A.M. CASTLE & CO. Information regarding the business and markets ofA.M. Castle & Co. and its subsidiaries (the "Company") is included in Item 1 "Business" of this annual report on Form 10-K. All references to numbers of shares and per share data has been adjusted to reflect the Reverse Stock Split that occurred onDecember 29, 2020 . The following discussion should be read in conjunction with the Company's consolidated financial statements and related notes thereto in Item 8 "Financial Statements and Supplementary Data". The following discussion and analysis of our financial condition and results of operations contain forward-looking statements and includes numerous risks and uncertainties, including those described under Item 1A "Risk Factors" and "Disclosure Regarding Forward-Looking Statements" of this Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. 21 Table of Contents EXECUTIVE OVERVIEW Financial Results Summary
The Company's strategy is to become a leading global provider of specialty metals products and services and supply chain solutions to targeted global industries.
During the year ended
Net sales decreased by 34.2%, compared to the prior year. The decrease in net
? sales in the current year was driven by a significant decrease in average tons
sold per day, and to a lesser degree a decrease in commodities pricing on the
Company's products.
? Operating loss was
to an operating loss of
Cash flows from operations generated
?
improved inventory management, compared to cash flow generated from operations
of
Improved gross material margin to 26.9%, compared to a gross material margin of
? 25.2% (including a non-recurring non-cash inventory charge of
the prior year. (Gross material margin is a non-
net sales less cost of materials divided by net sales).
Recent Market and Pricing Trends
As expected, demand and pricing headwinds in the industrial market from the second half of 2019 continued into 2020 and were further worsened by the macroeconomic impacts of the COVID-19 pandemic, resulting in a decrease in volumes and average selling prices for the majority of the Company's core industrial products, namely alloy bar, carbon and alloy flat products, and SBQ bar. In the Company's other primary market, aerospace, the favorable demand and pricing momentum for aluminum and stainless products experienced in the first quarter of 2020 was rapidly and dramatically reduced by the COVID-19 pandemic, which effectively grounded global air travel. The current metals pricing environment is challenging as a decrease in demand and availability in supply has led to increased price competition for all of the Company's core products. In challenging market conditions such as these, the Company has strategically focused on more highly accretive sales, particularly those including higher margin, value added service offerings. Despite macro headwinds in pricing, in the year endedDecember 31, 2020 , the Company achieved gross material margin of 26.9%, compared to a gross material margin of 25.2% (including a non-recurring non-cash inventory charge of$1.3 million ) in the prior year. To the extent that the Company can pass through higher material costs to its contractual customers, we expect higher selling prices within the metals market to continue to have an overall favorable impact on the Company's gross material margin. If higher material costs are not passed through to its contractual customers, the Company fails to avoid an overstocked position relative to the market and restock at lower replacement costs, or if prices begin to decrease within the metals market, the Company's gross material margin may be adversely impacted. 22
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In many cases, the pricing of its products can have a more significant impact on the Company's operating results than demand because of the following reasons, among others:
Changes in volume resulting from changes in demand typically result in
? corresponding changes to the Company's variable costs. However, as pricing
changes occur, variable expenses are not directly impacted.
? If surcharges are not passed through to the customer or are passed through
without a mark-up, the Company's profitability will be adversely impacted.
In total, demand for the Company's products decreased considerably in 2020, compared to the prior year, driven primarily by the macroeconomic impacts of the COVID-19 pandemic, which worsened already soft industrial end markets and substantially deteriorated global demand for aerospace products. The weakening of demand within the aerospace market is largely attributable to the impact of the COVID-19 pandemic on global air travel and the grounding of the Boeing 737 MAX, for which some of the Company's customers supply content. Industry data provided by theMetals Service Center Institute ("MSCI") indicates that overall 2020 U.S. steel service center shipment volumes decreased 11% compared to 2019 levels. According to MSCI data, industry sales volumes of products consistent with the Company's product mix decreased 12% in 2020 compared to 2019. Of theU.S. steel service center products tracked by the MSCI, shipment volumes for all of the products decreased in 2020 compared to 2019 with carbon bars, stainless steel and aluminum having the most significant decreases. The demand for the Company's products may change from time to time based on, among other things, general economic conditions, industry capacity, and the cyclical nature of the industries in which the Company's customers operate. The pricing environment, leading to increased competitiveness within the market, can also have a significant impact on demand. An increase or decrease in the demand for the Company's products has a significant impact on the Company's operating results. When volume increases, the Company's sales dollars generally increase, which leads to more dollars earned from normal operations. Similarly, a decrease in demand results in lower sales dollars which, once costs and expenses are factored in, leads to less dollars earned from normal operations. Although the lower demand also decreases the cost of materials and operating costs, including warehouse, delivery, selling, general and administrative expenses, the decrease in these costs and expenses is often less than the decrease in sales dollars due to fixed costs, resulting in lower operating margins. Management believes that with the Company's new global supply organization, which is focused on reducing aged inventories, improving overall stock levels throughout the Company, and providing real-time facilitation of the Company's branches in selling higher cost inventory, as well as its focus to excel in its highly accretive core product lines to the exclusion of low-margin, working capital intensive opportunities, it is in a better position to react quickly to variability in end-market demand and to manage the impact that demand variability might have on operating margins. Current Business Outlook Although there were intermittent signs of recovery in the second half of 2020, the Company experienced significantly lower demand for its products in 2020 as many of the industries the Company serves continue to be impacted economically, some significantly, by the COVID-19 pandemic. The global health crisis caused by the COVID-19 pandemic continues to result in a decline in orders from and shipments to customers compared to pre-pandemic levels, as well as slower-than-normal payments from customers and disruptions at certain of the Company's suppliers. In addition, the pricing environment for the Company's products continues to be extremely competitive with lower average price per ton sold in the year endedDecember 31, 2020 compared to the prior year. The Company anticipates the recovery in economic activity to pre-pandemic levels will be slower than originally expected as its customers and suppliers struggle to return their own businesses to pre-pandemic levels. The Company expects COVID-19 to continue to have an unfavorable impact on its financial results and business into 2021. 23 Table of Contents To date, the Company has taken actions to maintain operations through the pandemic and its network as a whole has remained operational, albeit at varying levels of volume aligned to customer orders and forecasts. The Company has prepared and regularly updates business continuity plans for ongoing operations and has taken steps to adjust its business to match the deteriorating economic conditions, including the implementation of enhanced measures through its global supply and branch management teams to ensure the Company is efficiently utilizing inventory on hand and inbound, as well as its internal processing capabilities. Given the expectation that the recovery to pre-pandemic levels may be longer than originally expected, the Company has implemented a long-term, permanently sustainable cost structure that does not rely on temporary cost reduction measures as significantly as during the early stages of the pandemic. The Company believes the permanent cost-cutting measures it implemented not only align the Company with current demand, but also better prepare it for any market recovery once this pandemic has passed. Permanent cost-cutting measures, which are estimated to reduce the Company's operating expenses by approximately$15.0 to$16.0 million on an annualized basis, primarily included staff reductions through layoffs, which were implemented in conjunction with the elimination of most of the temporary cost measures taken previously, including the temporary reduction in employee hours and/or salaries, deferral of periodic salary increases and/or incentive pay, and/or a combination of these actions. In an effort to protect the health and safety of its employees, the Company has adopted face covering requirements, sanitization, social distancing and other behavioral best practices at its locations, including remote work arrangements, reducing the number of people in the Company's branch and corporate locations at any one time, and suspending non-essential employee travel. At the outset of the COVID-19 pandemic, the Company established a COVID-19 response team to closely monitor the local, regional, and national situations that impact the Company's various branches, monitor and advise on COVID-19 exposures and potential exposures within the Company's workspaces, direct and implement health and safety plans and business continuity plans, and establish pandemic-related guidelines and policies to best protect the Castle team and its business, including responsible return-to-work or restart plans. Variables that the Company is taking into consideration as some branches and the Corporate office begin to return to normal operations include local case trends, testing availability, number of employees and the workstation layout, productivity and engagement concerns, the availability and efficacy of vaccinations, and most importantly, guidance and requirements from local, state, and federal government, medical and scientific authorities. In an effort to bolster its liquidity position and mitigate potentially significant detriment to its business, the Company has and will continue to pursue a variety of government-sponsored support programs, such as tax deferrals, employment-related subsidies, government-backed loans and other government relief available in theU.S. and in other countries in which it operates. Actual relief under each of these measures varies in terms of timing and availability as governments continue to define, implement, extend and/or fund their relief programs. The Company qualified under the "alternative size standard" for a forgivable loan under the Paycheck Protection Program ("PPP") administered by theSmall Business Association (SBA) pursuant to the CARES Act. OnApril 28, 2020 , the Company entered into an unsecured PPP loan in the aggregate principal amount of$10.0 million , which is to be used only for payroll expenses, rent, utilities, mortgage interest, and interest on other pre-existing indebtedness (the "PPP Loan"). After taking into account, among other things, the disruptions to the Company's business activities caused by the COVID-19 pandemic, the completed exchange offer and consent solicitation (the "Exchange Offer") to issue its 3.00% / 5.00% Convertible Senior Secured Paid-in-Kind ("PIK") Toggle Notes due 2024 (the "3.00%/5.00% Convertible Notes") and shares of its common stock in exchange for its 5.00% / 7.00% Convertible Senior Secured PIK Toggle Notes due 2022 (the "5.00%/7.00% Convertible Notes"), its available, committed primary sources of liquidity, and its lack of access to alternative sources of liquidity, economic conditions at that time made this loan request necessary and appropriate to support the Company's ongoingU.S. operations and mitigate potentially significant detriment to the Company's business. Under the terms of the CARES Act and the Paycheck Protection Program Flexibility Act passed onJune 5, 2020 (the "PPPFA"), the PPP Loan, and interest accrued thereon, is forgivable, partially or in full, subject to certain conditions, including the extent to which the PPP Loan proceeds are used for permissible purposes within the 24 week period following loan disbursement (which period was extended by the PPPFA from the 8 week period originally allowed by the CARES Act). The Company believes it has used the PPP Loan proceeds for 24
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permissible purposes only and intends to apply for forgiveness of the full amount of the PPP Loan in accordance with the terms of the PPP, the CARES Act and the PPPFA.
OnJune 24, 2020 , the Company's French subsidiary entered into a €6.0 million term loan (the "France Term Loan"). The France Term Loan, which is fully guaranteed by the French government, is part of a relief program related to the COVID-19 pandemic. Similar to the PPP Loan, economic conditions resulting from the COVID-19 pandemic made this France Term Loan necessary and appropriate to support the Company's ongoing operations inFrance and mitigate potentially significant detriment to the Company's business inFrance . The France Term Loan, which is evidenced by a term note with HSBC Bank, matures onJune 24, 2021 and bears no interest. However, in connection with the government guarantee of the France Term Loan, the Company must pay a commission to the French government of 0.5% per annum of the principal loan balance. Under the terms of the France Term Loan, the Company has the option to extend the maturity of the loan for a period of up to five years. As ofDecember 31, 2020 , the Company has the intent and ability to extend the maturity of the France Term Loan beyond twelve months and has therefore included the entire outstanding principal balance of theFrance Term Loan in long-term debt at the Consolidated Balance Sheets. The Company will continue to actively monitor the situation as it relates to the COVID-19 pandemic and may take further actions altering the Company's business operations that we determine are in the best interests of the Company's employees, customers, business partners, suppliers, and shareholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on the Company's business, including the effects on the Company's customers, employees, and prospects, or on the Company's financial results for fiscal 2021 or beyond.
RESULTS OF OPERATIONS
Our discussion of comparative period results is based upon the following components of the Company's Consolidated Statements of Operations and Comprehensive Loss.
Net Sales -The Company derives its sales from the processing and delivery of metals. Pricing is established with each customer order and includes charges for the material, processing activities and delivery. The pricing varies by product line and type of processing. From time to time, the Company may enter into fixed price arrangements with customers while simultaneously obtaining similar agreements with its suppliers.
Cost of Materials - Cost of materials consists of the costs that the Company pays suppliers for metals and related inbound and transfer freight charges, excluding depreciation, which is included in operating costs and expenses discussed below.
Operating Costs and Expenses - Operating costs and expenses primarily consist of:
Warehouse, processing and delivery expenses, including occupancy costs,
? compensation and employee benefits for warehouse personnel, processing,
shipping and handling costs;
? Sales expenses, including compensation and employee benefits for sales
personnel;
General and administrative expenses, including compensation for executive
? officers and general management, expenses for professional services primarily
related to accounting and legal advisory services, bad debt expense, data
communication and computer hardware and maintenance;
? Depreciation for all property, plant and equipment.
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Year ended
The following table sets forth certain statement of operations data in each year
indicated:
Favorable/
Year Ended December 31, (Unfavorable)
2020 2019 Year-over- Year-over-
% of Net % of Net Year Year(Dollar amounts in millions) $ Sales $ Sales $Change % Change
Net sales$ 368.3 100.0 %$ 559.6 100.0 %$ (191.3) (34.2) % Cost of materials (exclusive of depreciation) 269.1 73.1 % 418.8 74.8 % 149.7 35.7 % Operating costs and expenses 122.8 33.3 % 150.9
27.0 % 28.1 18.6 % Operating loss$ (23.7) (6.4) %$ (10.1) (1.8) %$ (13.5) 20.2 % Net Sales Net sales of$368.3 million in the year endedDecember 31, 2020 were a decrease of$191.3 million , or 34.2%, compared to$559.6 million in the year endedDecember 31, 2019 . The decrease in net sales in the year endedDecember 31, 2020 compared to 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 31.8% in the year endedDecember 31, 2020 , compared to the prior year. In the year endedDecember 31, 2020 , overall average selling prices of the Company's product mix sold decreased 3.5% compared to the year endedDecember 31, 2019 . The macroeconomic impact of the COVID-19 pandemic has resulted in a decrease in demand and availability of supply, which has led to increased price competition for all of the Company's core products. With the exception of aluminum, nickel and titanium, which had increases in price per ton sold, the price per ton sold decreased for all of the products the Company sells in the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 . The Company expects a long and slow market recovery to pre-pandemic levels. As a result, the Company believes that the unfavorable financial and business impacts of the pandemic that were experienced in the second through fourth quarters of 2020 will continue into 2021 as the Company's customers and suppliers continue to maintain reduced purchasing forecasts and output. In turn, the Company's expects the decrease in demand and availability and increase in competition in the markets that the Company serves to continue into 2021.
Cost of Materials
Cost of materials (exclusive of depreciation) was$269.1 million in the year endedDecember 31, 2020 compared to$418.8 million in the year endedDecember 31, 2019 . The$149.7 million , or 35.7%, decrease in the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was primarily due to the decrease in net sales volume compared to the prior year. Cost of materials (exclusive of depreciation) was 73.1% of net sales in the year endedDecember 31, 2020 , compared to 74.8% of net sales in the year endedDecember 31, 2019 . Cost of materials in the year endedDecember 31, 2019 included a non-recurring non-cash inventory charge of$1.3 million . 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 sales of products with higher gross material margins (calculated as net sales less cost of materials divided by net sales) in the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 . The Company expects its margins will remain relatively stable 26 Table of Contents in 2021 as its improved inventory management partially 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
Operating costs and expenses in the year ended
Favorable/ (Unfavorable)
Year-over- Year-over-
Year Ended December 31, Year Year(Dollar amounts in millions) 2020 2019
$Change %
23.3 %
Sales, general and administrative expense 52.8 64.6 11.8 18.3 %
Depreciation expense 7.9 8.8 0.9 10.2 %
Impairment of goodwill 2.7 - (2.7) -
Total operating costs and expenses $ 122.8 $ 150.9 $ 28.1 18.6 %
Total operating costs and expenses decreased by
Warehouse, processing and delivery expense decreased by
due to lower payroll and benefits costs and lower warehouse and freight costs
? in the year ended
2019. The 23.3% decrease was driven by cost cutting measures taken by the
Company in response to the COVID-19 pandemic, as well as lower sales volume.
Sales, general and administrative expense decreased by
due to lower payroll and benefit costs, as well as other reductions in employee
expenses and discretionary spending in the year ended
compared to the year ended
primarily by the cost cutting measures taken by the Company in response to the
? COVID-19 pandemic, including staff reductions, reductions in employee work
hours and/or salaries, furloughs, temporary layoffs, deferral of periodic
salary increases and/or incentive pay, or a combination of these actions. The
decreases were partially offset by legal and other direct fees associated with
the Exchange Offer, the filing of a registration statement for the registration
of additional shares of the Company's common stock and the Reverse Split of
The Company recorded a non-cash goodwill impairment charge of
? the year ended
goodwill to zero as of
Operating loss in the year ended
Other Income and Expense, Income Taxes and Net Loss
Interest expense, net was$25.5 million in the year endedDecember 31, 2020 , compared to$39.9 million in the year endedDecember 31, 2019 . Interest expense includes the interest cost component of the net periodic benefit cost of the Company's pension and post-retirement benefits of$4.1 million in the year endedDecember 31, 2020 and$5.3 million in the year endedDecember 31, 2019 . The decrease in interest expense in year endedDecember 31, 2020 , compared to the prior year is primarily due to the decrease in the Company's overall debt levels after the exchange of the majority of the outstanding 5.00%/7.00% Convertible Notes for equity and the 3.00%/5.00% Convertible Notes, which also carried
a
lower interest rate.
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The unrealized gain on embedded conversion option of $2.0 million in the year
ended December 31, 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 qualified for equity classification and the bifurcated derivative
liability will no longer need to be accounted for as a separate derivative on a
prospective basis from the date of 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 $3.5 million in the year ended December 31, 2020 ,
compared to $6.6 million in the year ended December 31, 2019 . Included in other
income, net in the year ended December 31, 2020 and December 31, 2019 was net
pension benefit of $6.3 million and $6.1 million , respectively. The remaining
other income, net for the comparative periods is comprised of foreign currency
transaction gains. The Company recorded a foreign currency transaction loss of
$2.9 million in the year ended December 31, 2020 , compared to a foreign currency
transaction gain of $0.5 million in the year ended December 31, 2019 .
The Company recorded an income tax benefit of $3.0 million in the year ended
December 31, 2020 , compared to an income tax benefit of $4.9 million in the year
ended December 31, 2019 . The Company's effective tax rate is expressed as income
tax expense benefit as a percentage of loss before income taxes. The effective
tax rate was 6.9% in the year ended December 31, 2020 and 11.3% in the year
ended December 31, 2019 . The change in the effective tax rate between periods
resulted from changes in the geographic mix and timing of income (losses) and
the inability to benefit from current year losses due to valuation allowance
positions in the U.S.
Net loss was $40.7 million in the year ended December 31, 2020 , compared to
$38.5 million in the year ended December 31, 2019 . Net loss in the year ended
December 31, 2020 includes the non-cash goodwill impairment charge of $2.7
million , partially offset by the unrealized gain on embedded conversion option
of $2.0 million .
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Liquidity and Capital Resources
The Company's principal sources of liquidity are cash provided by operations and proceeds from borrowings under its Credit Facilities. Given the economic uncertainty and disruptions resulting from the COVID-19 pandemic, the Company will continue to focus on maintaining liquidity to fund its normal operations and appropriately aligning its working capital with the changing economic conditions. The ongoing duration and severity of the COVID-19 pandemic, as well as the speed of recovery and administration of vaccinations, could have a significant unfavorable impact on the Company's suppliers' ability to deliver products and services and its customers' ability to purchase goods and services and pay their accounts receivable timely, if at all, which could have a significant adverse effect on the Company's operations, financial condition and liquidity. With the benefit of the various government-sponsored support programs such as tax deferrals, employment-related subsidies, government-backed loans and other government relief available in theU.S. and in other countries in which it operates, including the PPP Loan received inApril 2020 and the France Term Loan received inJune 2020 , coupled with temporary and long-term cost-cutting initiatives implemented by the Company, the Company expects it will be able to maintain adequate liquidity and working capital to continue its normal operations over the next 12 months. However, given the current uncertain economic conditions, there can be no assurance that the Company will be able to achieve its strategic initiatives or obtain additional funding on favorable terms in the future, which could have a significant adverse effect on its operations, financial condition and liquidity.
Cash and cash equivalents at
Cash and cash equivalents increased (decreased) as follows:
Year Ended
December 31,
(Dollar amounts in millions) 2020 2019Net cash from operating activities$ 20.5 $ 10.8 Net cash used in investing activities (2.8)
(3.6)
Net cash used in financing activities (2.4)
(9.6)
Effect of exchange rate changes on cash and cash equivalents 0.7
0.1
Net change in cash and cash equivalents$ 16.0
$ (2.2)
Working capital, defined as current assets less current liabilities, and the balances of its significant components were as follows:
December 31, Working Capital
(Dollar amounts in millions) 2020 2019 Increase (Decrease)
Working capital $ 147.5 $ 173.7 $ (26.2)
Cash and cash equivalents 22.4 6.4 16.0
Accounts receivable 42.6 74.7 (32.1)
Inventories 130.1 144.4 (14.3)
Accounts payable 29.0 41.7 (12.7)Accrued and other current liabilities 3.3 3.5
(0.2)
Accrued payroll and employee benefits 7.8 7.6
0.2
Specific components of the change in working capital (defined as current assets less current liabilities) are highlighted below:
A decrease in accounts receivable in the year ended
? in a cash flow source of
receivable in the year ended
million cash flow source. The higher accounts receivable balance in the year
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ended
quarter of 2019, compared to the fourth quarter of the current year. Average
receivable days outstanding was 58.2 days in the year ended
compared to 55.7 days in the year ended
the increase in the average receivable days outstanding in 2020 compared to 2019
reflects some slowing in payments from customers due to the financial impacts
resulting from the COVID-19 pandemic. The Company has fewer accounts receivables
as of
COVID-19 pandemic, which has decreased its borrowing base collateral
attributable to accounts receivable under its Credit Facilities and, in the near
term, could result in less cash provided by operations. Further decreases in the
Company's accounts receivable could result in further reductions in its
borrowing base collateral and therefore, the maximum amount it could borrow
under its Credit Facilities could continue to decrease accordingly.
A decrease in inventory in the year ended
million cash flow source, compared to a decrease in inventory in the
prior year, which resulted in a
sales in inventory increased to 191.1 days in the year ended
compared to 134.2 days in the year ended
substantial decrease in sales volume in the year ended
compared to the prior year. The Company is focused on maintaining liquidity by
? purchasing a sufficient level of inventory to meet customer demand while not
carrying excess inventory and lowering overall stock levels throughout the
business. However, if the Company is unable to sufficiently manage its
inventory levels and it begins to carry excess inventory, its liquidity could
be unfavorably impacted. Conversely, a decrease in the Company's inventory
could result in a reduction in its borrowing base collateral attributable to
inventory and therefore, the maximum amount it could borrow under its Credit
Facilities could decrease accordingly.
Total accounts payable, accrued payroll and employee benefits, and accrued and
other current liabilities provided a cash flow use of
ended
the year ended
61.2 days in the year ended
the year ended
? Company prior to the impact of the COVID-19 pandemic, particularly the
completion of the Exchange Offer, had resulted in improved credit terms with
certain of its suppliers, including an extension of net payment dates and/or
credit limits. Additionally, as the Company continues to align its cash flows
in response to the economic impacts and uncertainties caused by the COVID-19
pandemic, it expects some variability in the timing of payments to vendors to
continue.
Net cash used in investing activities of
Net cash used in financing activities of$2.4 million in the year endedDecember 31, 2020 was mainly attributable to payments of debt issuance costs of$3.1 million , payments of the Company's ABL Credit Agreement, offset by borrowings under the PPP Loan and the France Term Loan. Net cash used in financing activities of$9.6 million in the year endedDecember 31, 2019 was mainly attributable to repayments of borrowings under the Company's ABL Credit Agreement as well as repayments of short-term borrowings under the Company's local credit facilities. Capital Resources
The Company's various credit arrangements are with well-established, global
lenders. The Company does not expect the COVID-19 pandemic will have a
significant impact on the ability of these lenders to continue to lend cash to
the Company pursuant to the credit arrangements that the Company has with these
lenders.
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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 December 10, 2020 ,
the Company entered into an Amendment No. 3 to Revolving Credit and Security
Agreement (the "Amendment No. 3") by and among the Company, the other borrowers
and guarantors party thereto and PNC Bank, National Association as the agent and
the lenders, which amends the Original ABL Credit Agreement dated as of August
31, 2017 (as amended to date by Amendment No. 1 to Revolving Credit and Security
Agreement, dated June 1, 2018 , Amendment No. 2 to Revolving Credit and Security
Agreement, dated March 27, 2020 , and Amendment No. 3, the "ABL Credit
Agreement") to provide for additional borrowing capacity.
Amendment No. 3 provided for an additional $25.0 million Revolving B (Priority)
credit facility (the "Revolving B (Priority) Credit Facility"), which is
subordinated to the $125.0 million senior secured, revolving credit facility
(the "Revolving A Credit Facility") and senior to the $21.5 million senior
secured, revolving credit facility (the "Revolving B Credit Facility"). As part
of Amendment No. 3, the Company and PNC also agreed to extend the maturity of
the ABL Credit Agreement to February 28, 2023 , and to amend the ABL Credit
Agreement to (i) reduce the available borrowing capacity under its Revolving B
Credit Facility from $25.0 million to $21.5 million and subordinate the payment
under the Revolving B Credit Facility to the Revolving B (Priority) Credit
Facility, (ii) increase access to available borrowings by reducing the liquidity
covenant test threshold from $12.5 million to $8.75 million , and (iii) increase
the interest applicable to the Revolving Credit A Facility to LIBOR-base rate
plus a margin of 4.0%.
Subject to certain exceptions and permitted encumbrances, the obligations under
the 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 4.0%, as set forth in the ABL
Credit Agreement. Interest on indebtedness under the Revolving B (Priority)
Credit Facility and the Revolving B Credit Facility accrues at a rate of 15.0%
and 12.0% per annum, respectively, which will be paid-in-kind unless the Company
elects to pay such interest in cash and the Revolving B (Priority) payment
conditions or
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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
December 31, 2020 , the weighted average advance rates used in the borrowing base
calculation are 85.0% on eligible accounts receivable and 68.2% 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 $8.75 million for five consecutive days. The Company was not in a
Covenant Testing Period as of and for the year ended December 31, 2020 .
Additionally, upon the occurrence and during the continuation of an event of
default or upon the failure of the Company to maintain cash liquidity (as
defined in the ABL Credit Agreement, inclusive of certain cash balances and the
additional unrestricted borrowing capacity shown below) in excess of $8.75
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"). Based on the Company's cash projections, it does
not anticipate that Cash Dominion will occur, or that it will be in a Covenant
Testing Period during the next 12 months.
On April 28, 2020 , the Company entered into the PPP Loan, which provides
additional cash to be used for payroll costs, interest on mortgages, rent and
utilities. The Company intends to apply for forgiveness of the full amount of
the PPP Loan in accordance with the terms of the PPP, the CARES Act and the
PPPFA; however, the Company cannot assure at this time that the PPP Loan will be
fully forgiven. On June 24, 2020 , the Company's French subsidiary entered into
the France Term Loan, which is fully guaranteed by the French government, and
provides additional capital to support the Company's ongoing operations in
France .
Considerable uncertainty exists with regards to the ultimate duration, severity
and ultimate recovery from the impacts of the COVID-19 pandemic as well as the
full extent of the impact that the COVID-19 pandemic will have on the Company's
business, operations and financial condition. However, with the benefit of the
various government-sponsored support programs such as tax deferrals,
employment-related subsidies, government-backed loans and other government
relief available in the U.S. and in other countries in which it operates,
including the PPP Loan received in April 2020 and the France Term Loan received
in June 2020 , coupled with the temporary and long-term cost-cutting initiatives
implemented by the Company, the Company believes that its existing cash
balances, together with cash generated from operations and proceeds from its
various revolving credit facilities, will be sufficient to fund its normal
business operations and service its debt over the next twelve months from the
issuance of this report.
The Company's ability to borrow funds is dependent on its ability to maintain an
adequate borrowing base. Accordingly, if the Company does not generate
sufficient cash flow from operations to fund its working capital needs and
planned capital expenditures, and its availability is depleted, the Company may
need to take further actions, such as reducing or delaying capital investments,
strategic investments or other actions. The Company believes that its existing
cash balances, together with its availability under the ABL Credit Agreement,
will be sufficient to fund normal business operations over the next
twelve months from the issuance of this report. However, there can be no
assurance that the Company will be able to achieve its strategic initiatives or
obtain
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additional funding on favorable terms in the future which could have a significant adverse effect on its operations.
Additional unrestricted borrowing capacity under the Revolving A Credit Facility
at
Maximum borrowing capacity$ 125.0 Collateral reserves (41.8) Letters of credit and other reserves (2.2) Current maximum borrowing capacity 81.0 Current borrowings (78.4)
Additional unrestricted borrowing capacity
OnMarch 27, 2020 , the Company completed the Exchange Offer to issue its the 3.00%/5.00% Convertible Notes and shares of its common stock in exchange for its 5.00%/7.00% Convertible Notes, including any accrued and unpaid interest on the 5.00%/7.00% Convertible Notes as of the date in which the Exchange Offer was completed. Pursuant to the terms of the Exchange Offer,$190.2 million in aggregate principal amount of the 5.00%/7.00% Convertible Notes were tendered and accepted and in exchange, the Company issued$95.1 million in aggregate principal amount of its 3.00%/5.00% Convertible Notes and 7,026 shares of its common stock. An aggregate principal amount of 5.00%/7.00% Convertible Notes in the amount of$3.7 million were not tendered and remained outstanding at the date of Exchange Offer. As a result of the Exchange Offer, the Company reduced the aggregate principal amount of its long-term debt by$94.5 million and expects to reduce its annual interest expense by over$10.0 million . The 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 withWilmington Savings Fund Society , FSB, as trustee and collateral agent ("Indenture Agent"), onMarch 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 ofAugust 31, 2024 , compared to the 5.00%/7.00% Convertible Notes, which have a maturity date ofAugust 31, 2022 . In conjunction with the Exchange Offer, onMarch 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 onMarch 27, 2020 , PNC (in its capacity as "FirstLien 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 33
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applicable to the intercreditor agreement between the FirstLien 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 conversion price of$4.56 per share (after giving effect to an adjustment triggered by the Reverse Split), which rate is subject to further adjustment as set forth in the 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 conversion price of$37.68 per share (after giving effect to an adjustment triggered by the Reverse Split), which rate is subject to further adjustment as set forth in the Supplemental Indenture. Under the Supplemental Indenture, the conversion of the 5.00%/7.00% Convertible Notes in connection with a Fundamental Change (as defined in the Supplemental Indenture) is substantially the same as under the 3.00%/5.00% Convertible Notes Indenture, other than the applicable conversion price. Upon conversion of the 3.00%/5.00% Convertible Notes and/or the 5.00%/7.00% Convertible Notes, the Company will pay and/or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, together with cash in lieu of fractional shares. The value of shares of the Company's common stock for purposes of the settlement of the conversion right, if the Company elects to settle in cash, will be calculated as provided in the 3.00%/5.00% Convertible Notes Indenture or Supplemental Indenture, as applicable, using a 20 trading day observation period. As discussed previously, the 3.00%/5.00% Convertible Notes are convertible at the option of the holder, although the Company, at its own election, may pay and/or deliver, as the case may be, cash, shares of common stock, or a combination thereof. The Company determined that the conversion option is not clearly and closely related to the economic characteristics of the 3.00%/5.00% Convertible Notes, nor does the conversion option meet the own equity scope exception as the Company at that time did not have sufficient authorized and unissued common stock shares to satisfy the maximum number of common stock shares that could be required to be issued upon conversion. The initial value allocated to the derivative liability was$38,962 , with a corresponding reduction in the carrying value of the 3.00%/5.00% Convertible Notes. As a result of the Company's filing articles of amendment to increase the number of shares of common stock authorized, the number of the Company's common stock shares available for issuance upon conversion of the 3.00%/5.00% Convertible Notes is sufficient to allow the conversion option to be share-settled in full. The Company concluded that as ofJune 30, 2020 the conversion option qualified for equity classification and the bifurcated derivative liability no longer needed to be accounted for as a separate derivative on a prospective basis from the date of reassessment. As ofJune 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 34
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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 byA.M. Castle and Co. (the "Parent") are unconditionally guaranteed on a joint and several basis by all current and future domestic subsidiaries of the Parent (other than those designated as unrestricted subsidiaries) and the parent's subsidiaries inCanada andMexico (collectively, the "Guarantors"). Each guarantor is 100% owned
by
the Parent.
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The guarantees of the Guarantors are subject to release in limited circumstances, only upon the occurrence of certain customary conditions. There are no significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan.
OnMarch 31, 2020 , the Company early adopted the guidance of the SEC Final Rule Release No. 33-10762, "Financial Disclosures About Guarantors and Issuers ofGuaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities" (the "final rule") and has elected to present the summarized financial information of Parent and Guarantors (together, the "Obligors") as of and for the years endedDecember 31, 2020 andDecember 31, 2019 (see Note 1 - Basis of Presentation and Significant Accounting Policies, to the notes to the consolidated financial statements for further information on the final rule). The summarized financial information of the Obligors after elimination of (i) intercompany transactions and balances among the Parent and the Guarantors and (ii) equity in earnings from and investments in any subsidiary that is a Non-Guarantor follows: Obligors As of and for the As of and for the Year Ended Year Ended (in millions) December 31, 2020 December 31, 2019 Total current assets $ 150.8 $ 192.4 Total non-current assets (1) 125.8
134.4
Total current liabilities 47.9
54.9
Total non-current liabilities (1) 247.9 313.0 Net sales 310.8 453.1 Total costs and expenses 335.5 467.1 Operating loss 24.8 14.0 Net loss 40.7 38.5 (1) Included in non-current assets are$11.5 million and$12.2 million of non-current intercompany receivables due to the Obligors from the Non-Guarantors as ofDecember 31, 2020 andDecember 31, 2019 , respectively. Included in non-current liabilities are$7.8 million and$8.6 million of non-current intercompany payables due to the Non-Guarantors from the Obligors as ofDecember 31, 2020 andDecember 31, 2019 , respectively.
Other Credit Facilities
InJuly 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 to6.5 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 ofDecember 31, 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 ofDecember 31, 2019 . The Company records borrowings under the local credit facility as short-term borrowings at the Consolidated Balance Sheets. OnJuly 20, 2020 , the Company's Chinese subsidiary entered into a20.0 million yuan (approximately$3.0 million ) local banking line of credit with theBank of Communication Shanghai (the "China Credit Facility"). The China Credit Facility has a maturity date ofMarch 1, 2021 and accrues interest at a rate of 3.6% per annum. As ofDecember 31, 2020 , the Chinese subsidiary had borrowings of approximately$3.0 million outstanding under the China Credit Facility.
Interest expense in the year ended
As ofDecember 31, 2020 , the Company had$2.2 million of irrevocable letters of credit outstanding. 36 Table of Contents Capital Expenditures Cash paid for capital expenditures was$2.9 million in the year endedDecember 31, 2020 and$4.0 million in the year endedDecember 31, 2019 . Expenditures in 2020 were the result of normal equipment purchases, building improvements, and furniture and fixture upgrades throughout the year. Management believes that capital expenditures will be approximately$3.0 million in 2021.
Pension Funding
The Company's funding policy on its defined benefit pension plans is to satisfy
the minimum funding requirements of the Employee Retirement Income Security Act
("ERISA"). Future funding requirements are dependent upon various factors
outside the Company's control including, but not limited to, fund asset
performance and changes in regulatory or accounting requirements. Based upon
factors known and considered as of December 31, 2020 , including the funding
requirements under ERISA, the Company does not anticipate making significant
cash contributions to the pension plans in 2021.
The investment target portfolio allocation for the Company-sponsored pension
plans and supplemental pension plan focuses primarily on corporate fixed income
securities that match the overall duration and term of the Company's pension
liability structure. Refer to "Retirement Plans" within Critical Accounting
Policies and Note 7 - Employee Benefit Plans to the consolidated financial
statements for additional details regarding other plan assumptions.
Off-Balance Sheet Arrangements
As ofDecember 31, 2020 , the Company does not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by theSEC , that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources, that are material to investors.
Critical Accounting Policies
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , and include amounts that are based on management's estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The following is a description of the Company's accounting policies that management believes require the most significant judgments and estimates when preparing the Company's consolidated financial statements: Income Taxes - The Company accounts for income taxes using the asset and liability method, under which deferred income tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company regularly reviews deferred tax assets to assess whether it is more-likely-than-not that the deferred tax assets will be realized and, if necessary, establish a valuation allowance for portions of such assets to reduce the carrying value. For purposes of assessing whether it is more-likely-than-not that deferred tax assets will be realized, the Company considers the following four sources of taxable income for each tax jurisdiction: (a) future reversals of existing taxable temporary differences, (b) projected future earnings, (c) taxable income in carryback years, to the extent that carrybacks are permitted under the tax laws of the applicable jurisdiction, and (d) tax planning strategies, which represent prudent and feasible actions that a company ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused. To the extent that evidence about one or more of these sources of taxable income is sufficient to support a conclusion that a valuation allowance is not necessary, other sources need not be considered. Otherwise, evidence about each of the 37 Table of Contents sources of taxable income is considered in arriving at a conclusion about the need for and amount of a valuation allowance. See Note 8 - Income Taxes in the Notes to the Consolidated Financial Statements, for further information about the Company's valuation allowance assessments. The Company has incurred significant losses in recent years. The Company's operations inthe United States andCanada have generated pre-tax losses for the three-year period endedDecember 31, 2020 . The Company has determined that an ownership shift of greater than fifty percent occurred in 2016, 2017 and 2018 and as such, a significant portion of the pre-ownership shift net operating losses in these jurisdictions are subject to an annual utilization limitation under the Internal Revenue Code section 382 that will act to prevent the Company from utilizing most of its losses against future taxable income. As a result of the Company having recorded deferred tax assets in these jurisdictions asDecember 31, 2020 andDecember 31, 2019 , coupled with the negative evidence of significant cumulative three-year pre-tax losses, the Company has provided a valuation allowance against the full net deferred tax asset balances recorded inCanada and certain of the deferred income tax assets recorded bythe United States operations atDecember 31, 2020 .
The Company is subject to taxation in
The Company accounts for uncertainty in income taxes by recognizing the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not criteria, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Retirement Plans - The Company values retirement plan liabilities based on assumptions and valuations established by management. Future valuations are subject to market changes, which are not in the control of the Company and could differ materially from the amounts currently reported. The Company evaluates the discount rate and expected return on assets at least annually and evaluates other assumptions involving demographic factors, such as retirement age, mortality and turnover periodically, and updates them to reflect actual experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. Accumulated and projected benefit obligations are expressed as the present value of future cash payments which are discounted using the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and subsequent-year net periodic pension cost; higher discount rates decrease present values and subsequent-year net periodic pension cost. Discount rates used for determining the Company's projected benefit obligation for its pension plans were 2.10% - 2.30% atDecember 31, 2020 and 2.99% - 3.11% atDecember 31, 2019 . The Company's pension plan asset portfolio as ofDecember 31, 2020 is primarily invested in fixed income securities with a duration of approximately 12 years. The assets generally fall within Level 2 of the fair value hierarchy. In 2020, the pension plan assets realized an investment gain of approximately 12%. The target investment asset allocation for the pension plans' funds focuses primarily on corporate fixed income securities that match the overall duration and term of the Company's pension liability structure. There was a funding surplus of 1.0% atDecember 31, 2020 compared to a funding surplus of less than 0.2% atDecember 31, 2019 . To determine the expected long-term rate of return on the pension plans' assets, current and expected asset allocations are considered, as well as historical and expected returns on various categories of plan assets. 38
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The Company used the following weighted average discount rates and expected return on plan assets to determine the net periodic pension cost:
Year Ended December 31,
2020 2019
Discount rate 2.99% - 3.11 % 4.00% - 4.06 %Expected long-term rate of return on plan assets 5.00 %
5.00 %
Holding all other assumptions constant, the following table illustrates the sensitivity of changes to the discount rate and long-term rate of return assumptions on the Company's net periodic pension cost:
Impact on 2021
Expenses -
(Dollar amounts in millions) Increase (Decrease)100 basis point decrease in discount rate $
(0.8)
100 basis point increase in discount rate
(1.0)
100 basis point decrease in expected long-term rate of return on plan assets (1.6)
Inventories - Inventories are stated at the lower of cost or net realizable value. The net realizable value of metals is subject to volatility. During periods when open-market prices decline below net book value, we may need to record a provision to reduce the carrying value of our inventory. We analyze the carrying value of inventory for impairment if circumstances indicate impairment may have occurred. If impairment occurs, the amount of impairment loss is determined by measuring the excess of the carrying value of inventory over the net realizable value of inventory. The Company maintains an allowance for excess and obsolete inventory. The excess and obsolete inventory allowance is determined through the specific identification of material, adjusted for expected scrap value to be received, based upon product knowledge, estimated future demand, market conditions and an aging analysis of the inventory on hand. Inventory in excess of our estimated usage requirements is written down to its estimated net realizable value. Although the Company believes its estimates of the inventory allowance are reasonable, actual financial results could differ from those estimates due to inherent uncertainty involved in making such estimates. Changes in assumptions around the estimated future demand, selling price, scrap value, a decision to reduce inventories to increase liquidity, or other underlying assumptions could have a significant impact on the carrying value of inventory, future inventory impairment charges, or both. New Accounting Standards
See Note 1 - Basis of Presentation and Significant Accounting Policies to the Notes to the Consolidated Financial Statements for detailed information on recently issued guidance, whether adopted or to be adopted.
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