On June 23, 2016, the United Kingdom voted to leave the European Union (the “EU”), which triggered short-term financial volatility, including a decline in the value of the British pound in comparison to both the U.S. dollar and the euro. Before the United Kingdom leaves the EU, a process of negotiation is required to determine the future terms of the United Kingdom’s relationship with the EU. The uncertainty before, during and after the period of negotiation could have a negative economic impact and result in further volatility in the markets for several years. Such ongoing uncertainty may result in various economic and financial consequences for businesses operating in the United Kingdom, the EU and beyond.
During the Successor period September 1, 2017 through December 31, 2017, approximately 0.1% of our consolidated net sales were attributable to operations in the United Kingdom, and approximately 9.3% of our consolidated net sales were attributable to operations in Europe overall. During the Predecessor period January 1, 2017 through August 31, 2017, approximately 2.3% of our consolidated net sales were attributable to operations in the United Kingdom, and approximately 9.4% of our consolidated net sales were attributable to operations in Europe overall. The Company and its various subsidiaries hold financial assets and liabilities denominated in British pounds, including cash and cash equivalents, accounts receivable, and accounts payable, and the future impacts of the United Kingdom’s exit from the EU could have a materially adverse impact on our financial condition and operating results.
A portion of our workforce is represented by collective bargaining units, which may lead to work stoppages.
As of December 31, 2017,2020, approximately 21%18% of our U.S. employees were represented by the United Steelworkers of America (“USW”)USW under collective bargaining agreements, including hourly warehouse employees at our distribution centers in Cleveland, Ohio and Hammond, Indiana. As these agreements expire, there can be no assurance that we will succeed in concluding collective bargaining agreements with the USW to replace those that expire. Although we believe that our labor relations have generally been satisfactory, we cannot predict how stable our relationships with the USW will be or whether we will be able to meet the USW requirements without impacting our operating results and financial condition. The USW may also limit our flexibility in dealing with our workforce. Work stoppages and instability in our relationship with the USW could negatively impact the timely processing and shipment of our products, which could strain relationships with customers or suppliers and adversely affect our operating results. On October 1, 2014,Effective May 15, 2018, we entered into a four-year collective bargaining agreement with the USW, which covers approximately 10459 employees at our largest facility in Cleveland, Ohio. This agreement is scheduled to expire in September 2018, and our goal is to engage in early negotiations in the spring of 2018 to secure another four-year agreement and avoid disruption to the business. Approximately 2821 employees at our Hammond, Indiana facility are covered by a separate collective bargaining agreement with the USW that was renegotiated in August 2016effective September 1, 2020 and expires in August 2020.
on March 31, 2024.We rely upon our suppliers as to the specifications of the metals we purchase from them.
We rely on mill or supplier certifications that attest to the physical and chemical specifications of the metals received from our suppliers for resale and generally, consistent with industry practice, do not undertake independent testing of all such metals. We rely on our customers to notify us of any product that does not conform to the specifications certified by the supplier or ordered by the customer. Although our primary sources of products have been domestic suppliers, we have and will continue to purchase product from foreign suppliers when we believe it is appropriate. In the event that metal purchased from domestic suppliers is deemed to not meet quality specifications as set forth in the mill or supplier certifications or customer specifications, we generally have recourse against these suppliers for both the cost of the products purchased and possible claims from our customers. However, such recourse will not compensate us for the damage to our reputation that may arise from sub-standard products and possible losses of customers. Moreover, there is a greater level of risk that similar recourse will not be available to us in the event of claims by our customers related to products from foreign suppliers that do not meet the specifications set forth in the mill or supplier certifications. In such circumstances, we may be at greater risk of loss for claims for which we do not carry, or do not carry sufficient, insurance.
Our business could be adversely affected by a disruption to our primary distribution hubs.
Our largest facilities, in Cleveland (Ohio), Hammond (Indiana), and Janesville (Wisconsin) serve as primary distribution centers that ship product to our other facilities as well as external customers. Our business could be adversely impacted by a major disruption at any of these facilities due to unforeseen developments occurring in or around the facility, such as:
| ● | damage to or inoperability of our warehouse or related systems; |
| ● | a prolonged power or telecommunication failure; |
| ● | a natural disaster, environmental or public health issue or pandemic, or an act of war or terrorism on-site. |
damage to or inoperability of our warehouse or related systems;
a prolonged power or telecommunication failure;
a natural disaster, environmental or public health issue, or an act of war or terrorism on-site.
A prolonged disruption of the services and capabilities of these or other of our facilities could adversely impact our operating results.
Damage to or a disruption in our information technology systems could impact our ability to conduct business and could subject us to liability for failure to comply with privacy and information security laws.
Difficulties associated with the design and implementation of our enterprise resource planning (“ERP”) or other information technology systems could adversely affect our business, our customer service and our operating results.
We rely primarily on one information technology system to provide inventory availability to our sales and operating personnel, improve customer service through better order and product reference data and monitor operating results. Difficulties associated with upgrades or integration with new systems could lead to business interruption that could harm our reputation, increase our operating costs and decrease profitability. In addition, any significant disruption relating to our current information technology systems, whether resulting from such things as fire, flood, tornado and other natural disasters, power loss, network failures, loss of data, security breaches and computer viruses, or otherwise, may have an adverse effect on our business, our operating results and our ability to report our financial performance in a timely manner.
The success of our business depends on the security of our networks and, in part, on the security of the network infrastructures of our third-party vendors. In connection with conducting our business in the ordinary course, we store and transmit limited amounts of customer, vendor, and employee information, including account or credit card information, and other personally identifiable information. Unauthorized or inappropriate access to, or use of, our networks, computer systems or services, whether intentional, unintentional or as a result of criminal activity, could potentially jeopardize the security of this confidential information. A number of other companies have publicly disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their networks. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the perception of the effectiveness of our security measures could be harmed and we could lose employees, customers, or vendors. A party that is able to circumvent our security measures could misappropriate our proprietary information or the information of our customers, vendors, or employees, cause interruption in our operations, or damage our computers or those of our customers or vendors which could expose us to claims from such persons or from regulators, financial institutions or others with whom we do business, any of which could have an adverse impact on our financial condition and results of operations.
We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach related to us or the parties with which we have commercial relationships, could damage our reputation and expose us to a risk of loss, litigation, and possible liability. We cannot give assurance that the security measures we take will be effective in preventing these types of activities. We also cannot give assurance that the security measures of our third-party vendors, including network providers, providers of customer and vendor support services, and other vendors, will be adequate. In addition to potential legal liability, these activities may adversely impact our reputation or our revenues and may interfere with our ability to provide our products and services, all of which could adversely impact our business.
Ownership of our stock is concentrated, which may limit stockholders’ ability to influence corporate matters.
Following our bankruptcy, the Company’s ownership is concentrated among a small group of institutional investors and/or hedge funds and the Company’s management team. Certain directors, their affiliates, and/or any other concentrated ownership interests may have the voting power to substantially affect or control the outcome of matters requiring a stockholder vote including the election of directors and the approval of significant corporate matters. Such a concentration of control could adversely affect the market price of our common stock or prevent a change in control or other business combinations that might be beneficial to us.
General Risk Factors
We could be vulnerable to interest rate fluctuations on our indebtedness, which could hurt our operating results.
We are exposed to various interest rate risks that arise in the normal course of business. Market risk arises from changes in interest rates. We currently finance our operations with both fixed rate and variable rate borrowings, and the fair market value of our $168.8$149.9 million of fixed rate borrowings outstanding as of December 31, 2020 may be impacted by changes in interest rates. In addition, if in the future interest rates subsequently increase significantly, it could significantly increase the interest expense on our variable rate borrowings which could have an adverse effect on our operating results and liquidity.
Commodity hedging transactions may expose us to loss or limit our potential gains.
We have entered into certain fixed price sales contracts with customers which expose us to risks associated with fluctuations in commodity prices. As part of our risk management program, we may use financial instruments from time-to-time to mitigate all or portions of these risks, including commodity futures, forwards or other derivative instruments. While intended to reduce the effects of the commodity price fluctuations, these transactions may limit our potential gains or expose us to losses. Also, should our counterparties to such transactions fail to honor their obligations
due to financial distress, we would be exposed to potential losses or the inability to recover anticipated gains from these transactions. As of December 31, 2017, we are not a direct party to any derivative instruments.
We may face risks associated with current or future litigation and claims.
From time to time, we are involved in a variety of lawsuits, claims and other proceedings relating to the conduct of our business. These suits concern issues including contract disputes, employment actions, employee benefits, taxes, environmental, health and safety, personal injury and product liability matters. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While it is not feasible to predict the outcome of all pending lawsuits and claims, we do not believe that the disposition of any such pending matters is likely to have a materially adverse effect on our financial condition or liquidity, although the resolution in any reporting period of one of more of these matters could have an adverse effect on our operating results for that period. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results.
We could incur substantial costs in order to comply with, or to address any violations under, environmental and employee health and safety laws, which could adversely affect our operating results.
Our operations are subject to various environmental statutes and regulations, including laws and regulations governing materials we use and our facilities. In addition, certain of our operations are subject to international, federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Our operations are also subject to various employee safety and health laws and regulations, including those concerning occupational injury and illness, employee exposure to hazardous materials and employee complaints. Certain of our facilities are located in industrial areas, have a history of heavy industrial use and have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Currently unknown cleanup obligations at these facilities, or at off-site locations at which materials from our operations were disposed, could result in future expenditures that cannot be currently quantified, but which could have a material adverse effect on our financial condition, liquidity or operating results.
Potential environmental legislative and regulatory actions could impose significant costs on the operations of our customers and suppliers, which could have a material adverse impact on our results of operations, financial condition and cash flows.
Climate change regulation or some form of legislation aimed at reducing greenhouse gas (‘‘GHG’’) emissions is currently being considered in the United States as well as elsewhere globally. As a metals distributor, our operations do not emit significant amounts of GHG.greenhouse gas (“GHG”). However, the manufacturing processes of many of our suppliers and customers are energy intensive and generate carbon dioxide and other GHG emissions. Any adopted future climate change and GHG regulationslegislative or regulatory measures may impose significant costs on the operations of our customers and suppliers and indirectly impact our operations.
Until the timing, scope and extent of any future legislation and regulation becomes known, we cannot predict the effect on our results of operations, financial condition and cash flows.
Our business could be negatively impacted by cyber and other security threats or disruptions.
We haveface various mechanisms in place thatcyber and other security threats, including attempts to gain unauthorized access to our sensitive information and computer networks. Unauthorized or inappropriate access to, or use of, our computer networks or systems may prevent a change in control that stockholders may otherwise consider favorable.
In August 2013, we elected by resolution of the Board of Directors to become subject to Section 3-803 of the Maryland General Corporation Law (the “MGCL”). Asbe intentional, unintentional or a result of
this election,criminal activity. Such unauthorized or inappropriate access may lead to the
Boardcorruption of
Directors was classified into three separate classes of directors, with each class generally serving three-year terms. Only one class of directors will be elected at each annual meetingdata, which could cause interruption in our operations or damage our computer systems or those of our
stockholders,customers or vendors. A party that is able to circumvent our security measures could also gain unauthorized access to confidential, proprietary, personal or other sensitive information or capabilities, which may belong to third parties, our employees or us.The occurrence of such threats, attacks or incidents exposes us to risk of loss and possible claims brought by our customers, employees or other parties with the other classes continuing for the remainder of their respective three-year terms. The provision for a classified board could prevent a party who acquires control of a majority of our outstanding voting stock from obtaining control of our Board of Directors until the second annual stockholders meeting following the date the acquiring party obtains the controlling interest. The classified board provision could discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us and could increase the likelihood that incumbent directors will retain their positions.
whom we have commercial relationships, as well as actions by government regulators. In addition our charter and by-laws and the MGCL include provisions thatto potential legal liability, these activities may be deemed to have anti-takeover effects and may delay, defer or prevent a takeover attempt that stockholders might consider to be in their best interests. For example, the MGCL, our charter and bylaws require the approval of the holders of two-thirds of the votes entitled to be cast on the matter to amend our charter (unless our Board of Directors has unanimously approved the amendment,
in which case the approval of the holders of a majority of such votes is required), and contain certain advance notice procedures for nominating candidates for election to our Board of Directors.
Furthermore, we are subject to the anti-takeover provisions of the MGCL that prohibit us from engaging in a “business combination”interfere with an “interested stockholder” for a period of five years after the date of the transaction in which the person first becomes an “interested stockholder,” unless the business combination or stockholder interest is approved in a prescribed manner. The application of these and certain other provisions of our charter or the MGCL could have the effect of delaying or preventing a change of control, which could adversely affect the market price of our common stock.
The provisions of our debt instruments also contain limitations on our ability to
enter into changeprovide our products and services. Further, a perception that our security measures are ineffective against security incidents could damage our reputation, and we could lose employees, customers or vendors. Any of
control transactions. In addition,these occurrences could have an adverse impact on our financial condition and results of operations.Thus, the repurchase rights in our Second Lien Notes triggered by the occurrence of a fundamental change (as defined in the indenture for the Second Lien Notes), and the additional sharessuccess of our common stockbusiness depends on the security of our computer networks and systems and, in part, on the security of the computer networks and systems of our third-party vendors. Although we utilize various procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures and controls will be sufficient. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, we may be unable to anticipate these techniques
or to implement adequate preventative measures. We also cannot give assurance that the security measures of our third-party vendors, including network and system providers, providers of customer and vendor support services and other vendors will be adequate. Thus, we may need to expend significant resources to protect against security breaches or to address problems caused by which the conversion rate is increased in connection with certain fundamental change transactions, as described in the indenture for the Second Lien Notes, could discourage a potential acquirer.
ITEM 1B —
Unresolved Staff CommentsNone.
The Company’s corporate headquarters are located in Oak Brook, Illinois. All properties and equipment are sufficient for the Company’s current level of activities. As of December 31, 2017,2020, distribution centers and sales offices are maintained at each of the following locations, most of which are leased, except as indicated:
| | | | |
| | Approximate | | |
| | Floor Area in | | |
Locations | | Square Feet | | |
North America | | | | |
Bedford Heights, Ohio | | 374,400 | | (1) |
Charlotte, North Carolina | | 116,600 | | (1) |
Chihuahua, Mexico | | 30,000 | | |
Fairless Hills, Pennsylvania | | 71,600 | | (1) |
Grand Prairie, Texas | | 78,000 | | (1) |
Hammond, Indiana (H-A Industries) | | 252,595 | | |
Janesville, Wisconsin | | 208,000 | | |
Kennesaw, Georgia | | 69,100 | | |
Mexicali, Mexico | | 160,220 | | |
Mississauga, Ontario | | 57,000 | | |
Paramount, California | | 155,568 | | |
Queretaro, Mexico | | 32,291 | | |
Santa Cantarina, Nuevo Leon, Mexico | | 97,692 | | |
Selkirk, Manitoba | | 50,000 | | (1) |
Stockton, California | | 60,000 | | |
Wichita, Kansas | | 120,119 | | |
Europe | | | | |
Tarbes, France | | 36,705 | | |
Montoir de Bretagne, France | | 38,940 | | |
Asia | | | | |
Chengdu, China | | 20,796 | | |
Shanghai, China | | 45,700 | | |
Singapore | | 41,000 | | |
Sales Offices | | | | |
Bilbao, Spain | | (Intentionally left blank) | | |
Sub-Total | | 2,116,326 | | |
| | | | |
Headquarters | | | | |
Oak Brook, Illinois | | 39,361 | | (2) |
GRAND TOTAL | | 2,155,687 | | |
|
| | | |
| Locations | Approximate Floor Area in Square Feet |
| |
| North America | | |
| Bedford Heights, Ohio | 374,400 |
| (1) |
| Charlotte, North Carolina | 116,500 |
| (1) |
| Fairless Hills, Pennsylvania | 71,600 |
| (1) |
| Fort Smith, Arkansas | 28,000 |
| |
| Grand Prairie, Texas | 78,000 |
| (1) |
| Hammond, Indiana (H-A Industries) | 252,595 |
| |
| Janesville, Wisconsin | 208,000 |
| |
| Kennesaw, Georgia | 87,500 |
| |
| Mexicali, Mexico | 160,220 |
| |
| Mississauga, Ontario | 57,000 |
| |
| Paramount, California | 155,568 |
| |
| Queretaro, Mexico | 32,291 |
| |
| Santa Cantarina, Nuevo Leon, Mexico | 97,692 |
| |
| Saskatoon, Saskatchewan | 15,000 |
| |
| Selkirk, Manitoba | 50,000 |
| (1) |
| Stockton, California | 60,000 |
| |
| Wichita, Kansas | 68,900 |
| |
| Europe | | |
| Trafford Park, England | 30,000 |
| |
| Tarbes, France | 36,705 |
| |
| Montoir de Bretagne, France | 38,940 |
| |
| Asia | | |
| Shanghai, China | 45,700 |
| |
| Singapore | 39,578 |
| |
| Sales Offices | | |
| Auburn, Massachusetts | (Intentionally left blank) |
| |
| Bilbao, Spain | (Intentionally left blank) |
| |
| Fairfield, Ohio | (Intentionally left blank) |
| |
| Sub-Total | 2,104,189 |
| |
| | | |
| Headquarters | | |
| Oak Brook, Illinois | 39,361 |
| (2) |
| GRAND TOTAL | 2,143,550 |
| |
| |
| (1) | Represents owned facility. |
| |
| (2) | The Company’s principal executive office does not include a distribution center. |
ITEM 3 —Legal Proceedings
TheFrom time to time, the Company is party to a variety of legal proceedings, claims, and inquiries, including proceedings or inquiries by governmental authorities, which arise from the operation of its business. These proceedings, claims, and inquiries are incidental to and occur in the normal course of the Company'sCompany’s business affairs. The majority of these proceedings, claims, and inquiries relate to commercial disputes with customers, suppliers, and others; employment and employee benefits-related disputes; product quality disputes with vendors and/or customers; and environmental, health and safety claims. ItAlthough the outcome of these proceedings is the opinion ofinherently difficult to predict, management believes that the currently expectedamount of any judgment, settlement or other outcome of these proceedings, claims and inquiries, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on the Company’s consolidated results of operations, financial condition or cash flows of the Company.
ITEM 4 —
Mine Safety Disclosures
Executive Officers of the Registrant
The following selected information for each of our current executive officers (as defined by regulations of the SEC) was prepared as of March 14, 2018. |
| | | | |
Name and Title | Age | | Business Experience |
Patrick R. Anderson
Executive Vice President, Chief Financial Officer & Treasurer
| 46 |
| | Mr. Anderson began his employment with the registrant in 2007 as Vice President, Corporate Controller and Chief Accounting Officer. In September 2014, he was appointed to the position of Interim Vice President, Chief Financial Officer and Treasurer, and in May 2015 was appointed to his current role as the Executive Vice President, Chief Financial Officer & Treasurer. Prior to joining the registrant, he was employed with Deloitte & Touche LLP (a global accounting firm) from 1994 to 2007. |
Marec E. Edgar
Executive Vice President, General Counsel, Secretary & Chief Administrative Officer
| 42 |
| | Mr. Edgar began his employment with the registrant in April 2014, as Vice President, General Counsel and Secretary. In May 2015, he was appointed to his current role as Executive Vice President, General Counsel, Secretary & Chief Administrative Officer. Prior to joining the registrant, he held positions of increasing responsibility with Gardner Denver, Inc. (a global manufacturer of industrial compressors, blowers, pumps, loading arms and fuel systems) from 2004 to 2014. Most recently, he served as Assistant General Counsel and Risk Manager and Chief Compliance Officer of Gardner Denver. |
Ronald E. Knopp
Executive Vice President, Chief Operating Officer | 47 |
| | Mr. Knopp began his employment with the registrant in 2007 and was appointed to the position of Operations Manager of the Bedford Heights facility. In 2009, he was appointed Director of Operations for the Western Region and in 2010 served as Director of Operations for the Metals and Plate Commercial Units. In July 2013, Mr. Knopp was appointed to the position of Vice President, Operations, and in May 2015 was appointed to his current position as Executive Vice President, Chief Operating Officer. Prior to joining the registrant, Mr. Knopp served as Plant Manager for Alcoa, Inc., Aerospace Division (global producer of aluminum) from 2003 to 2007. |
Steven W. Scheinkman
President & Chief Executive Officer
| 64 |
| | President and Chief Executive Officer of the Company since April 2015. Mr. Scheinkman also served as an independent member of the Company’s Board of Directors from March 2015 to April 2015. Prior to joining the registrant, Mr. Scheinkman served as President and Chief Executive Officer and a director of Innovative Building Systems LLC, and certain of its affiliates and predecessor entities (a leading customer modular home producer) since 2010. He served as a director of Claymont Steel Holdings, Inc. (a manufacturer of custom discrete steel plate) from 2006 to 2008. He served as the President and Chief Executive Officer and a director of Transtar Metals Corp. (“Transtar”) (a supply chain manager/distributor of high alloy metal products for the transportation, aerospace and defense industries) from 1999 to 2006. Following Transtar’s acquisition by the Company in September 2006, he served as President of Transtar Metals Holdings, Inc. until September 2007, and thereafter served as its advisor until December 2007. He served in various capacities as an executive officer of Macsteel Service Centers USA (a distributor and processor of steel products) including President, Chief Operating Officer and Chief Financial Officer, from 1986 to 1999.
|
PART II
PART II
ITEM 5 — Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
In connection with our reorganization and emergence from bankruptcy, on the Effective Date all of our outstanding pre-emergence common stock and all other equity interests inOn December 28, 2020, the Company (as defined in the Plan and which include the Company’s prior commonfiled articles of amendment to effect a reverse stock $0.01 par value per share, warrants to purchase 2.5 million shares of the Company’s prior common stock at an exercise price of $0.50 per share, and warrants to purchase 2.5 million shares of the Company’s prior common stock at an exercise price of $0.65 per share) were automatically canceled and extinguished as of such date. Pursuant to the Plan, on the Effective Date, the Company created a new class of common stock, par value $0.01 per share (the “New Common Stock”).
On the Effective Date, by operation of the Plan, the Company issued an aggregate of 2.0 million shares of its New Common Stock, as follows:
1.3 million shares were issued to the holders of Prepetition Second Lien Secured Claims (as defined by the Plan) in partial satisfaction of their claims, pursuant to an exemption from the registration requirements of the Securities Act under Section 4(a)(2) of such act and Regulation D promulgated thereunder;
0.3 million shares were issued to the holders of Prepetition Third Lien Secured Claims (as defined by the Plan) in partial satisfaction of their claims, pursuant to an exemption from the registration requirements of the Securities Act under Section 4(a)(2) of such act and Regulation D promulgated thereunder;
0.4 million shares were issued to participating holderssplit of the Company’s outstanding shares of common stock, pursuant to Section 2-309(e) of the Maryland General Corporation Law, whereby each 10 shares of common stock issued and outstanding as of August 2, 2017 in partial satisfactionDecember 29, 2020 was combined into one whole share of their interests, pursuant to an exemption from the registration requirements of the Securities Act under Section 1145 of the Bankruptcy Code; and
Pursuant to the Plan, on September 1, 2017, the Company issued 1.7 millioncommon stock. No fractional shares of
restrictedcommon stock
together with an aggregate original principal amount of $2.4 million of restricted notes convertible into an additional 0.6 million shares of New Common Stock as of the Effective Date, were issued as
awards undera result of the Reverse Split. In lieu of issuing any fractional shares to any stockholder as a result of the Reverse Split, the Company made, to any stockholder that would otherwise hold a fractional share after giving effect to the Reverse Split, a cash payment in an amount equal to $0.70 multiplied by the number of pre-split shares held by such stockholder with respect to which a fractional share would have been issued. Stockholders of record who owned fewer than 10 shares of common stock prior to the Reverse Split were cashed out and are no longer stockholders of the Company.Prior to the Reverse Split, the Company’s 2017 Management Incentive Plan to certain officers of the Company, pursuant to an exemption from the registration requirements of the Securities Act under Section 4(a)(2) of such act and Regulation D promulgated thereunder.
From August 31, 2017, through November 8, 2017, our New Commoncommon stock was traded on the OTC PinkOTCQX tier of the OTC Markets Group, Inc. On November 9, 2017, our New Common Stock began trading on the OTCQB tier of the OTC Markets Group, Inc. (“OTCQB”) under the symbol “CTAM”. Prior to our emergence from bankruptcy, there was no established public trading market for our New Common Stock.
The“CTAM.”As permitted by the Exchange Act, following table sets forthdetermination by the intraday high and low sales pricesCompany that the number of ourstockholders of record of the Company’s common stock as reportedwas fewer than 300, following the Reverse Split on OTCQB forJanuary 6, 2021, the periods presented. Such quotations represent inter-dealer prices without retail markup, markdown or commissionCompany consummated a “going private” transaction by filing a Form 15 with the SEC. The Form 15 notified the SEC of the withdrawal of the Company’s common stock from registration under Section 12(g) of the Exchange Act in accordance with Rule 12g-4(a)(1) under the Exchange Act. As a result, the Company’s obligation to file periodic reports, including its quarterly and may not necessarily represent actual transactions:
|
| | | | | | | | |
| Quarter Ended | | High | | Low |
| September 30, 2017 (beginning on August 31, 2017) | | $ | 5.25 |
| | $ | 2.00 |
|
| December 31, 2017 | | $ | 5.25 |
| | $ | 3.67 |
|
annual reports, has been suspended. The deregistration is expected to become effective 90 days after filing of the Form 15, which will be after the filing of this Annual Report on Form 10-K.As of December 31, 2017, the last reported sales price of our common stock as reported on OTCQB was $3.71 per share and2020, there were approximately 331101 stockholders of record of our common stock, which excludes stockholders whose shares were held in nominee or street name by brokers.
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, for information regarding common stock authorized for issuance under equity compensation plans.
ITEM 7 —
Management’s Discussion and Analysis of Financial Condition and Results of OperationsInformation regarding the business and markets of A.M. Castle & Co. and its subsidiaries (the “Company”) is included in Item 1 “Business” of this annual report on Form 10-K.
All references to numbers of shares and per share data has been adjusted to reflect the Reverse Stock Split that occurred on December 29, 2020.The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes thereto in Item 8 “Financial Statements and Supplementary Data”. The following discussion and analysis of our financial condition and results of operations contain forward-looking statements and includes numerous risks and uncertainties, including those described under Item 1A "Risk Factors"“Risk Factors” and "Disclosure“Disclosure Regarding Forward-Looking Statements"Statements” of this Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements.
Financial Results Summary
The Company’s strategy is to become a leading global provider of specialty metals products and services and specialized supply chain solutions to targeted global industries.
On June 18, 2017 (the "Petition Date"), A.M. Castle & Co. and four of its subsidiaries (together with the A.M. Castle & Co., the "Debtors") filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware in Wilmington, Delaware (the "Bankruptcy Court"). The four subsidiaries in the chapter 11 cases are Keystone Tube Company, LLC, HY-Alloy Steels Company, Keystone Service, Inc. and Total Plastics, Inc. Also on June 18, 2017, the Debtors filed the Debtors' Prepackaged Joint Chapter 11 Plan of Reorganization with the Bankruptcy Court and on July 25, 2017, the Debtors filed the Debtors' Amended Prepackaged Joint Chapter 11 Plan of Reorganization (the "Plan") with the Bankruptcy Court. On August 2, 2017, the Bankruptcy Court entered an order (the "Confirmation Order") confirming the the Plan. On August 31, 2017 (the "Effective Date"), the Plan became effective pursuant to its terms and the Debtors emerged from their chapter 11 cases.
On the Effective Date, by operation of the Plan, among other things:
The Company issued an aggregate of 2.0 million shares of its New Common Stock consisting of 1.3 million shares issued to holders of Prepetition Second Lien Secured Claims (as defined by the Plan) in partial satisfaction of their claims; 0.3 million shares issued to holders of Prepetition Third Lien Secured Claims (as defined by the Amended Plan) in partial satisfaction of their claims; 0.4 million shares issued to participating holders of the Company's outstanding common stock as of August 2, 2017.
All agreements, instruments, and other documents evidencing, related to or connected with any equity interests of the Company (which include warrants to purchase such common stock, and awards under management equity plans adopted before the Effective Date) were extinguished without recovery.
All outstanding indebtedness, accrued interest, and related fees of the Debtors under that certain Credit and Guaranty Agreement, dated December 8, 2016, by and among the Company, Highbridge International Capital Management, LLC, Corre Partners Management, LLC, Whitebox Credit Partners, L.P., WFF Cayman II Limited, and SGF, LLC and Cantor Fitzgerald Securities, among others (as amended, the “Former Credit Agreement”), amounting to $49.4 million, was paid in full with the proceeds of borrowings under the New ABL Facility (defined below) and the issuance of Second Lien Notes under the Indenture dated August 31, 2017 ("Second Lien Notes Indenture").
All outstanding indebtedness of the Debtors under the Company’s 12.75% Senior Secured Notes due 2018 ("New Secured Notes") and the Indenture dated February 8, 2016 ("New Secured Notes Indenture"), by and between the Company, as issuer, its guarantors, and U.S. Bank National Association, as trustee, and all outstanding indebtedness of the Debtors under the Company’s 5.25% Convertible Senior Secured Notes due 2019 ("New Convertible Notes") and the Indenture dated May 19, 2016 ("New Convertible Notes Indenture"), by and between the Company, as issuer, its guarantors, and U.S. Bank National Association, as trustee, was discharged and canceled in exchange for cash, Second Lien Notes and New Common Stock in the Company.
The A.M. Castle & Co. 2017 Management Incentive Plan became effective.
All of the existing members of the Board were deemed to have resigned and were replaced by the new Board of the Company consisting of six members, four of whom are new to the Board.
Pursuant to the Plan, on September 1, 2017, the Company issued 1.7 million restricted New Common Stock shares, together with an aggregate original principal amount of $2.4 million of 5.00% / 7.00% Convertible Senior Secured PIK
Toggle Notes due 2022 ("Second Lien Notes") convertible into an additional 0.6 million shares of New Common Stock as of the Effective Date, and issued as awards under the A.M. Castle & Co. 2017 Management Incentive Plan to certain officers of the Company.
Pursuant to the Plan, on the Effective Date, the Debtors entered into a new senior secured asset-based lending facility due 2022 ("New ABL Facility").
The obligations of the Borrowers have been guaranteed by the subsidiaries of the Company named therein as guarantors. The New ABL Facility provides for a $125.0 million senior secured, revolving credit facility for the Company. Subject to certain exceptions and permitted encumbrances, the obligations under the New ABL Facility are secured by a first priority security interest in substantially all of the assets of each of the Borrowers and certain of their foreign subsidiaries. The proceeds of the advances under the New ABL Facility may only be used to (i) pay certain fees and expenses to the Agent and the lenders under the New ABL Facility, (ii) provide for Borrowers' working capital needs and reimburse drawings under letters of credit, (iii) repay the obligations under the Debtor-in-Possession Revolving Credit and Security Agreement dated as of June 10, 2017, by and among the Company, the lenders party thereto, and PNC Bank, National Association, and certain other existing indebtedness, and (iv) provide for the Borrowers' capital expenditure needs, in accordance with the New ABL Facility.
On the Effective Date, in connection with its entering into the New ABL Facility, the Company borrowed an aggregate amount equal to $78.8 million, of which $49.4 million was used to pay down outstanding indebtedness, accrued interest, and related fees of the Company under the Former Credit Agreement.
Pursuant to the Plan, on the Effective Date, the Company entered into the Second Lien Notes Indenture and, pursuant thereto, issued approximately $164.9 million in Second Lien Notes.
The Second Lien Notes are five-year senior obligations of the Company and certain of its subsidiaries, secured by a lien on all or substantially all of the assets of the Company, its domestic subsidiaries and certain of its foreign subsidiaries, which lien the Indenture Agent has agreed will be junior to the lien of the Agent under the New ABL Facility.
Recent Market and Pricing Trends
Although year over year net sales were down 2.7% in the combined periods September 1, 2017 through December 31, 2017 and January 1, 2017 through August 31, 2017 compared toDuring the year ended December 31, 2016,2020:
| ● | Net sales decreased by 34.2%, compared to the prior year. The decrease in net sales in the current year was driven by a significant decrease in average tons sold per day, and to a lesser degree a decrease in commodities pricing on the Company’s products. |
| ● | Operating loss was $23.7 million in the year ended December 31, 2020, compared to an operating loss of $10.1 million in the year ended December 31, 2019. |
| ● | Cash flows from operations generated $20.5 million in cash in the year ended December 31, 2020, driven primarily by collections of accounts receivable and improved inventory management, compared to cash flow generated from operations of $10.8 million in the year ended December 31, 2019. |
| ● | Improved gross material margin to 26.9%, compared to a gross material margin of 25.2% (including a non-recurring non-cash inventory charge of $1.3 million) in the prior year. (Gross material margin is a non-U.S. GAAP measure calculated as net sales less cost of materials divided by net sales). |
Recent Market and Pricing Trends
As expected, demand and pricing headwinds in the industrial market from the second half of 2019 continued into 2020 and were further worsened by the macroeconomic impacts of the COVID-19 pandemic, resulting in a decrease in volumes increased on virtually alland average selling prices for the products the Company sells. Overall, the Company's average tons shipped per day in 2017 were 8.9% higher than 2016. Pricing also improved for manymajority of the Company's core industrial products, withnamely alloy bar, carbon and alloy flat products, and SBQ bar. In the exceptionCompany’s other primary market, aerospace, the favorable demand and pricing momentum for aluminum and stainless products experienced in the first quarter of 2020 was rapidly and dramatically reduced by the COVID-19 pandemic, which effectively grounded global air travel.
The current metals pricing decreasesenvironment is challenging as a decrease in twodemand and availability in supply has led to increased price competition for all of the Company's most significant products, aluminum and stainless. Also, netCompany’s core products. In challenging market conditions such as these, the Company has strategically focused on more highly accretive sales, particularly those including higher margin, value added service offerings. Despite macro headwinds in pricing, in the year ended December 31, 2016 included2020, the Company achieved gross material margin of 26.9%, compared to a gross material margin of 25.2% (including a non-recurring non-cash inventory charge of $1.3 million) in the prior year. To the extent that the Company can pass through higher material costs to its contractual customers, we expect higher selling prices within the metals market to continue to have an overall favorable impact on the Company’s gross material margin. If higher material costs are not passed through to its contractual customers, the Company fails to avoid an overstocked position relative to the market and restock at lower replacement costs, or if prices begin to decrease within the metals market, the Company’s gross material margin may be adversely impacted.
In many cases, the pricing of its products can have a more significant impact on the Company’s operating results than demand because of the following reasons, among others:
| ● | Changes in volume resulting from changes in demand typically result in corresponding changes to the Company’s variable costs. However, as pricing changes occur, variable expenses are not directly impacted. |
| ● | If surcharges are not passed through to the customer or are passed through without a mark-up, the Company’s profitability will be adversely impacted. |
In total, demand for the Company’s products decreased considerably in 2020, compared to the prior year, driven primarily by the macroeconomic impacts of the COVID-19 pandemic, which worsened already soft industrial end markets and substantially deteriorated global demand for aerospace products. The weakening of demand within the aerospace market is largely attributable to the impact of the COVID-19 pandemic on global air travel and the grounding of the Boeing 737 MAX, for which some of the Company's $27.1 million sale of its entire inventory at its Houston and Edmonton facilities to an unrelated third party. The sale of this inventory was the result of a strategic decision to lower the Company's exposure to oil and gas market fluctuations. Including that sale of inventory, net sales in the year ended December 31, 2016 from the Houston and Edmonton locations, which were closed in February 2016, were $33.0 million.
customers supply content. Industry data provided by the Metals Service Center Institute ("MSCI"(“MSCI”) indicates that overall 20172020 U.S. steel service center shipment volumes increased 5%decreased 11% compared to 20162019 levels. According to MSCI data, industry sales volumes of products consistent with the Company'sCompany’s product mix increased 7%decreased 12% in 20172020 compared to 2016. All of2019. Of the U.S. steel service center products tracked by the MSCI, had shipment volume increasesvolumes for all of the products decreased in 20172020 compared to 20162019 with the exception of carbon pipebars, stainless steel and tube products, which had a decrease. The products which hadaluminum having the most significant increases according to MSCI data included carbon alloy bar, cold finished carbon bar, and SBQ carbon bar. The MSCI data included more modest sales volume increases for carbon plate, aluminum and stainless products.
The Company's operating results for both its successor and predecessor periods in 2017 were positively impacted by the increased demand for its products, which, in the aggregate, outpaced the demand increase reported by the MSCI. As a result of the Company's recent restructuring activities, which management believes lowered the variable and fixed costs contributing to each ton sold by the Company, the increased demand allowed the Company to experience operating margin growth, and therefore, growth in operating margin dollars, in the combined periods September 1, 2017 through December 31, 2017 and January 1, 2017 through August 31, 2017 compared to the year ended December 31, 2016.
decreases.The demand for the Company'sCompany’s products may change from time to time based on, among other things, general economic conditions, industry capacity, and the cyclical nature of the industries in which the Company'sCompany’s customers operate. AThe pricing environment, leading to increased competitiveness within the market, can also have a significant impact on demand. An increase or decrease in the demand for the Company'sCompany’s products has a significant impact on the Company'sCompany’s operating results. AWhen volume increases, the Company’s sales dollars generally increase, which leads to more dollars earned from normal operations. Similarly, a decrease in demand results in lower sales dollars which, once costs and expenses are factored in, leads to less dollars
earned from normal operations. Although the lower demand also decreases the cost of materials and operating costs, including warehouse, delivery, selling, general and administrative expenses, the decrease in these costs and expenses is often less than the decrease in sales dollars due to fixed costs, resulting in lower operating margins. Management believes
its recent restructuring activities have putthat with the Company’s new global supply organization, which is focused on reducing aged inventories, improving overall stock levels throughout the Company,
and providing real-time facilitation of the Company’s branches in selling higher cost inventory, as well as its focus to excel in its highly accretive core product lines to the exclusion of low-margin, working capital intensive opportunities, it is
in a better position to react
quickly to variability in end-market demand and
to manage the impact that demand variability might have on operating margins.
Management alsoCurrent Business Outlook
Although there were intermittent signs of recovery in the second half of 2020, the Company experienced significantly lower demand for its products in 2020 as many of the industries the Company serves continue to be impacted economically, some significantly, by the COVID-19 pandemic. The global health crisis caused by the COVID-19 pandemic continues to result in a decline in orders from and shipments to customers compared to pre-pandemic levels, as well as slower-than-normal payments from customers and disruptions at certain of the Company's suppliers. In addition, the pricing environment for the Company's products continues to be extremely competitive with lower average price per ton sold in the year ended December 31, 2020 compared to the prior year. The Company anticipates the recovery in economic activity to pre-pandemic levels will be slower than originally expected as its customers and suppliers struggle to return their own businesses to pre-pandemic levels. The Company expects COVID-19 to continue to have an unfavorable impact on its financial results and business into 2021.
To date, the Company has taken actions to maintain operations through the pandemic and its network as a whole has remained operational, albeit at varying levels of volume aligned to customer orders and forecasts. The Company has prepared and regularly updates business continuity plans for ongoing operations and has taken steps to adjust its business to match the deteriorating economic conditions, including the implementation of enhanced measures through its global supply and branch management teams to ensure the Company is efficiently utilizing inventory on hand and inbound, as well as its internal processing capabilities.
Given the expectation that the recovery to pre-pandemic levels may be longer than originally expected, the Company has implemented a long-term, permanently sustainable cost structure that does not rely on temporary cost reduction measures as significantly as during the early stages of the pandemic. The Company believes the permanent cost-cutting measures it implemented not only align the Company with current demand, but also better prepare it for any market recovery once this pandemic has passed. Permanent cost-cutting measures, which are estimated to reduce the Company's overall operating resultsexpenses by approximately $15.0 to $16.0 million on an annualized basis, primarily included staff reductions through layoffs, which were implemented in conjunction with the elimination of most of the temporary cost measures taken previously, including the temporary reduction in employee hours and/or salaries, deferral of periodic salary increases and/or incentive pay, and/or a combination of these actions. In an effort to protect the health and safety of its employees, the Company has adopted face covering requirements, sanitization, social distancing and other behavioral best practices at its locations, including remote work arrangements, reducing the number of people in the Company's branch and corporate locations at any one time, and suspending non-essential employee travel. At the outset of the COVID-19 pandemic, the Company established a COVID-19 response team to closely monitor the local, regional, and national situations that impact the Company's various branches, monitor and advise on COVID-19 exposures and potential exposures within the Company's workspaces, direct and implement health and safety plans and business continuity plans, and establish pandemic-related guidelines and policies to best protect the Castle team and its business, including responsible return-to-work or restart plans. Variables that the Company is taking into consideration as some branches and the Corporate office begin to return to normal operations include local case trends, testing availability, number of employees and the workstation layout, productivity and engagement concerns, the availability and efficacy of vaccinations, and most importantly, guidance and requirements from local, state, and federal government, medical and scientific authorities.
In an effort to bolster its liquidity position and mitigate potentially significant detriment to its business, the Company has and will continue to be significantly impactedpursue a variety of government-sponsored support programs, such as tax deferrals, employment-related subsidies, government-backed loans and other government relief available in the U.S. and in other countries in which it operates. Actual relief under each of these measures varies in terms of timing and availability as governments continue to define, implement, extend and/or fund their relief programs.
The Company qualified under the “alternative size standard” for a forgivable loan under the Paycheck Protection Program (“PPP”) administered by the pricingSmall Business Association (SBA) pursuant to the CARES Act. On April 28, 2020, the Company entered into an unsecured PPP loan in the aggregate principal amount of $10.0 million, which is to be used only for payroll expenses, rent, utilities, mortgage interest, and interest on other pre-existing indebtedness (the "PPP Loan"). After taking into account, among other things, the disruptions to the Company’s business activities caused by the COVID-19 pandemic, the completed exchange offer and consent solicitation (the “Exchange Offer”) to issue its 3.00% / 5.00% Convertible Senior Secured Paid-in-Kind ("PIK") Toggle Notes due 2024 (the “3.00%/5.00% Convertible Notes”) and shares of its products,common stock in exchange for its 5.00% / 7.00% Convertible Senior Secured PIK Toggle Notes due 2022 (the “5.00%/7.00% Convertible Notes”), its available, committed primary sources of liquidity, and its lack of access to alternative sources of liquidity, economic conditions at that time made this loan request necessary and appropriate to support the Company’s ongoing U.S. operations and mitigate potentially significant detriment to the Company’s business. Under the terms of the CARES Act and the Paycheck Protection Program Flexibility Act passed on June 5, 2020 (the "PPPFA"), the PPP Loan, and interest accrued thereon, is forgivable, partially or in full, subject to certain conditions, including the extent to which the PPP Loan proceeds are used for permissible purposes within the 24 week period following loan disbursement (which period was extended by the PPPFA from the 8 week period originally allowed by the CARES Act). The Company believes it has used the PPP Loan proceeds for
permissible purposes only and intends to apply for forgiveness of the full amount of the PPP Loan in many cases, canaccordance with the terms of the PPP, the CARES Act and the PPPFA.
On June 24, 2020, the Company's French subsidiary entered into a €6.0 million term loan (the "France Term Loan"). The France Term Loan, which is fully guaranteed by the French government, is part of a relief program related to the COVID-19 pandemic. Similar to the PPP Loan, economic conditions resulting from the COVID-19 pandemic made this France Term Loan necessary and appropriate to support the Company’s ongoing operations in France and mitigate potentially significant detriment to the Company’s business in France. The France Term Loan, which is evidenced by a term note with HSBC Bank, matures on June 24, 2021 and bears no interest. However, in connection with the government guarantee of the France Term Loan, the Company must pay a commission to the French government of 0.5% per annum of the principal loan balance. Under the terms of the France Term Loan, the Company has the option to extend the maturity of the loan for a period of up to five years. As of December 31, 2020, the Company has the intent and ability to extend the maturity of the France Term Loan beyond twelve months and has therefore included the entire outstanding principal balance of the France Term Loan in long-term debt at the Consolidated Balance Sheets.
The Company will continue to actively monitor the situation as it relates to the COVID-19 pandemic and may take further actions altering the Company's business operations that we determine are in the best interests of the Company's employees, customers, business partners, suppliers, and shareholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have a more significant impact on the Company's operating results than demand because ofbusiness, including the following reasons, among others:
Changes in volume resulting from changes in demand typically result in corresponding changes to the Company’s variable costs. However, as pricing changes occur, variable expenses are not directly impacted.
If surcharges are not passed through to the customer or are passed through without a mark-up, the Company’s profitability will be adversely impacted.
Although pricing for many ofeffects on the Company's products improved in 2017 compared to the historically low prices witnessed in 2016, the pricing environment remains competitive, which, coupled withcustomers, employees, and prospects, or on the Company's aggressive sales pricing to sell excess and slower moving inventory and residual financial impacts of its recent reorganization, tempered the gross material margins achieved by the Company in 2017. Despite this, overall the gross material margin achieved by the Company, calculated as net sales less cost of materials divided by net sales, increased from 21.0% in 2016 to 24.0% in the combined successor and predecessor periods in 2017. Cost of materialsresults for 2016 included $27.1 million from the sale of all inventory at the Houston and Edmonton facilities to an unrelated third party at a zero gross profit margin and $14.2 million of aged and excess inventory that was sold for $2.5 million. Excluding these specified items, gross margin for 2016 was 22.1%. The Company was able to improve its gross margin from 2016 by implementing improved inventory management strategies and, though not fully matured, the better matching sales prices with the inventory replacement cost. Although pricing uncertainty remains in the market, the Company expects its margins will continue to improve in 2018 as its excess inventory is sold and replaced with inventory better matched to the current market conditions.
Current Business Outlook
With the February 2016 closure of the Company's Houston and Edmonton facilities, which primarily serviced the oil and gas sector of the energy market, the Company became principally focused on two key markets, aerospace and industrial.
The aerospace market continues to be strong with defense and commercial spending driving the demand for the Company's aluminum and stainless products. The Company expects the aerospace market to remain stable and for business to improve, particularly where the Company has long-term contracts with subcontractors who support platforms that are anticipated to grow. However, the Company does anticipate continued pressure on transactional pricing resulting from competition in the market.
General sentiment in the industrial market has improved with mining, heavy machinery and light vehicles all having a positive outlook. Given the Company's lower cost structure, which is the result of its restructuring activities, it does see an opportunity to grow market share by improving its conversion rate on transactional business on a competitive basis at still accretive net margins.
As expected, pricing for many of the Company's products began to rise in 2017. The Company was not able to fully benefit from the improved pricing environment, however, as it continues to aggressively sell its excess and slower moving inventory at lower gross material margins and due to residual financial impacts of its recent financial reorganization. Management projects that its gross material margins will improve in 2018 as a result of better matching of inventory sales prices with the inventory replacement cost and increasing sales prices which, the Company believes it will be able to pass on to its customers. The Company expects uncertainty to contribute to a competitive pricing environment in 2018, particularly given the recent enactment of a 25% tariff on steel and a 10% tariff on aluminum imported from all countries except Canada and Mexico under Section 232 of the Trade Expansion Act of 1962. However, given its long-standing relationships with domestic steel mills, the Company also believes it is currently well-positioned to take advantage of an increasing pricing environment expected to result from the tariffs and may have a competitive price advantage relative to other U.S. based steel service centers that are more reliant on imported steel and aluminum products.
fiscal 2021 or beyond.RESULTS OF OPERATIONS
Our discussion of comparative period results is based upon the following components of the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income.
Loss.Net Sales —
The Company derives its sales from the processing and delivery of metals. Pricing is established with each customer order and includes charges for the material, processing activities and delivery. The pricing varies by product line and type of processing. From time to time, the Company may enter into fixed price arrangements with customers while simultaneously obtaining similar agreements with its suppliers. Cost of Materials
— Cost of materials consists of the costs that the Company pays suppliers for metals and related inbound and transfer freight charges, excluding depreciation, and amortization which areis included in operating costs and expenses discussed below.Operating Costs and Expenses
— Operating costs and expenses primarily consist of: | ● | Warehouse, processing and delivery expenses, including occupancy costs, compensation and employee benefits for warehouse personnel, processing, shipping and handling costs; |
| ● | Sales expenses, including compensation and employee benefits for sales personnel; |
| ● | General and administrative expenses, including compensation for executive officers and general management, expenses for professional services primarily related to accounting and legal advisory services, bad debt expense, data communication and computer hardware and maintenance; |
| ● | Depreciation for all property, plant and equipment. |
Warehouse, processing and delivery expenses, including occupancy costs, compensation and employee benefits for warehouse personnel, processing, shipping and handling costs;25
Sales expenses, including compensation and employee benefits for sales personnel;
General and administrative expenses, including compensation for executive officers and general management, expenses for professional services primarily related to accounting and legal advisory services, bad debt expense, data communication and computer hardware and maintenance;Restructuring expense, net, including moving costs associated with plant consolidations, employee termination and related benefits costs associated with workforce reductions, lease termination costs and other exit costs; and
Depreciation and amortization expenses, including depreciation for all owned property and equipment, and amortization of various intangible assets (amortization in predecessor period only).
Presentation of Predecessor and Successor
The Company adopted fresh-start reporting as of the Effective Date. As a result of the application of fresh-start reporting, the Company's financial statements for periods prior to the Effective Date are not comparable to those for periods subsequent to the Effective Date. References in this report to “Successor” refer to the Company on or after the Effective Date. References to “Predecessor” refer to the Company prior to the Effective Date. Operating results for the Successor and Predecessor periods are not necessarily indicative of the results to be expected for a full fiscal year. References such as the “Company,” “we,” “our” and “us” refer to A.M. Castle & Co. and its consolidated subsidiaries, whether Predecessor and/or Successor, as appropriate.
In the following discussion and analysis of the results of operations and liquidity, the Company compares certain financial information for the yearYear ended December 31, 20172020 compared to the year ended December 31, 2016. The Company believes that in certain instances, combining the financial results when discussing the Predecessor and Successor periods within the year ended December 31, 2017 is useful for management and investors to assess the Company's ongoing financial and operational performance and trends.
Periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) compared to the Year Ended December 31, 2016 (Predecessor)
2019The following table sets forth certain statement of operations data for the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) and for thein each year ended December 31, 2016 (Predecessor). Included in the operating results below for the year ended December 31, 2016 (Predecessor) is the sale of all inventory and subsequent closure of the Company's Houston and Edmonton facilities which occurred in the first quarter of 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | September 1, 2017 through December 31, 2017 | | | January 1, 2017 through August 31, 2017 | | Year Ended December 31, 2016 | | Favorable/(Unfavorable) |
(Dollar amounts in millions) | $ | | % of Net Sales | | | $ | | % of Net Sales | | $ | | % of Net Sales | | Year-over-Year $ Change | | Year-over-Year % Change |
| Net sales | $ | 164.9 |
| | 100.0 | % | | | $ | 353.9 |
| | 100.0 | % | | $ | 533.1 |
| | 100.0 | % | | $ | (14.3 | ) | | (2.7 | )% |
Cost of materials (exclusive of depreciation and amortization)(a) | 127.8 |
| | 77.5 | % | | | 266.5 |
| | 75.3 | % | | 421.3 |
| | 79.0 | % | | 27.0 |
| | 6.4 | % |
Operating costs and expenses(b) | 49.0 |
| | 29.7 | % | | | 100.2 |
| | 28.3 | % | | 182.1 |
| | 34.2 | % | | 32.9 |
| | 18.1 | % |
| Operating loss | $ | (11.9 | ) | | (7.2 | )% | | | $ | (12.8 | ) | | (3.6 | )% | | $ | (70.3 | ) | | (13.2 | )% | | $ | 45.6 |
| | 64.9 | % |
(a) Cost of materials includes $0.5 million of inventory scrapping expenses associated with restructuring activities for the year ended December 31, 2016 (Predecessor).
(b) Operating costs and expenses include $0.6 million of restructuring expenses for the period January 1, 2017 through August 31, 2017 (Predecessor) and $12.9 million of restructuring expenses for the year ended December 31, 2016 (Predecessor).
indicated:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Favorable/ | |
| | Year Ended December 31, | | (Unfavorable) | |
| | 2020 | | 2019 | | Year-over- | | Year-over- | |
| | | | | % of Net | | | | | % of Net | | Year | | Year | |
(Dollar amounts in millions) | | $ | | Sales | | $ | | Sales | | $Change | | % Change | |
| | | | | | | | | | | | | | | | |
Net sales | | $ | 368.3 | | 100.0 | % | $ | 559.6 | | 100.0 | % | $ | (191.3) | | (34.2) | % |
Cost of materials (exclusive of depreciation) | | | 269.1 | | 73.1 | % | | 418.8 | | 74.8 | % | | 149.7 | | 35.7 | % |
Operating costs and expenses | | | 122.8 | | 33.3 | % | | 150.9 | | 27.0 | % | | 28.1 | | 18.6 | % |
Operating loss | | $ | (23.7) | | (6.4) | % | $ | (10.1) | | (1.8) | % | $ | (13.5) | | 20.2 | % |
Net Sales
Net sales of $164.9$368.3 million in the period September 1, 2017 through December 31, 2017 (Successor) and $353.9 million in the period January 1, 2017 through August 31, 2017 (Predecessor) were a decrease of $14.3 million, or 2.7%, compared to the year ended December 31, 2016 (Predecessor). Net sales in the year ended December 31, 2016 (Predecessor) included2020 were a decrease of $191.3 million, or 34.2%, compared to $559.6 million in the Company's $27.1 million sale of its entire inventory at its Houston and Edmonton facilities to an unrelated third party.year ended December 31, 2019. The sale of this inventory, which was sold at a zero gross margin (calculated as net sales, less cost of materials), was the result of a strategic decision to lower the Company's exposure to oil and gas market fluctuations. Including that sale of inventory,decrease in net sales in the year ended December 31, 2016 (Predecessor) from2020 compared to the Houstonprior year was driven primarily by the macroeconomic impacts of the COVID-19 pandemic, which worsened already soft industrial end markets and Edmontonfurther weakened demand for global aerospace products. The weakening of demand within the aerospace market is largely attributable to the impact of the COVID-19 pandemic on global air travel and the grounding of the Boeing 737 MAX, for which some of the Company's locations which were closed in February 2016, were $33.0 million. Despite the closure of these two locations, the Company posted an 8.9% increase in tonshave customers that supply content. Tons sold per day to customers in 2017 compared to 2016. Excludingfor the tons sold from the Houston and Edmonton locationsCompany's products decreased by 31.8% in the year ended December 31, 2016 (Predecessor), tons2020, compared to the prior year.
In the year ended December 31, 2020, overall average selling prices of the Company's product mix sold decreased 3.5% compared to the year ended December 31, 2019. The macroeconomic impact of the COVID-19 pandemic has resulted in a decrease in demand and availability of supply, which has led to increased price competition for all of the Company's core products. With the exception of aluminum, nickel and titanium, which had increases in price per day increased 10.2%. Tonston sold, the price per day increasedton sold decreased for mostall of the products the Company sells within the largest improvements in alloy bar and carbon and alloy plate. Offsetting the positive impact of the increase in sales volumes was an overall 4.7% decrease in average selling prices.
In 2017, the average selling prices for most of the Company's products improvedyear ended December 31, 2020, compared to the
historically low average selling pricesyear ended December 31, 2019.The Company expects a long and slow market recovery to pre-pandemic levels. As a result, the Company believes that the unfavorable financial and business impacts of the pandemic that were experienced in 2016. However, athe second through fourth quarters of 2020 will continue into 2021 as the Company's customers and suppliers continue to maintain reduced purchasing forecasts and output. In turn, the Company's expects the decrease in the average selling price of aluminumdemand and a slight decreaseavailability and increase in competition in the average selling price of stainless, two ofmarkets that the highest contributing products in the Company's sales mix, resulted in an overall 4.7% decrease in average selling prices.
Company serves to continue into 2021.Cost of Materials
Cost of materials (exclusive of depreciation and amortization) were $127.8 million in the period September 1, 2017 through December 31, 2017 (Successor) and $266.5 million in the period January 1, 2017 through August 31, 2017 (Predecessor) compared to $421.3depreciation) was $269.1 million in the year ended December 31, 2016 (Predecessor). The $27.0 million, or 6.4%, decrease in the combined 2017 periods as2020 compared to 2016 is mainly due to the $27.1$418.8 million of cost of materials recognized on the sale of all inventory at the Company's Houston and Edmonton facilities in the year ended December 31, 2016 (Predecessor)2019. The $149.7 million, or 35.7%, as discussed above, partially offset by the increase in sales volumedecrease in the periods September 1, 2017 throughyear ended December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor)2020 compared to the year ended December 31, 2016 (Predecessor). Also,2019 was primarily due to the decrease in an effortnet sales volume compared to reduce the amountprior year.
Cost of aged and excess inventory on hand, costmaterials (exclusive of depreciation) was 73.1% of net sales in the year ended December 31, 2020, compared to 74.8% of net sales in the year ended December 31, 2019. Cost of materials in the year ended December 31, 2016 (Predecessor)2019 included
$14.2 million a non-recurring non-cash inventory charge of aged and excess inventory$1.3 million. The Company's focus on selectively pursuing higher margin sales that was sold for $2.5 millionare more accretive to the business, particularly those including the Company's value added service offerings, resulted in the fourth quartersales of 2016, which increased the operating lossproducts with higher gross material margins (calculated as net sales less cost of materials divided by net sales) in the year ended December 31, 2016 (Predecessor) by $11.7 million.
Cost of materials (exclusive of depreciation and amortization) increased to 77.5% of net sales in the period September 1, 2017 through December 31, 2017 (Successor) from 75.3% of net sales in the period January 1, 2017 through August 31, 2017 (Predecessor) due mainly to aggressive product pricing and sales of aged and excess inventory in the period and lower average tons sold per day in the period September 1, 2017 through December 31, 20172020, compared to the prior eight month period. Cost of materials was 79.0% of net sales in the year ended year ended December 31, 2016 (Predecessor).2019. The prior year 2016 percentage was affectedCompany expects its margins will remain relatively stable
in 2021 as its improved inventory management partially offsets the headwinds produced by reduced demand, a downward pricing environment and the saleunfavorable impacts of the Houston and Edmonton inventory andCOVID-19 pandemic on the sales of aged and excess inventory.
overall global economy.Operating Costs and Expenses and Operating Loss
Operating costs and expenses in the periods September 1, 2017 throughyear ended December 31, 2017 (Successor)2020 and January 1, 2017 through August 31, 2017 (Predecessor) and forin the year ended December 31, 2016 (Predecessor)2019 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Favorable/(Unfavorable) |
| | September 1, 2017 through December 31, 2017 | | | January 1, 2017
through
August 31, 2017 | | Year Ended December 31, 2016 | | Year-over-Year $ Change | | Year-over-Year % Change |
(Dollar amounts in millions) | | | | | |
| Warehouse, processing and delivery expense | $ | 25.3 |
| | | $ | 50.2 |
| | $ | 84.5 |
| | $ | 9.0 |
| | 10.7 | % |
| Sales, general and administrative expense | 20.5 |
| | | 39.2 |
| | 68.3 |
| | 8.6 |
| | 12.6 | % |
| Restructuring expense, net | — |
| | | 0.6 |
| | 12.9 |
| | 12.3 |
| | 95.3 | % |
| Depreciation and amortization expense | 3.2 |
| | | 10.2 |
| | 16.4 |
| | 3.0 |
| | 18.3 | % |
| Total operating costs and expenses | $ | 49.0 |
| | | $ | 100.2 |
| | $ | 182.1 |
| | $ | 32.9 |
| | 18.1 | % |
| | | | | | | | | | | | |
| | | | | | | | Favorable/ (Unfavorable) | |
| | | | | | | | Year-over- | | Year-over- | |
| | Year Ended December 31, | | Year | | Year | |
(Dollar amounts in millions) | | 2020 | | 2019 | | $Change | | % Change | |
Warehouse, processing and delivery expense | | $ | 59.5 | | $ | 77.6 | | $ | 18.1 | | 23.3 | % |
Sales, general and administrative expense | | | 52.8 | | | 64.6 | | | 11.8 | | 18.3 | % |
Depreciation expense | | | 7.9 | | | 8.8 | | | 0.9 | | 10.2 | % |
Impairment of goodwill | | | 2.7 | | | — | | | (2.7) | | — | |
Total operating costs and expenses | | $ | 122.8 | | $ | 150.9 | | $ | 28.1 | | 18.6 | % |
Total operating costs and expenses decreased by $32.9$28.1 million from $182.1to $122.8 million in the year ended December 31, 2016 (Predecessor) to $49.0 million in the period September 1, 2017 through December 31, 2017 (Successor) and $100.2 million in the period January 1, 2017 through August 31, 2017 (Predecessor):
Warehouse, processing and delivery expense decreased by $9.0 million primarily as a result of lower payroll, benefit and freight costs as well as the timing of the resolution of certain real estate and personal property tax matters associated with the Houston and Edmonton facilities, which were closed in the first quarter of 2016. The resolution of these matters contributed approximately $3.9 million to the overall decrease in warehouse, processing and delivery expenses.
Sales, general and administrative expense decreased by $8.6 million mainly as a result of lower payroll, benefit and outside services costs.
Restructuring expense, net, was $0.6 million in the period January 1, 2017 through August 31, 2017 (Predecessor), while restructuring expense, net, was $12.92020 from $150.9 million in the year ended December 31, 2016 (Predecessor). Restructuring expenses in the year ended December 31, 2016 (Predecessor) consisted mainly of lease termination charges associated with the closure of the Company's Houston and Edmonton facilities and moving expenses associated with plant consolidations. The Company recorded no restructuring expenses in the period September 1, 2017 through December 31, 2017 (Successor) as all of the previously announced restructuring activities are complete.
Depreciation and amortization expense decreased by $3.0 million due mainly to no amortization of intangible assets in the period September 1, 2017 through December 31, 2017 (Successor) and lower depreciation expense in both the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) resulting from plant consolidations and closures, and equipment sales occurring in the first quarter of 2016.
Operating loss in the period September 1, 2017 through December 31, 2017 (Successor) was $11.9 million and $12.8 million, including restructuring charges of $0.6 million, in the period January 1, 2017 through August 31, 2017 (Predecessor)2019: | ● | Warehouse, processing and delivery expense decreased by $18.1 million primarily due to lower payroll and benefits costs and lower warehouse and freight costs in the year ended December 31, 2020, compared to the year ended December 31, 2019. The 23.3% decrease was driven by cost cutting measures taken by the Company in response to the COVID-19 pandemic, as well as lower sales volume. |
| ● | Sales, general and administrative expense decreased by $11.8 million primarily due to lower payroll and benefit costs, as well as other reductions in employee expenses and discretionary spending in the year ended December 31, 2020, compared to the year ended December 31, 2019. The 18.3% decrease was driven primarily by the cost cutting measures taken by the Company in response to the COVID-19 pandemic, including staff reductions, reductions in employee work hours and/or salaries, furloughs, temporary layoffs, deferral of periodic salary increases and/or incentive pay, or a combination of these actions. The decreases were partially offset by legal and other direct fees associated with the Exchange Offer, the filing of a registration statement for the registration of additional shares of the Company’s common stock and the Reverse Split of $2.0 million and severance costs of approximately $0.7 million. |
| ● | The Company recorded a non-cash goodwill impairment charge of $2.7 million in the year ended December 31, 2020, reducing the remaining balance of its goodwill to zero as of December 31, 2020. |
Operating loss in the year ended December 31, 2016 (Predecessor)2020 was $70.3$23.7 million, which included restructuring charges of $12.9compared to $10.1 million and the $11.7 million impact of the sale of aged and excess inventory in the fourth quarter of 2016.
year ended December 31, 2019.Other Income and Expense, Income Taxes and Net Loss
Interest expense, net was $7.6 million in the period September 1, 2017 through December 31, 2017 (Successor) and $23.4 million in the period January 1, 2017 through August 31, 2017 (Predecessor) compared to $36.4$25.5 million in the year ended December 31, 2016 (Predecessor). Effective on the bankruptcy Petition Date, the Company discontinued recording interest expense on outstanding prepetition debt classified as liabilities subject2020, compared to compromise. As a result, interest expense for the period January 1, 2017 through the Effective Date, August 31, 2017, excludes approximately $4.9 million of contractual interest expense associated with the New Secured Notes and New Convertible Notes. Following the Plan becoming effective on August 31, 2017, the Company has significantly reduced its debt and contractual interest burden from what it had been in the comparable prepetition periods.
Financial restructuring expense of $7.0$39.9 million in the period January 1, 2017 through Augustyear ended December 31, 2017 (Predecessor) was comprised of legal and other professional fees incurred prior to filing2019. Interest expense includes the chapter 11 bankruptcy petitions in connection with the financial restructuringinterest cost component of the debt and equitynet periodic benefit cost of the Company.Company’s pension and post-retirement benefits of $4.1 million in the year ended December 31, 2020 and $5.3 million in the year ended December 31, 2019. The decrease in interest expense in year ended December 31, 2020, compared to the prior year is primarily due to the decrease in the Company’s overall debt levels after the exchange of the majority of the outstanding 5.00%/7.00% Convertible Notes for equity and the 3.00%/5.00% Convertible Notes, which also carried a lower interest rate.
The unrealized gain on embedded conversion option of $2.4$2.0 million in the period September 1, 2017 throughyear ended December 31, 2017 (Successor)2020 is the result of the mark-to-market adjustment associated with the bifurcated embedded derivative liability of the Company's Second Lien3.00%/5.00% Convertible Notes. The unrealized loss on embeddedAs of June 30, 2020, the conversion option qualified for equity classification and the bifurcated derivative liability will no longer need to be accounted for as a separate derivative on a prospective basis from the date of $0.1 million inreassessment. Any remaining debt discount that arose at the period January 1, 2017date of debt issuance from the original bifurcation will continue to be amortized through August 31, 2017 (Predecessor) and unrealized gain on embedded conversion option of $10.5interest expense.
Other income, net, was $3.5 million in the year ended December 31, 2016 (Predecessor) are the result of mark-to-market adjustments associated with the bifurcated embedded derivative liability of the Company's New Convertible Notes, which were discharged and canceled by operation of the Plan. Because of the chapter 11 bankruptcy proceedings, the fair value of the derivative liability for the embedded conversion feature of the New Convertible Notes was estimated2020, compared to be $0 as of the Petition Date, and the carrying value of the embedded conversion feature was written off to reorganization items, net in the second quarter of 2017.
Debt restructuring loss of $8.6$6.6 million in the year ended December 31, 2016 (Predecessor) consisted primarily2019. Included in other income, net in the year ended December 31, 2020 and December 31, 2019 was net pension benefit of consent fees$6.3 million and legal and$6.1 million, respectively. The remaining other direct costs incurred in conjunction with private exchange offer and consent solicitation to certain eligible holders to exchange New Secured Notesincome, net for the Company's outstanding 12.75% Senior Secured Notes due 2016 (the "Secured Notes"), the issuancecomparative periods is comprised of New Convertible Notes in exchange for outstanding 7.0% Senior Secured Convertible Notes due 2017 ("Convertible Notes"), and the termination of the Company's senior secured asset-based revolving credit facility in existence at that time. These fees were partly offset by gains resulting from the conversion of New Convertible Notes to equity. On the Effective Date, pursuant to the Plan, all outstanding indebtedness of theforeign currency transaction gains. The Company under the New Secured Notes and New Convertible Notes was discharged and canceled.
Other (income) expense, net, wasrecorded a gain of $2.8 million in both the period September 1, 2017 through December 31, 2017 (Successor) and the period January 1, 2017 through August 31, 2017 (Predecessor) compared to aforeign currency transaction loss of $7.6$2.9 million in the year ended December 31, 2016 (Predecessor). These gains or losses are primarily related2020, compared to a foreign currency transaction gains or losses on unhedged intercompany financing arrangements.
Reorganization items, net, in the period September 1, 2017 through December 31, 2017 (Successor) was a expense of $2.1 million compared to a gain of $74.5$0.5 million in the period January 1, 2017 through August 31, 2017 (Predecessor). Amounts recorded relate to expenses and income directly associated with the chapter 11 proceedings and incurred during or, in the case of some professional fees, after the pendency of the Company's chapter 11 cases. The balance for the period September 1, 2017 throughyear ended December 31, 2017 (Successor) is comprised solely of professional fees. The balance for the period January 1, 2017 through August 31, 2017 (Predecessor) is comprised of a gain on extinguishment of debt of $90.0 million and a gain on fresh-start revaluation of $16.6 million. Offsetting these gains are $10.3 million related to the write-off of debt issuance costs and discounts related to the New Secured Notes and the New Convertible Notes, prepayment penalties and debt related fees of $13.2 million, professional fees of $7.3 million and key employee incentive plan expense of $1.2 million (refer to Note 2 - Bankruptcy Relates Disclosures, to the consolidated financial statements).
2019.The Company recorded an income tax benefit of $3.2 million in the period September 1, 2017 through December 31, 2017 (Successor) and an income tax benefit of $1.4 million in the period January 1, 2017 through August 31, 2017 (Predecessor). Income tax benefit was $2.5$3.0 million in the year ended December 31, 2016 (Predecessor).2020, compared to an income tax benefit of $4.9 million in the year ended December 31, 2019. The Company’s effective tax rate is expressed as income tax expense (benefit), which includesbenefit as a percentage of loss before income taxes. The effective tax expense (benefit) on the Company’s share of joint venture lossesrate was 6.9% in the year ended December 31, 2016 (Predecessor), as a percentage of income (loss) from continuing operations before
income taxes2020 and equity in losses of joint venture. The effective tax rate was 19.3% and 4.0% in the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), respectively, and 2.3%11.3% in the year ended December 31, 2016 (Predecessor).2019. The change in the effective tax rate between periods resulted from changes in the geographic mix and
timing of income (losses), and the inability to benefit from current year losses due to valuation allowance positions in the U.S., the impact of the recent U.S. tax reform, and the impact of intraperiod allocations.
Equity in losses of joint ventureNet loss was $4.2$40.7 million in the year ended December 31, 2016. Included in the equity in losses of joint venture was an impairment charge of $4.6 million related2020, compared to the write-down of the Company's investment in joint venture to fair value. In August 2016, the Company completed the sale of its joint venture, Kreher Steel Company, LLC (“Kreher”), for aggregate cash proceeds of $31.6 million (refer to Note 4 -
Joint Venture to the consolidated financial statements).Loss from continuing operations was $13.3 million in the period September 1, 2017 through December 31, 2017 (Successor). Income from continuing operations of $36.2 million in the period January 1, 2017 through August 31, 2017 (Predecessor) includes the gain of $74.5 million for reorganization items, net. Loss from continuing operations was $114.1$38.5 million in the year ended December 31, 2016 (Predecessor). Income from discontinued operations, net of income taxes, was $6.1 million in the year ended December 31, 2016 (Predecessor), which includes an after-tax gain on the sale of its wholly-owned subsidiary, Total Plastics, Inc. ("TPI") of $1.3 million and an income tax benefit of $3.8 million consisting mainly of a $4.2 million income tax benefit from the reversal of an income tax valuation allowance.
Net loss was $13.3 million in the period September 1, 2017 through December 31, 2017 (Successor). Net income was $36.2 million in the period January 1, 2017 through August 31, 2017 (Predecessor), which includes the gain of $74.5 million for reorganization items, net. 2019. Net loss in the year ended December 31, 2016 (Predecessor), which2020 includes income from discontinued operations (netthe non-cash goodwill impairment charge of income taxes)$2.7 million, partially offset by the unrealized gain on embedded conversion option of $6.1 million, was $108.0$2.0 million.
Liquidity and Capital Resources
Cash and cash equivalents increased (decreased) as follows:
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | September 1, 2017 Through December 31, 2017 | | | January 1, 2017 Through August 31, 2017 | | Year Ended December 31, 2016 |
(Dollar amounts in millions)
| | | |
| Net cash used in operating activities | $ | (20.6 | ) | | | $ | (50.3 | ) | | $ | (35.0 | ) |
| Net cash (used in) from investing activities | (3.7 | ) | | | 5.3 |
| | 76.9 |
|
| Net cash from (used in) financing activities | 24.7 |
| | | 18.6 |
| | (16.5 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 0.6 |
| | | 0.9 |
| | (0.9 | ) |
| Net change in cash and cash equivalents | $ | 1.0 |
| | | $ | (25.6 | ) | | $ | 24.5 |
|
The Company’s principal sourcesources of liquidity isare cash provided by operations and proceeds from borrowings under its Credit Facilities. Given the economic uncertainty and disruptions resulting from the COVID-19 pandemic, the Company will continue to focus on maintaining liquidity to fund its normal operations and appropriately aligning its working capital with the changing economic conditions.
The ongoing duration and severity of the COVID-19 pandemic, as well as the speed of recovery and administration of vaccinations, could have a significant unfavorable impact on the Company's New ABL Facility. suppliers' ability to deliver products and services and its customers' ability to purchase goods and services and pay their accounts receivable timely, if at all, which could have a significant adverse effect on the Company's operations, financial condition and liquidity. With the benefit of the various government-sponsored support programs such as tax deferrals, employment-related subsidies, government-backed loans and other government relief available in the U.S. and in other countries in which it operates, including the PPP Loan received in April 2020 and the France Term Loan received in June 2020, coupled with temporary and long-term cost-cutting initiatives implemented by the Company, the Company expects it will be able to maintain adequate liquidity and working capital to continue its normal operations over the next 12 months. However, given the current uncertain economic conditions, there can be no assurance that the Company will be able to achieve its strategic initiatives or obtain additional funding on favorable terms in the future, which could have a significant adverse effect on its operations, financial condition and liquidity.
Cash and cash equivalents at December 31, 2020 were $22.4 million, with approximately $9.0 million of the Company’s consolidated cash and cash equivalents balance residing in the United States.
Cash and cash equivalents increased (decreased) as follows:
| | | | | | |
| | Year Ended |
| | December 31, |
(Dollar amounts in millions) | | 2020 | | 2019 |
Net cash from operating activities | | $ | 20.5 | | $ | 10.8 |
Net cash used in investing activities | | | (2.8) | | | (3.6) |
Net cash used in financing activities | | | (2.4) | | | (9.6) |
Effect of exchange rate changes on cash and cash equivalents | | | 0.7 | | | 0.1 |
Net change in cash and cash equivalents | | $ | 16.0 | | $ | (2.2) |
Working capital, defined as current assets less current liabilities, and the balances of its significant components were as follows:
| | | | | | | | | |
| | December 31, | | Working Capital |
(Dollar amounts in millions) | | 2020 | | 2019 | | Increase (Decrease) |
Working capital | | $ | 147.5 | | $ | 173.7 | | $ | (26.2) |
Cash and cash equivalents | | | 22.4 | | | 6.4 | | | 16.0 |
Accounts receivable | | | 42.6 | | | 74.7 | | | (32.1) |
Inventories | | | 130.1 | | | 144.4 | | | (14.3) |
Accounts payable | | | 29.0 | | | 41.7 | | | (12.7) |
Accrued and other current liabilities | | | 3.3 | | | 3.5 | | | (0.2) |
Accrued payroll and employee benefits | | | 7.8 | | | 7.6 | | | 0.2 |
Specific components of the change in working capital (defined as current assets less current liabilities) are highlighted below:
| ● | A decrease in accounts receivable in the year ended December 31, 2020 resulted in a cash flow source of $32.5 million, compared to a decrease in accounts receivable in the year ended December 31, 2019, which resulted in a $5.1 million cash flow source. The higher accounts receivable balance in the year |
Higher accounts receivable at both December 31, 2017 (Successor) and August 31, 2017 (Predecessor) compared to December 31, 2016 (Predecessor) resulted in $2.2 million and $6.1 millionTable of cash flow use, compared to a
$6.1 million cash flow source in the year ended December 31, 2016 (Predecessor). The higher accounts receivable balance at both December 31, 2017 (Successor) and August 31, 2017 (Predecessor) was a result of the timing of certain customer payments. Average receivable days outstanding was 53.3 days in the year ended December 31, 2017 and 54.0 days in the year ended December 31, 2016.Higher inventory levels at both December 31, 2017 (Successor) and August 31, 2017 (Predecessor) compared to December 31, 2016 (Predecessor) used $2.0 million and $2.7 million of cash, respectively, while lower inventory levels at December 31, 2016 (Predecessor) compared to the prior year end 2015 were a $65.7 million cash flow source in the year ended December 31, 2016 (Predecessor). The cash flow source from inventory in year ended December 31, 2016 was attributable to the previously discussed Houston and Edmonton inventory sale as well as approximately $23.8 million in inventory reductions related to scrapping restructuring activities. Average days sales in inventory was 140.6 days in the year ended December 31, 2017 as compared to 168.1 days in the year ended December 31, 2016. The decrease in average days sales in inventory in 2017 compared to 2016 resulted primarily from continued improvement in inventory management offset somewhat by the Houston and Edmonton inventory sale and scrapping restructuring activities in 2016. The Company's inventory management strategy is focused on adjusting its inventory deployment initiatives to better align inventory at its facilities with the needs of the customers specific to that facility. In 2017, the Company's successful execution of that strategy resulting in days sales in inventory surpassing the Company's original target of approximately 150 days. | | ended December 31, 2019 is primarily attributable to higher sales in the fourth quarter of 2019, compared to the fourth quarter of the current year. Average receivable days outstanding was 58.2 days in the year ended December 31, 2020, compared to 55.7 days in the year ended December 31, 2019. The Company believes the increase in the average receivable days outstanding in 2020 compared to 2019 reflects some slowing in payments from customers due to the financial impacts resulting from the COVID-19 pandemic. The Company has fewer accounts receivables as of December 31, 2020 as a result of the decrease in demand resulting from the COVID-19 pandemic, which has decreased its borrowing base collateral attributable to accounts receivable under its Credit Facilities and, in the near term, could result in less cash provided by operations. Further decreases in the Company's accounts receivable could result in further reductions in its borrowing base collateral and therefore, the maximum amount it could borrow under its Credit Facilities could continue to decrease accordingly. |
| ● | A decrease in inventory in the year ended December 31, 2020 resulted in a $15.8 million cash flow source, compared to a decrease in inventory in the prior year, which resulted in a $16.3 million cash flow source. Average days sales in inventory increased to 191.1 days in the year ended December 31, 2020, compared to 134.2 days in the year ended December 31, 2019 as a result of a substantial decrease in sales volume in the year ended December 31, 2020, compared to the prior year. The Company is focused on maintaining liquidity by purchasing a sufficient level of inventory to meet customer demand while not carrying excess inventory and lowering overall stock levels throughout the business. However, if the Company is unable to sufficiently manage its inventory levels and it begins to carry excess inventory, its liquidity could be unfavorably impacted. Conversely, a decrease in the Company's inventory could result in a reduction in its borrowing base collateral attributable to inventory and therefore, the maximum amount it could borrow under its Credit Facilities could decrease accordingly. |
| ● | Total accounts payable, accrued payroll and employee benefits, and accrued and other current liabilities provided a cash flow use of $13.1 million in the year ended December 31, 2020, compared to a cash flow use of $6.4 million in the year ended December 31, 2019. Accounts payable days outstanding were 61.2 days in the year ended December 31, 2020, compared to 41.6 days in the year ended December 31, 2019. The improving financial condition of the Company prior to the impact of the COVID-19 pandemic, particularly the completion of the Exchange Offer, had resulted in improved credit terms with certain of its suppliers, including an extension of net payment dates and/or credit limits. Additionally, as the Company continues to align its cash flows in response to the economic impacts and uncertainties caused by the COVID-19 pandemic, it expects some variability in the timing of payments to vendors to continue. |
Total accounts payable, accrued payroll and employee benefits, and accrued and other current liabilities used cash of $4.4 million in the period September 1, 2017 through December 31, 2017 (Successor) and provided a cash flow source of $2.6 million in the period January 1, 2017 through August 31, 2017 (Predecessor) compared to a use of cash of $14.7 million over the year ended December 31, 2016 (Predecessor). Accounts payable days outstanding were 41.4 days in the year ended December 31, 2017 and 43.3 days in the same period last year.
Net cash used in investing activities of $3.7$2.8 million and $3.6 million in the period September 1, 2017 throughyear ended December 31, 2017 (Successor) were2020 and December 31, 2019, respectively, was almost entirely the result of cash paid for capital expenditures. expenditures in each period.
Net cash from investingused in financing activities of $5.3 million in the period January 1, 2017 through August 31, 2017 (Predecessor) is mainly due to a $7.5 million reduction in the cash collateralization requirements of outstanding letters of credit offset by cash paid for capital expenditures of $2.9 million in the period. Net cash from investing activities of $76.9$2.4 million in the year ended December 31, 2016 (Predecessor) is mainly attributable to cash proceeds from the sale of TPI and the sale of the Company's 50% ownership in Kreher, partially offset by a cash outflow of $8.0 million used to cash collateralize letters of credit that were issued under the Company's previous asset-based lending facility, which was replaced in the year ended December 31, 2016.
Net cash from financing activities of $24.7 million in the period September 1, 2017 through December 31, 2017 (Successor) was the result of proceeds from borrowings under the Company's New ABL Facility, as well as net proceeds from short-term borrowings under the Company's foreign line of credit. During the period January 1, 2017 through
August 31, 2017 (Predecessor), net cash from financing activities of $18.6 million2020 was mainly attributable to
proceeds and repayments of debt in connection with the Company's bankruptcy proceedings and included the initial borrowings and subsequent repayment of the Debtor-in-Possession Revolving Credit and Security Agreement dated as of June 10, 2017 ("DIP Facility"), borrowings under the New ABL Facility, cash proceeds from the issuance of the Second Lien Notes and repayment of the prepetition First Lien Notes, as well as proceeds from short-term borrowings under the Company's foreign line of credit. Offsetting these net cash proceeds were a payment of $3.0 million made in connection with the Company's build-to-suit liability associated with its warehouse in Janesville, WI. In the year ended December 31, 2016 (Predecessor), all available proceeds from the sales of TPI and Kreher were used to pay down the Company's long-term debt, which, along with the $9.8 million payment of debt restructuring costs and $2.5 million paymentpayments of debt issuance costs
resulted in netof $3.1 million, payments of the Company’s ABL Credit Agreement, offset by borrowings under the PPP Loan and the France Term Loan. Net cash used in financing activities of
$16.5$9.6 million in the year ended December 31,
2016 (Predecessor).2019 was mainly attributable to repayments of borrowings under the Company’s ABL Credit Agreement as well as repayments of short-term borrowings under the Company’s local credit facilities.Capital Resources
The Company's various credit arrangements are with well-established, global lenders. The Company does not expect the COVID-19 pandemic will have a significant impact on the ability of these lenders to continue to lend cash to the Company pursuant to the credit arrangements that the Company has with these lenders.
On August 31, 2017, the Company entered into the Revolving Credit Facilities (as defined below)and Security Agreement with certain financial institutionsPNC Bank, National Association (“PNC”) as lender and as administrative and collateral agent (the "Financial Institutions"“Agent”) in order to replace, and repay outstanding borrowings and support the continuance of letters of credit under the Company's senior secured asset-based revolving credit facility.other lenders party thereto (the “Original ABL Credit Agreement”). The Original ABL Credit Facilities were in the form of senior secured first lien term loan facilities in an aggregate principal amount of $112.0 million. The Credit Facilities consisted of a $75.0 million initial term loan facility funded at closing and a $37.0 million Delayed Draw Facility. Under the Delayed Draw Facility, $24.5 million was drawn in December 2016. On May 4, 2017, the Company entered into an amendment to the Credit Facilities Agreement whereby the Financial Institutions agreed to accelerate the Company's access to the Delayed Draw Facility that was expected to be available in June 2017 or thereafter. The $12.5 million was drawn by the Company in May 2017 to finance additional investments in inventory and to service customers' needs.
The filing of the bankruptcy petitions constituted a default or event of default that accelerated the Company’s obligations under (i) the Credit Facilities Agreement, (ii) the New Secured Notes Indenture and the New Secured Notes issued pursuant thereto, and (iii) the New Convertible Notes Indenture and the New Convertible Notes issued pursuant thereto. The Credit Facilities Agreement, the New Secured Notes Indenture, and the New Convertible Notes Indenture provide that, as a result of the filing of the bankruptcy petitions, all outstanding indebtedness due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Credit Facilities Agreement, the New Secured Notes Indenture, and the New Convertible Notes Indenture were automatically stayed as a result of the bankruptcy petitions, and the creditors’ rights of enforcement in respect of the Credit Facilities Agreement, the New Secured Notes Indenture, and the New Convertible Notes Indenture are subject to the applicable provisions of the Restructuring Support Agreement and the Bankruptcy Code.
As fully discussed at Note 2 - Bankruptcy Related Disclosures to the consolidated financial statements, on the August 31, 2017 Effective Date, the Company's bankruptcy Plan became effective pursuant to its terms and the Debtors emerged from their chapter 11 cases. By operation of the Plan, all outstanding indebtedness, accrued interest, and related fees of the Debtors under the Credit Facilities, amounting to $49.4 million, was paid in full with the proceeds of borrowings under the New ABL Facility and the issuance of Second Lien Notes under the Second Lien Notes Indenture. Also, on the Effective Date and by operation of the Plan, all outstanding indebtedness of the Debtors under (i) the Company's New Secured Notes Indenture and the New Secured Notes issued pursuant thereto, and (ii) the Company's New Convertible Notes Indenture and the New Convertible Notes issues pursuant thereto, were discharged and canceled.
The New ABL Facility providesprovided for a $125.0 million senior secured, revolving credit facility
(the “Revolving A Credit Facility”), under which the Company and four of its subsidiaries each are borrowers (collectively, in such capacity, the “Borrowers”). The obligations of the Borrowers have been guaranteed by the subsidiaries of the Company named therein as guarantors. On December 10, 2020, the Company entered into an Amendment No. 3 to Revolving Credit and Security Agreement (the “Amendment No. 3”) by and among the Company, the other borrowers and guarantors party thereto and PNC Bank, National Association as the agent and the lenders, which amends the Original ABL Credit Agreement dated as of August 31, 2017 (as amended to date by Amendment No. 1 to Revolving Credit and Security Agreement, dated June 1, 2018, Amendment No. 2 to Revolving Credit and Security Agreement, dated March 27, 2020, and Amendment No. 3, the “ABL Credit Agreement”) to provide for
additional borrowing capacity.Amendment No. 3 provided for an additional $25.0 million Revolving B (Priority) credit facility (the “Revolving B (Priority) Credit Facility”), which is subordinated to the Company. $125.0 million senior secured, revolving credit facility (the “Revolving A Credit Facility”) and senior to the $21.5 million senior secured, revolving credit facility (the “Revolving B Credit Facility”). As part of Amendment No. 3, the Company and PNC also agreed to extend the maturity of the ABL Credit Agreement to February 28, 2023, and to amend the ABL Credit Agreement to (i) reduce the available borrowing capacity under its Revolving B Credit Facility from $25.0 million to $21.5 million and subordinate the payment under the Revolving B Credit Facility to the Revolving B (Priority) Credit Facility, (ii) increase access to available borrowings by reducing the liquidity covenant test threshold from $12.5 million to $8.75 million, and (iii) increase the interest applicable to the Revolving Credit A Facility to LIBOR-base rate plus a margin of 4.0%.
Subject to certain exceptions and permitted encumbrances, the obligations under the New ABL FacilityCredit Agreement are secured by a first priority security interest in substantially all of the assets of each of the Borrowers and certain subsidiaries of their foreign subsidiaries.the Company that are named as guarantors. The proceeds of the advances under the New ABL FacilityCredit Agreement may only be used to (i) pay certain fees and expenses to the Agent and the lenders under the New ABL Facility,Credit Agreement, (ii) provide for Borrowers'the Borrowers’ working capital needs and reimburse drawings under letters of credit, (iii) repay the obligations under the Debtor-in-Possession Revolving Credit and Security Agreement dated as of JuneJuly 10, 2017, by and among the Company, the lenders party thereto, and PNC, Bank, National Association, and certain other existing indebtedness, and (iv) provide for the Borrowers'Borrowers’ capital expenditure needs, in accordance with the New ABL Facility.
Credit Agreement.The Company may prepay its obligations under the New ABL FacilityCredit Agreement at any time without premium or penalty, and must apply the net proceeds of material sales of collateral in prepayment of such obligations. Payments made must be applied to the Company’s obligations under the Revolving A Credit Facility, if any, prior to its obligations under the Revolving B Credit Facility. In connection with an early termination or permanent reduction of the Revolving A Credit Facility prior to March 27, 2021, a 0.50% fee shall be due and, for the period from March 28, 2021 through September 27, 2021, a 0.25% fee shall be due, in each case in the amount of such commitment reduction, subject to reduction as set forth in the ABL Credit Agreement. Indebtedness for borrowings under the ABL Credit Agreement is subject to acceleration upon the occurrence of specified defaults or events of default, including (i) failure to pay principal or interest, (ii) the inaccuracy of any representation or warranty of a loan party, (iii) failure by a loan party to perform certain covenants, (iv) defaults under indebtedness owed to third parties, (v) certain liability producing events relating to ERISA, (vi) the invalidity or impairment of the Agent’s lien on its collateral or of any applicable guarantee, and certain adverse bankruptcy-related and (vii) certain adverse bankruptcy-related and other events.
Interest on indebtedness under the Revolving A Credit Facility accrues at a variable rate based on a grid with the highest interest rate being the applicable Prime or LIBOR-based rate plus a margin of 4.0%, as set forth in the New ABL Facility.Credit Agreement. Interest on indebtedness under the Revolving B (Priority) Credit Facility and the Revolving B Credit Facility accrues at a rate of 15.0% and 12.0% per annum, respectively, which will be paid-in-kind unless the Company elects to pay such interest in cash and the Revolving B (Priority) payment conditions or
the Revolving B payment conditions specified in the ABL Credit Agreement are satisfied. Additionally, the Company must pay a monthly Facility Feefacility fee equal to the product of (i) 0.25% per annum (or, if the average daily revolving facility usage is less than 50% of the maximum revolving advance amount of the Credit Facility, 0.375% per annum)
multiplied by (ii) the amount by which the maximum revolving advance amount of the Credit Facility exceeds such average daily revolving facilityCredit Facility usage for such month.
Under the New ABL Facility,Credit Agreement, the maximum borrowing capacity of the facilityRevolving A Credit Facility is based on the Company'sCompany’s borrowing base calculation. TheAs of December 31, 2020, the weighted average advance rates used in the borrowing base calculation are 87.3%85.0% on eligible accounts receivable and 69.2%68.2% on eligible inventory.
The Company's NewCompany’s ABL FacilityCredit Agreement contains certain covenants and restrictions customary to an asset-based revolving loan. Indebtedness for borrowings underPursuant to the New ABL Facility is subject to acceleration upon the occurrence of specified defaults or events of default, including failure to pay principal or interest, the inaccuracy of any representation or warranty of a loan party, failure by a loan party to perform certain covenants, defaults under indebtedness owed to third parties, certain liability producing events relating to ERISA, the invalidity or impairmentterms of the Agent’s lien on its collateral or ofABL Credit Agreement, the PPP Loan and the France Term Loan shall be excluded for all purposes from any applicable guarantee, and certain adverse bankruptcy-related and other events.
covenant calculations.The Company's NewCompany’s ABL FacilityCredit Agreement contains a springing financial maintenance covenant requiring the Company to maintain a Fixed Charge Coverage Ratio of 1.0 to 1.0 in any covenant testing periodCovenant Testing Period (as defined in the ABL Credit Agreement) when the Company'sCompany’s cash liquidity (as defined in the New ABL FacilityCredit Agreement) is less than the greater of i) 10% of the New ABL Facility's maximum borrowing capacity (as defined in the New ABL Facility Agreement) and ii) $9.0 million.$8.75 million for five consecutive days. The Company iswas not in a covenant testing periodCovenant Testing Period as of and for the year ended December 31, 2017 (Successor).
2020.Additionally, upon the occurrence and during the continuation of an event of default or upon the failure of the Company to maintain cash liquidity (as defined in the New ABL Facility Agreement)Credit Agreement, inclusive of certain cash balances and the additional unrestricted borrowing capacity shown below) in excess of the greater of $10.0$8.75 million, or 12.5% of the New ABL Facility's maximum borrowing capacity (as defined in the New ABL Facility Agreement), the lender has the right to take full dominion of the Company’s cash collections and apply these proceeds to outstanding loans under the New ABL FacilityCredit Agreement (“Cash Dominion”). Based on the Company’s cash projections, it does not anticipate that Cash Dominion will occur, or that it will be in a Covenant Testing Period during the next 12 months.
On April 28, 2020, the Company entered into the PPP Loan, which provides additional cash to be used for payroll costs, interest on mortgages, rent and utilities. The Company intends to apply for forgiveness of the full amount of the PPP Loan in accordance with the terms of the PPP, the CARES Act and the PPPFA; however, the Company cannot assure at this time that the PPP Loan will be fully forgiven. On June 24, 2020, the Company's French subsidiary entered into the France Term Loan, which is fully guaranteed by the French government, and provides additional capital to support the Company’s ongoing operations in France.
Considerable uncertainty exists with regards to the ultimate duration, severity and ultimate recovery from the impacts of the COVID-19 pandemic as well as the full extent of the impact that the COVID-19 pandemic will have on the Company's business, operations and financial condition. However, with the benefit of the various government-sponsored support programs such as tax deferrals, employment-related subsidies, government-backed loans and other government relief available in the U.S. and in other countries in which it operates, including the PPP Loan received in April 2020 and the France Term Loan received in June 2020, coupled with the temporary and long-term cost-cutting initiatives implemented by the Company, the Company believes that its existing cash balances, together with cash generated from operations and proceeds from its various revolving credit facilities, will be sufficient to fund its normal business operations and service its debt over the next twelve months from the issuance of this report.
The Company’s ability to borrow funds is dependent on its ability to maintain an adequate borrowing base. Accordingly, if the Company does not generate sufficient cash flow from operations to fund its working capital needs and planned capital expenditures, and its availability is depleted, the Company may need to take further actions, such as reducing or delaying capital investments, strategic investments or other actions. The Company believes that its existing cash balances, together with its availability under the ABL Credit Agreement, will be sufficient to fund normal business operations over the next twelve months from the issuance of this report. However, there can be no assurance that the Company will be able to achieve its strategic initiatives or obtain
additional funding on favorable terms in the future which could have a significant adverse effect on its operations.
Additional unrestricted borrowing capacity under the New ABLRevolving A Credit Facility at December 31, 2017 (Successor)2020 was as follows (in millions):
|
| | | |
| Maximum borrowing capacity | $ | 124.5 |
|
| Letters of credit and other reserves | (2.1 | ) |
| Availability reserve | (5.0 | ) |
| Current maximum borrowing capacity | 117.4 |
|
| Current borrowings | (101.0 | ) |
| Additional unrestricted borrowing capacity | $ | 16.4 |
|
| | | |
Maximum borrowing capacity | | $ | 125.0 |
Collateral reserves | | | (41.8) |
Letters of credit and other reserves | | | (2.2) |
Current maximum borrowing capacity | | | 81.0 |
Current borrowings | | | (78.4) |
Additional unrestricted borrowing capacity | | $ | 2.6 |
On March 27, 2020, the Company completed the Exchange Offer to issue its the 3.00%/5.00% Convertible Notes and shares of its common stock in exchange for its 5.00%/7.00% Convertible Notes, including any accrued and unpaid interest on the 5.00%/7.00% Convertible Notes as of the date in which the Exchange Offer was completed. Pursuant to the terms of the Exchange Offer, $190.2 million in aggregate principal amount of the 5.00%/7.00% Convertible Notes were tendered and accepted and in exchange, the Company issued $95.1 million in aggregate principal amount of its 3.00%/5.00% Convertible Notes and 7,026 shares of its common stock. An aggregate principal amount of 5.00%/7.00% Convertible Notes in the amount of $3.7 million were not tendered and remained outstanding at the date of Exchange Offer. As a result of the Exchange Offer, the Company reduced the aggregate principal amount of its long-term debt by $94.5 million and expects to reduce its annual interest expense by over $10.0 million.
The New ABL Facility matures on February 28, 2022.
The Second Lien3.00%/5.00% Convertible Notes
are five-year senior obligations ofwere issued pursuant to an indenture (the “3.00%/5.00% Convertible Notes Indenture”), which the Company and
certain of its subsidiaries,the Guarantors (defined below) entered into with Wilmington Savings Fund Society, FSB, as trustee and collateral agent ("Indenture Agent"), on March 27, 2020. The 3.00%/5.00% Convertible Notes are, secured by a lien on all or substantially all of the assets of the Company, its domestic subsidiaries and certain of its foreign subsidiaries, which lien the Indenture Agent has agreed will be junior to the lien of the Agent under the
ABL Credit Agreement.The 3.00%/5.00% Convertible Notes have substantially the same terms that the 5.00%/7.00% Convertible Notes had prior to the completion of the Exchange Offer, except for the following primary differences: (i) the 3.00%/5.00% Convertible Notes are not exempt from the registration requirements of the Securities Act and have the benefit of registration rights to the holders of the 3.00%/5.00% Convertible Notes, (ii) the interest on the 3.00%/5.00% Convertible Notes accrues at the rate of 3.00% per annum if paid in cash and at the rate of 5.00% per annum if paid in kind, compared to interest on the 5.00%/7.00% Convertible Notes, which accrues at the rate of 5.00% per annum if paid in cash and at the rate of 7.00% per annum if paid in kind, and (iii) the 3.00%/5.00% Convertible Notes have a maturity date of August 31, 2024, compared to the 5.00%/7.00% Convertible Notes, which have a maturity date of August 31, 2022.
In conjunction with the Exchange Offer, on March 27, 2020, the Company, the guarantors of the 5.00%/7.00% Convertible Notes and the trustee for the 5.00%/7.00% Convertible Notes entered into a supplemental indenture to the indenture governing the 5.00%/7.00% Convertible Notes (the “5.00%/7.00% Convertible Notes Indenture”) to provide for, among other things, the elimination or amendment of substantially all of the restrictive covenants, the release of all collateral securing the Company’s obligations under the 5.00%/7.00% Convertible Notes Indenture, and the modification of certain of the events of default and various other provisions contained in the 5.00%/7.00% Convertible Notes Indenture.
Also on March 27, 2020, PNC (in its capacity as “First Lien Agent”), the trustee for the 5.00%/7.00% Convertible Notes and the Company and certain of its subsidiaries executed an intercreditor agreement (the “New Intercreditor Agreement”) providing for the lien priority of the first lien facility over the 3.00%/5.00% Convertible Notes. The terms and conditions of the New ABL Facility.Intercreditor Agreement are substantially consistent with those
applicable to the intercreditor agreement between the First Lien Agent and the trustee for the 5.00%/7.00% Convertible Notes prior to the completion of the Exchange Offer (the “5.00%/7.00% Convertible Notes Intercreditor Agreement”). PNC and the trustee for the 5.00%/7.00% Convertible Notes also entered into an amendment of the 5.00%/7.00% Convertible Notes Intercreditor Agreement to, among other things, remove certain limitations and rights of the 5.00%/7.00% Convertible Notes with respect to the first lien facility.
The Second Lien3.00%/5.00% Convertible Notes are convertible into shares of the Company’s common stock at any time at the initial conversion price of $3.77$4.56 per share (after giving effect to an adjustment triggered by the Reverse Split), which rate is subject to further adjustment as set forth in the Second Lien3.00%/5.00% Convertible Notes Indenture. The valueUnder the 3.00%/5.00% Convertible Notes Indenture, upon the conversion of the 3.00%/5.00% Convertible Notes in connection with a Fundamental Change (as defined in the 3.00%/5.00% Convertible Notes Indenture), for each $1.00 principal amount of the 3.00%/5.00% Convertible Notes, that number of shares of the Company’s common stock for purposesissuable upon conversion shall equal the greater of (a) $1.00 divided by the then applicable conversion price or (b) $1.00 divided by the price paid per share of the settlementCompany's common stock in connection with such Fundamental Change calculated in accordance with the 3.00%/5.00% Convertible Notes Indenture, subject to other provisions of the conversion right3.00%/5.00% Convertible Notes Indenture. Subject to certain exceptions, under the 3.00%/5.00% Convertible Notes Indenture a “Fundamental Change” includes, but is not limited to, the following: (i) the acquisition of more than 50% of the voting power of the Company’s common equity by a “person” or “group” within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended; (ii) the consummation of any recapitalization, reclassification, share exchange, consolidation or merger of the Company pursuant to which the Company’s common stock will be calculated as providedconverted into cash, securities or other property; (iii) the “Continuing Directors” (as defined in the Second Lien3.00%/5.00% Convertible Notes Indenture) cease to constitute at least a majority of the board of directors; and (iv) the approval of any plan or proposal for the liquidation or dissolution of the Company by the Company’s stockholders.
The 5.00%/7.00% Convertible Notes are convertible into shares of the Company’s common stock at any time at the conversion price of $37.68 per share (after giving effect to an adjustment triggered by the Reverse Split), which rate is subject to further adjustment as set forth in the Supplemental Indenture. Under the Supplemental Indenture, the conversion of the 5.00%/7.00% Convertible Notes in connection with a Fundamental Change (as defined in the Supplemental Indenture) is substantially the same as under the 3.00%/5.00% Convertible Notes Indenture, using a 20 trading day observation period. other than the applicable conversion price.
Upon conversion of the 3.00%/5.00% Convertible Notes and/or the 5.00%/7.00% Convertible Notes, the Company will pay and/or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, together with cash in lieu of fractional shares. The value of shares of the Company’s common stock for purposes of the settlement of the conversion right, if the Company elects to settle in cash, will be calculated as provided in the 3.00%/5.00% Convertible Notes Indenture or Supplemental Indenture, as applicable, using a 20 trading day observation period.
As discussed previously, the 3.00%/5.00% Convertible Notes are convertible at the option of the holder, although the Company, at its own election, may pay and/or deliver, as the case may be, cash, shares of common stock, or a combination thereof. The Company determined that the conversion option is not clearly and closely related to the economic characteristics of the 3.00%/5.00% Convertible Notes, nor does the conversion option meet the own equity scope exception as the Company at that time did not have sufficient authorized and unissued common stock shares to satisfy the maximum number of common stock shares that could be required to be issued upon conversion. The initial value allocated to the derivative liability was $38,962, with a corresponding reduction in the carrying value of the 3.00%/5.00% Convertible Notes.
As a result of the Company's filing articles of amendment to increase the number of shares of common stock authorized, the number of the Company's common stock shares available for issuance upon conversion of the 3.00%/5.00% Convertible Notes is sufficient to allow the conversion option to be share-settled in full. The Company concluded that as of June 30, 2020 the conversion option qualified for equity classification and the bifurcated derivative liability no longer needed to be accounted for as a separate derivative on a prospective basis from the date of reassessment. As of June 30, 2020, the fair value of the conversion option of $36,952, was classified to equity as additional paid-in capital. There was no tax impact of the reclassification of the
conversion option to equity. Any remaining debt discount that arose at the date of debt issuance from the original bifurcation will continue to be amortized through interest expense.
The terms of the Second Lien3.00%/5.00% Convertible Notes contain numerous covenants imposing financial and operating restrictions on the Company’sCompany's business. These covenants place restrictions on the Company’s ability and the ability of its subsidiaries to, among other things, pay dividends, redeem stock or make other distributions or restricted payments; incur indebtedness or issue certain stock; make certain investments; create liens; agree to certain payment restrictions affecting certain subsidiaries; sell or otherwise transfer or dispose assets; enter into transactions with affiliates; and enter into sale and leaseback transactions.
The Second LienNeither the 3.00%/5.00% Convertible Notes nor the 5.00%/7.00% Convertible Notes may not be redeemed by the Company in whole or in part at any time subjectprior to maturity, except the Company may be required to make an offer to purchase the 3.00%/5.00% Convertible Notes using the proceeds of certain exceptions provided undermaterial asset sales involving the Second LienCompany or one of its restricted subsidiaries, as described more particularly in the 3.00%/5.00% Convertible Notes Indenture. In addition, if a Fundamental Change (as defined in the 3.00%/5.00% Convertible Notes Indenture and the Supplemental Indenture, as applicable) occurs at any time, each holder of any Second Lien3.00%/5.00% Convertible Notes or 5.00%/7.00% Convertible Notes has the right to require the Company to repurchase such holder’s Second Lien
Notesnotes for cash at a repurchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest thereon, subject to certain exceptions.
The Company must use the net proceeds of material sales of collateral, which proceeds are not used for other permissible purposes, to make an offer of repurchase to holders of the Second Lien Notes. Indebtedness for borrowings under the Second Lien3.00%/5.00% Convertible Notes Indenture and the Supplemental Indenture is subject to acceleration upon the occurrence of specified defaults or events of default as set forth under each such indenture, including failure to pay principal or interest, the inaccuracy of any representation or warranty of any obligor, under the Second Lien Notes, failure by an obligor under the Second Lien Notes to perform certain covenants, the invalidity or impairment of the Indenture Agent’s lien on its collateral under the 3.00%/5.00% Convertible Notes Indenture, the invalidity or impairment of any applicable guarantee, and certain adverse bankruptcy-related and other events.
Although the full extent that the COVID-19 pandemic will have on the Company's business, operations and financial condition is currently unknown, it does not anticipate that any specified defaults or events of default as set forth in the indenture will occur during the next 12 months.Upon satisfaction of certain conditions more particularly described in the 3.00%/5.00% Convertible Notes Indenture, including the deposit in trust of cash or securities sufficient to pay the principal of and interest and any premium on the 3.00%/5.00% Convertible Notes, the Company may effect a covenant defeasance of certain of the covenants imposing financial and operating restrictions on the Company’s business. In addition, and subject to certain exceptions as more particularly described in the 3.00%/5.00% Convertible Notes Indenture, the Company may amend, supplement or waive provisions of the 3.00%/5.00% Convertible Notes Indenture with the consent of holders representing a majority in aggregate principal amount of the 3.00%/5.00% Convertible Notes, and may in effect release collateral from the liens securing the 3.00%/5.00% Convertible Notes with the consent of holders representing 66-2/3% in aggregate principal amount of the 3.00%/5.00% Convertible Notes.
Interest on the Second Lien3.00%/5.00% Convertible Notes accrues at the rate of 5.00%, except that the Company may, in circumstances where the payment on interest3.00% per annum if paid in cash would cause a conditionand at the rate of default under5.00% per annum if paid in kind, payable quarterly. Interest on the New ABL Facility, pay5.00%/7.00% Convertible Notes continues to accrue at the rate of 5.00% per annum if paid in cash and at the rate of 7.00% per annum if paid in kind. Currently,kind, payable quarterly. Pursuant to the terms of both the 3.00%/5.00% Convertible Notes Indenture and the Supplemental Indenture, the Company is currently paying interest on both the Second Lien3.00%/5.00% Convertible Notes and the 5.00%/7.00% Convertible Notes in kindkind.
Summarized Parent and Guarantor Financial Information
As discussed above, the 3.00%/5.00% Convertible Notes issued by A.M. Castle and Co. (the "Parent") are unconditionally guaranteed on a joint and several basis by all current and future domestic subsidiaries of the Parent (other than those designated as perunrestricted subsidiaries) and the Second Lien Notes Indenture, interestparent’s subsidiaries in Canada and Mexico (collectively, the “Guarantors”). Each guarantor is 100% owned by the Parent.
The guarantees of the Guarantors are subject to release in limited circumstances, only upon the occurrence of certain customary conditions. There are no significant restrictions on the Second Lien Notesability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan.
On March 31, 2020, the Company early adopted the guidance of the SEC Final Rule Release No. 33-10762, "Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities" (the "final rule") and has elected to present the summarized financial information of Parent and Guarantors (together, the "Obligors") as of and for the years ended December 31, 2020 and December 31, 2019 (see Note 1 – Basis of Presentation and Significant Accounting Policies, to the notes to the consolidated financial statements for further information on the final rule).
The summarized financial information of the Obligors after elimination of (i) intercompany transactions and balances among the Parent and the Guarantors and (ii) equity in earnings from and investments in any subsidiary that is a Non-Guarantor follows:
| | | | | | |
| | Obligors |
| | As of and for the | | As of and for the |
| | Year Ended | | Year Ended |
(in millions) | | December 31, 2020 | | December 31, 2019 |
Total current assets | | $ | 150.8 | | $ | 192.4 |
Total non-current assets (1) | | | 125.8 | | | 134.4 |
Total current liabilities | | | 47.9 | | | 54.9 |
Total non-current liabilities (1) | | | 247.9 | | | 313.0 |
Net sales | | | 310.8 | | | 453.1 |
Total costs and expenses | | | 335.5 | | | 467.1 |
Operating loss | | | 24.8 | | | 14.0 |
Net loss | | | 40.7 | | | 38.5 |
(1) Included in non-current assets are $11.5 million and $12.2 million of non-current intercompany receivables due to the first 12 months is requiredObligors from the Non-Guarantors as of December 31, 2020 and December 31, 2019, respectively. Included in non-current liabilities are $7.8 million and $8.6 million of non-current intercompany payables due to be paid in kind at a ratethe Non-Guarantors from the Obligors as of 7.00%.
December 31, 2020 and December 31, 2019, respectively.Other Credit Facilities
In July 2017, the Company's French subsidiary entered into a local credit facility under which it may borrow against 100% of the eligible accounts receivable factored, with recourse, up to 6.5 million euros,Euros, subject to factoring fees and floating Euribor or LIBOR interest rates, plus a 1.0% margin. The French subsidiary utilizes the local credit facility to support its operating cash needs. As of December 31, 2017 (Successor),2020, the French subsidiary hashad no borrowings of $5.9 million under the local credit facility which is recordedand had borrowings under the local credit facility of $2.9 million as of December 31, 2019. The Company records borrowings under the local credit facility as short-term borrowings at the Consolidated Balance Sheets.
On July 20, 2020, the Company's Chinese subsidiary entered into a 20.0 million yuan (approximately $3.0 million) local banking line of credit with the Bank of Communication Shanghai (the "China Credit Facility"). The China Credit Facility has a maturity date of March 1, 2021 and accrues interest at a rate of 3.6% per annum. As of December 31, 2017 (Successor),2020, the Chinese subsidiary had borrowings of approximately $3.0 million outstanding under the China Credit Facility.
Interest expense in the year ended December 31, 2020 and the year ended December 31, 2019 was $25.5 million and $39.9 million, respectively, of which $4.7 million and $6.8 million, respectively, was cash interest.
As of December 31, 2020, the Company had $2.1$2.2 million of irrevocable letters of credit outstanding.
The Company's debt agreements impose significant operating and financial restrictions which may prevent the Company from executing certain business opportunities, such as making acquisitions or paying dividends, among other things. 36
For additional information regarding the terms of the New ABL Facility, the Second Lien Notes, and the French credit facility refer to Note 6 - Debt, to the consolidated financial statements.
The Company is committed to achieving a strong financial position while maintaining sufficient levels of available liquidity, managing working capital and monitoring the Company’s overall capitalization. Cash and cash equivalents at December 31, 2017 were $11.1 million, with approximately $3.7 million of the Company’s consolidated cash and cash equivalents balance residing in the United States.
Working capital, defined as current assets less current liabilities, and the balances of its significant components were as follows:
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor | | Working Capital |
(Dollar amounts in millions)
| 2017 | | | 2016 | | Increase (Decrease) |
| Working capital | $ | 191.9 |
| | | $ | 203.9 |
| | $ | (12.0 | ) |
| Inventory | 154.5 |
| | | 146.6 |
| | 7.9 |
|
| Accounts receivable | 74.4 |
| | | 64.4 |
| | 10.0 |
|
| Accounts payable | 41.8 |
| | | 33.1 |
| | (8.7 | ) |
| Accrued and other current liabilities | 6.0 |
| | | 10.4 |
| | 4.4 |
|
| Accrued payroll and employee benefits | 8.0 |
| | | 9.5 |
| | 1.5 |
|
| Cash and cash equivalents | 11.1 |
| | | 35.6 |
| | (24.5 | ) |
The Company currently plans that it will have sufficient cash flows from its operations to continue as a going concern.
Cash paid for capital expenditures was $3.7 million and $2.9 million in the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), respectively, compared to $3.5 million in the year ended December 31, 2016 (Predecessor).2020 and $4.0 million in the year ended December 31, 2019. Expenditures in the 2017 periods include approximately $0.3 million for leasehold improvements at the Company's warehouse in Janesville, Wisconsin and $0.4 million related to software licenses and IT equipment. The balance of the capital expenditures in the 2017 periods is2020 were the result of
normal equipment purchases, building improvementimprovements, and furniture and fixture upgrades throughout the year. Management believes that capital expenditures will be approximately $6.5 million to $7.5$3.0 million in 2018.
The Company’s funding policy on its defined benefit pension plans is to satisfy the minimum funding requirements of the Employee Retirement Income Security Act (“ERISA”). Future funding requirements are dependent upon various factors outside the Company’s control including, but not limited to, fund asset performance and changes in regulatory or accounting requirements. Based upon factors known and considered as of
December 31, 2017,2020, including the funding requirements under ERISA, the Company does not anticipate making significant cash contributions to the pension plans in 2018.2021.The investment target portfolio allocation for the Company-sponsored pension plans and supplemental pension plan focuses primarily on corporate fixed income securities that match the overall duration and term of the Company’s pension liability structure. Refer to
“Retirement Plans” within Critical Accounting Policies and Note 11 -7 – Employee Benefit Plans to the consolidated financial statements for additional details regarding other plan assumptions. Off-Balance Sheet Arrangements
WithAs of December 31, 2020, the exception of operating lease financing on certain equipment used in the operation of the business, it isCompany does not the Company’s general practice to usehave any off-balance sheet arrangements, such as third-party special-purpose entitiesdefined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or guaranteesare reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of third parties.
operations, liquidity, capital expenditures, or capital resources, that are material to investors.Critical Accounting Policies
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include amounts that are based on management’s estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The following is a description of the Company’s accounting policies that management believes require the most significant judgments and estimates when preparing the Company’s consolidated financial statements:
Revenue Recognition — Revenue from the sale of products is recognized when the earnings process is complete and when the title and risk and rewards of ownership have passed to the customer, which is primarily at the time of shipment. Revenue recognized other than at time of shipment represented less than 1% of the Company’s consolidated net sales in the periods ended September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) and the year ended December 31, 2016 (Predecessor). Revenue from shipping and handling charges is recorded in net sales. Provisions for allowances related to sales discounts and rebates are recorded based on terms of the sale in the period that the sale is recorded. Management utilizes historical information and the current sales trends of the business to estimate such provisions. Actual results could differ from these estimates. The provisions related to discounts and rebates due to customers are recorded as a reduction within net sales in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income.
The Company maintains an allowance for doubtful accounts related to the potential inability of our customers to make required payments. The allowance for doubtful accounts is maintained at a level considered appropriate based on historical experience and specific identification of customer receivable balances for which collection is unlikely. The provision for doubtful accounts is recorded in sales, general and administrative expense in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. Estimates of doubtful accounts are based on historical write-off experience as a percentage of net sales and judgments about the probable effects of economic conditions on certain customers, which can fluctuate significantly from year to year. The Company cannot be certain that the rate of future credit losses will be similar to past experience.
The Company also maintains an allowance for credit memos for estimated credit memos to be issued against current sales. Estimates of allowance for credit memos are based upon the application of a historical issuance lag period to the average credit memos issued each month. If actual results differ significantly from historical experience, there could be a negative impact on the Company’s operating results.
Income Taxes
— The Company accounts for income taxes using the asset and liability method, under which deferred income tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company regularly reviews deferred tax assets to assess whether it is more-likely-than-not that the deferred tax assets will be realized and, if necessary, establish a valuation allowance for portions of such assets to reduce the carrying value.
For purposes of assessing whether it is more-likely-than-not that deferred tax assets will be realized, the Company considers the following four sources of taxable income for each tax jurisdiction: (a) future reversals of existing taxable temporary differences, (b) projected future earnings, (c) taxable income in carryback years, to the extent that carrybacks are permitted under the tax laws of the applicable jurisdiction, and (d) tax planning strategies, which represent prudent and feasible actions that a company ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused. To the extent that evidence about one or more of these sources of taxable income is sufficient to support a conclusion that a valuation allowance is not necessary, other sources need not be considered. Otherwise, evidence about each of the
sources of taxable income is considered in arriving at a conclusion about the need for and amount of a valuation allowance. See Note 13 -8 – Income Taxes in the Notes to the consolidated financial statements,Consolidated Financial Statements, for further information about the Company'sCompany’s valuation allowance assessments.
The Company has incurred significant losses in recent years. The Company’s operations in the United States United Kingdom and Canada have generated pre-tax losses for the three-year period ended December 31, 2017.2020. The Company has determined that an ownership shift of greater than fifty percent occurred in 2016, 2017 and 2018 and as such, a significant portion of the pre-ownership shift net operating losses in these jurisdictions are subject to an annual utilization limitation under the Internal Revenue Code section 382 that will act to prevent the Company from utilizing most of its losses against future taxable income. As a result of the Company having recorded deferred tax assets in these jurisdictions as December 31, 20172020 and 2016,December 31, 2019, coupled with the negative evidence of significant cumulative three-year pre-tax losses, the Company has provided a valuation allowance against the full net deferred tax asset balances recorded in United Kingdom and Canada and certain of the deferred income tax assets recorded by the United States operations at December 31, 2017.
2020.The Company is subject to taxation in the United States, various states and foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording the related income tax assets and liabilities. It is possible that actual results could differ from the estimates that management has used to determine its consolidated income tax expense.
The Company accounts for uncertainty in income taxes by recognizing the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not criteria, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Retirement Plans
— The Company values retirement plan liabilities based on assumptions and valuations established by management. Future valuations are subject to market changes, which are not in the control of the Company and could differ materially from the amounts currently reported. The Company evaluates the discount rate and expected return on assets at least annually and evaluates other assumptions involving demographic factors, such as retirement age, mortality and turnover periodically, and updates them to reflect actual experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.Accumulated and projected benefit obligations are expressed as the present value of future cash payments which are discounted using the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and subsequent-year net periodic pension expense;cost; higher discount rates decrease present values and subsequent-year net periodic pension expense.cost. Discount rates used for determining the Company’s projected benefit obligation for its pension plans were 3.512.10% - 3.58%2.30% at December 31, 2017 (Successor) 3.522020 and 2.99% - 3.62% at August 31, 2017 (Predecessor) and 3.70 - 3.83%3.11% at December 31, 2016 (Predecessor).
2019.The Company’s pension plan asset portfolio as of December 31, 2017 (Successor)2020 is primarily invested in fixed income securities with a duration of approximately 12 years. The assets generally fall within Level 2 of the fair value hierarchy. Assets in the Company’s pension plans have earned approximately 9% since 2008 when the Company changed its target investment allocation to focus primarily on fixed income securities. In 2017,2020, the pension plan assets earnedrealized an investment gain of approximately 10%12%. The target investment asset allocation for the pension plans’ funds focuses primarily on corporate fixed income securities that match the overall duration and term of the Company’s pension liability structure. There was a funding surplus of approximately 3%1.0% at December 31, 2017 (Successor)2020 compared to a funding deficitsurplus of 2%less than 0.2% at
December 31, 2016 (Predecessor). 2019.To determine the expected long-term rate of return on the pension plans’ assets, current and expected asset allocations are considered, as well as historical and expected returns on various categories of plan assets.
The Company used the following weighted average discount rates and expected return on plan assets to determine the net periodic pension cost:
|
| | | | | | | | | |
| | Successor | | | Predecessor |
| | September 1, 2017 through
December 31, 2017 | | | January 1, 2017 through August 31, 2017 | | Year Ended December 31, 2016 |
| Discount rate | 3.52 - 3.62% |
| | | 3.70 - 3.83% |
| | 4.00 | % |
| Expected long-term rate of return on plan assets | 5.00 | % | | | 5.25 | % | | 5.25 | % |
| | | | | |
| | Year Ended December 31, | |
| | 2020 | | 2019 | |
Discount rate | | 2.99% - 3.11 | % | 4.00% - 4.06 | % |
Expected long-term rate of return on plan assets | | 5.00 | % | 5.00 | % |
Holding all other assumptions constant, the following table illustrates the sensitivity of changes to the discount rate and long-term rate of return assumptions on the Company’s net periodic pension cost (amounts in millions):
cost:
|
| |
| | Expenses - Increase (Decrease) | |
50 |
| Impact on 2021 |
| | Expenses - |
(Dollar amounts in millions) |
| Increase (Decrease) |
100 basis point decrease in discount rate | | $0.4 | (0.8) |
50100 basis point increase in discount rate | (0.3) |
| (1.0) |
50100 basis point decrease in expected long-term rate of return on plan assets | 0.8 |
| (1.6) |
Inventories —
Inventories are stated at the lower of cost or net realizable value. The net realizable value of metals is subject to volatility. During periods when open-market prices decline below net book value, we may need to record a provision to reduce the carrying value of our inventory. We analyze the carrying value of inventory for impairment if circumstances indicate impairment may have occurred. If impairment occurs, the amount of impairment loss is determined by measuring the excess of the carrying value of inventory over the net realizable value of inventory.The Company maintains an allowance for excess and obsolete inventory. The excess and obsolete inventory allowance is determined through the specific identification of material, adjusted for expected scrap value to be received, based upon product knowledge, estimated future demand, market conditions and an aging analysis of the inventory on hand. Inventory in excess of our estimated usage requirements is written down to its estimated net realizable value. Although the Company believes its estimates of the inventory allowance are reasonable, actual financial results could differ from those estimates due to inherent uncertainty involved in making such estimates. Changes in assumptions around the estimated future demand, selling price, scrap value, a decision to reduce inventories to increase liquidity, or other underlying assumptions could have a significant impact on the carrying value of inventory, future inventory impairment charges, or both.
Long-Lived Assets — The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset or asset group. If future net cash flows are less than the carrying value, the asset or asset group may be impaired. If such assets are impaired, the impairment charge is calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. The Company derives the required undiscounted cash flow estimates from historical experience and internal business plans. The Company had no impairments of long-lived assets in the periods September 1, 2017 through December 31, 2017 (Successor), January 1, 2017 through August 31, 2017 (Predecessor) or the year ended December 31, 2016 (Predecessor).
Fair Value of Financial Instruments — The three-tier value hierarchy the Company utilizes, which prioritizes the inputs used in the valuation methodologies, is:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
The fair value of cash, accounts receivable and accounts payable approximate their carrying values. The fair value of cash equivalents are determined using the fair value hierarchy described above.
The Company’s pension plan asset portfolio as of December 31, 2017 (Successor) and December 31, 2016 (Predecessor) is primarily invested in fixed income securities, which generally fall within Level 2 of the fair value hierarchy. Fixed income securities are valued based on evaluated prices provided to the trustee by independent pricing services. Such prices may be determined by factors which include, but are not limited to, market quotations, yields, maturities, call features, ratings, institutional size trading in similar groups of securities and developments related to specific securities.
The fair value of the Second Lien Notes, including the bifurcated embedded conversion option, falls within Level 3 of the fair value hierarchy and was determined based on market information and a review of prices and terms available for similar debt instruments that do not contain a conversion feature, as well as other factors related to the callable nature of the Second Lien Notes.
The main inputs and assumptions into the fair value model for the Second Lien Notes at December 31, 2017 (Successor) were as follows:
|
| | |
Risk-free interest rate | 2.16 | % |
Credit spreads | 13.93 | % |
PIK premium spread | 2.00 | % |
Volatility | 50.00 | % |
Given the nature and the variable interest rates, the fair value of borrowings under the New ABL Facility and the French subsidiary's foreign line of credit approximated the carrying value at December 31, 2017 (Successor).
Recent Accounting Pronouncements
StandardsSee
Note 1 - Basis of Presentation and Significant Accounting Policies to the consolidated financial statementsNotes to the Consolidated Financial Statements for detailed information on recent accounting pronouncements.recently issued guidance, whether adopted or to be adopted.
ITEM 8 — Financial Statements and Supplementary Data
(Amounts in thousands, except par value and per share data)
|
| | | | | | | | | | | | |
A.M. Castle & Co. Consolidated Statements of Operations and Comprehensive (Loss) Income
|
| | Successor | | | Predecessor |
| | September 1, 2017 through
December 31, 2017 | | | January 1, 2017 through August 31, 2017 | | Year Ended December 31, 2016 |
| | | | |
| Net sales | $ | 164,942 |
| | | $ | 353,926 |
| | $ | 533,150 |
|
| Costs and expenses: | | | | | | |
| Cost of materials (exclusive of depreciation and amortization) | 127,828 |
| | | 266,495 |
| | 421,290 |
|
| Warehouse, processing and delivery expense | 25,353 |
| | | 50,314 |
| | 84,555 |
|
| Sales, general and administrative expense | 20,464 |
| | | 39,139 |
| | 68,273 |
|
| Restructuring expense, net | — |
| | | 566 |
| | 12,942 |
|
| Depreciation and amortization expense | 3,213 |
| | | 10,150 |
| | 16,378 |
|
| Total costs and expenses | 176,858 |
| | | 366,664 |
| | 603,438 |
|
| Operating loss | (11,916 | ) | | | (12,738 | ) | | (70,288 | ) |
| Interest expense, net | 7,634 |
| | | 23,402 |
| | 36,422 |
|
| Financial restructuring expense | — |
| | | 7,024 |
| | — |
|
| Unrealized (gain) loss on embedded debt conversion option | (2,352 | ) | | | 146 |
| | (10,450 | ) |
| Debt restructuring loss, net | — |
| | | — |
| | 8,617 |
|
| Other (income) expense, net | (2,824 | ) | | | (3,582 | ) | | 7,582 |
|
| Reorganization items, net | 2,141 |
| | | (74,531 | ) | | — |
|
| (Loss) income from continuing operations before income taxes and equity in losses of joint venture | (16,515 | ) | | | 34,803 |
| | (112,459 | ) |
| Income tax benefit | (3,188 | ) | | | (1,387 | ) | | (2,546 | ) |
| (Loss) income from continuing operations before equity in losses of joint venture | (13,327 | ) | | | 36,190 |
| | (109,913 | ) |
| Equity in losses of joint venture | — |
| | | — |
| | (4,177 | ) |
| (Loss) income from continuing operations | (13,327 | ) | | | 36,190 |
| | (114,090 | ) |
| Income from discontinued operations, net of income taxes | — |
| | | — |
| | 6,108 |
|
| Net (loss) income | $ | (13,327 | ) | | | $ | 36,190 |
| | $ | (107,982 | ) |
| | | | | | | |
| Basic and diluted (loss) income per common share: | | | | | | |
| Continuing operations | $ | (6.66 | ) | | | $ | 1.12 |
| | $ | (3.93 | ) |
| Discontinued operations | — |
| | | — |
| | 0.21 |
|
| Net basic and diluted (loss) income per common share | $ | (6.66 | ) | | | $ | 1.12 |
| | $ | (3.72 | ) |
| | | | | | | |
| Comprehensive (loss) income: | | | | | | |
| Net (loss) income | $ | (13,327 | ) | | | $ | 36,190 |
| | $ | (107,982 | ) |
| Change in unrecognized pension and postretirement benefit costs, net of tax effect of $0, $0 and $(3,669) | 34 |
| | | 9,797 |
| | 7,388 |
|
| Foreign currency translation adjustments | (2,703 | ) | | | 16,142 |
| | 494 |
|
| Comprehensive (loss) income | $ | (15,996 | ) | | | $ | 62,129 |
| | $ | (100,100 | ) |
Consolidated Statements of Operations and Comprehensive Loss
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
Net sales | | $ | 368,253 | | $ | 559,591 |
Costs and expenses: | | | | | | |
Cost of materials (exclusive of depreciation) | | | 269,126 | | | 418,806 |
Warehouse, processing and delivery expense | | | 59,460 | | | 77,567 |
Sales, general and administrative expense | | | 52,813 | | | 64,557 |
Depreciation expense | | | 7,872 | | | 8,759 |
Impairment of goodwill | | | 2,676 | | | 0 |
Total costs and expenses | | | 391,947 | | | 569,689 |
Operating loss | | | (23,694) | | | (10,098) |
Interest expense, net | | | 25,477 | | | 39,902 |
Unrealized gain on embedded debt conversion option | | | (2,010) | | | 0 |
Other (income)/expense, net | | | (3,487) | | | (6,586) |
Loss before income taxes | | | (43,674) | | | (43,414) |
Income tax benefit | | | (3,014) | | | (4,899) |
Net loss | | $ | (40,660) | | $ | (38,515) |
| | | | | | |
Basic and diluted loss per common share | | $ | (7.27) | | $ | (175.87) |
| | | | | | |
Comprehensive (loss) income: | | | | | | |
Net loss | | $ | (40,660) | | $ | (38,515) |
Change in unrecognized pension and postretirement benefit costs, net of tax effect of $327 and $732, respectively | | | (931) | | | 2,082 |
Foreign currency translation adjustments, net of tax | | | 2,543 | | | (1,108) |
Comprehensive loss | | $ | (39,048) | | $ | (37,541) |
Per share data has been adjusted to reflect the Reverse Stock Split that occurred on December 29, 2020.
The accompanying notes are an integral part of these statements.
|
| | | | | | | | |
A.M. Castle & Co. Consolidated Balance Sheets
|
| | Successor | | | Predecessor |
| | December 31, | | | December 31, |
| | 2017 | | | 2016 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | $ | 11,104 |
| | | $ | 35,624 |
|
Accounts receivable, less allowances of $1,586 and $1,945, respectively | 74,370 |
| | | 64,385 |
|
| Inventories | 154,491 |
| | | 146,603 |
|
| Prepaid expenses and other current assets | 12,274 |
| | | 10,141 |
|
| Income tax receivable | 1,576 |
| | | 433 |
|
| Total current assets | 253,815 |
| | | 257,186 |
|
| Goodwill and intangible assets, net | 8,176 |
| | | 4,101 |
|
| Prepaid pension cost | 10,745 |
| | | 8,501 |
|
| Deferred income taxes | 1,278 |
| | | 381 |
|
| Other noncurrent assets | 1,344 |
| | | 9,449 |
|
| Property, plant and equipment: | | | | |
| Land | 5,581 |
| | | 2,070 |
|
| Buildings | 21,296 |
| | | 37,341 |
|
| Machinery and equipment | 33,011 |
| | | 125,836 |
|
| Property, plant and equipment, at cost | 59,888 |
| | | 165,247 |
|
| Accumulated depreciation | (2,961 | ) | | | (115,537 | ) |
| Property, plant and equipment, net | 56,927 |
| | | 49,710 |
|
| Total assets | $ | 332,285 |
| | | $ | 329,328 |
|
| Liabilities and Stockholders’ Equity (Deficit) | | | | |
| Current liabilities: | | | | |
| Accounts payable | $ | 41,757 |
| | | $ | 33,083 |
|
| Accrued payroll and employee benefits | 7,963 |
| | | 9,485 |
|
| Accrued and other current liabilities | 5,968 |
| | | 10,369 |
|
| Income tax payable | 262 |
| | | 209 |
|
| Short-term borrowings | 5,854 |
| | | — |
|
| Current portion of long-term debt | 118 |
| | | 137 |
|
| Total current liabilities | 61,922 |
| | | 53,283 |
|
| Long-term debt, less current portion | 199,903 |
| | | 286,459 |
|
| Deferred income taxes | 16,166 |
| | | — |
|
| Build-to-suit liability | 10,148 |
| | | 12,305 |
|
| Other noncurrent liabilities | 3,784 |
| | | 5,978 |
|
| Pension and postretirement benefit obligations | 6,377 |
| | | 6,430 |
|
| Commitments and contingencies (Note 14) |
| | |
|
| Stockholders’ (deficit) equity: | | | | |
| Predecessor preferred stock, $0.01 par value—9,988 shares authorized (including 400 Series B Junior Preferred, $0.00 par value); no shares issued and outstanding at December 31, 2016 | — |
| | | — |
|
| Predecessor common stock, $0.01 par value—60,000 shares authorized; 32,768 shares issued and 32,566 outstanding at December 31, 2016 | — |
| | | 327 |
|
| Successor common stock, $0.01 par value—200,000 Class A shares authorized with 3,734 shares issued and outstanding at December 31, 2017 | 37 |
| | | — |
|
| Predecessor additional paid-in capital | — |
| | | 244,825 |
|
| Successor additional paid-in capital | 49,944 |
| | | — |
|
| Accumulated deficit | (13,327 | ) | | | (253,291 | ) |
| Accumulated other comprehensive loss | (2,669 | ) | | | (25,939 | ) |
| Predecessor treasury stock, at cost — 202 shares at December 31, 2016 | — |
| | | (1,049 | ) |
| Total stockholders’ equity (deficit) | 33,985 |
| | | (35,127 | ) |
| Total liabilities and stockholders’ equity (deficit) | $ | 332,285 |
| | | $ | 329,328 |
|
A.M. Castle & Co.
Consolidated Balance Sheets
| | | | | | | |
| | December 31, | |
| | 2020 | | 2019 | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 22,444 | | $ | 6,433 | |
Accounts receivable, less allowances of $2,128 and $1,766, respectively | | | 42,597 | | | 74,697 | |
Inventories | | | 130,093 | | | 144,411 | |
Prepaid expenses and other current assets | | | 8,280 | | | 9,668 | |
Income tax receivable | | | 0 | | | 1,995 | |
Total current assets | | | 203,414 | | | 237,204 | |
Goodwill and intangible assets | | | 5,500 | | | 8,176 | |
Prepaid pension cost | | | 7,414 | | | 5,758 | |
Deferred income taxes | | | 1,435 | | | 1,534 | |
Operating right-of-use assets | | | 28,083 | | | 29,423 | |
Other noncurrent assets | | | 1,083 | | | 792 | |
Property, plant and equipment: | | | | | | | |
Land | | | 5,580 | | | 5,579 | |
Buildings | | | 21,037 | | | 20,950 | |
Machinery and equipment | | | 44,537 | | | 41,054 | |
Property, plant and equipment, at cost | | | 71,154 | | | 67,583 | |
Accumulated depreciation | | | (28,486) | | | (20,144) | |
Property, plant and equipment, net | | | 42,668 | | | 47,439 | |
Total assets | | $ | 289,597 | | $ | 330,326 | |
Liabilities and Stockholders’ Deficit | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 29,039 | | $ | 41,745 | |
Accrued payroll and employee benefits | | | 7,792 | | | 7,648 | |
Accrued and other current liabilities | | | 3,290 | | | 3,540 | |
Operating lease liabilities | | | 6,585 | | | 6,537 | |
Income tax payable | | | 514 | | | 573 | |
Short-term borrowings | | | 3,025 | | | 2,888 | |
Current portion of finance leases | | | 676 | | | 596 | |
Current portion of long-term debt | | | 5,000 | | | — | |
Total current liabilities | | | 55,921 | | | 63,527 | |
Long-term debt, less current portion | | | 210,430 | | | 263,523 | |
Deferred income taxes | | | 755 | | | 3,775 | |
Finance leases, less current portion | | | 7,727 | | | 8,208 | |
Other noncurrent liabilities | | | 3,397 | | | 2,894 | |
Pension and postretirement benefit obligations | | | 7,017 | | | 6,709 | |
Noncurrent operating lease liabilities | | | 21,530 | | | 22,760 | |
Commitments and contingencies (Note 9) | | | | | | | |
Stockholders’ deficit: | | | | | | | |
Common stock, $0.01 par value—40,000 Class A shares authorized with 7,408 shares issued and 7,255 shares outstanding at December 31, 2020, and 382 shares issued and 365 shares outstanding at December 31, 2019 | | | 74 | | | 4 | |
Additional paid-in capital | | | 124,815 | | | 61,495 | |
Accumulated deficit | | | (129,401) | | | (88,741) | |
Accumulated other comprehensive loss | | | (11,762) | | | (13,374) | |
Treasury stock, at cost — 153 shares at December 31, 2020 and 17 shares at December 31, 2019 | | | (906) | | | (454) | |
Total stockholders’ deficit | | | (17,180) | | | (41,070) | |
Total liabilities and stockholders’ deficit | | $ | 289,597 | | $ | 330,326 | |
The accompanying notes are an integral part of these statements.
|
| | | | | | | | | | | | |
A.M. Castle & Co. Consolidated Statements of Cash Flows
|
| | Successor | | | Predecessor |
| | September 1, 2017 through
December 31, 2017 | | | January 1, 2017 through August 31, 2017 | | Year Ended December 31, 2016 |
| | | | |
| Operating activities: | | | | | | |
| Net (loss) income | $ | (13,327 | ) | | | $ | 36,190 |
| | $ | (107,982 | ) |
| Less: Income from discontinued operations, net of income taxes | — |
| | | — |
| | 6,108 |
|
(Loss) income from continuing operations
| (13,327 | ) | | | 36,190 |
| | (114,090 | ) |
Adjustments to reconcile loss from continuing operations to net cash used in operating activities of continuing operations:
| | | | | | |
| Depreciation and amortization | 3,213 |
| | | 10,150 |
| | 16,378 |
|
| Amortization of deferred financing costs and debt discount | 1,958 |
| | | 3,810 |
| | 4,798 |
|
Debt restructuring loss, net
| — |
| | | — |
| | 8,617 |
|
| Loss from lease termination | — |
| | | — |
| | 2,200 |
|
Unrealized (gain) loss on embedded debt conversion option
| (2,352 | ) | | | 146 |
| | (10,450 | ) |
| Noncash interest paid in kind | 3,865 |
| | | — |
| | — |
|
| Noncash reorganization items, net | — |
| | | (87,107 | ) | | — |
|
| Loss on sale of property, plant & equipment | 26 |
| | | 7 |
| | 1,874 |
|
| Unrealized gains on commodity hedges | — |
| | | — |
| | (1,015 | ) |
| Unrealized foreign currency transaction (gain) loss | (1,709 | ) | | | (4,439 | ) | | 4,506 |
|
| Equity in losses of joint venture | — |
| | | — |
| | 4,141 |
|
| Deferred income taxes | (3,437 | ) | | | (953 | ) | | (4,354 | ) |
| Non-cash compensation expense | 866 |
| | | 630 |
| | 1,154 |
|
| Other, net | 634 |
| | | 537 |
| | (80 | ) |
| Changes in assets and liabilities: | | | | | | |
| Accounts receivable | (2,205 | ) | | | (6,061 | ) | | 6,100 |
|
| Inventories | (1,978 | ) | | | (2,703 | ) | | 65,712 |
|
| Prepaid expenses and other current assets | 752 |
| | | (3,100 | ) | | 1,358 |
|
| Other noncurrent assets | 324 |
| | | 1,664 |
| | 1,993 |
|
| Prepaid pension costs | (1,395 | ) | | | (849 | ) | | (59 | ) |
| Accounts payable | (4,548 | ) | | | 8,602 |
| | (8,449 | ) |
| Accrued payroll and employee benefits | 945 |
| | | (2,670 | ) | | 300 |
|
| Income tax payable and receivable | (828 | ) | | | (340 | ) | | (105 | ) |
| Accrued and other current liabilities | (773 | ) | | | (3,332 | ) | | (6,514 | ) |
| Postretirement benefit obligations and other noncurrent liabilities | (585 | ) | | | (471 | ) | | (3,063 | ) |
| Net cash used in operating activities of continuing operations | (20,554 | ) | | | (50,289 | ) | | (29,048 | ) |
Net cash used in operating activities of discontinued operations
| — |
| | | — |
| | (5,914 | ) |
Net cash used in operating activities
| (20,554 | ) | | | (50,289 | ) | | (34,962 | ) |
| Investing activities: | | | | | | |
| Proceeds from sale of investment in joint venture | — |
| | | — |
| | 31,550 |
|
| Capital expenditures | (3,742 | ) | | | (2,850 | ) | | (3,499 | ) |
| Proceeds from sale of property, plant and equipment | 31 |
| | | 619 |
| | 3,265 |
|
| Cash collateralization of letters of credit | — |
| | | 7,492 |
| | (7,968 | ) |
| Net cash (used in) from investing activities of continuing operations | (3,711 | ) | | | 5,261 |
| | 23,348 |
|
Net cash from investing activities of discontinued operations
| — |
| | | — |
| | 53,570 |
|
Net cash (used in) from investing activities
| (3,711 | ) | | | 5,261 |
| | 76,918 |
|
| Financing activities: | | | | | | |
| Short-term borrowings, net | 1,720 |
| | | 3,797 |
| | — |
|
| Proceeds from long-term debt including credit facilities | 22,973 |
| | | 195,026 |
| | 722,547 |
|
| Repayments of long-term debt including credit facilities | (25 | ) | | | (175,414 | ) | | (725,821 | ) |
| Payments of debt restructuring costs | — |
| | | — |
| | (9,802 | ) |
| Payments of debt issue costs | — |
| | | (1,831 | ) | | (2,472 | ) |
| Payments of build-to-suit liability | — |
| | | (3,000 | ) | | (932 | ) |
|
| | | | | | | | | | | | |
A.M. Castle & Co. Consolidated Statements of Cash Flows
|
| | Successor | | | Predecessor |
| | September 1, 2017 through
December 31, 2017 | | | January 1, 2017 through August 31, 2017 | | Year Ended December 31, 2016 |
| | | | |
| Net cash from (used in) financing activities | 24,668 |
| | | 18,578 |
| | (16,480 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 637 |
| | | 890 |
| | (952 | ) |
| Net change in cash and cash equivalents | 1,040 |
| | | (25,560 | ) | | 24,524 |
|
| Cash and cash equivalents—beginning of period | 10,064 |
| | | 35,624 |
| | 11,100 |
|
| Cash and cash equivalents—end of period | $ | 11,104 |
| | | $ | 10,064 |
| | $ | 35,624 |
|
A.M. Castle & Co.
Consolidated Statements of Cash Flows
| | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
Operating activities: | | | | | | |
Net loss | | $ | (40,660) | | $ | (38,515) |
Adjustments to reconcile net loss to net cash from operating activities: | | | | | | |
Depreciation | | | 7,872 | | | 8,759 |
Amortization of deferred financing costs and debt discount | | | 6,206 | | | 11,942 |
Noncash interest paid in kind | | | 10,503 | | | 15,912 |
Unrealized gain on debt conversion liability | | | (2,010) | | | — |
Impairment of goodwill | | | 2,676 | | | — |
Loss on sale of property, plant and equipment | | | 169 | | | 256 |
Unrealized foreign currency loss (gain) | | | 711 | | | (771) |
Deferred income taxes | | | (2,543) | | | (5,605) |
Noncash rent expense | | | 243 | | | 247 |
Noncash compensation expense | | | 798 | | | 2,862 |
Other, net | | | (528) | | | 0 |
Changes in assets and liabilities: | | | | | | |
Accounts receivable | | | 32,526 | | | 5,143 |
Inventories | | | 15,816 | | | 16,286 |
Prepaid expenses and other current assets | | | 1,449 | | | 3,963 |
Other noncurrent assets | | | 765 | | | (428) |
Prepaid pension costs | | | (2,915) | | | (1,190) |
Accounts payable | | | (12,928) | | | (1,014) |
Accrued payroll and employee benefits | | | 42 | | | (3,983) |
Income tax payable and receivable | | | 1,716 | | | (1,750) |
Accrued and other current liabilities | | | (221) | | | (1,397) |
Postretirement benefit obligations and other noncurrent liabilities | | | 810 | | | 107 |
Net cash from operating activities | | | 20,497 | | | 10,824 |
Investing activities: | | | | | | |
Capital expenditures | | | (2,868) | | | (4,021) |
Proceeds from sale of property, plant and equipment | | | 78 | | | 442 |
Net cash used in investing activities | | | (2,790) | | | (3,579) |
Financing activities: | | | | | | |
Proceeds from (repayments of) short-term borrowings, net | | | 73 | | | (2,461) |
Proceeds from long-term debt including credit facilities | | | 27,769 | | | 3,500 |
Repayments of long-term debt including credit facilities | | | (26,501) | | | (9,988) |
Principal paid on finance leases | | | (637) | | | (611) |
Payments of debt issue costs | | | (3,077) | | | 0 |
Net cash used in financing activities | | | (2,373) | | | (9,560) |
Effect of exchange rate changes on cash and cash equivalents | | | 677 | | | 80 |
Net change in cash and cash equivalents | | | 16,011 | | | (2,235) |
Cash and cash equivalents—beginning of year | | | 6,433 | | | 8,668 |
Cash and cash equivalents—end of year | | $ | 22,444 | | $ | 6,433 |
See Note 1 - Basis of Presentation and Significant Accounting Policies to the consolidated financial statements for supplemental cash flow disclosures.
The accompanying notes are an integral part of these statements.
A.M. Castle & Co.
Consolidated Statements of Stockholders’ Deficit
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | (Accumulated | | Accumulated | | | |
| | | | | | | | | | | | Additional | | Deficit) | | Other | | | |
| | Common | | Treasury | | Common | | Treasury | | Paid-in | | Retained | | Comprehensive | | | |
| | Shares | | Shares | | Stock | | Stock | | Capital | | Earnings | | Loss | | Total |
Balance at January 1, 2019 | | 380 | | 0 | | $ | 4 | | $ | 0 | | $ | 55,455 | | $ | (50,472) | | $ | (14,348) | | $ | (9,361) |
Cumulative effect from adoption of the new lease standard (Leases: Topic 842) | | | | | | | | | | | | | | | | 246 | | | | | | 246 |
Net loss | | | | | | | | | | | | | | | | (38,515) | | | | | | (38,515) |
Foreign currency translation, net of tax | | | | | | | | | | | | | | | | | | | (1,108) | | | (1,108) |
Change in unrecognized pension and postretirement benefit costs, $732 tax effect | | | | | | | | | | | | | | | | | | | 2,082 | | | 2,082 |
Reclassification to equity of interest paid in kind attributable to conversion option, net of $1,086 tax effect (Note 5) | | | | | | | | | | | | | 3,547 | | | | | | | | | 3,547 |
Share-based compensation | | | | | | | | | | | | | 1,938 | | | | | | | | | 1,938 |
Vesting of restricted shares and other | | 2 | | (17) | | | — | | | (454) | | | 555 | | | | | | | | | 101 |
Balance at December 31, 2019 | | 382 | | (17) | | $ | 4 | | $ | (454) | | $ | 61,495 | | $ | (88,741) | | $ | (13,374) | | $ | (41,070) |
Net loss | | | | | | | | | | | | | | | | (40,660) | | | | | | (40,660) |
Foreign currency translation, net of tax | | | | | | | | | | | | | | | | | | | 2,543 | | | 2,543 |
Change in unrecognized pension and postretirement benefit costs, $327 tax effect | | | | | | | | | | | | | | | | | | | (931) | | | (931) |
Reclassification to equity of interest paid in kind attributable to conversion option, net of $281 tax effect (Note 5) | | | | | | | | | | | | | 788 | | | | | | | | | 788 |
Reclassification of conversion option to equity, net of $0 tax effect (Note 5) | | | | | | | | | | | | | 36,952 | | | | | | | | | 36,952 |
Conversion of debt (Note 2) | | 7,026 | | | | | 70 | | | | | | 25,239 | | | | | | | | | 25,309 |
Share-based compensation | | | | | | | | | | | | | 591 | | | | | | | | | 591 |
Vesting of restricted shares and other | | | | (136) | | | 0 | | | (452) | | | (250) | | | | | | | | | (702) |
Balance at December 31, 2020 | | 7,408 | | (153) | | $ | 74 | | $ | (906) | | $ | 124,815 | | $ | (129,401) | | $ | (11,762) | | $ | (17,180) |
The accompanying notes are an integral part of these statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
A.M. Castle & Co. Consolidated Statements of Stockholders' Equity (Deficit)
|
| | Common Shares | | Treasury Shares | | Preferred Stock (Predecessor) | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | (Accumulated Deficit) Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Balance at January 1, 2016 - Predecessor | 23,888 |
| | (94 | ) | | $ | — |
| | $ | 238 |
| | $ | (964 | ) | | $ | 226,844 |
| | $ | (145,309 | ) | | $ | (33,821 | ) | | $ | 46,988 |
|
| Net loss | | | | | | | | | | | | | (107,982 | ) | | | | (107,982 | ) |
| Foreign currency translation, net of tax | | | | | | | | | | | | | | | 494 |
| | 494 |
|
| Change in unrecognized pension and postretirement benefit costs, net of $(3,669) tax effect | | | | | | | | | | | | | | | 7,388 |
| | 7,388 |
|
| Conversion of convertible notes | 8,576 |
| | | | | | 86 |
| | | | 16,543 |
| | | | | | 16,629 |
|
| Common stock warrants issued | | | | | | | | | | | 200 |
| | | | | | 200 |
|
| Share-based compensation | | | | | | | | | | | 882 |
| | | | | | 882 |
|
| Exercise of stock options and other | 304 |
| | (108 | ) | | | | 3 |
| | (85 | ) | | 356 |
| | | | | | 274 |
|
Balance at December 31, 2016 - Predecessor
| 32,768 |
| | (202 | ) | | $ | — |
| | $ | 327 |
| | $ | (1,049 | ) | | $ | 244,825 |
| | $ | (253,291 | ) | | $ | (25,939 | ) | | $ | (35,127 | ) |
| Net income | | | | | | | | | | | | | 36,190 |
| | | | 36,190 |
|
| Foreign currency translation, net of tax | | | | | | | | | | | | | | | 385 |
| | 385 |
|
| Change in unrecognized pension and postretirement benefit costs, $0 tax effect | | | | | | | | | | | | | | | (1,008 | ) | | (1,008 | ) |
| Share-based compensation | | | | | | | | | | | 630 |
| | | | | | 630 |
|
| Exercise of stock options and other | | | (80 | ) | | | | | | (29 | ) | | 91 |
| | | | | | 62 |
|
| Balance at August 31, 2017 - Predecessor | 32,768 |
| | (282 | ) | | $ | — |
| | $ | 327 |
| | $ | (1,078 | ) | | $ | 245,546 |
| | $ | (217,101 | ) | | $ | (26,562 | ) | | $ | 1,132 |
|
| Cancellation of Predecessor equity | (32,768 | ) | | 282 |
| | | | (327 | ) | | 1,078 |
| | (245,546 | ) | | 217,101 |
| | 26,562 |
| | (1,132 | ) |
| Issuance of Successor common stock | 2,000 |
| | | | | | 20 |
| | | | 5,640 |
| | | | | | 5,660 |
|
| Balance at August 31, 2017 - Successor | 2,000 |
| | — |
| | | | $ | 20 |
| | $ | — |
| | $ | 5,640 |
| | $ | — |
| | $ | — |
| | $ | 5,660 |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balance at September 1, 2017 - Successor | 2,000 |
| | — |
| | | | $ | 20 |
| | $ | — |
| | $ | 5,640 |
| | $ | — |
| | $ | — |
| | $ | 5,660 |
|
| Net loss | | | | | | | | | | | | | (13,327 | ) | | | | (13,327 | ) |
| Foreign currency translation, net of tax | | | | | | | | | | | | | | | (2,703 | ) | | (2,703 | ) |
| Change in unrecognized pension and postretirement benefit costs, $0 tax effect | | | | | | | | | | | | | | | 34 |
| | 34 |
|
| Reclassification of conversion option to equity, net of $17,044 tax effect (Note 9) | | | | | | | | | | | 43,716 |
| | | | | | 43,716 |
|
| Share-based compensation | | | | | | | | | | | 605 |
| | | | | | 605 |
|
| Issuance of restricted shares | 1,734 |
| | | | | | 17 |
| | | | (17 | ) | | | | | | — |
|
| Balance at December 31, 2017 - Successor | 3,734 |
| | — |
| | | | $ | 37 |
| | $ | — |
| | $ | 49,944 |
| | $ | (13,327 | ) | | $ | (2,669 | ) | | $ | 33,985 |
|
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
(Amounts in thousands except par value and per share data)
(1) Basis of Presentation and Significant Accounting Policies
Nature of operations
— A.M. Castle & Co. and its subsidiaries (the “Company”) is a specialty metals distribution company serving customers on a global basis. The Company has operations in the United States, Canada, Mexico, France, the United Kingdom, Spain, China and Singapore. The Company provides a broad range of products and value-added processing and supply chain services to a wide array of customers. The Company'sCompany’s customers are principally within the producer durable equipment, aerospace, heavy industrial equipment, industrial goods, construction equipment, and retail sectors of the global economy. Particular focus is placed on the aerospace and defense, power generation, mining, heavy industrial equipment, and general manufacturing industries, as well as general engineering applications.The Company’s corporate headquarters is located in Oak Brook, Illinois. The Company has 2221 operational service centers located throughout North America (17)(16), Europe (3)(2) and Asia (2)(3).
The Company purchases metals from many producers. Purchases are made in large lots and held in distribution centers until sold, usually in smaller quantities and often with value-added processing services performed. Orders are primarily filled with materials shipped from Companythe Company’s stock. The materials required to fill the balance of sales are obtained from other sources, such as direct mill shipments to customers or purchases from other distributors. Thousands of customers from a wide array of industries are serviced primarily through the Company’s own sales organization.
Reverse Stock Split
On December 28, 2020, the Company filed articles of amendment to effect a reverse split of the Company’s outstanding shares of common stock, pursuant to Section 2-309(e) of the Maryland General Corporation Law, whereby each 10 shares of common stock issued and outstanding as of December 29, 2020 was combined into one whole share of common stock (the “Reverse Split”). No fractional shares of common stock were issued as a result of the Reverse Stock Split. In lieu of issuing any fractional shares to any stockholder as a result of the Reverse Stock Split, the Company made, to any stockholder that would otherwise hold a fractional share after giving effect to the Reverse Stock Split, a cash payment in an amount equal to $0.70 multiplied by the number of pre-split shares held by such stockholder with respect to which a fractional share would be issued. Stockholders of record who owned less than 10 shares of common stock prior to the Reverse Split were cashed out and will no longer be stockholders of the Company.
All references to numbers of shares and per share data in these consolidated financial statements and related notes have been retroactively adjusted to account for the Reverse Split for all periods presented.
Basis of presentation
— On June 18, 2017 (the "Petition Date"), A. M. Castle & Co. and four of its subsidiaries (together with A.M. Castle & Co., the "Debtors") filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware in Wilmington, Delaware (the "Bankruptcy Court"). Also on June 18, 2017, the Debtors filed the Debtors' Prepackaged Joint Chapter 11 Plan of Reorganization with the Bankruptcy Court and on July 25, 2017, the Debtors filed the Debtors' Amended Prepackaged Joint Chapter 11 Plan of Reorganization (the "Plan") with the Bankruptcy Court. On August 2, 2017, the Bankruptcy Court entered an order (the "Confirmation Order") confirming the Plan. On August 31, 2017 (the “Effective Date”), the Plan became effective pursuant to its terms and the Debtors emerged from their chapter 11 cases.The consolidated financial statements included herein have been prepared to reflect the application of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 852, "Reorganizations" and ASC No. 805, "Business Combinations". Accordingly, the Company adopted fresh-start accounting upon emergence from their chapter 11 cases and became a new entity for financial reporting purposes as of September 1, 2017. For accounting purposes, all emergence related transactions of the Predecessor including the impact of the issuance of the Successor common stock, the entry into a new asset-based revolving credit facility and new senior secured convertible notes, and the accelerated debt obligations of the Company that were satisfied pursuant to the terms of the Plan, were recorded as of August 31, 2017. Accordingly, the consolidated financial statements for the Successor are not comparable to the consolidated financial statements for the Predecessor.
The consolidated financial statements included hereinnotes thereto have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), and accounting principles generally accepted in the United States of America (“U.S. GAAP”). This report contains consolidated financial statements of the Company as of December 31, 2017 (Successor), as of and for the yearyears ended December 31, 2016 (Predecessor), for the period from January 1, 2017 to August 31, 2017 (Predecessor),2020 and for the period from September 1, 2017 to December 31, 2017 (Successor).
The consolidated financial statements include the accounts of A. M. Castle & Co. and its subsidiaries over which the Company exhibits a controlling interest. The equity method of accounting was used for the Company’s 50% owned joint venture, Kreher Steel Company, LLC (“Kreher”) until the Company sold its investment in Kreher in August 2016. All intercompany accounts and transactions have been eliminated.
In March 2016, the Company completed the sale of substantially all the assets of its wholly-owned subsidiary, Total Plastics, Inc. ("TPI"). TPI is reflected in the accompanying consolidated financial statements as a discontinued operation.
2019.The accompanying consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for a reasonable period of time. The Company'sCompany’s principal source of liquidity is cash flows from operations and borrowings under its asset-based revolving credit facility.
facilities.Use of estimates
— The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the (2) Bankruptcy Related Disclosures
Chapter 11 Bankruptcy Filing
On the Petition Date, the Debtors filed voluntary chapter 11 petitions for reorganization under the Bankruptcy Code with the Bankruptcy Court pursuant to the terms of a Restructuring Support Agreement (as defined below) that contemplated the reorganization of the Debtors pursuant to a prepackaged plan of reorganization. The chapter 11 cases were consolidated for procedural purposes only and were administered jointly under the caption In re Keystone Tube Company, LLC, et al. (Case No. 17-11330). No trustee was appointed in the chapter 11 cases, and during the pendency of the chapter 11 cases, the Debtors continued to operate their business as “debtors-in-possession” subject to the supervision and orders of the Bankruptcy Court in accordance with the Bankruptcy Code.
The filing of the bankruptcy petitions constituted a default or event of default that accelerated the Company’s obligations under (i) the Credit Facilities Agreement (as defined below) and the 11.00% Senior Secured Term Loan Credit Facilities due 2018 issued pursuant thereto (the "Credit Facilities"), (ii) the Indenture dated February 8, 2016 (the "Senior Notes Indenture") and the 12.75% Senior Secured Notes due 2018 issued pursuant thereto (the "12.75% Secured Notes"), and (iii) the Indenture dated May 19, 2016 (the "Convertible Notes Indenture") and the 5.25% Convertible Senior Secured Notes due 2019 issued pursuant thereto (the "5.25% Convertible Notes"). The Credit Facilities Agreement, the Senior Notes Indenture, and the Convertible Notes Indenture provide that, as a result of the filing of the bankruptcy
petitions, all outstanding indebtedness due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Credit Facilities Agreement, the Senior Notes Indenture, and the Convertible Notes Indenture were automatically stayed as a result of the bankruptcy petitions, and the creditors’ rights of enforcement in respect of the Credit Facilities Agreement, the Senior Notes Indenture, and the Convertible Notes Indenture are subject to the applicable provisions of the Restructuring Support Agreement (as defined below) and the Bankruptcy Code.
Prior to the Petition Date, on June 16, 2017, the Debtors entered into a Commitment Agreement with certain of their creditors (the "Commitment Parties"). The Commitment Parties are the holders (or the investment advisors or managers for the holders) of the Credit Facility term loans made to the Company under a Credit and Guaranty Agreement, dated December 8, 2016, by and among the Company, Highbridge International Capital Management, LLC, Corre Partners Management, LLC, Whitebox Credit Partners, L.P., WFF Cayman II Limited, and SGF, LLC and Cantor Fitzgerald Securities, among others (as amended, the “Credit Facilities Agreement").
The Commitment Agreement was entered into pursuant to a Restructuring Support Agreement dated April 6, 2017, as amended, by and among the Debtors and certain of their creditors, including the Commitment Parties (the "RSA"). The RSA provides for a consensual restructuring of the debt and equity of the Company, which the Company seeks to effect by means of the Plan.
The Company continued its operations without interruption during the pendency of the chapter 11 cases and reorganization process. To maintain and continue ordinary course operations without interruption, the Company received approval from the Bankruptcy Court of a variety of “first day” motions seeking certain relief and authorizing the Company to maintain its operations and pay trade claims in the ordinary course.
Plan of Reorganization and Emergence from Chapter 11
Pursuant to the terms of the RSA, on the Petition Date, the Debtors filed the Plan with the Bankruptcy Court.
The Plan allowed general unsecured claims and claims that are unimpaired under the Plan to be paid in full in cash.
On August 2, 2017, the Bankruptcy Court entered the Confirmation Order approving and confirming the Plan. On the Effective Date, the Plan became effective pursuant to the terms described above and the Debtors emerged from their chapter 11 cases.
Key components of the Plan, which became effective on August 31, 2017, include:
Entrythe Company entered into a new senior secured exit financing facility in the form of an asset-based revolving credit facility (the "New ABL Facility")Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”) as lender and as administrative and collateral agent (the “Agent”), and the other lenders party thereto.thereto (the “Original ABL Credit Agreement”). The NewOriginal ABL Credit Agreement providesprovided for a $125,000 senior secured, revolving credit facility for the Company. The proceeds of the advances under the New ABL Facility may only be used to (i) pay certain fees and expenses to the Agent and the lenders under the New ABL Facility, (ii) provide for Borrowers' working capital needs and reimburse drawings under letters of credit, (iii) repay the obligations under the Debtor-in-Possession Revolving Credit and Security Agreement dated as of June 10, 2017 ("DIP Facility"), by and among the Company, the lenders party thereto, and PNC Bank, National Association, and certain other existing indebtedness, and (iv) provide for the Borrowers' capital expenditure needs, in accordance with the New ABL Facility.
| |
◦ | On the Effective Date, in connection with its entering into the New ABL Agreement, the Company borrowed an aggregate amount equal to $78,797, proceeds from which, along with proceeds of the New Money Notes of $38,002, were used to pay down all outstanding indebtedness, accrued interest, and related fees of the Company under the Credit Facilities Agreement and the borrowings outstanding under the DIP Facility. |
Entry into an Indenture (the “Second Lien Notes Indenture”) with Wilmington Savings Fund Society, FSB (“WSFS, FSB”), as trustee and collateral agent (“Indenture Agent”) and, pursuant thereto, issued approximately$162,502 in aggregate original principal amount of its 5.00% / 7.00% Convertible Senior Secured Paid-in-Kind ("PIK") Toggle Notes due 2022 (the “Second Lien Notes”), excluding restricted notes issued under the A.M. Castle & Co. 2017 Management Incentive Plan (See Note 10 - Share Based Compensation, for full description).
The Second Lien Notes were issued as follows:
| |
◦ | $111,875 in aggregate principal Second Lien Notes issued to holders of Prepetition Second Lien Secured Claims in partial satisfaction of their claims; |
| |
◦ | $3,125 in aggregate principal Second Lien Notes issued to holders of Prepetition Third Lien Secured Claims in partial satisfaction of their claims; and |
| |
◦ | $47,502 in aggregate principal Second Lien Notes issued to the Commitment Parties pursuant to the Commitment Agreement (the "New Money Notes"). |
As a result of these Plan actions, all of the outstanding indebtedness of the 12.75% Secured Notes and 5.25% Convertible Notes was discharged and canceled.
Issuance of an aggregate of 2,000 shares of a new class of common stock, par value $0.01 per share (the “New Common Stock”), as follows:
| |
◦ | 1,300 shares issued to holders of Prepetition Second Lien Secured Claims in partial satisfaction of their claims; |
| |
◦ | 300 shares issued to holders of Prepetition Third Lien Secured Claims in partial satisfaction of their claims; and |
| |
◦ | 400 shares issued to participating holders of the Company's outstanding common stock as of August 2, 2017. |
Payment in full of all general unsecured claims and claims that were unimpaired under the Plan in cash in the ordinary course of business.
Cash payment of $6,646 to holders of Prepetition Second Lien Secured Claims.
Cash payment of a put option fee of $2,000 to the Commitment Parties pursuant to the Commitment Agreement.
All agreements, instruments, and other documents evidencing, relating to or connected with any equity interests of the Company (which include warrants to purchase the Company’s prior common stock and unvested/unexercised awards under any existing pre-Effective Date management incentive compensation plans) were canceled without recovery.
All prior director, officer and employee incentive plans, as well as the awards issued thereunder, were canceled. The new A.M. Castle & Co. 2017 Management Incentive Plan, under which persons eligible to receive awards include directors, officers and employees of the Company and its subsidiaries, became effective.
Reporting During Bankruptcy
During the pendency of the Company's chapter 11 cases, expenses and income directly associated with the chapter 11 proceedings were reported separately in reorganization items, net in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. Reorganization items, net also include adjustments to reflect the carrying value of liabilities subject to compromise ("LSTC") at their estimated allowed claim amounts, as such adjustments were determined. In addition, effective as of the Petition Date and during the pendency of the Company's chapter 11 cases, the Company discontinued recording interest expense on outstanding prepetition debt classified as LSTC. Upon the Company's emergence from its chapter 11 cases, the Company settled and extinguished or reinstated liabilities that were subject to compromise.
Fresh-Start Accounting
Under ASC No. 852, "Reorganizations", fresh-start accounting is required upon emergence from chapter 11 if (i) the reorganization value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all post-petition liabilities and allowed claims; and (ii) holders of existing voting shares immediately before confirmation receive less than 50% of the voting shares of the emerging entity. The Company qualified for and adopted fresh-start accounting as of the Effective Date. Adopting fresh-start accounting results in a new reporting entity with no beginning retained earnings or deficits. The cancellation of all existing common shares outstanding on the Effective Date and issuance of new shares of the reorganized entity resulted in a change of control of the Company under ASC No. 852, "Reorganizations".
Adoption of fresh-start accounting resulted in the Company becoming a new entity for financial reporting purposes and the recording of the Company’s assets and liabilities at their fair value as of the Effective Date, with the excess of reorganization value over net asset values recorded as goodwill, in conformity with ASC No. 805, "Business Combinations". The estimated fair values of the Company’s assets and liabilities as of that date differed from the recorded values of its assets and liabilities as reflected in its historical consolidated financial statements. In addition,
the Company’s adoption of fresh-start accounting affected its results of operations following the fresh-start reporting date, as the Company had a new basis in its assets and liabilities. The Company also adopted one new accounting policy in connection with its adoption of fresh-start accounting (see Note 1 - Basis of Presentation and Significant Accounting Policies). Consequently, the Company’s financial statements on or after the Effective Date are not comparable with the financial statements prior to that date and the historical financial statements before the Effective Date are not reliable indicators of its financial condition and results of operations for any period after it adopted fresh-start accounting.
Reorganization Value
Reorganization value is the value attributed to an entity emerging from bankruptcy, as well as the expected net realizable value of those assets that will be disposed before emergence occurs. This value is viewed as the value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after emergence. Fresh-start accounting requires that the reporting entity allocate the reorganization value to its assets and liabilities in relation to their fair values upon emergence from chapter 11, with the excess of reorganization value over net asset values recorded as goodwill. The Company’s valuation of the reorganized Company, which was included in the Disclosure Statement related to the Plan, estimated the enterprise value of the Company to be in a range between $234 million and $264 million. The Company estimated the enterprise value of the Successor Company to be $244 million. The estimated enterprise value and the equity value are highly dependent on the achievement of the future financial results contemplated in the projections that were set forth in the Plan. The estimates and assumptions made in the valuation are inherently subject to significant uncertainties. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would have significantly affected the reorganization value include the assumptions regarding revenue growth, operating expenses, the amount and timing of capital expenditures and the discount rate utilized.
In order to determine the reorganization value, the Company estimated the enterprise value of the Successor utilizing the discounted cash flow analysis.
To estimate the fair value utilizing the discounted cash flow analysis, the Company established an estimate of future cash flows for the period from August 31, 2017 to December 31, 2021 and discounted the estimated future cash flows to the present value, adding the present value of the terminal value of cash flows beyond December 31, 2021. The expected cash flows for the period August 31, 2017 to December 31, 2021 were derived from earnings forecasts and assumptions regarding growth and margin projections and adjusted for other cash flows including capital expenditures and charges to working capital, as applicable, and expressed as a multiple of Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The discount rate of 11.1% was estimated based on an after-tax weighted average cost of capital reflecting the rate of return that would be expected by a market participant.
The following table reconciles the Company's enterprise value to the estimated fair value of the Successor's equity as of the Effective Date:
|
| | | | |
| Enterprise value | | $ | 244,000 |
|
| Less: fair value of debt | | (238,340 | ) |
| Equity value | | $ | 5,660 |
|
The fair value of the convertible notes portion of the debt was determined based on market information and a review of prices and terms available for similar debt instruments that do not contain a conversion feature, as well as other factors related to the callable nature of the convertible notes. Given the nature and the variable interest rates, the fair value of borrowings under the asset-based lending facility approximated carrying value as of the Effective Date.
The following table reconciles the Company's enterprise value to the reorganization value of the Successor's assets:
|
| | | |
| Enterprise value | $ | 244,000 |
|
| Current liabilities (excluding short-term borrowings and current portion of long-term debt) | 61,169 |
|
| Noncurrent liabilities (excluding long-term debt) | 23,479 |
|
| Reorganization value of Successor assets | $ | 328,648 |
|
The total of all postpetition liabilities and allowed claims immediately prior to confirmation of the Plan was approximately $404 million.
Fresh-Start Balance Sheet
The following fresh-start balance sheet as of the Effective Date, August 31, 2017, illustrates the financial effects on the Company of the implementation of the Plan and the adoption of fresh-start reporting. This fresh-start balance sheet reflects the effect of the completion of the transactions included in the Plan, including the issuance of successor equity and the settlement of prepetition indebtedness.
Reorganization adjustments, shown in column 2 of the following schedule, represent amounts recorded on the Effective Date for the implementation of the Plan, including the settlement of liabilities subject to comprise and related payments, the issuance of new debt and new shares of common stock, repayment of the debtor-in-possession revolving credit facility and cancellation of Predecessor common stock.
Fresh-start adjustments, as shown in column 3 of the following schedule, represent amounts recorded on the Effective Date as a result of the adoption of fresh-start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. The Company’s assets and liabilities have been recorded at estimated fair value as of the fresh-start reporting date or Effective Date.
|
| | | | | | | | | | | | | | | |
| | As of August 31, 2017 |
| | Predecessor | | Reorganization Adjustments | | Fresh-Start Adjustments | | Successor |
| ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 20,443 |
| | $ | (10,379 | ) | (a) | $ | — |
| | $ | 10,064 |
|
| Accounts receivable, net | 73,056 |
| | — |
| | — |
| | 73,056 |
|
| Inventories | 153,785 |
| | — |
| | — |
| | 153,785 |
|
| Prepaid expenses and other current assets | 14,217 |
| | — |
| | — |
| | 14,217 |
|
| Income tax receivable | 588 |
| | — |
| | — |
| | 588 |
|
| Total current assets | 262,089 |
| | (10,379 | ) | | — |
| | 251,710 |
|
| Intangible assets, net | 24 |
| | — |
| | 8,151 |
| (j) | 8,175 |
|
| Prepaid pension cost | 9,350 |
| | — |
| | — |
| | 9,350 |
|
| Deferred income taxes | 1,381 |
| | — |
| | — |
| | 1,381 |
|
| Other noncurrent assets | 1,364 |
| | — |
| | — |
| | 1,364 |
|
| Property, plant and equipment: | | | | | | | — |
|
| Land | 2,073 |
| | — |
| | 3,867 |
| (i) | 5,940 |
|
| Buildings | 37,498 |
| | — |
| | (15,518 | ) | (i) | 21,980 |
|
| Machinery and equipment | 129,324 |
| | — |
| | (100,576 | ) | (i) | 28,748 |
|
| Property, plant and equipment, at cost | 168,895 |
| | — |
| | (112,227 | ) | | 56,668 |
|
| Accumulated depreciation | (122,087 | ) | | — |
| | 122,087 |
| | — |
|
| Property, plant and equipment, net | 46,808 |
| | — |
| | 9,860 |
| | 56,668 |
|
| Total assets | $ | 321,016 |
| | $ | (10,379 | ) | | $ | 18,011 |
| | $ | 328,648 |
|
| LIABILITIES AND STOCKHOLDERS’ EARNINGS (DEFICIT) | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | $ | 47,063 |
| | $ | — |
| | $ | — |
| | $ | 47,063 |
|
| Accrued and other current liabilities | 12,145 |
| | 1,961 |
| (b) | — |
| | 14,106 |
|
| Short-term borrowings | 3,797 |
| | — |
| | — |
| | 3,797 |
|
| Current portion of long-term debt | 109,213 |
| | (109,187 | ) | (c) | — |
| | 26 |
|
| Total current liabilities | 172,218 |
| | (107,226 | ) | | — |
| | 64,992 |
|
| Long-term debt, less current portion | — |
| | 234,517 |
| (d) | — |
| | 234,517 |
|
| Deferred income taxes | — |
| | — |
| | 3,159 |
| (m) | 3,159 |
|
| Build-to-suit liability | 9,898 |
| | — |
| | — |
| | 9,898 |
|
| Other noncurrent liabilities | 5,711 |
| | — |
| | (1,715 | ) | (k) | 3,996 |
|
| Pension and postretirement benefit obligations | 6,426 |
| | — |
| | — |
| | 6,426 |
|
| Liabilities subject to compromise | 211,363 |
| | (211,363 | ) | (e) | — |
| | — |
|
| Commitments and contingencies |
| |
| |
| |
|
| Stockholders’ earnings (deficit): | | | | | | | |
| Predecessor common stock | 327 |
| | (327 | ) | (f) | — |
| | — |
|
| Successor common stock | — |
| | 20 |
| (g) | — |
| | 20 |
|
| Predecessor additional paid-in capital | 245,546 |
| | (1,883 | ) | (f) | (243,663 | ) | (l) | — |
|
| Successor additional paid-in capital | — |
| | 5,640 |
| (g) | — |
| | 5,640 |
|
| Retained (deficit) earnings | (302,833 | ) | | 69,165 |
| (h) | 233,668 |
| (l) | — |
|
| Accumulated other comprehensive loss | (26,562 | ) | | — |
| | 26,562 |
| (l) | — |
|
| Treasury stock, at cost | (1,078 | ) | | 1,078 |
| (f) | — |
| | — |
|
| Total stockholders’ earnings (deficit) | (84,600 | ) | | 73,693 |
| | 16,567 |
| | 5,660 |
|
| Total liabilities and stockholders’ earnings (deficit) | $ | 321,016 |
| | $ | (10,379 | ) | | $ | 18,011 |
| | $ | 328,648 |
|
Reorganization Adjustments
The consolidated financial information gives effect to the following Reorganization Adjustments, the Plan and the implementation of the transactions contemplated by the Plan. These adjustments give effect to the terms of the Plan and certain underlying assumptions, which include, but are not limited to, the following:
| |
a. | Represents net cash outflows occurring upon the Plan becoming effective on August 31, 2017 as follows: |
|
| | | | |
| Cash received from initial draw on New ABL Facility | | $ | 78,797 |
|
| Repayment of Debtor-In-Possession financing borrowings, including interest and fees | | (66,932 | ) |
| Cash received from issuance of New Money Notes | | 38,002 |
|
| Payment of put option fee | | (2,000 | ) |
| Repayment of prepetition First Lien Notes, including interest and fees | | (49,415 | ) |
| Payment of cash recovery to prepetition Second Lien Noteholders | | (6,646 | ) |
| Payment related to key employee incentive plan | | (1,229 | ) |
| Professional fees paid upon emergence | | (956 | ) |
| Net cash paid upon emergence | | $ | (10,379 | ) |
| |
b. | Represents the accrual of success fees earned upon emergence of $2,416 net of payment of accrued interest on the prepetition First Lien Notes of $455. |
| |
c. | Represents repayment of the Debtor-In-Possession financing balance of $66,599 and the repayment of the prepetition First Lien Notes principal balance of $48,000, net of the write-off of unamortized original issue discount and deferred issuance costs related to the prepetition First Lien Notes of $5,412. |
| |
d. | Represents the fair value of the Second Lien Notes Indenture issued upon emergence of $155,720 and the initial draw on New ABL Facility of $78,797. |
| |
e. | Liabilities subject to compromise were satisfied as follows: |
|
| | | | |
| 12.75% Senior Secured Notes due December 15, 2018 | | $ | 177,019 |
|
| 5.25% Convertible Notes due December 30, 2019 | | 22,323 |
|
| Accrued interest payable | | 12,021 |
|
| Liabilities subject to compromise | | 211,363 |
|
| Cash payment to prepetition Second Lien Noteholders | | (6,646 | ) |
| Fair value of Second Lien Notes (including conversion option) issued to prepetition Second and Third Lien Noteholders | | (110,200 | ) |
| New equity issued to prepetition Second and Third Lien Noteholders | | (4,528 | ) |
| Gain on settlement of liabilities subject to compromise | | $ | 89,989 |
|
| |
f. | Represents the cancellation of the Predecessor common stock, warrants and treasury stock. |
| |
g. | Represents the issuance of 2,000 common shares of the Successor company in accordance with the Plan. |
| |
h. | The cumulative effect on retained earnings of the reorganization adjustments discussed above is as follows: |
|
| | | | |
| Gain on settlement of liabilities subject to compromise | | $ | 89,989 |
|
| Write off of original issue discount and deferred financing costs | | (5,412 | ) |
| Backstop and other fees related to the repayment of old debt and issuance of new debt | | (10,811 | ) |
| Success fees and key employee incentive plan payments | | (4,601 | ) |
| Net impact to retained earnings (accumulated deficit) | | $ | 69,165 |
|
Fresh-Start Adjustments
| |
i. | Represents the adjustments made to increase the carrying value of property, plant and equipment to their estimated fair value. The Company’s overall range of useful lives from an accounting policy perspective did not change. However, when the fair value of each asset was adjusted, a new remaining useful life was assigned to each asset, and the new value will be depreciated over that time period, which may be different from the remaining depreciable life of that asset at the end of the Predecessor period. Estimated fair value was determined as follows: |
The cost approach was utilized to estimate the fair value of personal property as well as buildings and land improvements. This approach considers the amount required to construct or purchase a new asset of equal utility at current market prices, with adjustments in value for physical deterioration.
The sales comparison approach was utilized to estimate fair value of owned real property. The sales comparison approach relies upon recent sales, offerings of similar assets or a specific inflationary adjustment to original purchase price to arrive at a probable selling price.
| |
j. | An adjustment of $8,151 was made to record the estimated fair value of the Successor trade name of $5,500 and write off $24 of Predecessor intangible assets, and to record goodwill of $2,675, representing the excess of the reorganization value of the assets over the fair value of identifiable assets, as follows: |
|
| | | | |
| Reorganization value of assets | | $ | 328,648 |
|
| Less: fair value of: | | |
| Total current assets | | (251,710 | ) |
| Property, plant and equipment | | (56,668 | ) |
| Successor trade name | | (5,500 | ) |
| Other noncurrent assets | | (12,095 | ) |
| Goodwill | | $ | 2,675 |
|
The fair value of the Successor's customer relationships was determined to be nil.
| |
k. | Represents the elimination of deferred rent and deferred gains of $2,105, adjusting these balances to zero fair value, net of a liability for unfavorable contracts of $390. |
| |
l. | Represents the cumulative impact of fresh-start adjustments as discussed above and the elimination of Predecessor retained deficit and other comprehensive loss. |
| |
m. | Represents the recording of a tax liability related to indefinite lived trade name and land. |
Contractual Interest
Effective June 18, 2017, the Company discontinued recording interest expense on outstanding prepetition debt classified as LSTC. The table below shows contractual interest amounts for debt classified as LSTC calculated in accordance with the respective agreements without giving effect to any penalties as a result of the default on such agreements, which are amounts due under the contractual terms of the outstanding debt. Interest expense reported in the Consolidated Statement of Operations and Comprehensive (Loss) Income for the periods after the Effective Date does not include $4,880, per the table below, in contractual interest on prepetition debt classified as LSTC, which was stayed by the Bankruptcy Court effective on the Petition Date.
|
| | | | |
| | | Predecessor |
| | | June 18, 2017 Through August 31, 2017 |
| 12.75% Senior Secured Notes due December 15, 2018 | | $ | 4,639 |
|
| 5.25% Convertible Notes due December 30, 2019 | | 241 |
|
| Total Contractual Interest | | $ | 4,880 |
|
Reorganization Items, Net
During the pendency of the Company's chapter 11 cases, expenses and income directly associated with the chapter 11 proceedings were reported separately in reorganization items, net in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. Reorganization items, net also include adjustments to reflect the carrying value of LSTC at their estimated allowed claim amounts, as such adjustments were determined. The following table presents reorganization items incurred in the the periods after the Effective Date, as reported in the accompanying Consolidated Statement of Operations and Comprehensive (Loss) Income:
|
| | | | | | | | |
| | Successor | | | Predecessor |
| | September 1, 2017 Through December 31, 2017 | | | January 1, 2017 Through August 31, 2017 |
| Gain on extinguishment of debt | — |
| | | (89,989 | ) |
| Gain on fresh-start revaluation | — |
| | | (16,566 | ) |
| Write-off of unamortized debt issuance costs and discounts | — |
| | | 10,262 |
|
| Prepayment penalties and debt-related fees | — |
| | | 13,191 |
|
| Professional fees | 2,141 |
| | | 7,342 |
|
| Key employee incentive plan | — |
| | | 1,229 |
|
| Reorganization items, net | $ | 2,141 |
| | | $ | (74,531 | ) |
For the period from January 31, 2017 through August 31, 2017 (Predecessor), the cash reorganization items included approximately $8,571 of professional fees and employee incentives and $3,673 of debt issuance and repayment costs. Cash reorganization items included approximately $2,141 for professional fees for the period from September 1, 2017 through December 31, 2017 (Successor). The cash outflow is included in net cash provided by operating activities in our Consolidated Statements of Cash Flows for the periods presented.
(3) Discontinued Operation
On March 15, 2016, the Company completed the sale of TPI for $55,070 in cash, subject to customary working capital adjustments. Under the terms of the sale, $1,500 of the purchase price was placed into escrow pending adjustment based upon the final calculation of the working capital at closing. The Company and the buyer agreed to the final working capital adjustment during the third quarter of 2016, which resulted in the full escrowed amount being returned to the buyer. The sale resulted in pre-tax and after-tax gains of $2,003 and $1,306, respectively, for the year ended December 31, 2016 (Predecessor).
Prior to the sale of TPI, the Company had two reportable segments consisting of its Plastics segment and its Metals segment. Subsequent to the sale of TPI, which represented the Company's Plastics segment in its entirety, the Company has only one reportable segment.
Summarized results of the discontinued operation were as follows:
|
| | | | |
| | | Predecessor |
| | | Year Ended |
| | | December 31, 2016 |
| Net sales | | $ | 29,680 |
|
| Cost of materials | | 21,027 |
|
| Operating costs and expenses | | 7,288 |
|
Interest expense(a) | | 333 |
|
| Income from discontinued operations before income taxes | | $ | 1,032 |
|
Income tax benefit (b) | | (3,770 | ) |
| Gain on sale of discontinued operations, net of income taxes | | 1,306 |
|
| Income from discontinued operations, net of income taxes | | $ | 6,108 |
|
(a) Interest expense was allocated to the discontinued operation based on the debt that was required to be paid as a result of the sale of TPI.
(b) Income tax benefit for the year ended December 31, 2016 (Predecessor) includes $4,207 reversal of valuation allowance resulting from the sale of TPI.
(4) Joint Venture
Kreher Steel Company, LLC, a national distributor and processor of carbon and alloy steel bar products, headquartered in Melrose Park, Illinois, was a 50% owned joint venture of the Company. In June 2016, the Company received an offer from its joint venture partner to purchase its ownership share in Kreher for an amount that was less than the current carrying value of the Company's investment in Kreher. The Company determined that the offer to purchase its ownership share in Kreher at a purchase price lower than the carrying value indicated that it may not be able to recover the full carrying amount of its investment, and therefore recognized a $4,636 other-than-temporary impairment charge in the second quarter of 2016 to reduce the carrying amount of the investment to the negotiated purchase price. Prior to receiving the purchase offer, the Company had no previous indicators that its investment in Kreher had incurred a loss in value that was other-than-temporary. In August 2016, the Company completed the sale of its ownership share in Kreher to its joint venture partner for aggregate cash proceeds of $31,550, which resulted in a loss on disposal of $5, including selling expenses. The impairment charge and the loss on disposal are reported in equity in earnings (losses) of joint venture in the Consolidated Statement of Operations and Comprehensive (Loss) Income for the year ended December 31, 2016 (Predecessor). Because the sale of the Company's investment in Kreher is not considered to be a strategic shift that will have a major effect on the Company's operations and financial results, the results of Kreher are reflected within continuing operations in the consolidated financial statements.
The following information summarizes the Company’s participation in the joint venture as of and for the year ended December 31, 2016 (Predecessor):
|
| | | | |
| | | 2016 |
| Equity in losses of joint venture | | $ | (4,177 | ) |
| Investment in joint venture | | — |
|
| Sales to joint venture | | 188 |
|
| Purchases from joint venture | | 4 |
|
(5) Goodwill and Intangible Assets
Goodwill
In connection with the Company’s adoption of fresh-start accounting on the Effective Date, the Company recorded $2,675 of goodwill representing the excess of reorganization value over the fair value of identifiable tangible and intangible assets. The goodwill will not be tax deductible. The Company currently has one reporting unit. The Company will test goodwill for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The was no change in the carrying value of goodwill between the Effective Date and December 31, 2017 (Successor).
Intangible assets, net
The following summarizes the components of the Company's intangible assets at December 31, 2017 (Successor) and December 31, 2016 (Predecessor):
|
| | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31, 2017 | | | December 31, 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | | Gross Carrying Amount | | Accumulated Amortization |
| Intangible assets subject to amortization: | | | | | | | | |
| Customer relationships | $ | — |
| | $ | — |
| | | $ | 67,317 |
| | $ | 63,216 |
|
| Intangible asset not subject to amortization: | | | | | | | | |
| Trade name | 5,500 |
| | — |
| | | — |
| | — |
|
| Total intangible assets | $ | 5,500 |
| | $ | — |
| | | $ | 67,317 |
| | $ | 63,216 |
|
In connection with the Company’s adoption of fresh-start accounting on the Effective Date, an insignificant amount of intangible assets and related accumulated amortization of the Predecessor were eliminated. Also as part of fresh-start accounting, the Company recorded an adjustment of $5,500 representing the fair value of the intangible asset of the Successor (refer to Note 2 - Bankruptcy Related Disclosures). The intangible asset of the Successor is comprised of
an indefinite-lived trade name, which is not subject to amortization. The fair value of the Successor trade name intangible asset was determined based on the relief from royalty method, which estimates the savings that the owner of the asset would realize rather than paying a royalty to use the asset, using forecasted net sales attributable to the trade name and applying a royalty rate, assumed to be 0.1% to those net sales.
The Company recorded amortization expense $4,088 and $6,126 for the period January 1, 2017 through August 31, 2017 (Predecessor) and the year ended December 31, 2016 (Predecessor), respectively. The was no amortization expense recorded in the period September 1, 2017 through December 31, 2017 (Successor).
(6) Debt
Long-term debt consisted of the following:
|
| | | | | | | |
| | Successor | | Predecessor |
| | December 31,
2017 | | December 31,
2016 |
| LONG-TERM DEBT | | | |
| 7.0% Convertible Notes due December 15, 2017 | — |
| | 41 |
|
| 11.0% Senior Secured Term Loan Credit Facilities due September 14, 2018 | — |
| | 99,500 |
|
| 12.75% Senior Secured Notes due December 15, 2018 | — |
| | 177,019 |
|
| 5.25% Convertible Notes due December 30, 2019 | — |
| | 22,323 |
|
| 5.00% / 7.00% Convertible Notes due August 31, 2022 | 168,767 |
| | — |
|
| Floating rate New ABL Credit Facility due February 28, 2022 | 101,047 |
| | — |
|
| Other, primarily capital leases | 288 |
| | 96 |
|
| Plus: derivative liability for embedded conversion feature | — |
| | 403 |
|
Less: unvested restricted Second Lien Notes(a)
| (2,144 | ) | | — |
|
| Less: unamortized discount | (67,937 | ) | | (7,587 | ) |
| Less: unamortized debt issuance costs | — |
| | (5,199 | ) |
| Total long-term debt | $ | 200,021 |
| | $ | 286,596 |
|
| Less: current portion | 118 |
| | 137 |
|
| Total long-term portion | $ | 199,903 |
| | $ | 286,459 |
|
(a) Represents unvested portion of $2,400 of restricted Second Lien Notes issued to certain members of management (see Note 10 - Share-based compensation).
Credit Facilities Agreement
On the Effective Date, by operation of the Plan, all outstanding indebtedness, accrued interest, and related fees of the Debtors under the Credit Facilities Agreement, amounting to $49,400, was paid in full with the proceeds of borrowings under the New ABL Facility and the issuance of Second Lien Notes under the Second Lien Notes Indenture.
12.75% Senior Secured Notes
On the Effective Date, by operation of the Plan, all outstanding indebtedness of the Debtors under the Company's 12.75% New Secured Notes and the New Secured Notes Indenture, was discharged and canceled.
5.25% Convertible Senior Secured Notes
On the Effective Date, by operation of the Plan, all outstanding indebtedness of the Debtors under the Company's 5.25% New Convertible Notes and the New Convertible Notes Indenture, was discharged and canceled.
New ABL Credit Facility
Pursuant to the Plan, on the Effective Date, the Successor entered into the New ABL Facility under which the Company and
four4 of its subsidiaries each are borrowers (collectively, in such capacity, the “Borrowers”). The obligations of the Borrowers have been guaranteed by the subsidiaries of the Company named therein as guarantors.
The NewOn December 10, 2020 the Company entered into Amendment No. 3 to Revolving Credit and Security Agreement (“Amendment No. 3”) by and among the Company, the other borrowers and guarantors party thereto and PNC Bank, National Association as the agent and the lenders, which amends the Original ABL Facility providesCredit Agreement dated as of August 31, 2017 (as amended to date by Amendment No. 1 to Revolving Credit and Security Agreement, dated June 1, 2018, Amendment No. 2 to Revolving Credit and Security Agreement, dated March 27, 2020, and Amendment No. 3, the “ABL Credit Agreement”) to provide for aadditional borrowing capacity.
Amendment No. 3 provided for an additional $25,000 Revolving B (Priority) credit facility (the “Revolving B (Priority) Credit Facility”), which is subordinated to the $125,000 senior secured, revolving credit facility for(the “Revolving A Credit Facility”) and senior to $21,500 senior secured, revolving credit facility (the “Revolving B Credit Facility”). As part of Amendment No. 3, the Company. Company and PNC also agreed to extend the maturity of the ABL Credit Agreement to February 28, 2023, and to amend the ABL Credit Agreement to (i) reduce the available borrowing capacity under its Revolving B Credit Facility from $25,000 to $21,500 and subordinate the payment under the Revolving B Credit Facility to the Revolving B (Priority) Credit Facility, (ii) increase access to available borrowings by reducing the liquidity covenant test threshold from $12,500 to $8,750, and (iii) increase the interest applicable to the Revolving Credit A Facility to LIBOR-base rate plus a margin of 4.0%.
Subject to certain exceptions and permitted encumbrances, the obligations under the New ABL FacilityCredit Agreement are secured by a first priority security interest
in substantially all of the assets of each of the Borrowers and certain subsidiaries of their foreign subsidiaries.the Company that are named as guarantors. The proceeds of the advances under the New ABL FacilityCredit Agreement may only be used to (i) pay certain fees and expenses to the Agent and the lenders under the New ABL Facility,Credit Agreement, (ii) provide for Borrowers'the Borrowers’ working capital needs and reimburse drawings under letters of credit, (iii) repay the obligations under the Debtor-in-Possession Revolving Credit and Security Agreement dated as of July 10, 2017, by and among the Company, the lenders party thereto, and PNC, Bank, National Association, and certain other existing indebtedness, and (iv) provide for the Borrowers'Borrowers’ capital expenditure needs, in accordance with the New ABL Facility.
Credit Agreement.The Company may prepay its obligations under the New ABL FacilityCredit Agreement at any time without premium or penalty, and must apply the net proceeds of material sales of collateral in prepayment of such obligations. Payments made must be applied to the Company’s obligations under the Revolving A Credit Facility, if any, prior to its obligations under the Revolving B Credit Facility. In connection with an early termination or permanent reduction of the Revolving A Credit Facility prior to March 27, 2021, a 0.50% fee shall be due for the period from March 28, 2021 through September 27, 2021 on the amount of such commitment reduction, subject to reduction as set forth in the ABL Credit Agreement. Indebtedness for borrowings under the New ABL FacilityCredit Agreement is subject to acceleration upon the occurrence of specified defaults or events of default, including (i) failure to pay principal or interest, (ii) the inaccuracy of any representation or warranty of a loan party, (iii) failure by a loan party to perform certain covenants, (iv) defaults under indebtedness owed to third parties, (v) certain liability producing events relating to the Employee Retirement Income Security Act of 1974 ("ERISA"),ERISA, (vi) the invalidity or impairment of the Agent’s lien on its collateral or of any applicable guarantee, and (vii) certain adverse bankruptcy-related and other events.
Interest on indebtedness under the Revolving A Credit Facility accrues at a variable rate based on a grid with the highest interest rate being the applicable prime or LIBOR-based rate plus a margin of 4.0%, as set forth in the New ABL Facility.Credit Agreement. Interest on indebtedness under the Revolving B (Priority) Credit Facility and the Revolving
Authorized Shares of Common Stock
On June 30, 2020, the Company's shareholders approved a proposal to amend the Company's charter to authorize an increase in the Company's authorized shares of common stock. Subsequent to this approval, also on June 30, 2020, the Company filed articles of amendment with the Secretary of State of the State of Maryland, which amended its Articles of Amendment and Restatement effective on such date to increase the Company's authorized common stock shares from 200,000 shares of common stock at $0.01 par value per share to 400,000 shares of common stock at $0.01 par value per share. The Company concluded that as of June 30, 2020 the conversion option associated with its 3.00%/5.00% Convertible Notes qualified for equity classification and the bifurcated derivative liability no longer needed to be accounted for as a separate derivative on a prospective basis from the date of reassessment. On June 30, 2020, the fair value of the conversion option of $36,952 was classified to equity as additional paid-in capital.
The Company has classified the fair value of the conversion option associated with its 3.00%/5.00% Convertible Notes as additional paid-in capital. Similarly, the interest paid-in kind attributable to the fair value conversion option of the Second Lien3.00%/5.00% Convertible Notes between December 31, 2016 (Predecessor) and December 31, 2017 (Successor) prior to its reclassification tois classified as additional paid-in capital:
|
| | | |
| | Derivative liability for embedded conversion option (Successor) |
| Fair value at issuance date | $ | 61,608 |
|
| Interest paid in kind | 1,504 |
|
Mark-to-market adjustment on conversion feature(a) | (2,352 | ) |
| Fair value as of December 31, 2017 (Successor) | $ | 60,760 |
|
(a) Mark-to-market adjustment is recognized in unrealized gain on embedded debtcapital. Interest paid-in kind attributable to the fair value of the conversion option in the Consolidated Statements of Operations and Comprehensive (Loss) Earnings in the period September 1, 2017 through December 31, 2017 (Successor).
(8) Lease Agreements
The Company has operating and capital leases covering certain warehouse and office facilities, equipment, automobiles and trucks, with the lapse of time as the basis for all rental payments.
The Company has determined that for accounting purposes its lease of its operating facility in Janesville, Wisconsin is a build-to-suit lease. During the construction of this facility, which concluded in the fourth quarter of 2015, the Company assumed certain risks of certain construction cost overages and was, therefore, deemed to be the owner of the facility during the construction period. All costs of construction related to this facility are recognized as property, plant and equipment, with a related build-to-suit liability.
Subsequent to the completion of construction, the Company did not qualify for sale-leaseback accounting because of provisions in the lease which constituted prohibited continuing involvement. As a result, the Company will amortize the build-to-suit liability over the lease term and depreciate the building over the lease term. The Company has reflected $10,148 and $12,305 as build-to-suit liability in the Consolidated Balance Sheets as of December 31, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.
Total gross value of property, plant and equipment underadditional paid-in capital leases was $360 and $524 as of December 31, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.
Future minimum rental payments under leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2017 (Successor) are as follows:
|
| | | | | | | | | | | |
| | Capital Leases | | Operating Leases | | Built-to-Suit Lease |
| 2018 | $ | 118 |
| | $ | 7,970 |
| | $ | 897 |
|
| 2019 | 117 |
| | 5,848 |
| | 915 |
|
| 2020 | 54 |
| | 4,878 |
| | 933 |
|
| 2021 | — |
| | 4,511 |
| | 952 |
|
| 2022 | — |
| | 4,643 |
| | 971 |
|
| Later years | — |
| | 7,255 |
| | 8,451 |
|
| Total future minimum rental payments | $ | 289 |
| | $ | 35,105 |
| | $ | 13,119 |
|
Total rental payments charged to expense were $2,869 in the period September 1, 2017 through December 31, 2017 (Successor), $6,028 in the period January 1, 2017 through August 31, 2017 (Predecessor), and $9,175$788 in the year ended December 31,
2016 (Predecessor). Lease extrication charges2020, net of
$6,038 associated with restructuring activities were charged to expensethe tax impact of $281, and $3,547, net of the tax impact of $1,086, in the year ended December 31,
2016 (Predecessor) within restructuring expense in2019.Reverse Stock Split
On December 28, 2020, the Consolidated StatementsCompany filed articles of Operationsamendment to effect a reverse stock split of the Company’s outstanding shares of common stock, pursuant to Section 2-309(e) of the Maryland General Corporation Law, whereby each 10 shares of common stock issued and Comprehensive (Loss) Income. Thereoutstanding as of December 29, 2020 was combined into one whole share of common stock (the “Reverse Split”). No fractional shares of common stock were no lease extrication charges inissued as a result of the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor).
(9) Stockholders' Equity
Stockholders' Equity upon Emergence from Bankruptcy
PursuantReverse Split. In lieu of issuing any fractional shares to any stockholder as a result of the Reverse Split, the Company made, to any stockholder that would otherwise hold a fractional share after giving effect to the Plan, onReverse Split, a cash payment in an amount equal to $0.70 multiplied by the Effective Date the Companynumber of pre-split shares held by such stockholder with respect to which a fractional share would have been issued an aggregate. Stockholders of 2,000record who owned less than 10 shares of New Common Stock. All agreements, instruments,common stock prior to the Reverse Split were cashed out and other documents evidencing, relating to or connected with any equity interestsare no longer stockholders of the Company (which include warrants to purchase the Company’s prior common stock and unvested/unexercised awards under any existing pre-Effective Date management incentive compensation plans) were canceled without recovery (refer to Note 2 - Bankruptcy Related Disclosures).
Reclassification of Conversion Option from Liabilities to Equity
On December 31, 2017, the Company determined that the condition that caused the conversion option to not meet the criteria to be considered indexed to the Company’s common stock was no longer in effect, and the conversion option met the criteria to be considered indexed to the Company’s common stock effective December 31, 2017 (see Note 6 - Debt). Accordingly, the previously bifurcated embedded conversion option was remeasured to a fair value of $60,760 and reclassified from a liability to additional paid-in capital. The deferred tax asset of $17,044 associated with the temporary difference between the financial reporting basis of the derivative and its tax basis at the Effective Date was also reclassified to additional paid-in capital for a net reclass to additional paid-in capital of $43,716.
Company.Accumulated Comprehensive Loss
AccumulatedThe components of accumulated other comprehensive loss are as reported in the Consolidated Balance Sheets as of December 31, 2017 (Successor) and December 31, 2016 (Predecessor) was comprised of the following:follows:
| | | | | | |
| | December 31, |
| | 2020 | | 2019 |
Unrecognized pension and postretirement costs, net of tax | | $ | (8,002) | | $ | (7,071) |
Foreign currency translation losses, net of tax | | | (3,760) | | | (6,303) |
Total accumulated other comprehensive loss, net of tax | | $ | (11,762) | | $ | (13,374) |
Marec E. Edgar
Jonathan B. Mellin
Steven W. Scheinkman
Jonathan Segal
Michael J. Sheehan
Parker Tornell