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 , Part II Item 1A of our quarterly report on Form 10-Q for the quarter endedMarch 31, 2020 , and Part II Item 1A of this quarterly report on Form 10-Q for the quarter endedJune 30, 2020 . 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. Authorization of Additional Shares of Common Stock At the Company's annual meeting of stockholders held onJune 30, 2020 , the Company's stockholders approved a proposal to amend the Company's charter to authorize an increase in the Company's authorized shares of capital stock and common stock from 200,000 shares to 400,000 shares. OnJune 30, 2020 , the Company filed articles of amendment with the Secretary of State of theState of Maryland , which amended its articles of amendment and restatement effective on such date. Impact of Coronavirus (COVID-19) Pandemic In the second quarter of 2020, the Company experienced a significant decline in demand as many of the industries the Company serves have been rapidly and materially impacted economically by the novel coronavirus 2019 ("COVID-19") pandemic. The global health crisis caused by the COVID-19 pandemic 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 Company anticipates the recovery 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. In the short-term, the Company expects COVID-19 to continue to have an unfavorable impact on its financial results and business. 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 23 -------------------------------------------------------------------------------- Table of Contents 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. The Company continues to implement temporary and long-term cost-cutting initiatives to align to 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 remote work arrangements, reducing the number of people in the Company's branch 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, 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 pursue 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, 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 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 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 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, 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. Under the terms of the CARES Act and the Paycheck Protection Program Flexibility Act passed onJune 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 PPP Loan in accordance with the terms of the PPP, the CARES Act and the PPPFA. OnJune 24, 2020 , the Company's French subsidiary entered into a €6,000 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 inFrance and mitigate potentially significant detriment to the Company's business inFrance . The France Term Loan, which is evidenced by a term note with HSBC Bank, matures onJune 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 ofJune 30, 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 Condensed Consolidated Balance Sheets. 24 -------------------------------------------------------------------------------- Table of Contents 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, including the effects on the Company's customers, employees, and prospects, or on the Company's financial results for the remainder of fiscal 2020. Results of Operations The following tables set forth certain statement of operations data in each period indicated: Three Months Ended June 30, Favorable/ 2020 2019 (Unfavorable) Three Month Three Month (Dollar amounts in millions) $ % of Net Sales $ % of Net Sales $ Change % Change Net sales$ 84.7 100.0 %$ 147.9 100.0 %$ (63.2) (42.7) % Cost of materials (exclusive of depreciation) 60.9 71.9 % 109.9 74.3 % 49.0 44.6 % Operating costs and expenses 28.3 33.4 % 39.1 26.5 % 10.8 27.6 % Operating loss$ (4.5) (5.3) %$ (1.2) (0.8) %$ (3.3) n/m Six Months Ended June 30, Favorable/ 2020 2019 (Unfavorable) Six Month Six Month (Dollar amounts in millions) $ % of Net Sales $ % of Net Sales $ Change % Change Net sales$ 211.3 100.0 %$ 297.5 100.0 %$ (86.2) (29.0) % Cost of materials (exclusive of depreciation) 153.2 72.5 % 220.9 74.3 % 67.7 30.6 % Operating costs and expenses 64.6 30.6 % 78.1 26.2 % 13.5 17.3 % Operating loss$ (6.5) (3.1) %$ (1.5) (0.5) %$ (5.0) n/m Net Sales Net sales of$84.7 million in the three months endedJune 30, 2020 decreased$63.2 million , or 42.7%, compared to$147.9 million in the three months endedJune 30, 2019 . Net sales of$211.3 million in the six months endedJune 30, 2020 decreased$86.2 million , or 29.0%, compared to$297.5 million in the six months endedJune 30, 2019 . The decrease in net sales in both the three and six months endedJune 30, 2020 compared to the same periods in the prior year was driven primarily by the macroeconomic impacts of the COVID-19 pandemic, which worsened already soft industrial end markets and further 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 have customers that supply content. Tons sold per day for the Company's products decreased by 40.2% in the three months endedJune 30, 2020 compared to the same quarter in the prior year and 30.4% in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . In the six months endedJune 30, 2020 , the decrease in tons sold per day was partially offset by a 1.7% increase in overall selling prices compared to the three months endedJune 30, 2019 , which resulted from favorable selling prices realized on the Company's aluminum and stainless product lines in the first quarter of 2020 prior to the impact of the COVID-19 pandemic. In the three months endedJune 30, 2020 , overall average selling prices of the Company's product mix sold decreased 4.4% compared to the three months endedJune 30, 2019 as the macroeconomic impact of the COVID-19 pandemic resulted in a decrease in demand and availability of supply led to increased price competition for all of the Company's core products. 25 -------------------------------------------------------------------------------- Table of Contents The Company realized a favorable sales mix in both the second quarter and first half of 2020 compared to the second quarter and first half 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. The Company expects that the unfavorable financial and business impacts of the COVID-19 pandemic that were realized in the first half of 2020 will continue into the second half of 2020 as the Company's customers and suppliers continue to maintain reduced purchasing forecasts and output. In turn, the Company's expects the decrease in demand and availability and increase in competition in the markets that the Company serves to continue into the second half of 2020, although not at as detrimental levels as those experienced in the three and six months endedJune 30, 2020 . Although the Company began to see some markets begin to recover in the late second quarter of 2020, given the above factors and the uncertainties surrounding the COVID-19 pandemic the Company believes it will continue to have a decrease in sales volume and pricing of the Company's products in the latter half of 2020. Cost of Materials Cost of materials (exclusive of depreciation) was$60.9 million in the three months endedJune 30, 2020 compared to$109.9 million in the three months endedJune 30, 2019 . The$49.0 million , or 44.6%, decrease in the second quarter of 2020 compared to the second 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 71.9% of net sales in the three months endedJune 30, 2020 compared to 74.3% of net sales in the three months endedJune 30, 2019 . Cost of materials (exclusive of depreciation) was$153.2 million in the six months endedJune 30, 2020 compared to$220.9 million in the six months endedJune 30, 2019 , and decrease of$67.7 million , or 30.6%. Cost of materials (exclusive of depreciation) was 72.5% of net sales in the six months endedJune 30, 2020 compared to 74.3% of net sales in the six months endedJune 30, 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 both the second quarter and first half of 2020, compared to the same periods 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 In response to the unfavorable global economic conditions resulting from the COVID-19 pandemic, the Company began early in the second quarter of 2020 to take steps to align its operating costs and expenses with a decrease in customer and supplier forecasts and output. The steps taken by management have included reductions in discretionary spending, 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 at each of its branches and at its corporate offices. In addition, for the safety of its employees, the Company has suspended non-essential employee travel. The cost-cutting measures taken by the Company have resulted in a significant decrease in operating costs and expenses in the three and six months endedJune 30, 2020 compared to the same periods last year. The Company expects to continue to implement the temporary and long-term cost cutting initiatives it has taken to align to the current demand and to be prepared for any market recovery once the pandemic has passed. 26
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Three Months Ended June 30, Favorable/(Unfavorable)
Three Month Three Month
(Dollar amounts in millions) 2020 2019 $ Change % Change
Warehouse, processing and delivery
expense $ 14.2 $ 20.5 $ 6.3 30.7 %
Sales, general and administrative
expense 12.1 16.5 4.4 26.7 %
Depreciation expense 2.0 2.1 0.1 4.8 %
Total operating costs and expenses $ 28.3 $ 39.1 $ 10.8 27.6 %
Operating costs and expenses decreased by $10.8 million , or 27.6%, from $39.1
million in the three months ended June 30, 2019 to $28.3 million in the three
months ended June 30, 2020 , primarily as a result of the following:
•Warehouse, processing and delivery expense decreased by $6.3 million primarily
due to a lower payroll and benefits costs and lower warehouse and freight costs
in the three months ended June 30, 2020 compared to the same period last year.
The 30.7% 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 $4.4 million primarily
the result of lower payroll and benefits costs, as well as other reductions in
employee expenses and discretionary spending in the three months ended June 30,
2020 compared to three months ended June 30, 2019 driven mainly 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 in the
amount of $0.6 million .
Six Months Ended June 30, Favorable/(Unfavorable)
Three Month Three Month
(Dollar amounts in millions) 2020 2019 $ Change % Change
Warehouse, processing and delivery
expense $ 32.2 $ 40.8 $ 8.6 21.1 %
Sales, general and administrative
expense 28.3 33.0 4.7 14.2 %
Depreciation expense 4.1 4.3 0.2 4.7 %
Total operating costs and expenses $ 64.6 $ 78.1 $ 13.5 17.3 %
Operating costs and expenses decreased by $13.5 million , or 17.3%, from $78.1
million in the six months ended June 30, 2019 to $64.6 million in the six months
ended June 30, 2020 , primarily as a result of the following:
•Warehouse, processing and delivery expense decreased by $8.6 million primarily
due to a lower payroll and benefits costs and lower warehouse and freight costs
in the six months ended June 30, 2020 compared to the six months ended June 30,
2019 . The 21.1% decrease was driven by cost cutting measures taken by the
Company in the second quarter of 2020 in response to the COVID-19 pandemic, as
well as lower sales volume.
•Sales, general and administrative expense decreased by $4.7 million primarily
the result of lower payroll and benefits costs in the six months ended June 30,
2020 compared to six months ended June 30, 2019 driven mainly 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 in the
amount of $1.3 million .
In the first and second quarters of 2020, the Company performed an interim
impairment test of its goodwill and intangible assets. Based on these tests, the
Company determined its one reporting unit's goodwill and indefinite-lived trade
name assets were not impaired as of both March 31, 2020 and June 30, 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 and intangible asset for impairment as events
and circumstances change. Any further deterioration in the Company's forecasted
revenue, gross material margin, and/or costs and expenses, or an increase in the
Company's assumed
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discount rate, could result in an impairment of a portion or all of its goodwill
or a portion or all of its intangible asset. The amount of such impairment would
be recognized as a noncash expense in the period the goodwill and/or intangible
asset is impaired. With all other assumptions being held constant, a 50 basis
point increase in the assumed discount rate as of June 30, 2020 would result in
an impairment of both the Company's goodwill and intangible asset.
Operating loss in the three months ended June 30, 2020 was $4.5 million ,
compared to $1.2 million in the three months ended June 30, 2019 . Operating loss
in the six months ended June 30, 2020 was $6.5 million , compared to $1.5 million
in the six months ended June 30, 2019 .
Other Income and Expense, Income Taxes and Net Loss
Interest expense, net was $5.1 million in the three months ended June 30, 2020 ,
compared to $9.9 million in the three months ended June 30, 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 June 30, 2020 and $1.3 million in the three months ended June 30,
2019 . 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 decrease in interest
expense in the three months ended June 30, 2020 compared to the three months
ended June 30, 2019 is primarily due to a decrease in the overall non-cash
interest expense on outstanding convertible debt as a result of the Exchange
Offer of $1.9 million , a decrease in non-cash amortization of the outstanding
convertible debt of $2.0 million , and a decrease in interest expense on the
Company's revolving credit facility of $0.6 million as a result of both a lower
revolving credit facility borrowings and a lower effective interest rate on
revolving credit facility borrowings in the three and six months ended June 30,
2020 compared to the three and six months ended June 30, 2019 .
Interest expense, net was $15.1 million in the six months ended June 30, 2020 ,
compared to $19.3 million in the six months ended June 30, 2019 . Interest
expense includes the interest cost component of the net periodic benefit cost of
the Company's pension and post retirement benefits of $2.0 million in the six
months ended June 30, 2020 and $2.6 million in the six months ended June 30,
2019 . The decrease in interest expense net in the six months ended June 30, 2020
compared to the six months ended June 30, 2019 is primarily due to the decrease
in interest expense in the three months ended June 30, 2020 compared to the
three months ended June 30, 2019 described above.
The unrealized gain on embedded conversion option of $2.0 million in both the
three and six months ended June 30, 2020 is the result of the mark-to-market
adjustment associated with the bifurcated embedded derivative liability of the
Company's 3.00% / 5.00% Convertible Notes. As of June 30, 2020 the conversion
option qualifies 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. Any remaining debt discount
that arose at the date of debt issuance from the original bifurcation will
continue to be amortized through interest expense.
Other income, net was $2.0 million in the three months ended June 30, 2020 ,
compared to other income, net of $2.5 million in the three months ended June 30,
2019 . Included in other income, net in the three months ended June 30, 2020 and
the three months ended June 30, 2019 was net pension benefit of $1.7 million and
$1.5 million , respectively. The remaining other income, net for the comparative
periods is the result of foreign currency transaction gains and losses. The
Company recorded a net foreign currency gain of $0.4 million in the three months
ended June 30, 2020 , of which $0.7 million was attributable to unrealized losses
on foreign currency transactions, which was more than offset by a $1.1 million
unrealized gain on intercompany loan, compared to a net foreign currency gain of
$1.0 million in the three months ended June 30, 2019 , $0.2 million of which was
attributable to unrealized gains on foreign currency transactions and $0.8
million to an unrealized gain on intercompany loan.
Other income, net was $1.9 million in the six months ended June 30, 2020 ,
compared to other income, net of $4.1 million in the six months ended June 30,
2019 . Included in other income, net in the six months ended June 30, 2020 and
the six months ended June 30, 2019 was net pension benefit of $3.4 million and
$3.1 million , respectively. The remaining other income, net for the comparative
periods is the result of foreign currency transaction gains and losses. The
Company recorded a net foreign currency loss of $1.3 million in the six months
ended June 30, 2020 , of which $0.4 million is attributable to unrealized losses
on foreign currency transactions and $0.9 million is an unrealized loss on
intercompany loan, compared to a foreign currency gain of $1.0 million in the
six months ended June 30, 2019 , virtually all of which was attributable to a
unrealized gain on intercompany loan.
Loss before income taxes was $5.5 million in the three months ended June 30,
2020 , compared to $8.5 million in the three months ended June 30, 2019 . The
decrease in the loss before income taxes in the three months ended
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June 30, 2020 compared to the same period in the prior year was primarily due to
a $4.8 million decrease in interest expense and a $2.0 million unrealized gain
on the embedded debt conversion derivative liability recognized in the three
months ended June 30, 2020 , which was partially offset by an increase in the
Company's operating loss in the three months ended June 30, 2020 and the net
unfavorable impact of foreign currency in the three months ended June 30, 2020 ,
compared to the same period last year.
Loss before income taxes was $17.7 million in the six months ended June 30,
2020 , compared to $16.7 million in the six months ended June 30, 2019 . The
increase in the loss before income taxes in the six months ended June 30, 2020
compared to the same period in the prior year was primarily due to an increase
in operating loss and the unfavorable impact of foreign currency in the six
months ended June 30, 2020 compared to the six months ended June 30, 2019 ,
partially offset by lower interest expense in the six months ended June 30, 2020
and the impact of the unrealized gain on the embedded debt conversion derivative
liability recognized in the second quarter of 2020.
The Company recorded an income tax benefit of $1.4 million in the three months
ended June 30, 2020 , compared to an income tax benefit of $0.2 million in the
three months ended June 30, 2019 and income tax benefit of $2.6 million in the
six months ended June 30, 2020 , compared to an income tax benefit of $0.4
million in the six months ended June 30, 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 June 30, 2020 was 26.3% as
compared to 2.6% in the three months ended June 30, 2019 and 14.7% in the six
months ended June 30, 2020 as compared to 2.4% in the six months ended June 30,
2019 . The change in the effective tax rate between periods resulted from changes
in the geographic mix and timing of income or losses, the inclusion of foreign
earnings under Internal Revenue Code ("IRC") Section 951A, the impact of the
foreign income tax rate differential and, for the six month periods, the
increase in the Company's net operating loss carrybacks due to the CARES Act,
which was recognized in the six months ended June 30, 2020 .
Net loss was $4.1 million in the three months ended June 30, 2020 , compared to
$8.3 million in the three months ended June 30, 2019 , and $15.1 million in the
six months ended June 30, 2020 , compared to $16.3 million in the six months
ended June 30, 2019 .
Liquidity and Capital Resources
Liquidity
Cash and cash equivalents increased (decreased) as follows:
Six Months Ended
(Dollar amounts in millions) 2020 2019 Net cash provided by (used in) operating activities$ 15.9 $ (5.3) Net cash used in investing activities (1.3) (2.6) Net cash provided by financing activities 5.3 5.7 Effect of exchange rate changes on cash and cash equivalents - 0.1 Net change in cash and cash equivalents$ 19.9 $ (2.1) 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 its working capital with the changing economic conditions. In the second quarter of 2020, the average receivable days outstanding increased from levels in previous quarters, which the Company believes reflects some slowing in payments from customers due to the financial uncertainties resulting from the COVID-19 pandemic. The Company has fewer accounts receivables as ofJune 30, 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 revolving credit facility 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 revolving credit facility could decrease accordingly. The decrease in demand has also resulted in an increase in inventory and average days sales in inventory in the second quarter compared to the previous quarter. 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 29 -------------------------------------------------------------------------------- Table of Contents 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 revolving credit facility could decrease accordingly. 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 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 theU.S. and in other countries in which it operates, including the PPP Loan received inApril 2020 and the France Term Loan received inJune 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). 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. Specific components of the change in working capital (defined as current assets less current liabilities), are highlighted below: •A decrease in accounts receivable atJune 30, 2020 compared toDecember 31, 2019 resulted in a cash flow source of$19.3 million in the six months endedJune 30, 2020 , compared to a cash flow use of$13.4 million in the six months endedJune 30, 2019 . Average receivable days outstanding was 58.8 days in the six months endedJune 30, 2020 compared to 54.5 days for the six months endedJune 30, 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 additional allowance for doubtful accounts was required as ofJune 30, 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 as the impact the level of accounts receivable may have on its borrowing capacity under the ABL Credit Agreement. •Higher inventory levels atJune 30, 2020 compared toDecember 31, 2019 resulted in a cash flow use of$5.6 million in the six months endedJune 30, 2020 compared to lower inventory levels atJune 30, 2019 compared toDecember 31, 2018 , which resulted in a cash flow source of$3.2 million in the six months endedJune 30, 2019 . Average days sales in inventory was 152.1 days for the six months endedJune 30, 2020 compared to 133.0 days for the six months endedJune 30, 2019 . The increase in average days sales in inventory is primarily due to the impact of the COVID-19 pandemic, which caused a significant decrease in sales volume beginning inMarch 2020 offset somewhat by the Company's improved inventory management. As the Company expects the markets to remain soft 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 toDecember 31, 2019 resulted in a$4.4 million cash flow source in the six months endedJune 30, 2020 compared to a cash flow source of$2.0 million in the six months endedJune 30, 2019 . Accounts payable days outstanding was 50.6 days for the six months endedJune 30, 2020 compared to 42.5 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 (defined below), 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. 30
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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) June 30, 2020 December 31, 2019 Increase (Decrease)
Working capital $ 173.2 $ 173.7 $ (0.5)
Cash and cash equivalents 26.4 6.4 20.0
Accounts receivable 55.0 74.7 (19.7)
Inventories 149.6 144.4 5.2
Accounts payable 48.8 41.7 (7.1)
Accrued and other current liabilities 8.6 11.2 2.6
Operating lease liabilities 5.9 6.5 0.6
Approximately $15.8 million of the Company's consolidated cash and cash
equivalents balance of $26.4 million at June 30, 2020 resided in the United
States .
The decrease in net cash used in investing activities to $1.3 million during the
six months ended June 30, 2020 from $2.6 million during the six months ended
June 30, 2019 is due to a decrease in cash paid for capital expenditures,
primarily purchases of warehouse equipment. In response to the COVID-19
pandemic, the Company lowered its expected capital expenditures to approximately
$3.0 million to $4.0 million for the full-year 2020. Depending on the severity
and duration of the pandemic, the Company will continue to assess its capital
expenditures for the remainder of 2020 and may lower its expected capital
expenditures further.
During the six months ended June 30, 2020 , net cash provided by financing
activities of $5.3 million was attributable to net proceeds from long term
borrowings made by the Company, which were partially offset by net repayments of
short-term borrowings under the Company's foreign line of credit in France and
payments of debt restructuring costs. In the six months ended June 30, 2020 , the
Company entered into two new long-term debt agreements (PPP Loan and France Term
Loan, discussed below), the proceeds of which were partially offset by net
repayments under its revolving credit facilities. During the six months ended
June 30, 2019 , the net cash from financing activities of $5.7 million was
primarily attributable to proceeds from borrowings under the Company's revolving
credit facilities, as well as net proceeds from short-term borrowings.
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
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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 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
June 30, 2020 , the weighted average advance rates used in the borrowing base
calculation are 85.0% on eligible accounts receivable and 70.0% 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 and the France Term Loan 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 and six months ended June 30,
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.
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
cannot completely assure at this
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time that such loan forgiveness will occur. 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 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 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, 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.
Additional unrestricted borrowing capacity under the Revolving A Credit Facility
as of June 30, 2020 was as follows (in millions):
Maximum borrowing capacity $ 125.0
Collateral reserves (19.7)
Letters of credit and other reserves (2.5)
Current maximum borrowing capacity 102.8
Current borrowings (96.4)
Additional unrestricted borrowing capacity(a) $ 6.4
(a) Subject to the cash dominion threshold noted above
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 70,261 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 3.00%/5.00% Convertible Notes were issued pursuant to an indenture (the
"3.00%/5.00% Convertible Notes Indenture"), which the Company and 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
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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 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 3.00%/5.00% Convertible 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 3.00%/5.00% Convertible
Notes Indenture. Under 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 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
3.00%/5.00% Convertible Notes Indenture, subject to other provisions of the
3.00%/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 converted into cash, securities or other property; (iii) the
"Continuing Directors" (as defined in the 3.00%/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 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 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, 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 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 3.00%/5.00% Convertible 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 3.00%/5.00%
Convertible Notes.
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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 has concluded that as of June 30, 2020 the conversion option
qualifies 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. 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 3.00%/5.00% Convertible 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 3.00%/5.00% Convertible Notes nor the 5.00%/7.00% Convertible 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
3.00%/5.00% Convertible Notes using the proceeds of certain material asset sales
involving the Company 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 3.00%/5.00% Convertible Notes or 5.00%/7.00% Convertible 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 3.00%/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, failure by an obligor to perform
certain covenants, the invalidity or impairment of the 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 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,
payable quarterly. Interest on the 5.00%/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, 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 3.00%/5.00% Convertible Notes
and the 5.00%/7.00% Convertible Notes in kind.
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 unrestricted subsidiaries) and the parent's subsidiaries in Canada
and Mexico (collectively, the "Guarantors"). Each guarantor is 100% owned by the
Parent.
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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.
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 six months ended June 30, 2020 and as of and for
the year ended December 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:
Obligors
As of and for the Six As of and for the
Months Ended Year Ended
(in millions) June 30, 2020 December 31, 2019
Total current assets $ 189.2 $ 192.4
Total non-current assets (1) 133.2 134.4
Total current liabilities 60.8 54.9
Total non-current liabilities (1) 257.9 313.0
Net sales 178.0 453.1
Total costs and expenses 185.7 467.1
Operating loss 7.7 14.0
Net loss 15.8 38.5
(1) Included in non-current assets are $12.1 million and $12.2 million of
non-current intercompany receivables due to the Obligors from the Non-Guarantors
as of June 30, 2020 and December 31, 2019 , respectively. Excluded from
non-current liabilities are $7.5 million and $8.6 million of non-current
intercompany payables due to the Non-Guarantors from the Obligors as of June 30,
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 June 30, 2020 , the French subsidiary had no
borrowings under the local credit facility and 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
Condensed Consolidated Balance Sheets.
On July 20, 2020 , the Company's Chinese subsidiary entered into a $3.0 million
local banking line of credit with the Bank of Communication Shanghai (the "China
Credit Facility"). The China Credit Facility has an initial maturity date of
January 20, 2021 and accrues interest at a rate of 3.6% per annum.
Interest expense in the six months ended June 30, 2020 and the six months ended
June 30, 2019 was $15.1 million and $19.3 million , respectively, of which $1.4
million and $1.7 million , respectively, was cash interest.
As of June 30, 2020 , the Company had $2.5 million of irrevocable letters of
credit outstanding.
For additional information regarding the terms of the ABL Credit Agreement, the
3.00%/5.00% Convertible Notes, the 5.00%/7.00% Convertible 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
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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 six months ended June 30, 2020 .
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