1 million;

• Increases in professional fees of $0.2 million primarily driven by acquisition related costs;

• Increases in other expenses of $0.4 million primarily driven by increases in taxes, licenses and insurance.

The full-year increases were partially offset by:

• Decreases in share-based payment expense of $1.0 million primarily driven by a reduction of awards outstanding in the current year;

• Increases on gains recognized on the sale of assets of $0.8 million primarily driven by wind down activities at the Palmer facility;

• Decreases in bad debt expense of $0.2 million due to lower levels of uncollectible accounts in the current year.

Consolidated operating income for the full-year 2021 totaled $27.4 million compared to an operating loss of $31.1 million for the full-year 2020.

The operating income increase for the full-year 2021 was primarily driven by increased demand driven sales, increases in average selling prices, a continued favorable surcharge market environment and goodwill and asset impairment expenses in 2020 that did not occur in 2021.

Comparison of 2021 to 2020 - Metals Segment

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

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17,836 6.6 % 17,538 8.6 %

Asset impairments 6,214 3.0 % — — %

Asset impairment — — % 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;

• 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;

• 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

Operating income (loss) $ 33,561 12.6 % $ (24,599) (12.0) %

Net sales for the Metals Segment totaled $267.2 million for the full year of 2021, an increase of 30.7% compared to the full-year 2020.

The increase in net sales was primarily driven by a 15.7% increase in average selling prices and a 12.5% increase in pounds shipped.

The net sales increase (decrease) for the full-year 2021 compared to the full-year 2020 is summarized as follows:

(in thousands) $ % Average Selling Price (1)

Units Shipped

Fiberglass and steel liquid storage tanks and separation equipment $ (4,159) (75.6) % (29.7) % (62.6) %

Heavy wall seamless carbon steel pipe and tube 16,869 71.3 % 14.7 % 49.3 %

Stainless steel pipe and tube 31,676 20.4 % 14.0 % 5.6 %

Galvanized pipe and tube 18,393 90.6 % 65.9 % 14.9 %

Total increase $ 62,779

(1) Average price increases (decreases) for the full-year 2021 as compared to the full-year 2020 relate to the following:

• Fiberglass and steel liquid storage tanks and separation equipment - due to the curtailment of Palmer operations and decision to sublease facility;

• Heavy wall seamless carbon steel pipe and tube - increase due to demand driven price increases and raw material availability;

• Stainless steel pipe and tube - increase due to demand driven price increases and raw material availability, and;

• Galvanized pipe and tube - increase due to improvement in indexed pricing.

SG&A expense increased $0.3 million, or 1.7%, for the full-year 2021 when compared to 2020.

SG&A as a percentage of sales was 6.7% of sales for 2021 and 8.6% of sales for 2020.

The changes in SG&A expense were primarily driven by:

• Increases in personnel costs related to salaries, commissions and employee benefit costs of $1.5 million;

• Increases in incentive bonus of $1.0 million primarily driven by higher attainment of performance goals in the current year over the prior year.

The full-year increases were partially offset by:

• Increases on gains recognized on the sale of assets of $1.0 million related to wind down activities at the Palmer facility;

• Decreases in bad debt expense of $0.6 million due to lower levels of uncollectible accounts in the current year;

• Decreases in share-based payment expense of $0.2 million primarily driven by a reduction of awards outstanding in the current year.

Operating income increased to $33.6 million for the full-year 2021 compared to an operating loss of $24.6 million for the full-year 2020.

The current year operating income increase was primarily driven by increased demand driven sales, increases in average selling prices, a continued favorable surcharge market environment and goodwill and asset impairments in the full-year 2020 that did not occur in the full-year 2021.

Comparison of 2021 to 2020 – Specialty Chemicals Segment

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

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5,961 8.8 % 3,772 7.3 %

Asset impairment 233 0.3 % — — %

Operating income $ 3,656 5.4 % $ 4,033 7.8 %

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);

• 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).

Net sales for the Specialty Chemicals Segment increased 30.9%, or $15.9 million, to $67.5 million for 2021 compared to $51.5 million in 2020.

The increase in net sales was primarily driven by a 26.7% increase in average selling prices and a 3.8% increase in pounds shipped.

Excluding DanChem, net sales increased $10.2 million, or 19.9%, to $61.8 million driven by a 18.9% increase in average selling prices and a 1.3% increase in pounds shipped.

SG&A expense increased $2.2 million or 58.0%, to $6.0 million in 2021 when compared to 2020.

Excluding the DanChem acquisition, SG&A expense increased $1.3 million, or 35.2% compared to 2020.

SG&A as a percentage of sales increased to 8.8% in 2021 from 7.3% in 2020.

The changes in SG&A expense were primarily driven by:

• Increases in personnel costs related to salaries, commissions and employee benefit costs of $1.4 million;

• Increases in bad debt expense of $0.3 million primarily driven by an increase in uncollectible accounts in the current year;

• Increases in travel expense of $0.1 million;

• Increases in professional fees of $0.1 million.

The full-year increases were partially offset by:

• Decreases in incentive bonus of $0.2 million primarily driven by lower attainment of performance goals in the current year over the prior year;

• Decreases in share-based payment expense of $0.1 million primarily driven by a reduction of awards outstanding in the current year.

Operating income decreased to $3.7 million for the full-year 2021 compared to operating income of $4.0 million for the full-year 2020.

The decrease in operating income was primarily driven by the aforementioned increases in SG&A expense.

Comparison of 2021 to 2020 - 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.

Corporate expenses decreased $1.1 million to $6.8 million, or 2.0% of sales, in 2021 down from $7.9 million, or 3.1% of sales, in 2020.

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.

• Decreases in personnel costs related to salaries, wages and employee benefits of $1.7 million driven by a reduction in severance expense in the current year over the prior year;

• Decreases in share-based compensation of $0.8 million over the prior year driven by a reduction in awards outstanding;

• Decreases in travel expense of $0.3 million due to continued reductions in non-essential travel in response to the on-going COVID-19 pandemic.

The full-year decreases were partially offset by increases in :

• Incentive bonus expense of $0.6 million as a result of higher attainment of performance goals in the current year over the prior year;

• Other corporate overhead expenses of $0.8 million driven primarily by increases in taxes and licenses and insurance expense.

Interest expense was $1.5 million and $2.1 million for the full-years of 2021 and 2020, 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.

The decrease was primarily driven by more favorable interest rates associated the Company's debt refinance in the first quarter of 2021.

Non-GAAP Financial Measures

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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.

goodwill impairment, asset impairment, gain on lease modification, stock-based compensation, non-cash lease cost, acquisition costs and other fees, proxy contest costs and recoveries, loss on extinguishment of debt, earn-out adjustments, realized and unrealized (gains) and losses on investments in equity securities and other investments, retention costs and restructuring and severance costs from net income.

We caution investors that 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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($ in thousands) 2021 2020

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

Net income (loss) $ 20,245 $ (27,267)

Interest expense 1,486 2,110

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Acquisition costs and other 1,001 861

Proxy contest costs 3,105 —

Shelf registration costs — 10

Proxy contest costs and recoveries 168 3,105

Loss on extinguishment of debt 223 —

Earn-out adjustments 1,872 (1,195)

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

Asset impairments 6,214 —

Loss (gain) on investments in equity securities and other investments 363 (170)

Asset impairment 233 6,214

Goodwill impairment — 16,203

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Metals Segment

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

Net income (loss) $ 31,893 $ (22,388)

Interest expense — 11

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Earn-out adjustments 1,872 (1,195)

Asset impairments 6,214 —

Asset impairment — 6,214

Goodwill impairment — 16,203

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Retention expense 500 —

Restructuring and severance costs 363 —

Metals Segment Adjusted EBITDA $ 42,963 $ 8,047

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Depreciation 1,932 1,552

Amortization 73 —

EBITDA 5,605 5,607

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 61 —

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) —

Asset impairment 233 —

Stock-based compensation 165 207

Non-cash lease expense 510 560

Retention expense 235 223

Restructuring and severance costs 484 —

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)

Specialty Chemicals Segment Adjusted EBITDA $ 6,548 $ 5,814

% of segment sales 9.7 % 11.3 %

Liquidity and Capital Resources

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Financing activities 15,391 (19,362)

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

Net increase (decrease) in cash and cash equivalents $ 1,785 $ (390)

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.

The increase in net cash provided by operating activities for the full-year 2021 compared to the full-year 2020 was primarily driven by higher net earnings partially offset by changes in working capital.

Accounts receivable decreased operating cash flow for 2021 by approximately $21.7 million over 2020 driven by an increase in net sales partially offset by a decrease in days sales outstanding to 43 days as of December 31, 2021 from 45 days as of December 31, 2020.

The decrease in days sales outstanding was driven by increased collection efforts in the current year.

Inventory decreased operating cash flow for 2021 by approximately $28.0 million over 2020 driven by higher purchases to meet increased customer demand partially offset by increases in inventory turns to 2.91 turns as of December 31, 2021 from 2.55 turns as of December 31, 2020.

The increases in cash used from accounts receivable and inventory were partially offset by an increase in cash provided by accounts payable due to an increase in days payables outstanding to 35 days as of December 31, 2021 from 32 days as of December 31, 2020, as well as changes in accrued income taxes driven in part by tax benefits received as part of the CARES Act.

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).

Net cash used in investing activities primarily consists of transactions related to capital expenditures, proceeds from the disposal of property, plant and equipment and acquisitions.

The increase in cash used in investing activities for the full-year 2021 compared to cash provided by investing activities for the full-year 2020 was primarily driven by an increase in cash outflows related to the DanChem acquisition in the current year partially offset by a decrease in capital expenditures in the current year over the prior year.

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.

The increase in net cash provided by financing activities for the full-year 2021 compared to net cash used in financing activities in the full-year 2020 was primarily due to increased borrowings against the Company's asset backed line of credit driven by the acquisition of DanChem and proceeds received from the Company's Rights Offering in the fourth quarter of 2021.

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.

Our existing cash, cash equivalents, and credit facilities balances may fluctuate during 2022.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, continued effects of the pandemic and other risks detailed in Item 1A - Risk Factors of this report.

We believe our current sources of liquidity will be sufficient to fund operations, debt obligations and anticipated capital expenditures over the next 12 months.

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.

The new Credit Agreement provides the Company with a new four-year revolving credit facility with up to

$150.0 million of borrowing capacity (the "Facility").

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

The initial borrowing capacity under the Facility totals $110.0 million consisting of a $105.0 million revolving line of credit and a $5.0 million delayed draw term loan.

The revolving line of credit includes a $17.5 million machinery and equipment sub-limit which requires quarterly payments of $0.4 million with a balloon payment due upon maturity of the Facility in January 2025.

The term loan requires quarterly payments of $0.2 million with a balloon payment due upon maturity of Facility in January 2025.

We have pledged all of our accounts receivable, inventory, and certain machinery and equipment as collateral for the Credit Agreement.

Availability under the Credit Agreement is subject to the amount of eligible collateral as determined by the lenders' borrowing base calculations.

Amounts outstanding under the revolving line of credit portion of the Facility currently bear interest, at the Company's option, at (a) the Base Rate (as defined in the Credit Agreement) plus 0.50%, or (b) LIBOR plus 1.50%.

Amounts outstanding under the delayed draw term loan portion of the Facility bear interest at LIBOR plus 1.65%.

The Facility also provides an unused commitment fee based on the daily used portion of the Facility.

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.

The Facility contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i) $7.5 million and (ii) 10% of the revolving credit facility (currently $10.5 million).

As of December 31, 2021, the Company was in compliance with all debt covenants.

As of December 31, 2021, the Company has $39.4 million of remaining availability under it credit facility.

Stock Repurchases and Dividends

We repurchase common stock and pay dividends pursuant to programs approved by our Board of Directors.

We may repurchase common stock and pay dividends from time to time 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.

On February 17, 2021, the Board of Directors re-authorized the Company's share repurchase program.

The previous share repurchase program had a term of 24 months and terminated on February 21, 2021.

The share repurchase program allows for repurchase of up to 790,383 shares of the Company's 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.

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The metrics are defined as:

Liquidity Measure:

• Current ratio = current asset divided by current liabilities.

The current ratio will be determined by the Company using generally accepted accounting principles, consistently applied.

Leverage Measure:

• Debt to capital = Total debt divided by total capital.

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

The debt to capital ratio will be determined by the Company using generally accepted accounting principles, consistently applied.

Profitability Ratio:

• Return on average equity ("ROAE") = net income divided by the trailing 12-month average of equity.

The ROAE will be determined by the Company using generally accepted accounting principles, consistently applied.

Results of these additional financial measures are as follows:

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Return on average equity 21.1% (29.2)%

Off-Balance Sheet Arrangements and Contractual Obligations

Material Cash Requirements from Contractual and Other Obligations

As of December 31, 2021, our material cash requirements for our known contractual and other obligations were as follows:

• Debt Obligations and Interest Payments - Outstanding obligations on our revolving credit facility and term loan were $65.6 million and $4.8 million, respectively, with $2.5 million payable within 12 months.

The interest payments on our remaining borrowings will be determined based upon the average outstanding balance of our borrowings and the prevailing interest rate during that time.

See Note 6 for further detail of our debt and the timing of expected future payments.

• Operating and Finance Leases - The Company enters into various lease agreements for real estate and manufacturing equipment used in the normal course of business.

Operating and finance lease obligations were $34.8 million, with $1.3 million payable within 12 months.

See Note 7 for further detail of our lease obligations and the timing of expected future payments.

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

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

We expect capital spending in fiscal 2022 to be as much as $10.0 million.

Critical Accounting Policies and Estimates

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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.

Our significant accounting policies are described in Note 1 to the consolidated financial statements included herein.

We believe the following accounting policies affect the most significant estimates and management judgments 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.

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

Under this method, the total consideration transferred to consummate the business combination 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 transaction.

Judgments and uncertainties involved in the estimate

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.

Fair value determinations involve significant assumptions about highly subjective variables, including future cash flows, discount rates, and expected business performance.

There are also different valuation models and inputs for each component, the selection of which requires considerable judgment.

Our estimates and assumptions may be based, in part, on the availability of listed market prices or other transparent market data.

These determinations will affect the amount of amortization expense recognized in future periods as well the allocation of goodwill, if any, attributable to the transaction.

Effect if actual results differ from assumptions

We base our fair value estimates on assumptions we believe are reasonable, but recognize the assumptions are inherently uncertain.

Depending on the size of the purchase price of a particular acquisition, the mix of intangible assets acquired and expected business performance, the purchase price allocation could be materially impacted by applying a different set of assumptions and estimates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

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.

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.

Our acquisitions may include earn-out liabilities (contingent consideration) as part of the purchase price.

In connection with the American Stainless, MUSA-Galvanized and MUSA-Stainless acquisitions, we are required to make quarterly earn-out payments based on certain performance metrics determined at the time of the acquisition.

These quarterly earn-out payments end in 2022.

The fair value of the earn-out liabilities is estimated as of the acquisition date based on the present value of the contingent payments to be made using the probability-weighted expected return method.

Each quarter-end, the Company re-evaluates its assumptions for all earn-out liabilities and adjusts to reflect the updated fair values.

Judgments and uncertainties involved in the estimate

Our earn-out liability evaluations require us to apply judgment surrounding the unobservable inputs used in the determination of the fair value of the earn-out liabilities.

The calculations require us to apply judgment in estimating expected pounds to be shipped and future price per pound.

We apply judgment in estimating future payments, including the selection of an appropriate discount rate to determine the present value of the contingent payments to be made and liability balance at a period end.

Effect if actual results differ from assumptions

We have not made any material changes in the methodology used to establish our earn-out liabilities in the past two fiscal years.

This approach reasonably estimates future payments related to the earn-out liabilities, however, it is possible that actual results could differ from recorded earn-out liabilities.

Changes in the estimated fair value of the earn-out liabilities are reflected in the results of operations in the periods in which they are identified.

Changes in the fair value of the earn-out liabilities may materially impact and cause volatility in the Company's operating results.

For instance, a 10% change in estimated pounds shipped or future price per pound used in our earn-out liability calculation would not have had a material effect on earnings for 2021.

Goodwill is the excess of the purchase price over the fair value of identifiable assets acquired, less fair value of liabilities assumed, in a business combination.

The Company reviews goodwill for impairment at the reporting unit level, which is the operating segment level or one level below the operating segment level.

A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management.

Goodwill is not amortized but is evaluated for impairment at least annually on October 1

or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable.

The evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary.

If, after assessing qualitative factors, we determine it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is performed.

Judgments and uncertainties involved in the estimate

We make various estimates and assumptions about our goodwill, including whether any potential impairment events have occurred.

Examples of such events or changes in circumstances, many of which are subjective in nature, include the following:

• Significant negative industry or economic trends;

• A significant change in the use of the acquired assets or our strategy;

• A significant divestiture or other disposition activity;

• A significant decrease in the market value of the asset;

• A significant change in legal factors or the business climate that could affect the value of the asset;

• A change in segment by one or more reporting unit

Additionally, we make estimates and assumptions regarding the inputs used to perform a quantitative assessment of our goodwill, if necessary.

The Company performed a discounted cash flow analysis and a market multiple analysis.

The discounted cash flow analysis included management assumptions for expected sales growth, capital expenditures and overall operational forecasts.

The market multiple analysis included historical and projected performance, market capitalization, volatility and multiples for industry peers.

Effect if actual results differ from assumptions

We have not made any material changes in our methodology used to determine whether potential impairment events have occurred or any material changes in the estimates and assumptions used in our quantitative goodwill impairment testing.

During 2021, goodwill was allocated to the Company's Specialty Chemicals Segment and as of December 31, 2021, we determined that no impairment of the carrying value of goodwill for this reporting unit was required.

During the third and fourth quarter of 2020, the Company determined potential indicators of impairment existed within our Welded Pipe and Tube reporting unit existed and quantitatively tested the goodwill assigned to the reporting unit for impairment.

As a result of the quantitative analysis, the Company incurred goodwill impairment expenses of $16.2 million.

In the event that our estimates vary from actual results, we may record additional impairment losses, which could be material to our results of operations.

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

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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.

We record an obsolete inventory reserve for identified finished goods with no sales activity and raw materials with no usage.

This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience.

During 2021, our reserve increased approximately $0.9 million to $1.1 million as of December 31, 2021.

We also record an inventory reserve for the estimated shrinkage (quantity losses) between physical inventories.

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

During 2021, the inventory shrink reserve decreased approximately $0.3 million to $0.2 million as of December 31, 2021, in response to estimated shrinkage rates based on results from previous physical inventories.

Judgments and uncertainties involved in the estimate

We do not believe that our inventories are subject to significant risk of obsolescence in the near term and we have the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions.

However, changes in demand, product life cycle, cost trends, product pricing or a deterioration in product quality could result in the need for additional reserves.

Likewise, changes in the estimated shrink reserve may be necessary, based on the timing and results of physical inventories.

We also apply judgment in the determination of levels of obsolete inventory and assumptions about net realizable value.

Effect if actual results differ from assumptions

We have not made any material changes in the methodology used to establish our reserves for obsolete inventory or inventory shrinkage during the past two fiscal years.

However, it is possible that actual results could differ from recorded reserves.

For instance, a 10% change in the amount of products considered obsolete or the estimated shrinkage rate would not have had a material impact on net earnings for 2021.

Quantitative and Qualitative Disclosures about Market Risk

The Company is a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and is not required to provide the information required by this Item.

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