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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-29 · 141 added, 166 removed, 214 unchanged (59% 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 fiscal years ended December 31, 2021 and December 31, 2020.

This discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the fiscal years ended December 31, 2022 and 2021.

Unless otherwise noted, all references herein for the years 2022 and 2021 represent the fiscal years ended December 31, 2022 and 2021, respectively.

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Executive Overview

On August 5, 2022, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Certificate of Incorporation to change our corporate name from Synalloy Corporation to Ascent Industries Co., effective August 10, 2022 .

The rebrand to Ascent represents our commitment to unlocking the potential of our industrial manufacturing portfolio and embodies the considerable progress that we have made and our growth prospects into the future.

Macroeconomic Events

Economic activity continues to be impacted by ongoing factors driving volatility in global markets including the misalignment of supply and demand for labor, transportation and logistic services, energy, raw materials and other inputs, the inflation of (or unavailability of) raw material inputs and transportation and logistics services, currency fluctuations, rising interest rates, extreme weather and the evolution of the novel coronavirus disease ("COVID-19").

The ongoing factors driving volatility in global markets that could impact our business' earnings and cash flows include, but are not limited to, the factors discussed above, the purchasing of commodities and relative commodity prices.

The Company continues efforts to offset these inflationary pressures and continues to take action to improve working capital and evaluate other opportunities to maintain and improve financial performance in the short and long term.

In February 2022, the United States announced targeted economic sanctions on Russia in response to the military conflict in Ukraine.

This conflict and the associated sanctions have disrupted the global economy, causing heightened cybersecurity risks, supply chain challenges, higher energy costs, and an exacerbation of existing inflationary pressures.

As our operations are located in North America, we have no direct exposure to Russia and Ukraine, however, we are actively monitoring the broader economic impact of the crisis, especially the potential impact on commodity and fuel prices, and the potential decreased demand for our products.

The Inflation Reduction Act of 2022 was signed into law during the third quarter of 2022 and included provisions for an alternative minimum tax and a one percent excise tax on share repurchases.

We anticipate being subject to the excise tax beginning in 2023 and continue to evaluate other provisions of the Inflation Reduction Act for their impact on our business.

Fiscal 2022 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.

Consolidated net sales increased 23.7%, or $79.4 million, compared to 2021 driven by increases in average selling price and the Company's acquisition of DanChem in the fourth quarter of 2021, partially offset by a decrease in pounds shipped.

Excluding the DanChem acquisition, net sales increased 16.1%, or $52.8 million, over 2021.

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.

Consolidated net income increased to $22.1 million in 2022, compared to net income of $20.2 million in 2021.

Earnings per share decreased to $2.12 diluted earnings per share for the full-year 2022 compared to $2.14 diluted earnings per share in

Excluding the DanChem acquisition, consolidated net income increased to $22.0 million and diluted earnings per share increased to $2.11 per share.

For 2022, cash flows from operating activities were $5.6 million, with $5.8 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 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.

Fiscal 2022 represented a year of solid financial performance for the Company with continued execution of our strategy and transformation efforts.

Both of our segments contributed to the success of the Company in 2022, delivering solid financial results along with quality and reliability for our customers.

During the year we continued to make progress on our transformation efforts and strategic priorities by investing in upgrades and new equipment at our facilities to further enhance and improve manufacturing processes, continued to focus on operational efficiencies within our facilities and continued efforts to maximize our working capital use.

As part of these efforts, during the fourth quarter of 2022, the Company began a strategic reassessment of certain operations to drive an increased focus on its core operations and to continue to improve overall performance and operating profitability.

As a result of this reassessment, management and the Board of Directors decided to pursue an exit of the Company's galvanized pipe and tube operations at its Munhall facility, resulting in accelerated depreciation and amortization charges of $0.9 million within our Tubular Products segment in the fourth quarter of 2022.

We believe this will position the Company to focus on its most profitable operations enhancing and building efficiencies while further increasing long-term profitability.

The DanChem acquisition continues to drive growth as we continue to integrate the business with the existing portfolio.

Full-year 2022 results include $32.3 million in net sales and $0.1 million in operating income attributable to the operations acquired in the fourth quarter of 2021.

During the year, we also repurchased 110,404 shares for $1.3 million through our share repurchase program as part of our continued efforts to create sustainable value for our shareholders.

Results of Operations

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Consolidated net sales for the full-year 2022 increased $79.4 million, or 23.7%, over the full-year 2021 to $414.1 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.

The increase in net sales was primarily driven by a 42.2% increase in average price partially offset by a 14.0% decrease in pounds shipped.

Excluding DanChem, net sales increased $52.8 million, or 16.1%, to $381.9 million driven by a 44.0% increase in average selling price partially offset by a 18.9% decrease in pounds shipped.

Full-year 2022 consolidated gross profit decreased 7.0% to $56.5 million, or 13.7% of sales, compared to $60.8 million, or 18.2% of sales, in the full-year 2021.

The decrease in dollars and percentage of sales for the full-year 2022 were attributable to increasing raw material and freight costs.

Consolidated selling, general and administrative expense (SG&A) for the full-year 2022 increased by $4.8 million to $35.0 million compared to $30.1 million for the full-year 2021.

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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.

• Increases in professional fees primarily driven by accounting, tax and other advisory related costs;

• Increases in amortization expense primarily driven by DanChem acquisition related intangibles;

• Increases in repairs and maintenance costs in our facilities;

• Increases in travel expenses;

• Increases in other expenses primarily driven by increases in share-based compensation, bad debt expense, utilities, 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

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

• Decreases in taxes and licenses in the current year compared to the prior year.

Consolidated operating income for the full-year 2022 totaled $20.4 million compared to operating income of $27.3 million for the full-year 2021.

The operating income decrease for the full-year 2022 was primarily driven by aforementioned increasing raw material and freight costs and increased SG&A expenses.

Comparison of 2022 to 2021 - Tubular Products

Net sales for the Tubular Products segment totaled $306.6 million for the full year of 2022, an increase of 14.7% compared to the full-year 2021.

The increase in net sales was primarily driven by a 45.3% increase in average selling prices partially offset by a 20.3% decrease in pounds shipped.

The net sales increase (decrease) for the full-year 2022 compared to the full-year 2021 is summarized as follows:

(in thousands) $ % Average Selling Price Units Shipped

Fiberglass and steel liquid storage tanks and separation equipment $ (932) (69.4) % 29.6 % (78.1) %

Heavy wall seamless carbon steel pipe and tube 7,687 19.0 % 34.4 % (11.5) %

Stainless steel pipe and tube 36,242 19.4 % 32.9 % (10.2) %

Galvanized pipe and tube (3,630) (9.4) % 49.4 % (39.3) %

Total increase $ 39,367

SG&A expense decreased $2.4 million, or 13.2%, for the full-year 2022 when compared to 2021.

SG&A as a percentage of sales was 5.0% of sales for 2022 and 6.7% of sales for 2021.

The changes in SG&A expense were primarily driven by decreases in incentive bonus primarily driven by lower attainment of performance goals in the current year over the prior year and lower allocated costs in the current year compared to the prior year.

The full-year decreases were partially offset by increases in travel and bad debt expenses.

Operating income decreased to $27.6 million for the full-year 2022 compared to operating income of $33.6 million for the full-year 2021.

The operating income decrease for the full-year 2022 was primarily driven by increased raw material and freight costs.

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

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15,477 5.0 % 17,836 6.6 %

Asset impairment — — % 6,214 3.0 %

Goodwill impairment — — % 16,203 7.9 %

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

Operating income $ 27,607 9.0 % $ 33,561 12.6 %

Comparison of 2022 to 2021 – Specialty Chemicals

Net sales for the Specialty Chemicals segment increased 59.4%, or $40.1 million, to $107.5 million for 2022 compared to $67.5 million in 2021.

The increase in net sales was primarily driven by a 52.2% increase in average selling prices partially offset by a 3.1% decrease in pounds shipped.

Excluding DanChem, net sales increased $13.5 million, or 21.8%, to $75.2 million driven by a 45.2% increase in average selling prices partially offset by a 16.3% decrease in pounds shipped.

SG&A expense increased $0.9 million or 15.6%, to $6.9 million in 2022 when compared to 2021.

Excluding DanChem, SG&A expense decreased $3.2 million, or 62.1% compared to 2021.

SG&A as a percentage of sales decreased to 6.5% in 2022 from 8.8% in 2021.

The changes in SG&A expense were primarily driven by increases in amortization expense related to DanChem acquisition related intangibles and incentive bonuses due to higher attainment of performance goals.

The increases were partially offset by lower allocated costs in the current year compared to the prior year and decreases in salaries, wages and benefits.

Operating income increased to $7.0 million for the full-year 2022 compared to operating income of $3.6 million for the full-year 2021.

The increase in operating income was primarily driven by the aforementioned increases in average selling prices partially offset increases in SG&A expense.

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

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Operating income $ 6,971 6.5 % $ 3,656 5.4 %

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 2022 to 2021 - Corporate

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:

• 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.

Corporate expenses increased $6.2 million to $13.0 million, or 3.1% of sales, in 2022 up from $6.8 million, or 2.0% of sales, in 2021.

The full-year increase resulted primarily from decreases in allocated costs in the current year over the prior year, increases in professional fees related to accounting, tax and other advisory related costs, share-based payment expense partially offset by decreases in salaries, wages and benefits and incentive bonus due to lower attainment of performance goals.

Interest expense was $2.7 million and $1.5 million for the full-years of 2022 and 2021, respectively.

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

The increase was primarily driven by higher average debt outstanding and increasing interest rates in 2022 compared to 2021.

The Company's effective tax rate for 2022 was less than the U.S.

statutory rate of 21% primarily driven by tax benefits associated with the closure of Palmer and the release of valuation allowances on certain deferred tax assets, partially offset by state taxes.

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.

EBITDA and Adjusted EBITDA.

Management believes that these non-GAAP measures are useful because they are key measures used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions as well as 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.

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These items include:

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.

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, shelf registration costs, 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.

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($ in thousands) 2022 2021

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

Net income $ 22,066 $ 20,245

Interest expense 2,742 1,486

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Acquisition costs and other 1,200 1,001

Shelf registration costs 12 —

Proxy contest costs and recoveries — 168

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Earn-out adjustments (7) 1,872

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

Loss on investments in equity securities and other investments — 363

Asset impairment — 233

Goodwill impairment — 16,203

Gain on lease modification (2) —

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% sales 8.7 % 13.2 %

Metals Segment EBITDA and Adjusted EBITDA are as follows:

Tubular Products EBITDA and Adjusted EBITDA are as follows:

Year Ended December 31,

($ in thousands) 2022 2021

Metals Segment

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

Tubular Products

Net income $ 27,644 $ 31,893

Interest expense 1 —

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Earn-out adjustments (7) 1,872

Asset impairment — 6,214

Goodwill impairment — 16,203

Stock-based compensation 100 129

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Restructuring and severance costs 20 363

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

Tubular Products Adjusted EBITDA $ 35,760 $ 42,963

% of segment sales 11.7 % 16.1 %

Specialty Chemicals Segment EBITDA and Adjusted EBITDA are as follows:

Specialty Chemicals EBITDA and Adjusted EBITDA are as follows:

Year Ended December 31,

($ in thousands) 2022 2021

Specialty Chemicals Segment

Specialty Chemicals

Net income $ 6,935 $ 3,589

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Stock-based compensation 41 165

Non-cash lease expense 2 —

Restructuring and severance costs 8 484

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

Specialty Chemicals Adjusted EBITDA $ 11,771 $ 6,548

% of segment sales 10.9 % 9.7 %

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

Sources of Liquidity

Funds generated by operating activities supplemented by our available cash and cash equivalents and our credit facilities are our most significant sources of liquidity.

As of December 31, 2022, we held $1.4 million of cash and cash equivalents, as well as $37.6 million of remaining available capacity on our revolving line of credit.

Our existing cash, cash equivalents, and credit facilities balances may fluctuate during 2023.

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 sources of liquidity will be sufficient to fund operations and anticipated capital expenditures as well as repay our debt obligations as they become due over the next 12 months and beyond.

Cash flows were as follows:

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Financing activities (1,182) 15,391

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

Net (decrease) increase in cash and cash equivalents $ (580) $ 1,785

Operating Activities

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.

The decrease in cash provided by operating activities for the year ended December 31, 2022 compared to cash provided by operating activities in the year ended December 31, 2021 was primarily driven by changes in working capital.

Changes in working capital can vary significantly depending on factors such as the timing of inventory production and purchases, customer payments of accounts receivable and payments to vendors in the regular course of business.

Inventory decreased operating cash flows for the year ended December 31, 2022 by approximately $13.8 million compared to a decrease of approximately $18.9 million for 2021, while accounts payable decreased operating cash flows by approximately $10.3 million for the year ended December 31, 2022 compared to an increase of approximately $10.8 million for the year ended December 31, 2021.

The increase in inventory is primarily due to product cost and freight inflation over the prior year, partially offset by slightly higher inventory turns year-over-year while the decrease in accounts payable is primarily driven by a decrease in days payables outstanding.

Accounts receivable increased operating cash flow by approximately $4.0 million compared to a decrease of $16.2 million driven by higher sales in the current year partially offset by slightly lower days sales outstanding.

Investing Activities

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.

The decrease in cash used in investing activities for the full-year 2022 compared to cash used in investing activities for the full-year 2021 was primarily driven by an increase in cash outflows related to the DanChem acquisition in the prior year not in the current year partially offset by an increase 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 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.

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

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.

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 increase in net cash used in financing activities for the full-year 2022 compared to net cash provided by financing activities in the full-year 2021 was primarily due to increased borrowings against the Company's asset backed line of credit driven by the acquisition of DanChem in the prior year not in the current year and proceeds received from the Company's Rights Offering in the fourth quarter of 2021 that were not received in 2022.

Short-term Debt

The Company has a note payable in the amount of $1.0 million with an annual interest rate of 2.77% maturing April 1, 2023, associated with the financing of the Company's insurance premium in the current year.

As of December 31, 2022, the outstanding balance was $0.4 million.

Long-term Debt

The Company and its subsidiaries have a Credit Agreement with BMO providing the Company with a four-year revolving credit facility, maturing on January 15, 2025, and providing the Company with up to $150.0 million of borrowing capacity.

As of December 31, 2022, the Company had $71.5 million of total borrowings outstanding with its lender, an increase of $1.2 million from the balance at December 31, 2021.

As of December 31, 2022, the Company had $37.6 million of remaining availability under it credit facility.

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.

As of December 31, 2022, the Company was in compliance with all financial debt covenants.

See Note 6 in the notes to the consolidated financial statements for additional information on the Company's line of credit.

Stock Repurchases and Dividends

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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 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.

On December 20, 2022, the Board of Directors re-authorized the Company's share repurchase program.

The previous share repurchase program had a term of 24 months and was set to expire on February 17, 2023.

The share repurchase program allows for repurchase of up to 790,383 shares of the Company's outstanding common stock and extends to February 17, 2025.

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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As of December 31, 2022, the Company has 679,979 shares of its share repurchase authorization remaining.

Stock repurchase activity was as follows:

Shares repurchased for the year ended December 31, 2022 and 2021 were as follows:

Year ended December 31,

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

Earn-Out Liabilities

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.

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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.

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.

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During 2022, goodwill was allocated to the Company's Specialty Chemicals segment and as of December 31, 2022, 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.

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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.

During 2022, the inventory shrink reserve had an immaterial increase in response to estimated shrinkage rates based on results from previous physical inventories.

Our inventory reserve for estimated shrinkage was $0.2 million as of December 31, 2022.

Judgments and uncertainties involved in the estimate

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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.

For instance, a 10% change in the amount of products considered obsolete would have decreased net earnings by $2.7 million for 2022.

A 10% change in the estimated shrinkage rate would not have had a material impact on net earnings for 2022.

In determining income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax expense, the resultant tax liabilities and the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

In addition, deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Valuation allowances are established when realization of the benefit of deferred tax assets is not deemed to be more likely than not.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We recognize net tax benefits under the recognition and measurement criteria of FASB ASC Topic 740, Income Taxes, which prescribes requirements and other guidance for financial statement recognition and measurement of positions taken or expected to be taken on tax returns.

We record interest and penalties, if any, related to uncertain tax positions as a component of income tax expense.

Judgments and uncertainties involved in the estimate

We assess on a tax jurisdictional basis the likelihood that our deferred tax assets can be recovered.

If recovery is not more likely than not (a likelihood of less than 50 percent), the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to ultimately be recoverable.

In this process, certain relevant criteria are evaluated including:

the amount of income or loss in prior years, the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years that can be used to absorb net operating losses and credit carry backs, future expected taxable income and prudent and feasible tax planning strategies.

Changes in taxable income, market conditions, tax laws and other factors may change our judgment regarding whether we will be able to realize the deferred tax assets.

These changes, if any, may require material adjustments to the net deferred tax assets and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made.

The utilization of certain deferred tax assets is dependent on the amount and timing of taxable income that we will ultimately generate in the future and other factors, such as changes in tax laws.

We also assess the likelihood that our tax reporting positions will ultimately be sustained.

To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion, or all, of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability.

Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes in tax laws and other factors.

These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made.

We have provided valuation allowances as of December 31, 2022, aggregating to $1.7 million against certain state and local net operating loss carryforwards and other deferred tax assets.

As of December 31, 2022, the Company has no liability for unrecognized income tax benefits.

Effect if actual results differ from assumptions

Although management believes that the estimates and judgments discussed herein are reasonable, actual results could differ, which could result in income tax expense or benefits that could be material.

Quantitative and Qualitative Disclosures about Market Risk

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What changed 10-K

Item 7. Management’s Discussion and Analysis