A.M. CASTLE & CO. Disclosure Regarding Forward-Looking Statements Certain statements contained in this report or in other materials we have filed or will file with theSecurities and Exchange Commission (the "SEC") constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect our expectations, estimates or projections concerning our possible or assumed future results of operations, including, but not limited to, descriptions of our business strategy, and the benefits we expect to achieve from our working capital management initiative. These statements are often identified by the use of words such as "believe," "expect," "anticipate," "may," "could," "estimate," "likely," "will," "intend," "predict," "plan," "should," or other similar expressions. Forward-looking statements are not guarantees of performance or results and involve a number of risks and uncertainties. Although we believe that these forward-looking statements are based on reasonable assumptions and estimates, there are many factors that could cause our actual results to differ materially from those projected. These factors include the impact of volatility of metals prices, the cyclical and seasonal aspects of our business, our ability to effectively manage inventory levels, the impact of our substantial level of indebtedness, the impact of the novel Coronavirus (COVID-19) pandemic on our financial results and business, as well as those risk factors identified in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , our Annual Report on Form 10-K/A for the fiscal year endedDecember 31, 2019 and Part II Item 1A of this quarterly report on Form 10-Q. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Any forward-looking statement speaks only as of the date made. Except as required by applicable laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances in the future, to reflect the occurrence of unanticipated events or for any other reason. The following discussion should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related notes thereto in Item 1. "Financial Statements (unaudited)". OverviewA. M. Castle & Co. , together with its subsidiaries (the "Company," "we" or "us"), is a global distributor of specialty metals and supply chain services, principally serving the producer durable equipment, commercial and military aircraft, heavy equipment, industrial goods, and construction equipment sectors of the global economy. The Company provides a broad range of product inventories as well as value-added processing and supply chain services to a wide array of customers, with a particular focus on the aerospace and defense, power generation, mining, heavy industrial equipment, and general manufacturing industries, as well as general engineering applications. Exchange Offer OnMarch 27, 2020 , the Company completed an 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 "New Notes") and shares of its common stock in exchange for its 5.00% / 7.00% Convertible Senior Secured PIK Toggle Notes due 2022 (the "Existing Notes"), including any accrued and unpaid interest on the Existing 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 Existing Notes were tendered and accepted and in exchange, the Company issued$95.1 million in aggregate principal amount of its New Notes and 70,261 shares of its common stock. Holders of the Existing Notes who did not tender into this Exchange Offer will retain their Existing Notes. An aggregate principal amount of Existing 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 . In conjunction with the Exchange Offer, onMarch 27, 2020 , the Company, the guarantors of the Existing Notes and the trustee for the Existing Notes entered into a supplemental indenture to the indenture governing the Existing Notes (the "Existing 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 Existing Indenture, and the modification of certain of the events of default and various other provisions contained in the Existing Indenture. 20 -------------------------------------------------------------------------------- Table of Contents Impact of Coronavirus (COVID-19) Pandemic Although the Company has already been impacted by the global emergence of the novel coronavirus 2019 ("COVID-19") pandemic, the full extent of the impact that the COVID-19 pandemic will have on the Company's business, operations and financial condition is currently unknown. To date, the Company has had no reported or presumptive positive cases of COVID-19 among its workforce and its branches, 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. In an effort to bolster its liquidity position and mitigate potentially significant detriment to its business, the Company is pursuing a variety of government-sponsored support programs such as tax deferrals, employment-related subsidies, government-backed loans and other government relief available in theU.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 and fund their relief programs. The Company qualified under the "alternative size standard" for a forgivable loan under the Paycheck Protection Program ("PPP") administered by theSmall Business Association (SBA) pursuant to the CARES Act. OnApril 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 recently completed Exchange Offer, its available, committed primary sources of liquidity, and its lack of access to alternative sources of liquidity, current economic conditions made this loan request necessary and appropriate to support the Company's ongoingU.S. operations and mitigate potentially significant detriment to the Company's business. The PPP Loan, which is evidenced by a Paycheck Protection Program Term Note, matures onApril 28, 2022 and bears interest at a fixed rate of 1.0 percent per annum, with the first six months of interest deferred. The PPP Loan is payable in 17 monthly payments commencing onNovember 16, 2020 and may be prepaid at any time prior to maturity with no prepayment penalties. Under the terms of the CARES Act, 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 eight week period following loan disbursement. The Company intends to use the PPP Loan proceeds for permissible purposes only and to apply for forgiveness of the PPP Loan in accordance with the terms of the PPP and the CARES Act; however, the Company can provide no assurances that it will be eligible for forgiveness of the PPP Loan, in whole or in part, and cannot quantify the portion of the PPP Loan that will be forgiven. In addition, the Company has implemented a number of temporary and long-term cost-cutting initiatives to meet current demand and to be prepared for any market recovery once this pandemic has passed, including staff reductions, reduction in employee hours and/or salaries, furloughs, temporary layoffs, deferral of periodic salary increases and/or incentive pay, and/or a combination of these actions, at each of its locations. In an effort to protect the health and safety of its employees, the Company has adopted sanitization, social distancing and other behavioral best practices at its locations, including working from home, reducing the number of people in the Company's branch locations at any one time, and suspending non-essential employee travel. Despite these plans and precautions, certain branches are experiencing more significant impacts as governments around the world have also enacted various measures, including orders to close all businesses not deemed "essential," isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities, and as the Company has received updates from customers on reductions in anticipated production forecasts and/or closures or reductions in their own operations. In particular, the Company has seen a growing trend of its customers reducing forecasts and requesting elongated payment terms, as their customers implement the same. The Company considers itself and has been identified as an "essential" business, as defined by the various local, state and national orders and as supported by the directives of the Company's customers many of whom are explicitly deemed "essential" businesses themselves, and therefore has generally continued to operate during the pandemic. The Company will continue to actively monitor the situation 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 on the Company's business, 21 -------------------------------------------------------------------------------- Table of Contents including the effects on the Company's customers, employees, and prospects, or on the Company's financial results for the remainder of fiscal 2020. The Company anticipates that these actions and the global health crisis caused by the COVID-19 pandemic will negatively impact business activity across the globe. The Company has already experienced declining demand as many of the industries the Company serves have been significantly impacted economically, which has resulted in a decline in orders from and shipments to customers as well as slower-than-normal payments from customers and disruptions at certain of the Company's suppliers. The pandemic situation and circumstances in each city, state and country, and at each of the Company's branches, is very fluid and subject to rapid change. The Company anticipates improvements in economic activity will depend on the rate, pace, and effectiveness of the efforts deployed by various national, state, and local governments to contain the COVID-19 pandemic and the rate and pace at which its customers and suppliers return their own businesses to pre-pandemic levels. Results of Operations The following tables set forth certain statement of operations data in each period indicated: Three Months Ended March 31, Favorable/ 2020 2019 (Unfavorable) Three Month Three Month (Dollar amounts in millions) $ % of Net Sales
$ % of Net Sales $ Change % Change
Net sales $ 126.6 100.0 % $ 149.5 100.0 % $ (22.9) (15.3) %
Cost of materials (exclusive of
depreciation) 92.3 72.9 % 111.0 74.2 % 18.7 16.8 %
Operating costs and expenses 36.3 28.7 % 38.9 26.0 % 2.6 6.7 %
Operating loss $ (2.0) (1.6) % $ (0.3) (0.2) % $ (1.7) n/m
Net Sales
Net sales of $126.6 million in the three months ended March 31, 2020 decreased
$22.9 million , or 15.3%, compared to $149.5 million in the three months ended
March 31, 2019 . The decrease in net sales in the current quarter compared to the
prior year quarter was a result of a decrease in tons sold per day, partially
offset by an increase in selling prices and a favorable sales mix. Tons sold per
day for the Company's products decreased by 20.7% in the three months ended
March 31, 2020 compared to the same quarter in the prior year as sales volumes
decreased for virtually all of the core products that the Company sells. The
decrease in demand was driven by continued softness in the industrial end
markets, which was worsened by the macroeconomic impacts of the COVID-19
pandemic, and a decrease in demand for global aerospace products. The weakening
of demand within the aerospace market is largely attributable to grounding of
the Boeing 737 MAX, on which some of the Company's locations have customers that
supply content, and, most recently, the impact of the COVID-19 pandemic on
global air travel.
Overall average selling prices of the Company's product mix sold increased 6.0%
in the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 , driven by favorable selling prices realized on the Company's
aluminum and stainless product lines. As expected, demand and pricing headwinds
in the industrial market from the second half of 2019 continued into the first
quarter of 2020, resulting in a decrease in volumes and average selling prices
for the majority of the Company's other core industrial products, namely alloy
bar, carbon and alloy flat products, and SBQ bar.
The Company realized a favorable sales mix in the first quarter of 2020 compared
to the same quarter of the prior year as a result of its strategic focus on more
highly accretive sales, particularly those including higher margin, value added
service offerings, as well as a shift in sales volume towards higher priced
aluminum and stainless products.
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The Company expects that the unfavorable financial and business impacts of the
COVID-19 pandemic that were realized in the later portion of the first quarter
of 2020 will continue into the near-term as the Company's customers and
suppliers reduce their purchasing forecasts and output. In turn, this decrease
in demand and availability of supply could lead to increased competition in the
markets that the Company serves, which could result in a decrease in sales
volume and pricing of the Company's products in the near-term.
Cost of Materials
Cost of materials (exclusive of depreciation) was $92.3 million in the three
months ended March 31, 2020 compared to $111.0 million in the three months ended
March 31, 2019 . The $18.7 million , or 16.8%, decrease in the first quarter of
2020 compared to the first quarter of 2019 is primarily due to the decrease in
net sales volume compared to the same period last year. Cost of materials
(exclusive of depreciation) was 72.9% of net sales in the three months ended
March 31, 2020 compared to 74.2% of net sales in the three months ended March
31, 2019 . The Company's focus on selectively pursuing higher margin sales that
are more accretive to the business, particularly those including the Company's
value added service offerings, resulted in favorable product mix towards sales
of products with higher gross material margins (calculated as net sales less
cost of materials divided by net sales) in the first quarter of 2020, compared
to the same quarter last year. The Company expects its margins will remain
relatively stable for the remainder of 2020 as its improved inventory management
offsets the headwinds produced by reduced demand, a downward pricing environment
and the unfavorable impacts of the COVID-19 pandemic on the overall global
economy.
Operating Costs and Expenses and Operating Loss
Three Months Ended March 31, Favorable/(Unfavorable)
Three Month Three Month
(Dollar amounts in millions) 2020 2019 $ Change % Change
Warehouse, processing and delivery
expense $ 18.0 $ 20.3 $ 2.3 11.3 %
Sales, general and administrative
expense 16.2 16.5 0.3 1.8 %
Depreciation expense 2.1 2.1 - - %
Total operating costs and expenses $ 36.3 $ 38.9 $ 2.6 6.7 %
Operating costs and expenses decreased by $2.6 million from $38.9 million in the
three months ended March 31, 2019 to $36.3 million in the three months ended
March 31, 2020 , primarily as a result of the following:
•Warehouse, processing and delivery expense decreased by $2.3 million primarily
due to a decrease in warehouse and freight costs, as well as lower payroll and
benefits costs, resulting from lower sales volume in the three months ended
March 31, 2020 compared to the same period last year.
•Sales, general and administrative expense decreased by $0.3 million primarily
the result of lower payroll and benefits costs in the three months ended March
31, 2020 compared to three months ended March 31, 2019 and the timing of certain
other sales, general and administrative expenses, somewhat offset by legal and
other direct fees associated with the Exchange Offer in the amount of $0.8
million .
As the Company continues to respond to the unfavorable global economic
conditions resulting from the COVID-19 pandemic, it plans to take the necessary
steps to align its operating costs and expenses with a decrease in customer and
supplier forecasts and output. As a result, the Company expects operating costs
and expenses to continue to decrease in the near term as sales volumes are
expected to decrease. Further, the Company has implemented and plans to continue
to implement, as necessary, staff reductions, reductions in employee work hours
and/or salaries, furloughs, temporary layoffs, or a combination of these actions
at each of its branches and at its corporate offices.
In the first quarter of 2020, the Company performed an interim impairment test
of its goodwill and intangible assets. Based on this test, the Company
determined its one reporting unit's goodwill and indefinite-lived trade name
assets were not impaired as of March 31, 2020 . While the Company considered the
impact the COVID-19 pandemic may have on it future cash flows when preparing its
interim goodwill impairment test, the full extent of the impact that the
COVID-19 pandemic will have on the Company's business, operations and financial
condition is currently unknown. The Company will continue to assess its goodwill
for impairment as events and circumstances change. Any further deterioration in
the Company's forecasted revenue, gross material margin, and/or costs and
expenses could result
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in an impairment of a portion or all of its goodwill. The amount of such
impairment would be recognized as an expense in the period the goodwill is
impaired.
Operating loss in the three months ended March 31, 2020 was $2.0 million ,
compared to $0.3 million in the three months ended March 31, 2019 .
Other Income and Expense, Income Taxes and Net Loss
Interest expense, net was $10.0 million in the three months ended March 31,
2020 , compared to $9.4 million in the three months ended March 31, 2019 .
Interest expense includes the interest cost component of the net periodic
benefit cost of the Company's pension and post retirement benefits of $1.0
million in the three months ended March 31, 2020 and $1.3 million in the three
months ended March 31, 2019 . The increase in interest expense in the three
months ended March 31, 2020 compared to the three months ended March 31, 2019 is
primarily due to an increase in non-cash amortization of the Existing Notes,
partially offset by a decrease in the interest cost component of the net
periodic benefit cost.
Other expense, net was $0.2 million in the three months ended March 31, 2020 ,
compared to other income, net of $1.6 million in the three months ended March
31, 2019 . Included in other (expense) income, net in the three months ended
March 31, 2020 and the three months ended March 31, 2019 was net pension benefit
of $1.7 million and $1.5 million , respectively. The remaining other (expense)
income, net for the comparative periods is the result of foreign currency
transaction gains and losses. The Company recorded a foreign currency loss of
$1.8 million in the three months ended March 31, 2020 , of which $2.0 million is
an unrealized loss on intercompany loan, compared to a foreign currency gain of
$0.1 million in the three months ended March 31, 2019 , virtually of which was
attributable to a unrealized gain on intercompany loan.
Loss before income taxes was $12.2 million in the three months ended March 31,
2020 , compared to $8.2 million in the three months ended March 31, 2019 . The
increase in the loss before income taxes in the three months ended March 31,
2020 compared to the same period in the prior year was primarily due to a $1.7
million increase in the operating loss for the quarter as well as the
unfavorable impact of foreign currency in the three months ended March 31, 2020 .
The Company recorded an income tax benefit $1.1 million in the three months
ended March 31, 2020 , compared to and income tax benefit of $0.2 million in the
three months ended March 31, 2019 . The Company's effective tax rate is expressed
as income tax expense as a percentage of loss before income taxes. The effective
tax rate in the three months ended March 31, 2020 was 9.4% as compared to 2.1%
in the three months ended March 31, 2019 . The change in the effective tax rate
between periods resulted from an increase in the Company's net operating loss
carrybacks due to the CARES Act, changes in the geographic mix and timing of
income or losses, the inclusion of foreign earnings under Internal Revenue Code
("IRC") Section 951A, and the impact of the foreign income tax rate
differential.
Net loss was $11.0 million in the three months ended March 31, 2020 , compared to
$8.0 million in the three months ended March 31, 2019 .
Liquidity and Capital Resources
Liquidity
Cash and cash equivalents increased (decreased) as follows:
Three Months Ended
March 31,
(Dollar amounts in millions) 2020 2019
Net cash used in operating activities $ (0.7) $ (3.4)
Net cash used in investing activities (0.6) (0.8)
Net cash (used in) provided by financing activities (0.7)
1.3
Effect of exchange rate changes on cash and cash equivalents (0.1)
-
Net change in cash and cash equivalents$ (2.2)
The Company's principal sources of liquidity are cash provided by operations and
proceeds from borrowings under its revolving 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
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its working capital with the changing economic conditions. Although the Company
is not currently aware of any such circumstances, a prolonged economic downturn
as a result of COVID-19 could have a significant unfavorable impact on its
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 an 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 , 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 (see Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Impact of
Coronavirus (COVID-19) Pandemic). 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.
Specific components of the change in working capital (defined as current assets
less current liabilities), are highlighted below:
•An increase in accounts receivable at March 31, 2020 compared to December 31,
2019 resulted in a cash flow use of $9.7 million in the three months ended March
31, 2020 , compared to a cash flow use of $12.7 million in the three months ended
March 31, 2019 . Average receivable days outstanding was 56.5 days in the three
months ended March 31, 2020 compared to 53.1 days for the three months ended
March 31, 2019 , which, the Company believes, reflects some slowing in payments
from customers due to the financial uncertainties resulting from the COVID-19
pandemic. Although the Company expects slowness of payments from customers to
continue, the Company considered the economic impact of the COVID-19 pandemic on
the collectibility of customer accounts receivable and determined that no
specific addition allowance for doubtful accounts was required as of March 31,
2020 . The full impact of the COVID-19 pandemic is unknown and rapidly evolving.
The Company will continue to analyze any financial and commercial impacts of the
COVID-19 pandemic, including any adverse impact the COVID-19 pandemic may have
on the collectibility of customer accounts receivable as well the impact the
level of accounts receivable may have on its borrowing capacity under the ABL
Credit Agreement.
•Higher inventory levels at March 31, 2020 compared to December 31, 2019
resulted in a cash flow use of $7.9 million in the three months ended March 31,
2020 compared to a higher inventory levels at March 31, 2019 compared to
December 31, 2018 , which resulted in a cash flow use of $3.8 million in the
three months ended March 31, 2019 . Average days sales in inventory was 136.0
days for the three months ended March 31, 2020 compared to 134.0 days for the
three months ended March 31, 2019 . The increase in average days sales in
inventory is primarily due to the higher price of the inventory on-hand as a
result of increased commodity pricing within the aerospace market throughout
2019 and the beginning of the first quarter of 2020 as well as the impact of the
COVID-19 pandemic, which caused a slow-down in sales near the latter part of the
three months ended March 31, 2020 , offset somewhat by the Company's improved
inventory management. As the Company expects the markets to continue to soften
due to the impacts of the COVID-19 pandemic, it will continue to focus on
managing inventory levels, primarily by reducing aged inventories, lowering
overall stock levels throughout the business and the real-time facilitation of
its branches in selling higher-priced inventory. The Company will continue to
monitor the impact its inventory levels may have on its borrowing capacity under
the ABL Credit Agreement.
•An increase in total accounts payable and accrued and other current liabilities
compared to December 31, 2019 resulted in a $17.6 million cash flow source in
the three months ended March 31, 2020 compared to a cash flow source of $12.2
million in the three months ended March 31, 2019 . Accounts payable days
outstanding was 43.7 days for the three months ended March 31, 2020 compared to
42.6 days for the same period last year. The improving financial condition of
the Company prior to the impact of the COVID-19 pandemic, particularly the
recent 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. 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.
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Table of Contents Working capital and the balances of its significant components are as follows:
As of
Working Capital
(Dollar amounts in millions) March 31, 2020 December 31, 2019 Increase (Decrease)
Working capital $ 171.9 $ 173.7 $ (1.8)
Cash and cash equivalents 4.3 6.4 (2.1)
Accounts receivable 83.6 74.7 8.9
Inventories 151.2 144.4 6.8
Accounts payable 59.4 41.7 (17.7)
Accrued and other current liabilities 10.9 11.2 0.3
Operating lease liabilities 6.1 6.5 0.4
Approximately $2.3 million of the Company's consolidated cash and cash
equivalents balance of $4.3 million at March 31, 2020 resided in the United
States .
The decrease in net cash used in investing activities to $0.6 million during the
three months ended March 31, 2020 from $0.8 million during the three months
ended March 31, 2019 is due to a decrease in cash paid for capital expenditures,
primarily purchases of warehouse equipment. In response to the COVID-19
pandemic, management now expects capital expenditures will be approximately $3.0
million to $4.0 million for the full-year 2020. Depending on the severity and
duration of the pandemic, management will continue to assess its capital
expenditures for the remainder of 2020 and may lower its expected capital
expenditures further.
During the three months ended March 31, 2020 , net cash used in financing
activities of $0.7 million was attributable to net proceeds from borrowings made
by the Company on its revolving credit facility, which were more than offset by
payments of debt restructuring costs, net repayments of short-term borrowings
under the Company's foreign line of credit in France and principal paid on
financing leases. During the three months ended March 31, 2019 , the net cash
from financing activities of $1.3 million was primarily attributable to net
proceeds from borrowings under the Company's foreign line of credit in France ,
partially offset by principal paid on financing leases.
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 and Security
Agreement with PNC Bank, National Association ("PNC") as lender and as
administrative and collateral agent (the "Agent"), and other lenders party
thereto (the "Original ABL Credit Agreement"). The Original ABL Credit Agreement
provided 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 June 1, 2018 , the
Company entered into an Amendment No. 1 to ABL Credit Agreement (the "Credit
Agreement Amendment No. 1") by and among the Company, the Borrowers and
guarantors party thereto and the Agent and the other lenders party thereto,
which amended the Original ABL Credit Agreement to provide for additional
borrowing capacity. On March 27, 2020 , the Company entered into an Amendment No.
2 to the Original ABL Credit Agreement (the "Credit Agreement Amendment No. 2)
by and among the Company, the Borrowers and guarantors party thereto and the
Agent and other lenders party thereto, which amended the Original ABL Credit
Agreement (as amended by the Credit Agreement Amendment No. 1 and Credit
Agreement Amendment No. 2, the "ABL Credit Agreement") to permit the Exchange
Offer (defined below) to proceed. The ABL Credit Agreement provides for an
additional $25.0 million last out Revolving B Credit Facility (the "Revolving B
Credit Facility" and together with the Revolving A Credit Facility, the "Credit
Facility") made available in part by way of a participation in the Revolving B
Credit Facility by certain of the Company's stockholders. Borrowings under the
Credit Facility will mature on February 28, 2022 .
Subject to certain exceptions and permitted encumbrances, the obligations under
the ABL Credit Agreement are secured by a first priority security interest in
substantially all of the assets of each of the Borrowers and certain
subsidiaries of the Company that are named as guarantors. The proceeds of the
advances under the ABL Credit Agreement may only be used to (i) pay certain fees
and expenses to the Agent and the lenders under the ABL Credit Agreement, (ii)
provide for 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
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of July 10, 2017 , by and among the Company, the lenders party thereto, and PNC,
and certain other existing indebtedness, and (iv) provide for the Borrowers'
capital expenditure needs, in accordance with the ABL Credit Agreement.
The Company may prepay its obligations under the ABL Credit 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 LIBOR-based rate plus a margin of 3.0%, as set forth in the ABL
Credit Agreement. Interest on indebtedness under the Revolving B Credit Facility
accrues at a rate of 12.0% per annum, which will be paid-in-kind unless the
Company elects to pay such interest in cash and the Revolving B payment
conditions specified in the ABL Credit Agreement are satisfied. Additionally,
the Company must pay a monthly facility 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 advance amount of the Credit
Facility exceeds such average daily Credit Facility usage for such month.
Under the ABL Credit Agreement, the maximum borrowing capacity of the Revolving
A Credit Facility is based on the Company's borrowing base calculation. As of
March 31, 2020 , the weighted average advance rates used in the borrowing base
calculation are 85.0% on eligible accounts receivable and 70.58% on eligible
inventory.
The Company's ABL Credit Agreement contains certain covenants and restrictions
customary to an asset-based revolving loan. Pursuant to the terms of the ABL
Credit Agreement, the PPP Loan (defined below) shall be excluded for all
purposes from any covenant calculations.
The Company's ABL Credit 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 Period (as defined in the ABL Credit Agreement)
when the Company's cash liquidity (as defined in the ABL Credit Agreement) is
less than $12.5 million for five consecutive days. The Company was not in a
Covenant Testing Period as of and for the three months ended March 31, 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 ABL Credit Agreement, inclusive of certain cash balances and the
additional unrestricted borrowing capacity shown below) in excess of $12.5
million , the lender has the right to take full dominion of the Company's cash
collections and apply these proceeds to outstanding loans under the ABL Credit
Agreement ("Cash Dominion"). A prolonged economic downturn due to the COVID-19
pandemic could result in the Company's cash liquidity decreasing to a level that
would cause Cash Dominion to occur and/or the Company to enter into a Covenant
Testing Period. The extent to which the COVID-19 pandemic will impact the
Company's liquidity is currently unknown. Based on the Company's current cash
projections, taking into consideration 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 , coupled with temporary and long-term cost-cutting
initiatives implemented by the Company, it does not anticipate that Cash
Dominion will occur, or that it will be in a Covenant Testing Period during the
next 12 months.
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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, it may need to
take further actions, such as reducing or delaying capital investments,
strategic investments or other actions. A prolonged economic downturn due to the
COVID-19 pandemic could unfavorably impact the Company's ability to fund its
working capital needs through operating cash flows, which could result in a
reduction in its borrowing base. Although the extent to which the COVID-19
pandemic will impact the Company's operating cash flows and borrowing base is
currently unknown, the Company anticipates it will be able to maintain an
adequate borrowing base to support ongoing availability under its ABL Credit
Agreement.
Considerable uncertainty exists with regards to the ultimate duration and
severity 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 , coupled 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. In addition, 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 plans to apply for
forgiveness of the PPP Loan in accordance with the terms of the PPP and the
CARES Act; however, the Company can provide no assurances that it will be
eligible for forgiveness of the PPP Loan, in whole or in part, and cannot
quantify the portion of the PPP Loan that will be forgiven.
Additional unrestricted borrowing capacity under the Revolving A Credit Facility
as of March 31, 2020 was as follows (in millions):
Maximum borrowing capacity $ 125.0
Collateral reserves (2.2)
Letters of credit and other reserves (2.4)
Current maximum borrowing capacity 120.4
Current borrowings (103.5)
Additional unrestricted borrowing capacity(a) $ 16.9 (a) Subject to the cash dominion threshold noted above
OnMarch 27, 2020 , the Company completed the Exchange Offer, which resulted in the issuance of$95.1 million in aggregate principal of New Notes and Existing Notes with the aggregate principal amount of$3.7 million which were not tendered and remained outstanding at the date of Exchange Offer. The Company received no cash proceeds as part of the Exchange Offer. The New Notes were issued pursuant to an indenture (the "New Notes Indenture"), which the Company and the Guarantors (defined below) entered into withWilmington Savings Fund Society , FSB, as trustee and collateral agent ("Indenture Agent"), onMarch 27, 2020 . The New 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 New Notes have substantially the same terms that the Existing Notes had prior to the completion of the Exchange Offer, except for the following primary differences: (i) the New Notes are not exempt from the registration requirements of the Securities Act and have the benefit of registration rights to the holders of the New Notes, (ii) the interest on the New 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 Existing 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 New Notes have a maturity date ofAugust 31, 2024 , compared to the Existing Notes, which have a maturity date ofAugust 31, 2022 . In conjunction with the Exchange Offer, onMarch 27, 2020 , the Company, the guarantors of the Existing Notes and the trustee for the Existing Notes entered into the Supplemental 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 Existing Indenture, and the modification of certain of the events of default and various other provisions contained in the Existing Indenture. 28 -------------------------------------------------------------------------------- Table of Contents Also onMarch 27, 2020 , PNC (in its capacity as "FirstLien Agent "), the trustee for the Existing 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 New Notes. The terms and conditions of the New Intercreditor Agreement are substantially consistent with those applicable to the intercreditor agreement between the FirstLien Agent and the trustee for the Existing Notes prior to the completion of the Exchange Offer (the "Existing Intercreditor Agreement"). PNC and the trustee for the Existing Notes also entered into an amendment of the Existing Intercreditor Agreement to, among other things, remove certain limitations and rights of the Existing Notes with respect to the first lien facility. The New Notes are convertible into shares of the Company's common stock at any time at the initial conversion price of$0.46 per share, which rate is subject to adjustment as set forth in the New Notes Indenture. Under the New Notes Indenture, upon the conversion of the New Notes in connection with a Fundamental Change (as defined in the New Notes Indenture), for each$1.00 principal amount of the New Notes, that number of shares of the Company's common stock issuable 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 Company's common stock in connection with such Fundamental Change calculated in accordance with the New Notes Indenture, subject to other provisions of the New Notes Indenture. Subject to certain exceptions, under the New 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 converted into cash, securities or other property; (iii) the "Continuing Directors" (as defined in the New 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 Existing Notes are convertible into shares of the Company's common stock at any time at the initial conversion price of$3.77 per share, which rate is subject to adjustment as set forth in the Supplemental Indenture. Under the Supplemental Indenture, the conversion of the Existing Notes in connection with a Fundamental Change (as defined in the Supplemental Indenture) is substantially the same as under the New Notes Indenture, other than the applicable conversion price. Upon conversion of the New Notes and/or the Existing 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 New Notes Indenture or Supplemental Indenture, as applicable, using a 20 trading day observation period. As discussed previously, the New Notes are convertible into common stock at the option of the holder. The Company determined that the conversion option is not clearly and closely related to the economic characteristics of the New Notes, nor does the conversion option meet the own equity scope exception as the Company does not currently 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 New Notes. If the Company receives shareholder approval for the increase in the number of shares of common stock authorized and available for issuance upon conversion of the New Notes so the conversion option can be share-settled in full, the conversion option is expected to qualify 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 reassessment. The Company expects the approval of the authorization of additional shares of the Company's common stock to occur at its annual meeting scheduled forJune 30, 2020 . Until such time, the derivative liability, which is classified in long-term debt, will be marked to fair value through earnings. The terms of the New Notes contain numerous covenants imposing financial and operating restrictions on the Company'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. Neither the New Notes nor the Existing Notes may be redeemed by the Company in whole or in part at any time prior to maturity, except the Company may be required to make an offer to purchase the New Notes using the 29 -------------------------------------------------------------------------------- Table of Contents proceeds of certain material asset sales involving the Company or one of its restricted subsidiaries, as described more particularly in the New Notes Indenture. In addition, if a Fundamental Change (as defined in the New Notes Indenture and the Supplemental Indenture, as applicable) occurs at any time, each holder of any New Notes or Existing Notes has the right to require the Company to repurchase such holder's notes 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. Indebtedness for borrowings under the New 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, failure by an obligor to perform certain covenants, the invalidity or impairment of the Agent's lien on its collateral under the New 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 New Notes Indenture, including the deposit in trust of cash or securities sufficient to pay the principal of and interest and any premium on the New 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 New Notes Indenture, the Company may amend, supplement or waive provisions of the New Notes Indenture with the consent of holders representing a majority in aggregate principal amount of the New Notes, and may in effect release collateral from the liens securing the New Notes with the consent of holders representing 66-2/3% in aggregate principal amount of the New Notes. Interest on the New 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, payable quarterly. Interest on the Existing 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, payable quarterly. Pursuant to the terms of both the New Notes Indenture and the Supplemental Indenture, the Company is currently paying interest on both the New Notes and the Existing Notes in kind. Summarized Parent and Guarantor Financial Information As discussed above, the New Notes issued byA.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 unrestricted subsidiaries) and the parent's subsidiaries inCanada andMexico (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 ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan. OnMarch 31, 2020 , the Company early adopted the guidance of the SEC Final Rule Release No. 33-10762, "Financial Disclosures About Guarantors and Issuers ofGuaranteed 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 three months endedMarch 31, 2020 and as of and for the year endedDecember 31, 2019 (see Note 2 - New Accounting Standards, to the notes to the condensed 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: 30
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Obligors
As of and for the Three As of and for the
Months Ended Year Ended
(in millions) March 31, 2020 December 31, 2019
Total current assets $ 203.7 $ 192.4
Total non-current assets (1) 136.2 134.4
Total current liabilities 69.0 54.9
Total non-current liabilities (1) 298.0 313.0
Net sales 106.6 453.1
Total costs and expenses 109.3 467.1
Operating loss (2.7) (14.0)
Net loss (11.0) (38.5)
(1) Included in non-current assets are $12.3 million and $12.2 million of
non-current intercompany receivables due to the Obligors from the Non-Guarantors
as of March 31, 2020 and December 31, 2019 , respectively. Excluded from
non-current liabilities are $7.7 million and $8.6 million of non-current
intercompany payables due to the Non-Guarantors from the Obligors as of March
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 , 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 March 31, 2020 , the French subsidiary has borrowings
of $2.3 million under its local credit facility, which is recorded as short-term
borrowings at the Condensed Consolidated Balance Sheets.
Interest expense in the three months ended March 31, 2020 and the three months
ended March 31, 2019 was $10.0 million and $9.4 million , respectively, of which
$1.4 million and $1.7 million , respectively, was cash interest.
As of March 31, 2020 , the Company had $2.4 million of irrevocable letters of
credit outstanding.
For additional information regarding the terms of the ABL Credit Agreement, the
New Notes, the Existing Notes and the Company's foreign credit facility, refer
to Note 6 - Debt to the Notes to the Condensed Consolidated Financial
Statements.
Critical Accounting Policies
The preparation of our financial statements requires us to make 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. Part II, Item 7 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2019 includes a summary of the
critical accounting policies we believe are the most important to aid in
understanding our financial results. There have been no changes to those
critical accounting policies that have had a material impact on our reported
amounts of assets, liabilities, revenues or expenses during the three months
ended March 31, 2020 .
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