A.M. CASTLE & CO. Disclosure Regarding Forward-Looking Statements Certain statements contained in this report or in other materials we have filed or will file with theSecurities and Exchange Commission (the "SEC") constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect our expectations, estimates or projections concerning our possible or assumed future results of operations, including, but not limited to, descriptions of our business strategy, and the benefits we expect to achieve from our working capital management initiative. These statements are often identified by the use of words such as "believe," "expect," "anticipate," "may," "could," "estimate," "likely," "will," "intend," "predict," "plan," "should," or other similar expressions. Forward-looking statements are not guarantees of performance or results and involve a number of risks and uncertainties. Although we believe that these forward-looking statements are based on reasonable assumptions and estimates, there are many factors that could cause our actual results to differ materially from those projected. These factors include the impact of volatility of metals prices, the cyclical and seasonal aspects of our business, our ability to effectively manage inventory levels, the impact of our substantial level of indebtedness, the impact of the novel Coronavirus (COVID-19) pandemic on our financial results and business, as well as those risk factors identified in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , our Annual Report on Form 10-K/A for the fiscal year endedDecember 31, 2019 , Part II Item 1A of our quarterly report on Form 10-Q for the quarter endedMarch 31, 2020 , Part II Item 1A of our quarterly report on Form 10-Q for the quarter endedJune 30, 2020 , and Part II Item 1A of this quarterly report on Form 10-Q for the quarter endedSeptember 30, 2020 . All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Any forward-looking statement speaks only as of the date made. Except as required by applicable laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances in the future, to reflect the occurrence of unanticipated events or for any other reason. The following discussion should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related notes thereto in Item 1. "Financial Statements (unaudited)". OverviewA. M. Castle & Co. , together with its subsidiaries (the "Company," "we" or "us"), is a global distributor of specialty metals and supply chain services, principally serving the producer durable equipment, commercial and military aircraft, heavy equipment, industrial goods, and construction equipment sectors of the global economy. The Company provides a broad range of product inventories as well as value-added processing and supply chain services to a wide array of customers, with a particular focus on the aerospace and defense, power generation, mining, heavy industrial equipment, and general manufacturing industries, as well as general engineering applications. Impact of Coronavirus (COVID-19) Pandemic Although there were some signs of recovery in the third quarter of 2020, the significantly lower demand for the Company's products experienced in the prior quarter continued into the third quarter as many of the industries the Company serves continue to be impacted economically, some significantly, by the novel coronavirus 2019 ("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 third quarter on both a quarter-over-quarter and year-over-year basis. 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 in the fourth quarter of 2020, which is historically a seasonally slow quarter, and into 2021. To date, the Company has taken actions to maintain operations through the pandemic and its network as a whole has remained operational, albeit at varying levels of volume aligned to customer orders and forecasts. The Company has prepared and regularly updates business continuity plans for ongoing operations and has taken steps to adjust its business to match the deteriorating economic conditions, including the implementation of enhanced 24 -------------------------------------------------------------------------------- Table of Contents 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 begun to implement a long-term, permanently sustainable cost structure that does not rely on temporary cost reduction measures as significantly as those relied on during the early stages of the pandemic. The Company believes the permanent cost-cutting measures being implemented will 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 at least$15.0 million on an annualized basis, primarily include 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 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, 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 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 €6,000 term loan (the "France Term Loan"). The France Term Loan, which is fully guaranteed by the French government, is part of a relief program related to the COVID-19 pandemic. Similar to the PPP Loan, economic conditions resulting from the COVID-19 pandemic made this France Term Loan necessary and appropriate to support the Company's ongoing operations inFrance and mitigate potentially significant detriment to the Company's business inFrance . The France Term Loan, which is evidenced by a term note with HSBC Bank, matures onJune 24, 2021 and bears no interest. However, in connection with the government guarantee of the France Term Loan, the Company must pay a commission to the French government of 0.5% per annum of the principal loan balance. Under the terms of the France Term Loan, the Company has the option to extend the maturity of the loan for a period of up to five years. As ofSeptember 30, 2020 , the Company has the intent and ability to extend the maturity of the France Term Loan beyond twelve months 25 -------------------------------------------------------------------------------- Table of Contents 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 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 the remainder of fiscal 2020 or beyond. Results of Operations The following tables set forth certain statement of operations data in each period indicated: Three Months Ended September 30, Favorable/ 2020 2019 (Unfavorable) Three Month Three Month (Dollar amounts in millions) $ % of Net Sales $ % of Net Sales $ Change % Change Net sales$ 79.5 100.0 %$ 136.1 100.0 %$ (56.6) (41.6) % Cost of materials (exclusive of depreciation) 58.6 73.7 % 103.0 75.7 % 44.4 43.1 % Operating costs and expenses 31.5 39.6 % 36.9 27.1 % 5.4 14.6 % Operating loss$ (10.6) (13.3) %$ (3.8) (2.8) %$ (6.8) n/m Nine Months Ended September 30, Favorable/ 2020 2019 (Unfavorable) Six Month Six Month (Dollar amounts in millions) $ % of Net Sales $ % of Net Sales $ Change % Change Net sales$ 290.9 100.0 %$ 433.6 100.0 %$ (142.7) (32.9) % Cost of materials (exclusive of depreciation) 211.8 72.8 % 323.9 74.7 % 112.1 34.6 % Operating costs and expenses 96.1 33.0 % 114.9 26.5 % 18.8 16.4 % Operating loss$ (17.1) (5.9) %$ (5.3) (1.2) %$ (11.8) n/m Net Sales Net sales of$79.5 million in the three months endedSeptember 30, 2020 decreased$56.6 million , or 41.6%, compared to$136.1 million in the three months endedSeptember 30, 2019 . Net sales of$290.9 million in the nine months endedSeptember 30, 2020 decreased$142.7 million , or 32.9%, compared to$433.6 million in the nine months endedSeptember 30, 2019 . The decrease in net sales in both the three and nine months endedSeptember 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 33.7% in the three months endedSeptember 30, 2020 compared to the same quarter in the prior year and 31.4% in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . In the three months endedSeptember 30, 2020 and the nine months endedSeptember 30, 2020 , overall average selling prices of the Company's product mix sold decreased 12.7% and 2.7%, respectively, compared to the same periods in 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, which had an increase in price per ton sold, the price per ton sold decreased for all of the products the Company sells in the three months endedSeptember 30, 2020 and the nine months endedSeptember 30, 2020 , compared to the same periods in 2019. 26 -------------------------------------------------------------------------------- Table of Contents 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 and third quarters of 2020 will continue into the fourth quarter of 2020 and 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 for the remainder of 2020 and into 2021. Cost of Materials Cost of materials (exclusive of depreciation) was$58.6 million in the three months endedSeptember 30, 2020 compared to$103.0 million in the three months endedSeptember 30, 2019 . The$44.4 million , or 43.1%, decrease in the third quarter of 2020 compared to the third 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 73.7% of net sales in the three months endedSeptember 30, 2020 compared to 75.7% of net sales in the three months endedSeptember 30, 2019 . Cost of materials (exclusive of depreciation) was$211.8 million in the nine months endedSeptember 30, 2020 compared to$323.9 million in the nine months endedSeptember 30, 2019 , a decrease of$112.1 million , or 34.6%. Cost of materials (exclusive of depreciation) was 72.8% of net sales in the nine months endedSeptember 30, 2020 compared to 74.7% of net sales in the nine months endedSeptember 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 sales of products with higher gross material margins (calculated as net sales less cost of materials divided by net sales) in both the three and nine months endedSeptember 30, 2019 , 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 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 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 the decrease in customer and supplier forecasts and output, including the temporary reduction in employee hours and salaries, deferral of periodic salary increases and incentive pay, or a combination of these actions. As a result of the slower-than-expected recovery, the Company has elected to make many of the cost reduction steps permanent as it moves toward a permanently sustainable cost structure aligned for a longer period of reduced customer demand. The permanent steps taken by management include reductions in discretionary spending and additional staff reductions through layoffs 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 to date have resulted in a significant decrease in operating costs and expenses in the three and nine months endedSeptember 30, 2020 compared to the same periods last year. The Company expects the permanent cost-cutting measures taken, which were primarily implemented in the latter half ofSeptember 2020 , to result in a further decrease in operating costs and expenses in future periods. 27
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Three Months Ended September 30, Favorable/(Unfavorable)
Three Month Three Month
(Dollar amounts in millions) 2020 2019 $ Change % Change
Warehouse, processing and delivery
expense $ 13.4 $ 18.8 $ 5.4 28.7 %
Sales, general and administrative
expense 13.5 16.0 2.5 15.6 %
Depreciation expense 1.9 2.1 0.2 9.5 %
Impairment of goodwill 2.7 - (2.7) n/m
Total operating costs and expenses $ 31.5 $ 36.9 $ 5.4 14.6 %
Operating costs and expenses decreased by$5.4 million , or 14.6%, from$36.9 million in the three months endedSeptember 30, 2019 to$31.5 million in the three months endedSeptember 30, 2020 , primarily as a result of the following: •Warehouse, processing and delivery expense decreased by$5.4 million primarily due to a lower payroll and benefits costs and lower warehouse and freight costs in the three months endedSeptember 30, 2020 compared to the same period last year. The 28.7% 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$2.5 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 endedSeptember 30, 2020 compared to the three months endedSeptember 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 severance costs of approximately$0.7 million and by legal and other direct fees of$0.3 million associated with the filing of a registration statement for the registration of additional shares of the Company's common stock. •As described in Note 5,Goodwill and Other Intangibles, to the Notes to the Condensed Consolidated Financial Statements, due to the ongoing unfavorable economic impacts of the COVID-19 pandemic, which represented facts and circumstances indicating that it was likely that its goodwill and indefinite lived trade name intangible assets could be impaired, the Company performed an assessment of its goodwill as ofSeptember 30, 2020 . As a result of the goodwill impairment assessment, the Company recorded a non-cash impairment charge of$2.7 million during the third quarter of fiscal 2020. The Company has no remaining goodwill as a result of the charge recognized in the period. This non-cash impairment charge does not result in any future cash expenditures, impact liquidity, affect ongoing business or financial performance of the Company, impact compliance with our lending arrangements or reduce borrowing capacity. Nine Months Ended September 30, Favorable/(Unfavorable) Three Month Three Month (Dollar amounts in millions) 2020 2019 $ Change % Change Warehouse, processing and delivery expense $ 45.6$ 59.6 $ 14.0 23.5 % Sales, general and administrative expense 41.8 49.0 7.2 14.7 % Depreciation expense 6.0 6.3 0.3 4.8 % Impairment of goodwill 2.7 - (2.7) n/m
Total operating costs and expenses $ 96.1
$ 18.8 16.4 % Operating costs and expenses decreased by$18.8 million , or 16.4%, from$114.9 million in the nine months endedSeptember 30, 2019 to$96.1 million in the nine months endedSeptember 30, 2020 , primarily as a result of the following: •Warehouse, processing and delivery expense decreased by$14.0 million primarily due to lower payroll and benefits costs and lower warehouse and freight costs in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The 23.5% decrease was driven by cost cutting measures taken by the Company beginning in the second quarter of 2020 in response to the COVID-19 pandemic, as well as lower sales volume. 28 -------------------------------------------------------------------------------- Table of Contents •Sales, general and administrative expense decreased by$7.2 million primarily the result of lower payroll and benefits costs in the nine months endedSeptember 30, 2020 compared to nine months endedSeptember 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$1.4 million , severance costs of approximately$0.7 million , and legal and other direct fees of$0.3 million associated with the filing of a registration statement for the registration of additional shares of the Company's common stock. •As described above, the Company recorded a non-cash goodwill impairment charge in the three and nine months endedSeptember 30, 2020 . Operating loss in the three months endedSeptember 30, 2020 was$10.6 million , compared to$3.8 million in the three months endedSeptember 30, 2019 . Operating loss in the nine months endedSeptember 30, 2020 was$17.1 million , compared to$5.3 million in the nine months endedSeptember 30, 2019 . Other Income and Expense, Income Taxes and Net Loss Interest expense, net was$5.1 million in the three months endedSeptember 30, 2020 , compared to$10.2 million in the three months endedSeptember 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 endedSeptember 30, 2020 and$1.3 million in the three months endedSeptember 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 endedSeptember 30, 2020 compared to the three months endedSeptember 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$2.0 million , a decrease in non-cash amortization of the outstanding convertible debt of$2.2 million , and a decrease in interest expense on the Company's variable rate revolving credit facility of$0.7 million as a result of both a lower revolving credit facility borrowings and a lower effective interest rate on revolving credit facility borrowings. Interest expense, net was$20.1 million in the nine months endedSeptember 30, 2020 , compared to$29.5 million in the nine months endedSeptember 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$3.0 million in the nine months endedSeptember 30, 2020 and$4.0 million in the nine months endedSeptember 30, 2019 . The decrease in interest expense net in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 is primarily due to the decrease in interest expense in the second and third quarters of 2020, for the reasons described above. The unrealized gain on embedded conversion option of$2.0 million in the nine months endedSeptember 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 ofJune 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$0.3 million in the three months endedSeptember 30, 2020 , compared to$0.7 million in the three months endedSeptember 30, 2019 . Included in other income, net in the three months endedSeptember 30, 2020 and the three months endedSeptember 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 loss of$1.3 million in the three months endedSeptember 30, 2020 , of which$1.5 million was attributable to unrealized losses on foreign currency transactions, partially offset by a$0.2 million unrealized gain on intercompany loan, compared to a net foreign currency loss of$0.8 million in the three months endedSeptember 30, 2019 ,$0.3 million of which was attributable to unrealized gains on foreign currency transactions and$0.5 million to an unrealized gain on intercompany loan. 29 -------------------------------------------------------------------------------- Table of Contents Other income, net was$2.2 million in the nine months endedSeptember 30, 2020 , compared to other income, net of$4.8 million in the nine months endedSeptember 30, 2019 . Included in other income, net in the nine months endedSeptember 30, 2020 and the nine months endedSeptember 30, 2019 was net pension benefit of$5.0 million and$4.6 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$2.6 million in the nine months endedSeptember 30, 2020 , of which$1.9 million is attributable to unrealized losses on foreign currency transactions and$0.7 million is an unrealized loss on intercompany loan, compared to a foreign currency gain of$0.2 million in the nine months endedSeptember 30, 2019 , of which$0.4 was attributable to an unrealized gain on intercompany loan, partially offset by a$0.2 million unrealized loss on foreign currency transactions. Loss before income taxes was$15.3 million in the three months endedSeptember 30, 2020 , compared to$13.3 million in the three months endedSeptember 30, 2019 . The decrease in the loss before income taxes in the three months endedSeptember 30, 2020 compared to the same period in the prior year was primarily due to a$5.1 million decrease in interest expense, partially offset by an increase in the Company's operating loss in the three months endedSeptember 30, 2020 and the larger unfavorable impact of foreign currency in the three months endedSeptember 30, 2020 , compared to the same period last year. Loss before income taxes of$33.0 million in the nine months endedSeptember 30, 2020 was virtually flat compared to the nine months endedSeptember 30, 2019 as the increase in the operating loss in the nine months endedSeptember 30, 2020 compared to the same period in the prior year was offset by a decrease in interest expense. Further, the decrease in other income, net, which was primarily due to the net unfavorable impact of foreign currency in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , was offset by 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$0.6 million in the three months endedSeptember 30, 2020 , compared to an income tax benefit of$1.1 million in the three months endedSeptember 30, 2019 and income tax benefit of$3.2 million in the nine months endedSeptember 30, 2020 , compared to an income tax benefit of$1.5 million in the nine months endedSeptember 30, 2019 . The Company's effective tax rate is expressed as income tax expense as a percentage of loss before income taxes. The effective tax rate in the three months endedSeptember 30, 2020 was 3.7% as compared to 8.1% in the three months endedSeptember 30, 2019 and 9.6% in the nine months endedSeptember 30, 2020 as compared to 4.9% in the nine months endedSeptember 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 nine month period, the increase in the Company's net operating loss carrybacks due to the CARES Act, which was recognized in the nine months endedSeptember 30, 2020 . Net loss was$14.7 million in the three months endedSeptember 30, 2020 , compared to$12.2 million in the three months endedSeptember 30, 2019 , and$29.8 million in the nine months endedSeptember 30, 2020 , compared to$28.5 million in the nine months endedSeptember 30, 2019 . Net loss in both the three and nine months endedSeptember 30, 2020 includes a non-cash goodwill impairment charge of$2.7 million . Liquidity and Capital Resources Liquidity Cash and cash equivalents increased (decreased) as follows: Nine Months Ended September 30, (Dollar amounts in millions) 2020 2019 Net cash provided by operating activities$ 19.8 $ 4.6 Net cash used in investing activities (2.3) (3.1) Net cash provided by (used in) financing activities 0.1 (2.7) Effect of exchange rate changes on cash and cash equivalents 0.2 - Net change in cash and cash equivalents$ 17.8 $ (1.2) The Company's principal sources of liquidity are cash provided by operations and proceeds from borrowings under its revolving credit facilities. Given the economic uncertainty and disruptions resulting from the COVID-19 pandemic, the Company will continue to focus on maintaining liquidity to fund its normal operations and appropriately aligning its working capital with the changing economic conditions. In the second and third quarters of 2020, the average 30 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 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 a significant increase in average days sales in inventory in the third 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. The ongoing duration and severity of the COVID-19 pandemic 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 (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 atSeptember 30, 2020 compared toDecember 31, 2019 resulted in a cash flow source of$27.9 million in the nine months endedSeptember 30, 2020 , compared to a cash flow use of$8.4 million in the nine months endedSeptember 30, 2019 . Average receivable days outstanding was 58.3 days in the nine months endedSeptember 30, 2020 compared to 55.4 days for the nine months endedSeptember 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 collectability of customer accounts receivable and determined that no specific additional allowance for doubtful accounts was required as ofSeptember 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 collectability 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. •Lower inventory levels atSeptember 30, 2020 compared toDecember 31, 2019 resulted in a cash flow source of$4.7 million in the nine months endedSeptember 30, 2020 compared to lower inventory levels atSeptember 30, 2019 compared toDecember 31, 2018 , which resulted in a cash flow source of$10.0 million in the nine months endedSeptember 30, 2019 . Average days sales in inventory was 172.0 days for the nine months endedSeptember 30, 2020 compared to 133.4 days for the nine months endedSeptember 30, 2019 . The increase in average days sales in inventory is primarily due to the impact of the COVID-19 pandemic, which caused a significant decrease in sales volume beginning inMarch 2020 . 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. 31 -------------------------------------------------------------------------------- Table of Contents •A decrease in total accounts payable and accrued and other current liabilities compared toDecember 31, 2019 resulted in a$1.9 million cash flow use in the nine months endedSeptember 30, 2020 compared to a cash flow source of$1.6 million in the nine months endedSeptember 30, 2019 . Accounts payable days outstanding was 56.6 days for the nine months endedSeptember 30, 2020 compared to 41.7 days for the same period last year. The improving financial condition of the Company prior to the impact of the COVID-19 pandemic, particularly the recent completion of the Exchange Offer (defined below), had resulted in improved credit terms with certain of its suppliers, including an extension of net payment dates and/or credit limits. Additionally, as the Company continues to align its cash flows in response to the economic impacts and uncertainties caused by the COVID-19 pandemic, it expects some variability in the timing of payments to vendors to continue. Working capital and the balances of its significant components are as follows: As of Working Capital September 30, December 31, Increase (Dollar amounts in millions) 2020 2019 (Decrease) Working capital$ 160.2 $ 173.7 $ (13.5) Cash and cash equivalents 24.2 6.4 17.8 Accounts receivable 46.8 74.7 (27.9) Inventories 140.1 144.4 (4.3) Accounts payable 40.6 41.7 1.1 Accrued and other current liabilities 10.8 11.2 0.4 Operating lease liabilities 6.5 6.5 - Approximately$12.7 million of the Company's consolidated cash and cash equivalents balance of$24.2 million atSeptember 30, 2020 resided inthe United States . The decrease in net cash used in investing activities to$2.3 million during the nine months endedSeptember 30, 2020 from$3.1 million during the nine months endedSeptember 30, 2019 is due to a decrease in cash paid for capital expenditures, primarily purchases of warehouse equipment. The Company expects capital expenditures to be approximately$3.0 million for the full-year 2020. During the nine months endedSeptember 30, 2020 , net cash provided by financing activities of$0.1 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 inFrance and payments of debt restructuring costs. In the nine months endedSeptember 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 nine months endedSeptember 30, 2019 , the net cash used in financing activities of$2.7 million was primarily attributable to net principal repayments made by the Company on its revolving credit facility, as well as net repayments of short-term borrowings under the Company's foreign lines of credit. 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. OnAugust 31, 2017 , the Company entered into the Revolving Credit and Security Agreement withPNC 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. OnJune 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. OnMarch 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 32 -------------------------------------------------------------------------------- Table of Contents 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 onFebruary 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 ofJuly 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 toMarch 27, 2021 , a 0.50% fee shall be due and, for the period fromMarch 28, 2021 throughSeptember 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 ofSeptember 30, 2020 , the weighted average advance rates used in the borrowing base calculation are 85.0% on eligible accounts receivable and 69.4% 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 nine months endedSeptember 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 33 -------------------------------------------------------------------------------- Table of Contents 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 theU.S. and in other countries in which it operates, including the PPP Loan received inApril 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. OnApril 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 and the CARES Act; however, the Company cannot assure at this time that the PPP Loan will be fully forgiven. OnJune 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 inFrance . 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 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 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 ofSeptember 30, 2020 was as follows (in millions): Maximum borrowing capacity$ 125.0 Collateral reserves (32.7) Letters of credit and other reserves (2.4) Current maximum borrowing capacity 89.9 Current borrowings (89.2) Additional unrestricted borrowing capacity(a)$ 0.7 (a) Subject to the cash dominion threshold noted above OnNovember 16, 2020 , the Company announced it had reached an agreement in principle with its first lien lender, PNC, and certain of its stockholders to provide for a new$8.0 million term loan from such stockholders, subordinated only to the Revolving A Credit Facility. As part of this agreement in principle, the Company and PNC also agreed to extend the maturity date of the Revolving A Credit Facility toFebruary 28, 2023 and to amend certain aspects of the facility to lower the minimum (on hand) liquidity requirement that the Company must maintain by$3.8 million under the terms of the Revolving A Credit Facility. Refer to Note 13 - Subsequent Events in the notes to the condensed consolidated financial statements for further details. 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 70,261 shares of its common stock. An aggregate 34 -------------------------------------------------------------------------------- Table of Contents 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 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 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 35 -------------------------------------------------------------------------------- Table of Contents 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 ofJune 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 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 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 36 -------------------------------------------------------------------------------- Table of Contents 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. 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 six months endedSeptember 30, 2020 and as of and for the year endedDecember 31, 2019 (see Note 2 - New Accounting Standards, to the notes to the condensed consolidated financial statements for further information on the final rule). The summarized financial information of the Obligors after elimination of (i) intercompany transactions and balances among the Parent and the Guarantors and (ii) equity in earnings from and investments in any subsidiary that is a Non-Guarantor follows: Obligors As of and for the Nine As of and for the Months Ended Year Ended (in millions) September 30, 2020 December 31, 2019 Total current assets $ 172.0 $ 192.4 Total non-current assets (1) 128.0 134.4 Total current liabilities 55.0 54.9 Total non-current liabilities (1) 253.3 313.0 Net sales 246.0 453.1 Total costs and expenses 264.3 467.1 Operating loss 18.2 14.0 Net loss 29.8 38.5 (1) Included in non-current assets are$10.8 million and$12.2 million of non-current intercompany receivables due to the Obligors from the Non-Guarantors as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. Included in 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 ofSeptember 30, 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 ofSeptember 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 ofDecember 31, 2019 . The Company records borrowings under the local credit facility as short-term borrowings at the Condensed Consolidated Balance Sheets. 37 -------------------------------------------------------------------------------- Table of Contents OnJuly 20, 2020 , the Company's Chinese subsidiary entered into a$3.0 million local banking line of credit with theBank of Communication Shanghai (the "China Credit Facility"). The China Credit Facility has an initial maturity date ofJanuary 20, 2021 and accrues interest at a rate of 3.6% per annum. As ofSeptember 30, 2020 , the Chinese subsidiary had borrowings of$2.0 million outstanding under the China Credit Facility. Interest expense in the nine months endedSeptember 30, 2020 and the nine months endedSeptember 30, 2019 was$20.1 million and$29.5 million , respectively, of which$3.7 million and$5.2 million , respectively, was cash interest. As ofSeptember 30, 2020 , the Company had$2.4 million of irrevocable letters of credit outstanding. For additional information regarding the terms of the ABL Credit Agreement, the 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 endedDecember 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 nine months endedSeptember 30, 2020 . 38
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