Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 797K
2: EX-22.1 EX-22.1 List of Issuers and Guarantor Subsidiaries HTML 21K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 22K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 22K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 20K
12: R1 Cover Page HTML 68K
13: R2 Condensed Consolidated Balance Sheets HTML 124K
14: R3 Condensed Consolidated Balance Sheets HTML 31K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Operations HTML 65K
and Comprehensive Loss
16: R5 Condensed Consolidated Statements of Cash Flows HTML 100K
17: R6 Consolidated Statements of Stockholders' (Deficit) HTML 74K
Equity
18: R7 Consolidated Statements of Stockholders' (Deficit) HTML 26K
Equity (Parenthetical)
19: R8 Basis of Presentation HTML 21K
20: R9 New Accounting Standards HTML 27K
21: R10 Revenue HTML 77K
22: R11 Loss Per Share HTML 55K
23: R12 Goodwill and Intangible Asset HTML 22K
24: R13 Debt HTML 90K
25: R14 Fair Value Measurements HTML 34K
26: R15 Stockholders' Equity HTML 128K
27: R16 Share-based Compensation HTML 37K
28: R17 Employee Benefit Plans HTML 49K
29: R18 Income Taxes HTML 23K
30: R19 Commitments and Contingent Liabilities HTML 20K
31: R20 Subsequent Events HTML 19K
32: R21 New Accounting Standards (Policies) HTML 27K
33: R22 Revenue (Tables) HTML 72K
34: R23 Loss Per Share - (Tables) HTML 53K
35: R24 Debt (Tables) HTML 49K
36: R25 Fair Value Measurements (Tables) HTML 23K
37: R26 Stockholders' Equity (Tables) HTML 128K
38: R27 Share-based Compensation (Tables) HTML 31K
39: R28 Employee Benefit Plans (Tables) HTML 48K
40: R29 Revenue - Narrative (Details) HTML 30K
41: R30 Revenue - Schedule of Accounts Receivable and HTML 30K
Allowance for Doubtful Accounts (Details)
42: R31 Revenue - Schedule of Company-wide Geographic Data HTML 34K
(Details)
43: R32 Loss Per Share - Narrative (Details) HTML 36K
44: R33 Loss Per Share - Reconciliations of Basic and HTML 45K
Diluted Earnings (Loss) Per Common Share (Details)
45: R34 Goodwill and Intangible Asset - Narrative HTML 26K
(Details)
46: R35 Debt - Long-term Debt (Details) HTML 72K
47: R36 Debt - Narrative (Details) HTML 169K
48: R37 Fair Value Measurements - Narrative (Details) HTML 71K
49: R38 Fair Value Measurements - Schedule of Valuation HTML 31K
Assumptions used in Determining Fair Value
(Details)
50: R39 Stockholders' Equity - Narrative (Details) HTML 32K
51: R40 Stockholders' Equity - Components of Accumulated HTML 27K
Other Comprehensive Loss (Details)
52: R41 Stockholders' Equity - Schedule of Change In HTML 51K
Accumulated Other Comprehensive Loss (Details)
53: R42 Stockholders' Equity - Reclassifications From HTML 34K
Accumulated Other Comprehensive Loss (Details)
54: R43 Share-based Compensation - Narrative (Details) HTML 58K
55: R44 Share-based Compensation - Summary of Restricted HTML 47K
Shares (Details)
56: R45 Employee Benefit Plans - Schedule of Net Benefit HTML 39K
Costs (Details)
57: R46 Employee Benefit Plans - Narrative (Details) HTML 25K
58: R47 Income Taxes - Narrative (Details) HTML 25K
59: R48 Subsequent Events (Details) HTML 25K
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(Exact name of registrant as specified in its charter)
iMaryland
i36-0879160
(State
or other jurisdiction of incorporation of organization)
(I.R.S. Employer Identification No.)
i1420 Kensington Road, Suite 220,
iOak
Brook,
iIllinois
i60523
(Address of principal executive offices)
(Zip
Code)
Registrant’s telephone, including area code (i847) i455-7111
(Former name, former address and former fiscal year, if changed since last report) None
Securities
registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock,
Par Value $0.01 Per Share
iCTAM
OCTQX Best Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
iYes☒No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
iYes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated
filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☒
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yesi☐No☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Accounts
receivable, less allowances of $i1,912 and $i1,766, respectively
i55,018
i74,697
Inventories
i149,568
i144,411
Prepaid
expenses and other current assets
i8,729
i9,668
Income
tax receivable
i2,472
i1,995
Total
current assets
i242,161
i237,204
Goodwill
and intangible assets
i8,176
i8,176
Prepaid
pension cost
i6,910
i5,758
Deferred
income taxes
i1,490
i1,534
Operating
right-of-use assets
i30,216
i29,423
Other
noncurrent assets
i422
i792
Property,
plant and equipment:
Land
i5,577
i5,579
Buildings
i20,880
i20,950
Machinery
and equipment
i40,385
i41,054
Property,
plant and equipment, at cost
i66,842
i67,583
Accumulated
depreciation
(i22,027)
(i20,144)
Property,
plant and equipment, net
i44,815
i47,439
Total
assets
$
i334,190
$
i330,326
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable
$
i48,848
$
i41,745
Accrued
and other current liabilities
i8,569
i11,188
Operating
lease liabilities
i5,877
i6,537
Income
tax payable
i592
i573
Short-term
borrowings
i—
i2,888
Current
portion of finance leases
i654
i596
Current
portion of long-term debt
i4,444
i—
Total
current liabilities
i68,984
i63,527
Long-term
debt, less current portion
i214,967
i263,523
Deferred
income taxes
i2,188
i3,775
Finance
leases, less current portion
i8,060
i8,208
Other
noncurrent liabilities
i3,260
i2,894
Pension
and postretirement benefit obligations
i6,606
i6,709
Noncurrent
operating lease liabilities
i24,399
i22,760
Commitments
and contingencies (see Note 12)
i
i
Stockholders’
equity (deficit):
Common stock, $ii0.01/
par value—ii400,000/ Class A shares
authorized with i74,079 shares issued and i73,911 shares outstanding at June 30, 2020, and i3,818
shares issued and i3,650 shares outstanding at December 31, 2019
Notes to Condensed Consolidated Financial Statements
Unaudited - Amounts in thousands except per share data and percentages
(1) iBasis
of Presentation
The Condensed Consolidated Financial Statements of A.M. Castle & Co. and its consolidated subsidiaries (collectively, the "Company") included herein and the notes thereto have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), and accounting principles generally accepted in the United States of America (“GAAP”). The Condensed Consolidated Balance Sheet at December 31, 2019 is derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed
or omitted pursuant to the rules and regulations of the SEC. In the opinion of the Company's management, the unaudited statements included herein contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of financial results for the interim period. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The operating results for the three and six months ended June 30, 2020, as reported herein, may not necessarily be indicative of the
Company’s operating results for the full year.
(2) iNew Accounting Standards
i
Standards
Updates Adopted
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 amends Fair Value Measurement (Topic 820) to add, remove, and modify fair value measurement disclosure requirements. The ASU’s changes to disclosures aim to improve the effectiveness of Topic 820's disclosure requirements under the aforementioned FASB disclosure framework project. The Company adopted the disclosure requirements of ASU No. 2018-13 in the first quarter of 2020. The Company determined the adoption of the
disclosure requirements had no impact on its fair value disclosures herein.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 amends ASC 740 to simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations, and adding guidance to reduce complexity in the accounting standard under the FASB’s simplification initiative. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020. Upon adoption, the amendments in ASU 2019-12 should be applied on a prospective basis to all periods presented. Early adoption is permitted. The Company adopted the new guidance under ASU 2019-12 in the first quarter of 2020
and removed the exception for intraperiod allocations from its interim period tax provision calculation, accordingly.
On March 2, 2020, the SEC issued 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”). The final rule simplifies the disclosure requirements related to certain registered securities under SEC Regulation S-X, Rules 3-10 and 3-16, which currently require separate financial statements for (1) subsidiary issuers and guarantors of registered debt securities unless certain exceptions are met and (2) affiliates that collateralize registered securities offerings if the affiliates’ securities are a substantial portion of the collateral. Under the final rule, alternative financial disclosures or narrative disclosures
(referred to collectively as “Alternative Disclosures”) may be provided in lieu of separate financial statements of the guarantors or affiliates. The amendments in the final rule are generally effective for filings on or after January 4, 2021, with early application permitted. The Company has elected to adopt the amendments of the final rule for the quarter ended March 31, 2020 and accordingly, has elected to present the alternative disclosures of the guarantors of its registered securities in Part I Item 2, Management's Discussion and Analysis, of this Form 10-Q.
Standards Updates Issued Not Yet Effective
In June 2016, the
FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for smaller
reporting companies for fiscal years beginning after December 15, 2022, including interim periods within the year of adoption. Early adoption is permitted. The
Company will adopt the guidance and disclosure requirements of ASU 2016-13 in fiscal year 2023.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans - General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plan.” ASU No. 2018-14 amends Compensation - Retirement Benefits (Topic 715) to add or remove certain disclosure requirements related to defined benefit pension and other postretirement plans. The ASU’s changes to disclosures aim to improve the effectiveness of Topic 715's disclosure requirements under the FASB’s disclosure framework project. ASU No. 2018-14 is effective for public entities for fiscal years beginning after December 15, 2020. ASU No. 2018-14 does not impact the interim disclosure requirements of Topic 715. Early adoption is permitted. The
Company will adopt the disclosure requirements of this new guidance in fiscal year 2021.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The purpose of ASU 2020-04 is to provide optional guidance for a limited time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates, and, in particular, the risk of cessation of the London Interbank Offered Rate (LIBOR), reference rate reform refers to a global initiative to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 is effective for all entities as of March 12, 2020 through December
31, 2022. An entity may elect to apply the amendments for contract modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a topic or an industry subtopic, the amendments in ASU 2020-04 must be applied prospectively for all eligible contract modifications for that topic or industry subtopic. The Company is currently assessing
the accounting and financial impact of reference rate reform and will consider applying the optional guidance of ASU 2020-04 accordingly.
(3) iRevenue
The Company recognizes revenue from the sale of products when the earnings process is complete and when the title and
risk and rewards of ownership have passed to the customer, which is primarily at the time of shipment. Revenue recognized other than at the time of shipment represented less than ii1/%
of the Company’s consolidated net sales in the three and six months ended June 30, 2020 and June 30, 2019, respectively. Customer payment terms are established prior to the time of shipment. Provisions for allowances related to sales discounts and rebates are recorded based on terms of the sale in the period that the sale is recorded. The Company utilizes historical information and the current sales trends of the Company's business to estimate such provisions. The provisions related to discounts and rebates due to customers are recorded as a reduction within net sales in the
Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.
The Company records revenue from shipping and handling charges in net sales. Costs incurred in connection with shipping and handling the Company’s products, which are related to third-party carriers or performed by Company personnel, are included in warehouse, processing and delivery expenses. In the three months ended June 30, 2020 and June 30, 2019, shipping and handling costs included in warehouse, processing and delivery expenses were $i4,841
and $i6,160, respectively. In the six months ended June 30, 2020 and June 30, 2019, shipping and handling costs included in warehouse, processing and delivery expenses were $i10,448
and $i12,296, respectively. As a practical expedient under Accounting Standards Codification No. 606, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"), the Company has elected to account for shipping and handling activities as fulfillment costs and not a promised good or service. As a result, there is no change to the
Company's accounting for revenue from shipping and handling charges under ASC 606.
The Company maintains an allowance for doubtful accounts related to the potential inability of customers to make required payments. The allowance for doubtful accounts is maintained at a level considered appropriate based on historical experience and specific identification of customer receivable balances for which collection is unlikely. The provision for doubtful accounts is recorded in sales, general and administrative expense in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. Estimates of doubtful accounts are based on historical write-off experience as a percentage of net sales and judgments about the probable effects of economic
conditions on certain customers. The Company considered the economic impact of the novel coronavirus ("COVID-19") pandemic on the collectibility of customer accounts receivable. Although the Company has detected some slowing in payments from customers due to the financial uncertainties resulting from the COVID-19 pandemic,
it determined that no additional allowance for doubtful accounts specific to customer accounts receivable impacted by COVID-19
was required as of June 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.
The Company also maintains an allowance for credit memos for estimated credit memos to be issued against current sales. Estimates of allowance for credit memos are based upon the application of a historical issuance lag period to the average credit memos issued each month.
i
Accounts
receivable allowance for doubtful accounts and credit memos activity is as follows:
(a)
Includes the net amount of credit memos reserved and issued.
/
The Company operates primarily in North America. Net sales are attributed to countries based on the location of the Company’s subsidiary that is selling direct to the customer. Net sales exclude assessed taxes such as sales and excise tax. iCompany-wide
geographic data is as follows:
The
Company does not incur significant incremental costs when obtaining customer contracts and any costs that are incurred are generally not recoverable from its customers. iSubstantially all of the Company's customer contracts are for a duration of less than one year and individual customer purchase orders for contractual customers are fulfilled within one year of the
purchase order date. As a practical expedient under ASC 606, the Company has elected to continue to recognize incremental costs of obtaining a contract, if any, as an expense when incurred if the amortization period of the asset would have been one year or less. The Company does not have any costs to obtain a contract that are capitalized under ASC 606.
(4) iLoss
Per Share
Diluted loss per common share is computed by dividing net loss by the weighted average number of shares of the common stock of A.M. Castle & Co. outstanding plus outstanding common stock equivalents. Common stock equivalents consist of restricted stock awards and other share-based payment awards, and shares that may be issued upon conversion of the Company’s outstanding i5.00% / i7.00%
Convertible Senior Secured Paid-in-Kind ("PIK") Toggle Notes due 2022 (the “i5.00%/i7.00% Convertible Notes”) and the
Company's outstanding i3.00% / i5.00% Convertible Senior Secured PIK Toggle Notes due 2024 (the “i3.00%/i5.00%
Convertible Notes”), which are included in the calculation of weighted average shares outstanding using the if-converted method. Refer to Note 6 - Debt, for further description of the i5.00%/i7.00%
Convertible Notes and the i3.00%/i5.00% Convertible Notes.
Excluded
outstanding share-based awards having an anti-dilutive effect
i1,407
i1,437
i1,132
i1,518
/
The
computation of diluted loss per common share does not include common shares issuable upon conversion of the Company’s i5.00%/i7.00%
Convertible Notes or i3.00%/i5.00% Convertible Notes, as they were anti-dilutive under the if-converted method.
The i5.00%/i7.00%
Convertible Notes are convertible into shares of the Company’s common stock at any time at the initial conversion price of $i3.77 per share. The i3.00%/i5.00%
Convertible Notes are convertible into shares of the Company’s common stock at any time at the initial conversion price of $i0.46 per share. In future periods, absent a fundamental change as described in Note 6 - Debt, the outstanding i5.00%/i7.00%
Convertible Notes and i3.00%/i5.00% Convertible Notes could increase diluted average shares outstanding by a maximum of approximately i212,400
shares.
(5) iGoodwill and Intangible Asset
As of both June 30, 2020 and December 31, 2019, the Company had goodwill with a carrying value of $ii2,676/,
none of which is tax deductible. There were ino changes in the amount of goodwill recognized in the six months ended June 30, 2020. The Company's other intangible asset is comprised of an indefinite-lived trade name, which is not subject to amortization. The gross carrying value of the trade name intangible asset was $ii5,500/
at both June 30, 2020 and December 31, 2019.
The Company tests both its goodwill and intangible asset for impairment on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. As a result of the recent outbreak of the COVID-19 pandemic, which has spread across the globe to many countries in which the Company does business and is impacting worldwide economic activity, the Company has determined that the potential impact on its business, including,
but not limited to, a potential decrease in revenue, supply chain disruptions and/or facility closures, represented a triggering event requiring an interim impairment test of its goodwill and indefinite-lived trade name assets. Based on the results of these interim impairment tests, the Company determined its one reporting unit's goodwill and indefinite-lived trade name asset were not impaired as of June 30, 2020.
While the Company considered the impact the COVID-19 pandemic may have on its future cash flows when preparing its interim goodwill and intangible asset impairment tests, 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 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.
(d) Represents the unvested portion of restricted i3.00%
/ i5.00% Convertible Senior Secured PIK Toggle Notes due August 31, 2024 issued to certain members of management and the unvested portion of restricted i5.00%
/ i7.00% Convertible Senior Secured PIK Toggle Notes due August 31, 2022 issued to certain members of management (see Note 9 - Share-based compensation).
/
Credit Facilities
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 $i125,000 senior secured, revolving credit facility (the "Revolving A Credit Facility") under which the Company and ifour
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 Original 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 the other lenders party thereto, which amended the Original ABL Credit Agreement (as amended by the Credit Agreement Amendment No. 1 and Credit Agreement No. 2, the “ABL Credit Agreement”) to permit the Exchange Offer (defined below) to proceed.
The ABL Credit Agreement provides for an additional $i25,000
last out Revolving B Credit Facility (the "Revolving B Credit Facility" and together with the Revolving A Credit Facility, the "Credit Facility"). The Credit Facility was 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 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 i0.50%
fee shall be due and, for the period from March 28, 2021 through September 27, 2021, a i0.25% 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 (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 i3.0%,
as set forth in the ABL Credit Agreement. Interest on indebtedness under the Revolving B Credit Facility accrues at a rate of i12.0% 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) i0.25%
per annum (or, if the average daily revolving facility usage is less than i50% of the maximum revolving advance amount, i0.375%
per annum) multiplied by (ii) the amount by which the maximum revolving advance amount exceeds such average daily revolving facility usage for such month.
The weighted average interest rate on outstanding borrowings under the Revolving A Credit Facility for the three and six months ended June 30, 2020 was i3.52% and i4.11%,
respectively, and i5.72% and i5.65% for the three and six months ended June 30, 2019,
respectively. The weighted average facility fee for each such period was ii0.25/%.
The Company pays certain customary recurring fees with respect to the ABL Credit Agreement. Interest expense related to the Revolving B Credit Facility of $i806 and $i1,588
was paid in kind in the three and six months ended June 30, 2020. Interest expense related to the Revolving B Credit Facility of $i715 and $i1,401 was paid in kind in the three
and six months ended June 30, 2019, respectively.
The ABL Credit Agreement includes negative covenants customary for an asset-based revolving loan. Such covenants include limitations on the ability of the Borrowers to, among other things, (i) effect mergers and consolidations, (ii) sell assets, (iii) create or suffer to exist any lien, (iv) make certain investments, (v) incur debt and (vi) transact with affiliates. In addition, the ABL Credit Agreement includes customary affirmative covenants for an asset-based revolving loan, including covenants regarding the delivery of financial statements, reports and notices to the Agent. The ABL Credit Agreement also contains customary representations and warranties and event of default provisions for a secured term loan.
The
Company's ABL Credit Agreement contains a springing financial maintenance covenant requiring the Company to maintain a Fixed Charge Coverage Ratio of i1.0 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 $i12,500.
The Company was not in a Covenant Testing Period as of and for the three and six months ended June 30, 2020.
Unamortized debt issuance costs of $i222 associated with the ABL Credit Agreement were recorded as a reduction in long-term debt as of June 30, 2020.
Convertible Senior Secured Notes
On March
27, 2020, the Company completed an exchange offer and consent solicitation (the “Exchange Offer”) to issue its 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, $i190,200
in aggregate principal amount of the 5.00%/7.00% Convertible Notes were tendered and accepted and in exchange, the Company issued $i95,135 in aggregate principal amount of its 3.00%/5.00% Convertible Notes and i70,261
shares of its common stock. The 3.00%/5.00% Convertible Notes are guaranteed on a senior basis by all current and future domestic subsidiaries (other than those designated as "unrestricted subsidiaries") of the Company (the "Guarantors"). An aggregate principal amount of 5.00%/7.00% Convertible Notes in the amount of $i3,693
were not tendered and remained outstanding at the date of Exchange Offer.
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 of 1933, as amended, 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 i3.00%
per annum if paid in cash and at the rate of i5.00% per annum if paid in kind, compared to interest on the 5.00%/7.00% Convertible Notes, which accrues at the rate of i5.00%
per annum if paid in cash and at the rate of i7.00% 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 (the "Supplemental 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 were issued pursuant to an indenture (the “3.00%/5.00% Convertible Notes Indenture”), which the
Company and the Guarantors 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 are convertible into shares of the Company’s common stock at any time at the initial conversion price of $i0.46 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
NotesIndenture, 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 NotesIndenture), for each $i1.00
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) $i1.00 divided by the then applicable conversion price or (b) $i1.00
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 NotesIndenture. Subject to certain exceptions, under the 3.00%/5.00% Convertible NotesIndenture a “Fundamental Change” includes, but is not limited to, the following: (i) the acquisition of more than i50%
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 NotesIndenture) 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 $i3.77
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 NotesIndenture
or Supplemental Indenture, as applicable, using a ii20/
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. As of March 27, 2020, the date of the Exchange Offer, the Company determined that the conversion option was not clearly and closely related to the economic characteristics of the 3.00%/5.00% Convertible Notes, nor did the conversion option meet the own equity scope exception as the Company did not have sufficient authorized and unissued common stock shares to satisfy the maximum number of common stock shares that could be required to be issued upon conversion. As a result,
the Company concluded that the embedded conversion option must be bifurcated from the 3.00%/5.00% Convertible Notes, separately valued, and accounted for as a derivative liability, which was classified in long term debt and marked to fair value through earnings.
On June 30, 2020, the Company filed articles of amendment to increase the number of shares of common stock authorized (see Note 8 - Stockholders' Equity). As a result of this increase, 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 $i36,952
was classified to equity as additional paid-in capital. The remaining debt discount that arose at the date of debt issuance from the original bifurcation will continue to be amortized through interest expense.
The 3.00%/5.00% Convertible Notes are fully and unconditionally guaranteed, jointly and severally, by certain subsidiaries of the Company. The 3.00%/5.00% Convertible Notes and the related guarantees are secured by a lien on substantially all of the Company’s and the guarantors’ assets, subject to certain exceptions pursuant to certain collateral documents pursuant to the 3.00%/5.00% Convertible Notes Indenture.
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 ii100/%
of the principal amount thereof, together with accrued and unpaid interest thereon, subject to certain exceptions.
The Company must use the net proceeds of material sales of collateral, which proceeds are not used for other permissible purposes, to make an offer of repurchase to holders of the 3.00%/5.00% Convertible Notes. 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.
Upon satisfaction of certain conditions more particularly described in the 3.00%/5.00% Convertible NotesIndenture,
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 NotesIndenture, the Company may amend, supplement or waive provisions of the 3.00%/5.00% Convertible NotesIndenture 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 i66.67%
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 i3.00% per annum if paid in cash and at the rate of i5.00%
per annum if paid in kind, payable quarterly beginning with the quarter ending June 30, 2020. Interest on the 5.00%/7.00% Convertible Notes continues to accrue at the rate of i5.00% per annum if paid in cash and at the rate of i7.00%
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. Interest expense related to the 5.00%/7.00% Convertible Notes of $i66 and $i3,348
was paid in kind in the three and six months ended June 30, 2020 respectively. Interest expense related to the 5.00%/7.00% Convertible Notes of $i3,221 and $i6,387
was paid in kind in the three and the six months ended June 30, 2019, respectively. Interest expense related to the 3.00%/5.00% Convertible Notes of $ii1,229/
was paid in kind in both the three and six months ended June 30, 2020.
The Company determined that the Exchange Offer was considered to be a troubled debt restructuring within the scope of ASC No. 470-60, "Debt-Troubled Debt Restructurings". Accordingly, for the three and six months ended June 30, 2020, the Company has expensed legal and other direct costs incurred in conjunction with the Exchange Offer in the amount of $i639
and $i1,376, respectively, in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss and recognized additional legal and other direct costs incurred also in the amount $i639
and $i1,376 as a decrease to additional paid-in capital for the three and six months ended June 30, 2020, respectively.
Other long-term debt
The Company qualified under the “alternative size standard” for a forgivable loan under the Paycheck Protection Program (“PPP”) administered by the Small Business Association (SBA) pursuant
to the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. On April 28, 2020, the Company entered into an unsecured PPP loan in the aggregate principal amount of $i10,000, 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, 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 ongoing U.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 on April 28, 2022 and bears interest at a fixed rate of i1.0%
per annum, with the first six months of interest deferred. The PPP Loan is payable in 17 monthly payments commencing on November 16, 2020 and may be prepaid at any time prior to maturity with no prepayment penalties.
Under the terms of the CARES Act and the Paycheck Protection Program Flexibility Act passed on June 5, 2020 (the "PPPFA"), the PPP Loan, and interest accrued thereon, is forgivable, partially or in full, subject to certain conditions, including the extent to which the PPP Loan proceeds are used for permissible purposes within the 24 week period following loan disbursement (which period was extended by the PPPFA from the 8 week period originally allowed by the CARES Act). The Company believes it has used the PPP Loan proceeds
for permissible purposes only and intends to apply for forgiveness of the PPP Loan in accordance with the terms of the PPP, the CARES Act and the PPPFA. As of June 30, 2020, the Company has recorded the amount of the PPP Loan due within one year in the current portion of long-term debt and the remainder in long-term debt on the Condensed Consolidated Balance Sheets.
On June 24, 2020, the Company's French subsidiary entered into a €i6,000
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 in France and mitigate potentially significant detriment to the Company’s business in France. The France Term Loan, which is evidenced by
a term note with HSBC Bank, matures on June 24, 2021 and bears ino interest. However, in connection with the government guarantee of the France Term Loan, the Company must pay a commission to the French government of i0.5%
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 ifive years. As of June 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.
Short-term borrowings
The Company's French subsidiary is party to a local credit facility under which it may borrow against i100% of the eligible accounts receivable factored, with recourse, up to i6,500
Euros. The French subsidiary is charged a factoring fee of i0.16% of the gross amount of accounts receivable factored. Local currency borrowings on the French subsidiary's credit facility are charged interest at the daily 3-months Euribor rate plus a i1.0%
margin and U.S dollar borrowings on the credit facility are 3-months LIBOR plus a i1.0% margin. The French subsidiary utilizes the local credit facility to support its operating cash needs. As of June 30, 2020, the French subsidiary had ino
borrowings under the local credit facility and had borrowings under the local credit facility of $i2,888 as of December 31, 2019. The Company records borrowings under the local credit facility as short-term borrowings in the Condensed Consolidated Balance Sheets.
(7) iFair
Value Measurements
The three-tier value hierarchy used by the Company, which prioritizes the inputs used in the valuation methodologies, is:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting
our own assumptions, consistent with reasonably available assumptions made by other market participants.
The fair value of cash, accounts receivable and accounts payable approximate their carrying values. The fair value of cash equivalents are determined using the fair value hierarchy described above.
The Company’s pension plan asset portfolio as of June 30, 2020 and December 31, 2019 is primarily invested in fixed income securities, which generally fall within Level 2 of the fair value hierarchy. Fixed income securities are valued based on evaluated prices provided to the trustee of the pension plan by independent pricing services. Such prices may be determined by various factors which include, but
are not limited to, market quotations, yields, maturities, call features, ratings, institutional size trading in similar groups of securities and developments related to specific securities.
Fair Value Measurements of Debt
As of June 30, 2020, the fair value of the Company's 3.00%/5.00% Convertible Notes, including the conversion option, was estimated to be $i109,640,
compared to a face value of $i96,364. As of June 30, 2020, the fair value of the Company's 5.00%/7.00% Convertible Notes, including the conversion option, was estimated to be $i3,350
compared to a face value of $i3,823. As of December 31, 2019, the fair value of the Company's 5.00%/7.00% Convertible Notes, including the conversion option, was estimated to be $i136,085
compared to a face value of $i193,660. The fair value of the 3.00%/5.00% Convertible Notes as of June 30, 2020 and the 5.00%/7.00% Convertible Notes as of December 31, 2019 was determined using a binomial lattice model using assumptions based on market information and historical data, and a review of prices and terms available for similar debt instruments that do not contain a conversion feature, as well as other factors related to the callable nature of the 3.00%/5.00% Convertible Notes, which is a Level
3 input as defined by the fair value hierarchy. The fair value of the 5.00%/7.00% Convertible Notes as of June 30, 2020 was estimated based on a model that discounted future
principal and interest payments at interest rates available to the Company at the end of the period for similar debt of the same maturity, which is a Level 2 input as defined by the fair value hierarchy.
i
The
following valuation assumptions were used in determining the fair value of the 3.00%/5.00% Convertible Notes, including the conversion option, as of June 30, 2020:
Risk-free interest rate
i0.24
%
Credit
spread
i9.47
%
PIK premium spread
i2.00
%
Volatility
i50.00
%
/
As
of June 30, 2020, the fair value of the Company's Revolving B Credit Facility was estimated to be $i26,707 compared to a face value of $i27,376.
As of December 31, 2019, the fair value of the Company's Revolving B Credit Facility was estimated to be $i25,082 compared to a face value of $i25,788. Also
as of June 30, 2020, the fair value of the Company's PPP Loan was estimated to be $i8,571 compared to a face value of $i10,000
and the fair value of the Company's France Term Loan was estimated to be $i3,271 compared to a face value of $i6,721.
The fair value of the Revolving B Credit Facility, the PPP Loan and the France Term Loan was estimated based on a model that discounted future principal and interest payments at interest rates available to the Company at the end of the period for similar debt of the same maturity, which is a Level 2 input as defined by the fair value hierarchy.
Given the short-term nature and/or the variable interest rates, the fair value of borrowings under the Revolving A Credit Facility approximated the carrying value as of June 30, 2020.
Fair Value Measurement of Embedded Conversion Feature
On June 30, 2020, the
Company filed articles of amendment to increase the number of shares of common stock authorized (see Note 8 - Stockholders' Equity). As a result of this increase, the number 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 $i36,952 was classified to equity as additional paid-in capital. There was ino
tax impact of the reclassification of the conversion option to equity. The estimated fair value of the derivative liability for the embedded conversion feature of the 3.00%/5.00% Convertible Notes, which falls within Level 3 of the fair value hierarchy, is measured on a recurring basis using a binomial lattice model using the same assumptions as the 3.00%/5.00% Convertible Notes. The following reconciliation represents the change in fair value of the embedded conversion feature of the 3.00%/5.00% Convertible Notes for the six months ended June 30, 2020. Prior to the reclassification of the embedded conversion feature to additional paid-in capital on June 30, 2020, the Company recognized a gain of $i2,010
on the mark-to-fair value adjustment on the embedded debt conversion option.
On June 30, 2020, the Company's shareholders approved a proposal to amend the Company's charter to authorize an increase in the
Company's authorized shares of common stock. Subsequent to this approval, also on June 30, 2020, the Company filed articles of amendment with the Secretary of State of the State of Maryland, which amended its Articles of Amendment and Restatement effective on such date to increase the Company's authorized common stock shares from i200,000 shares of
common stock at $i0.01 par value per share to i400,000 shares of common stock at $i0.01
par value per share. 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 $i36,952
was classified to equity as additional paid-in capital.
Exchange Offer
The Company issued i70,261 shares of its common stock on March 27, 2020 in connection with the Exchange Offer (see Note 6 - Debt). The issuance of these shares was recorded using the fair
value of the Company's common stock on the date the shares were issued and resulted in an increase in the par value of common stock and additional paid-in capital of $i703 and $i24,606,
respectively. The shares were issued in exchange for 5.00%/7.00% Convertible Notes, and, as such, the Company received no cash proceeds as part of the exchange.
Accumulated Other Comprehensive Loss
i
The components of accumulated other comprehensive loss are as follows:
Other
comprehensive loss before reclassifications, net of tax
i—
i—
i36
(i279)
i36
(i279)
Amounts
reclassified from accumulated other comprehensive loss, net of tax (a)
i25
i23
i—
i—
i25
i23
Net
current period other comprehensive income (loss)
i25
i23
i36
(i279)
i61
(i256)
Ending
Balance
$
(i7,021)
$
(i9,107)
$
(i7,215)
$
(i5,938)
$
(i14,236)
$
(i15,045)
(a)
See reclassifications from accumulated other comprehensive loss table below for details of reclassification from accumulated other comprehensive loss in the three months ended June 30, 2020 and June 30, 2019.
Changes in accumulated other comprehensive loss by component in the six months ended June 30, 2020 and June 30, 2019 are as follows:
Other
comprehensive loss before reclassifications, net of tax
i—
i—
(i912)
(i743)
(i912)
(i743)
Amounts
reclassified from accumulated other comprehensive loss, net of tax (a)
i50
i46
i—
i—
i50
i46
Net
current period other comprehensive income (loss)
i50
i46
(i912)
(i743)
(i862)
(i697)
Ending
Balance
$
(i7,021)
$
(i9,107)
$
(i7,215)
$
(i5,938)
$
(i14,236)
$
(i15,045)
(a)
See reclassifications from accumulated other comprehensive loss table below for details of reclassification from accumulated other comprehensive loss in the six months ended June 30, 2020 and June 30, 2019.
Unrecognized pension and postretirement benefit items:
Prior
service cost (a)
$
i13
$
i13
$
i26
$
i26
Actuarial
loss (a)
i12
i10
i24
i20
Total
before tax
i25
i23
i50
i46
Tax
effect
i—
i—
i—
i—
Total
reclassifications for the period, net of tax
$
i25
$
i23
$
i50
$
i46
/
(a)
These accumulated other comprehensive loss components are included in the computation of net periodic pension and postretirement benefit cost included in other income, net.
(9) iShare-based Compensation
Restricted Shares
The
Company's Board of Directors (the "Board") has issued restricted shares of the Company's common stock ("Restricted Shares") and restricted 5.00%/7.00% Convertible Notes (the "Restricted 5.00%/7.00% Convertible Notes") to certain officers of the Company, as well as Restricted Shares to certain members of the Board. On March 27, 2020, in conjunction with the Exchange Offer, the Company issued restricted 3.00%/5.00% Convertible Notes (the "Restricted 3.00%/5.00% Convertible Notes") and Restricted Shares in exchange for all of the outstanding Restricted 5.00%/7.00% Convertible Notes, including any accrued and unpaid interest on the Restricted 5.00%/7.00%
Convertible Notes as of the date in which the Exchange Offer was completed (the "Restricted Note Exchange"). Pursuant to the Restricted Note Exchange, $i1,613 in aggregate principal amount of the Restricted 5.00%/7.00% Convertible Notes were tendered and accepted and in exchange, the Company issued $i793
in aggregate principal amount of Restricted 3.00%/5.00% Convertible Notes and i586 shares of Restricted Shares. The Restricted 3.00%/5.00% Convertible Notes outstanding were convertible into an additional i1,740
shares of the Company's common stock as of June 30, 2020.
The Restricted Shares granted to certain officers of the Company on September 1, 2017 cliff vest ithree years from the date of grant, subject to the
conditions set forth in the MIP. As they relate to the first tranche of Restricted 5.00%/7.00% Convertible Notes, the Restricted 3.00%/5.00% Convertible Notes and Restricted Shares issued as a result of the Restricted Note Exchange cliff vest ithree years from the original date of grant, September 31, 2017. As they relate to the second tranche of Restricted 5.00%/7.00% Convertible Notes, which were made available as lapsed incentive awards and awarded to certain officers of the
Company on March 25, 2020, the Restricted 3.00%/5.00% Convertible Notes, and Restricted Shares issued as a result of the Restricted Note Exchange cliff vest on August 31, 2024.
i
A summary of the activity of the Company's Restricted Shares as of June 30, 2020 and in the six months then ended
follows:
The Board has granted performance share units ("PSUs") as awards under the MIP to non-executive senior level managers and other select personnel. The PSUs contain a performance-based condition tied to the enterprise value of the Company. Each PSU that vests entitles the participant to receive, at the discretion of the Company's Board,
one share of the
Company's common stock or cash equal to the fair market value of one share of the Company's common stock. Vesting occurs upon achievement of a defined enterprise value of the Company, with i50% vesting upon achievement of the defined enterprise value between the performance period September
30, 2020 and September 30, 2022, and the remaining i50% vesting upon the achievement of the defined enterprise value as a result of a specified transaction, as defined in the PSU agreement, on or before September 30, 2022.
As of June 30, 2020, there were i783
PSUs outstanding.
Share-Based Compensation Expense
Compensation expense recognized related to the PSUs is based on management’s expectation of future performance compared to the pre-established performance goals. If the performance goals are not expected to be met, ino compensation expense is recognized and any previously recognized compensation expense is reversed. As of June 30,
2020, ino compensation expense was recognized for these awards to date as the threshold for expense recognition for the performance-based condition had not been met.
As of June 30, 2020, the unrecognized share-based compensation expense related to unvested Restricted Shares was $i202
and is expected to be recognized over a weighted-average period of approximately i0.7 years. Forfeitures are accounted for as they occur.
As of June 30, 2020, the unrecognized share-based compensation expense related to the outstanding Restricted 3.00%/5.00% Convertible Notes was $i159
and is expected to be recognized over a weighted-average period of approximately i1.7 years. The Company will recognize this compensation expense on a straight-line basis over the remaining vesting period using the fair value of the Restricted 3.00%/5.00% Convertible Notes at the Restricted Note Exchange date.
(10) iEmployee
Benefit Plans
i
Components of the net periodic pension and postretirement benefit credit are as follows:
Net
periodic pension and postretirement benefit credit
$
(i529)
$
(i80)
$
(i1,059)
$
(i160)
Contributions
paid
$
i—
$
i—
$
i—
$
i—
/
The
Company anticipates making ino additional cash contributions to its pension plans in the remainder of 2020.
The Company was party to a multi-employer pension plan from which the Company determined to withdraw. At June
30, 2020, the total estimated liability to withdraw from the plan was $i3,064. The current liability associated with the Company's withdrawal from the multi-employer pension plan of $i240
is included in accrued and other current liabilities in the Condensed Consolidated Balance Sheets and the long-term liability of $i2,824 is included in other noncurrent liabilities in the Condensed Consolidated Balance Sheets.
(11) iIncome
Taxes
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. The Company’s effective tax rate is expressed as income tax benefit as a percentage of loss beforeincome taxes.
On March 27, 2020, the U.S. federal government signed into law the CARES Act, to provide economic relief to U.S. companies impacted by the COVID-19 pandemic. Pursuant to the provisions of the CARES Act, the Company will carryback
its net operating losses from 2019 to offset taxable net income realized in 2018.
In the three months ended June 30, 2020, the Company recorded income tax benefit of $i1,448
on a loss before income taxes of $i5,501, for an effective tax rate of i26.3%.
In the three months ended June 30, 2019, the Company recorded income tax benefit of $i225 on a loss before income taxes of $i8,529,
for an effective tax rate of i2.6%.
In the six months ended June 30, 2020, the Company recorded income tax benefit of $i2,591
on a loss before income taxes of $i17,685, for an effective tax rate of i14.7%.
In the six months ended June 30, 2019, the Company recorded income tax benefit of $i400 on a loss before income taxes of $i16,707,
for an effective tax rate of i2.4%.
The most significant factors impacting the effective tax rate in the three months ended June 30, 2020 were (i) the recording of the period expense associated with the quasi territorial tax regime called the Global Intangible Low Taxed Income Inclusion (“GILTI”), (ii) the foreign rate differential, and (iii) changes in valuation allowances in the United States
and Canada. Also impacting the effective tax rate in the six months ended June 30, 2020 was the increase in net operating loss carrybacks due to the CARES Act.
The Company's U.S. federal corporate income tax rate is 21%.
(12) iCommitments
and Contingent Liabilities
From time to time, the Company is party to a variety of legal proceedings, claims, and inquiries, including proceedings or inquiries by governmental authorities, which arise from the operation of its business. These proceedings, claims, and inquiries are incidental to and occur in the normal course of the Company's business affairs. The majority of these proceedings, claims, and inquiries relate to commercial disputes with customers, suppliers, and others; employment and employee benefits-related disputes; product quality disputes with vendors and/or customers; and environmental, health and safety claims. Although the outcome of these proceedings is inherently difficult to predict, management believes that the amount of any judgment,
settlement or other outcome of these proceedings, claims and inquiries, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on the Company’s consolidated results of operations, financial condition or cash flows.
(13) iSubsequent Event
On
July 20, 2020, the Company's China subsidiary entered into a $i3,000 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 i3.6%
per annum.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
Certain statements contained in this report or in other materials we have filed or will file with the Securities 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 ended December 31, 2019, our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2019, Part II Item 1A of our quarterly report on Form 10-Q for the quarter ended March 31, 2020, and Part II Item 1A of this quarterly report on Form 10-Q for the quarter ended June
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)”.
Overview
A.
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 on June 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. On June 30, 2020, the Company filed articles of amendment with the Secretary of State of the State of Maryland, which amended its articles of amendment and restatement effective on such date.
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
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 the U.S. and in other countries in which it operates. Actual relief under each of these measures varies in terms of timing and availability as governments continue to define, implement, extend and/or fund their relief programs.
The Company qualified under the “alternative size standard” for a forgivable loan under the Paycheck Protection Program (“PPP”) administered by the Small Business Association (SBA) pursuant to the CARES Act. On April
28, 2020, the Company entered into an unsecured PPP loan in the aggregate principal amount of $10.0 million, which is to be used only for payroll expenses, rent, utilities, mortgage interest, and interest on other pre-existing indebtedness (the "PPP Loan"). After taking into account, among other things, the disruptions to the Company’s business activities caused by the COVID-19 pandemic, the completed exchange offer and consent solicitation (the “Exchange Offer”) to issue its 3.00% / 5.00% Convertible Senior Secured Paid-in-Kind ("PIK") Toggle Notes due 2024 (the “3.00% / 5.00% Convertible Notes”) and shares of its 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 ongoing U.S. operations and mitigate potentially significant detriment to the Company’s business. Under the terms of the CARES Act and the Paycheck Protection Program Flexibility Act passed on June 5, 2020 (the "PPPFA"), the PPP Loan, and interest accrued thereon, is forgivable, partially or in full, subject to certain conditions, including the extent to which the PPP Loan proceeds are used for permissible purposes within the 24 week period following loan disbursement (which period was extended by the PPPFA from the 8 week period originally allowed by
the CARES Act). The Company believes it has used the PPP Loan proceeds for permissible purposes only and intends to apply for forgiveness of the PPP Loan in accordance with the terms of the PPP, the CARES Act and the PPPFA.
On June 24, 2020, the Company's French subsidiary entered into a €6,000 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 in France and mitigate potentially significant detriment to the Company’s business in France. The France Term Loan, which is evidenced by a term note with HSBC Bank, matures on June 24, 2021 and bears no interest. However, in connection with the government guarantee of the France Term Loan, the Company must pay a commission to the French government of 0.5% per annum of the principal loan balance. Under the terms of the France Term Loan, the Company has the option to extend the maturity of the loan for a period of up to five years. As of June 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.
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:
Net sales of $84.7 million in the three months ended June 30, 2020 decreased $63.2 million, or 42.7%, compared to $147.9 million in the three months ended June 30, 2019. Net sales of $211.3 million in the six months ended June 30, 2020 decreased $86.2 million, or 29.0%, compared to $297.5 million in the six months ended June 30, 2019. The decrease in net sales in both the three and six months ended June 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 ended June 30, 2020 compared to the same quarter in the prior year and 30.4% in the six months ended June 30, 2020 compared to the six months ended June
30, 2019.
In the six months ended June 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 ended June 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 ended June 30, 2020, overall average selling prices of the Company's product mix sold decreased 4.4% compared
to the three months ended June 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.
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 ended June 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 ended June 30, 2020 compared to $109.9 million in the three months ended June 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 ended June 30, 2020 compared to 74.3% of net sales in the three months ended June 30, 2019.
Cost of materials (exclusive of depreciation) was $153.2 million in the six months ended June 30, 2020 compared to $220.9
million in the six months ended June 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 ended June 30, 2020 compared to 74.3% of net sales in the six months ended June 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 ended June 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.
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)
(Dollar
amounts in millions)
2020
2019
Three Month $ Change
Three Month % 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
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
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 beforeincome 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
June 30,
(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 of June
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
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 the U.S. and in other countries in which it operates, including the PPP Loan received in April 2020 and the France Term Loan received in June 2020, coupled with temporary and long-term cost-cutting
initiatives implemented by the Company, the Company expects it will be able to maintain adequate liquidity and working capital to continue its normal operations over the next 12 months (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 at June 30, 2020 compared to December 31, 2019 resulted in a cash flow source of $19.3 million in the six months ended June 30, 2020, compared to a cash flow use of $13.4 million in the six months ended June 30, 2019. Average receivable days outstanding was 58.8 days in the six months ended June 30, 2020 compared to 54.5 days for the six months ended June 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 of June 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 at June 30, 2020 compared to December 31, 2019 resulted in a cash flow use of $5.6 million in the six months ended June 30, 2020 compared to lower inventory levels at June 30, 2019 compared to December 31, 2018, which resulted in a cash flow source of $3.2 million in the six months ended June 30, 2019. Average days sales in inventory was 152.1 days for the six months ended June
30, 2020 compared to 133.0 days for the six months ended June 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 in March 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 to December 31, 2019 resulted in a $4.4 million cash flow source in the six months ended June 30, 2020 compared to a cash flow source of $2.0 million in the six months ended June 30, 2019. Accounts payable days outstanding was 50.6 days for the six months ended June 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.
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
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
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
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.
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.
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:
(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.
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
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable. As a smaller reporting company, the Company is not required to provide the information required by this item.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by the Company’s management, including the Chairman and Chief Executive Officer (“CEO”)
and Executive Vice President, Finance and Administration (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that review and evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in the
Company’s internal control over financial reporting (as defined in Rule 13a-15 and 15d-15 under the Exchange Act) that occurred during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
From time to time, the Company is party to a variety of legal proceedings, claims, and inquiries, including proceedings or inquiries by governmental authorities, which arise from the operation of its business. These proceedings, claims, and inquiries are incidental to and occur in the normal course of the Company's business affairs. The majority of these proceedings, claims, and inquiries relate to commercial disputes with customers, suppliers, and others; employment and employee benefits-related disputes; product quality disputes with vendors and/or customers; and environmental, health and safety claims. Although the outcome of these proceedings is inherently difficult to predict, management believes that the amount of any judgment, settlement
or other outcome of these proceedings, claims and inquiries, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on the Company’s consolidated results of operations, financial condition or cash flows.
Item 1A. Risk Factors
Other than the updated risk factor described below, there have been no material changes to the risk factors disclosed under the caption “Risk Factors” in Part I, Item 1A of both the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2019, filed with the SEC on February 27, 2020 and Form 10-K/A for the fiscal year ended December 31, 2019, filed with the SEC on March 19, 2020, and Part II Item 1A of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 15, 2020.
Our business and operations, and the operations of our suppliers and customers, have been, and for an indefinite period of time may continue to be, adversely affected by the recent novel coronavirus (or COVID-19) pandemic.
We may face risks related to the ongoing outbreak
of the Novel Coronavirus Disease 2019 (COVID-19), which has been declared a “pandemic” by the World Health Organization and a national public health emergency by governments throughout the world as the disease has spread across the globe and is substantially and materially impacting worldwide economic activity. The full impact of COVID-19 and the associated pandemic is unknown and rapidly evolving. Health epidemics or outbreaks of communicable diseases such as COVID-19 could result in widespread or localized health crises that could adversely affect general commercial activity and the economies and financial markets of many countries or localities in which the Company operates, sells, or purchases good and services. A public health epidemic, including COVID-19, poses the risk that we or our employees, contractors, suppliers, customers, transportation providers, and other business
partners may be prevented or impaired from conducting ordinary course business activities for an indefinite period of time, either at specific branches or on a broader scale, including due to shutdowns necessitated for the health and well-being of our employees, the employees of our business partners, or shutdowns that may be requested or mandated by governmental authorities. Directives to “de-densify” worksites, “Shelter in Place,”“Safe at Home,” quarantine or similar orders or mandates that restrict workforce and/or require closures of “non-essential” businesses have been implemented by government authorities to one degree or another starting with China in January 2020 and quickly spreading in the following months through Europe, North America and most locations throughout the world. Such orders or mandates have been lifted in many geographies, but there is a continuing threat that such measures may again be required as the spread of the
disease has also accelerated in certain geographies. Although the Company has already been adversely impacted by the COVID-19 pandemic, the situation is very fluid and subject to rapid change; the full extent of the impact that the COVID-19 pandemic may have on the Company's business, operations and financial condition is currently unknown.
While we have fortunately had only a few reported positive cases of COVID-19 among our workforce, and while our branches have as a whole generally remained operational at varying levels of volume, there can be no assurances that we will not have to close any branch or multiple branches for indefinite periods of time due to concerns over the health and well-being of our employees, due to further developments in government directives
or due to continued drop in demand from our customers or disruptions from our suppliers. While we have implemented policies and practices to protect our employees at each of our locations, including sanitizing and cleaning protocols, requiring face coverings and other personal protective equipment, social distancing and other behavioral best practices, remote work, staggered and spaced shifts, separating workspaces by distance and/or physical barriers, and suspending non-essential employee travel and visitors to our locations throughout the world, there can be no assurances that these efforts will be successful to prevent a contamination from impacting or potentially closing any of our branches or corporate offices for a time. While each of our operations has prepared and regularly updates customized business continuity and return to work plans to address COVID-19 concerns, in an effort to ensure that
we are protecting our employees, continuing to operate our business and service our customers’ needs, and mitigating the potential impacts of COVID-19 or other similar epidemics, there is no guarantee that such plans will anticipate or fully mitigate the various impacts the pandemic, much of which is still entirely uncertain. While it is not possible at this time to estimate the scope and severity of the impact that COVID-19 could have on our branches, the continued spread of COVID-19, the measures taken by the governments of countries affected, actions taken to protect employees, actions taken to continue operations, and the impact of the pandemic on various business activities in affected countries could adversely affect our financial condition, results of operations and cash flows.
In April 2020, we applied for and received a $10.0 million PPP Loan (see
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Impact of Coronavirus (COVID-19) Pandemic). After taking into account, among other things, the disruptions to our business activities caused by the COVID-19 pandemic, our completed Exchange Offer, available, committed primary sources of liquidity, and our lack of access to alternative sources of liquidity, we believed and certified that current economic conditions made this loan request necessary and appropriate to support our ongoing U.S. operations and mitigate potentially significant detriment to our business. Recipients of loans in excess of $2.0 million will be audited and, despite our good-faith belief that given our circumstances we then satisfied and continue to satisfy all eligible requirements for the PPP Loan, the federal government may disagree and determine that we were ineligible to have applied for and received the PPP Loan. In such event, we may be required
to repay the PPP Loan in its entirety and could be subject to additional penalties, which could have a material adverse effect on our liquidity and financial condition.
While we have and continue to pursue government relief programs in addition to the PPP loan and the France Term Loan (including tax deferrals, subsidies, loans, etc.) and have and continue to implement a number of temporary and long-term cost-cutting initiatives to align our operations to current customer demand as well as be prepared for any market recovery once this pandemic has passed, including staff reductions, reduction in employee hours and/or salaries, furloughs, temporary layoffs, or a combination of these actions, at each of our locations there can be no assurances that such actions will be sufficient to stave off the economic impacts of the pandemic or that further such actions will not be warranted. We have seen a significant reduction in customer
forecasts and orders as a result of the pandemic and there can be no assurances that we will not see further degradation in customer business in the short-term and it is uncertain how quickly customer forecasts and business will improve following this pandemic.
Our principal sources of liquidity are cash provided by operations and proceeds from borrowings under its revolving credit facilities. 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. We also have fewer accounts receivables as of June 30, 2020 as a result of the decrease in demand resulting from the COVID-19 pandemic, which
has decreased our borrowing base collateral attributable to accounts receivable under our revolving credit facility and, in the near term, could result in less cash provided by operations. Further decreases in our accounts receivable could result in further reductions in our borrowing base collateral and therefore, the maximum amount we could borrow under our 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. We are 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 we are unable to sufficiently manage our inventory levels and we begin to carry excess inventory, our liquidity could be unfavorably impacted.
Conversely, a decrease in our inventory could result in a reduction in our borrowing base collateral attributable to inventory and therefore, the maximum amount we could borrow under our revolving credit facility could decrease accordingly.
The full extent to which COVID-19 impacts our business both in the short-term and long-term will depend on the severity, location and duration of the spread of COVID-19 as well as new outbreaks of COVID-19 which could result as some communities begin to reopen. The extent of the impact will further depend on, among other things, the rate, pace, and effectiveness of the actions undertaken by local and world governments and health officials to contain the virus or treat its effects, the nature of government public health guidelines and the public’s adherence to those guidelines, the impact of government economic relief on the US economy, unemployment levels, the success of businesses reopening,
the timing for proven treatments and vaccines for COVID-19, consumer confidence and the rate, pace and effectiveness of the actions undertaken by the leadership and employees of our Company, as well as those of our suppliers, customers and other business partners, to return businesses to pre-pandemic levels.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Statements of
Operations and Comprehensive Loss, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Deficit, and (vi) Notes to the Condensed Consolidated Financial Statements.
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
