Company Quick10K Filing
Quick10K
Castle A M
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-03-14 Earnings, Exhibits
8-K 2018-12-21 Officers, Exhibits
8-K 2018-11-13 Earnings, Exhibits
8-K 2018-11-05 Officers, Other Events, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-06-01 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-04-25 Shareholder Vote
8-K 2018-03-13 Earnings, Regulation FD, Exhibits
8-K 2018-02-06 Other Events
NOW ServiceNow 43,290
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RFP Resolute Forest Products 731
NVTR Nuvectra 189
OFS OFS Capital 163
NAII Natural Alternatives International 96
LODE Comstock Mining 18
MTGA Mohegan Tribal Gaming Authority 0
UBIA UBI Blockchain 0
NWCN Network Cn 0
CTAM 2018-12-31
Part I
Item 1 - Business
Item 1A - Risk Factors
Item 1B - Unresolved Staff Comments
Item 2 - Properties
Item 3 - Legal Proceedings
Item 4 - Mine Safety Disclosures
Part II
Item 5 - Market for The Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8 - Financial Statements and Supplementary Data
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A - Controls & Procedures
Item 9B - Other Information
Part III
Item 10 - Directors, Executive Officers and Corporate Governance
Item 11 - Executive Compensation
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 - Certain Relationships and Related Transactions, and Director Independence
Item 14 - Principal Accountant Fees and Services
Part IV
Item 15 - Financial Statement Schedules and Exhibits
Item 16 - Form 10-K Summary
EX-21.1 ctam-ex211x123118.htm
EX-23.1 casl-ex231consentofdeloitt.htm
EX-31.1 ctam-ex311x123118.htm
EX-31.2 ctam-ex312x123118.htm
EX-32.1 ctam-ex321x123118.htm

Castle A M Earnings 2018-12-31

CTAM 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 ctam-10kx123118.htm 10-K Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Commission File Number: 1-5415
 
A. M. CASTLE & CO.
(Exact name of registrant as specified in its charter)
Maryland
 
36-0879160
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1420 Kensington Road, Suite 220, Oak Brook, Illinois
 
60523
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (847) 455-7111
Securities registered pursuant to Section 12(b) of the Act: 
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $0.01 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    
Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x






Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (check one):
 
Large Accelerated Filer
 
¨
  
Accelerated Filer
 
¨

 
 
 
 
 
 
 
Non-Accelerated Filer
 
¨
  
Smaller Reporting Company
 
x
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter) was $10,435,221.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    
☒ Yes    ☐ No
The number of shares outstanding of the registrant’s common stock on March 13, 2019 was 3,634,658 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated by Reference
 
Applicable Part of Form 10-K
This Annual Report on Form 10-K incorporates by reference portions of the registrant’s Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders. In the event the registrant does not file a Proxy Statement for its 2019 Annual Meeting of Stockholders with the United States Securities and Exchange Commission within 120 days after the end of the registrant’s 2018 fiscal year, this information will be included in an amendment to this Annual Report on Form 10-K.
 
Part III







Disclosure Regarding Forward-Looking Statements
Information provided and statements contained in this report that are not purely historical are 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 only speak as of the date of this report and the Company assumes no obligation to update the information included in this report. Such forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy, and the cost savings and other benefits that we expect to achieve from our facility closures and organizational changes. These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “predict,” “plan,” “should,” or similar expressions. These statements are not guarantees of performance or results, and they involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements, including those risk factors identified in Item 1A “Risk Factors” of this report. 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 above. Except as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future, to reflect the occurrence of unanticipated events or for any other reason.
INDUSTRY AND MARKET DATA
In this report, we rely on and refer to information and statistics regarding the metal service center industry and general manufacturing markets. We obtained this information and these statistics from sources other than us, such as the Metals Service Center Institute, which we have supplemented where necessary with information from publicly available sources and our own internal estimates. Although we have not independently verified such information, we have used these sources and estimates and believe them to be reliable.
PART I
ITEM 1 — Business
In this Annual Report on Form 10-K, “the Company,” “we” or “our” refer to A. M. Castle & Co., a Maryland corporation, and its subsidiaries included in the consolidated financial statements, except as otherwise indicated or as the context otherwise requires.
Company Overview
A.M. Castle & Co. (the "Company") is a global distributor of specialty metals and supply chain services, principally serving the producer durable equipment, commercial aircraft, heavy equipment, industrial goods, construction equipment, and retail sectors of the global economy. Its customer base includes many Fortune 500 companies as well as thousands of medium- and smaller-sized firms spread across a variety of industries. Particular focus is placed on the aerospace and defense, power generation, mining, heavy industrial equipment, and general manufacturing industries, as well as general engineering applications.
On August 31, 2017, the Company emerged from its chapter 11 cases and its Amended Prepackaged Joint Chapter 11 Plan of Reorganization became effective (the "Effective Date"). References to “Successor” refer to the Company on or after the Effective Date. References to “Predecessor” refer to the Company prior to the Effective Date. For more information on the chapter 11 cases, see Note 2 - Bankruptcy Related Disclosures in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
The Company’s corporate headquarters is located in Oak Brook, Illinois. As of December 31, 2018, the Company operates out of 21 service centers located throughout North America (17), Europe (2) and Asia (2). The Company's service centers hold inventory and process and distribute products to both local and export markets.
Industry and Markets
Service centers act as supply chain intermediaries between primary producers, which deal in bulk quantities in order to achieve economies of scale, and end-users in a variety of industries that require specialized products in significantly smaller quantities and forms. Service centers also manage the differences in lead times that exist in the supply chain. While original equipment manufacturers (“OEM”) and other customers often demand delivery within hours, the lead time required by primary producers can be as long as several months. Service centers provide value to customers by

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aggregating purchasing, providing warehousing and distribution services to meet specific customer needs, including demanding delivery times and precise metal specifications, and by providing value-added metals processing services.
The principal markets served by the Company are highly competitive. The Company is principally focused on two key markets, aerospace and industrial. Competition within these markets is based on service, quality, processing capabilities, inventory availability, timely delivery, ability to provide supply chain solutions and price. The Company competes in a highly fragmented industry. Competition in the various markets in which the Company participates comes from a large number of value-added metals processors and service centers on a regional and local basis, some of which have greater financial resources and some of which have more established brand names in the local, regional and global markets served by the Company.
The Company also competes to a lesser extent with primary metals producers who typically sell to larger customers requiring shipments of large volumes of metal.
In order to capture scale efficiencies and remain competitive, many primary metal producers are consolidating their operations and focusing on their core production activities. These producers have increasingly outsourced metals distribution, inventory management and value-added metals processing services to metals service centers. This process of outsourcing allows them to work with a relatively small number of intermediaries rather than many end customers. As a result, metals service centers, including the Company, are now providing a range of services for their customers, including metal purchasing, processing and supply chain solutions.
The Company’s marketing strategy focuses on distributing highly engineered specialty grades and alloys of metals as well as providing specialized processing services designed to meet very precise specifications. Core products include alloy and stainless steels, nickel alloys, aluminum, titanium, and carbon. Inventories of these products assume many forms such as plate, sheet, extrusions, round bar, hexagon bar, square and flat bar, tubing and coil. Depending on the size of the facility and the nature of the markets it serves, the Company's service centers are equipped as needed with bar saws, plate saws, oxygen and plasma arc flame cutting machinery, trepanning machinery, boring machinery, honing equipment, water-jet cutting equipment, stress relieving and annealing furnaces, surface grinding equipment, CNC machinery and sheet shearing equipment. Various specialized fabrications are also performed for customers through pre-qualified subcontractors that thermally process, turn, polish, cut-to-length and straighten alloy and carbon bar.
Procurement
The Company purchases metals from many producers. Material is purchased in large lots and stocked at its service centers until sold, usually in smaller quantities and typically with some value-added processing services performed. The Company’s ability to provide quick delivery of a wide variety of specialty metals products, along with its processing capabilities and supply chain management solutions, allows customers to lower their own inventory investment by reducing their need to order the large quantities required by producers and their need to perform additional material processing services. Some of the Company’s purchases are covered by long-term contracts and commitments, which generally have corresponding customer sales agreements.
Thousands of customers from a wide array of industries are serviced primarily through the Company’s own sales organization. Orders are primarily filled with materials shipped from Company stock. The materials required to fill the balance of sales are obtained from other sources, such as purchases from other distributors or direct mill shipments to customers. Deliveries are made principally by third party logistics providers using their fleets, which display Company-branding. Otherwise, common carrier delivery is used in areas not serviced directly by such third party logistics providers. The Company’s broad network of locations provides same or next-day delivery to most of their markets, and two-day delivery to substantially all of the remaining markets.
Customers
The Company’s customer base is well diversified and therefore, the Company does not have dependence upon any single customer, or a few customers. The customer base includes many Fortune 500 companies as well as thousands of medium- and smaller-sized firms.
Employees
As of December 31, 2018, the Company had 979 full-time employees. Of these full-time employees, 135 were represented by the United Steelworkers of America under collective bargaining agreements. Effective May 15, 2018, we entered into a four-year collective bargaining agreement with the USW, which covers approximately 106 employees at our largest facility in Cleveland, Ohio. Approximately 29 employees at our Hammond, Indiana facility are covered

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by a separate collective bargaining agreement with the USW that was renegotiated effective September 1, 2016 and expires on August 31, 2020. The Company believes its relationships with its employees are good.
Access to SEC Filings
The Company makes available free of charge on or through its Web site at www.castlemetals.com the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). Information on our Web site does not constitute part of this Annual Report on Form 10-K.
ITEM 1A — Risk Factors
(Dollar amounts in millions, except per share data)
Our business, financial condition, results of operations, and cash flows are subject to various risks, many of which are not exclusively within our control that may cause actual performance to differ materially from historical or projected future performance. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. Any of the following risks, as well as other risks and uncertainties not currently known to us or that we currently consider to be immaterial, could materially and adversely affect our business, financial condition, results of operations, or cash flows.
Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our debt instruments.
We have substantial debt service obligations. As of December 31, 2018, we had approximately $317.8 million of total debt outstanding, excluding capital lease obligations of $0.2 million, all of which is secured. The debt outstanding, in order of priority, was comprised of $131.4 million of borrowings against our Revolving Credit and Security Agreement (as amended, the “Expanded ABL Credit Agreement”), $180.9 million aggregate principal amount of 5.00% / 7.00% Convertible Senior Secured Paid In Kind (PIK) Toggle Notes due 2022 (the “Second Lien Notes”), including $2.4 million of restricted Second Lien Notes issued to certain members of management (“MIP Notes”), and short-term borrowings of approximately $5.5 million under a local credit facility, entered into by the Company’s French subsidiary under which it may borrow against 100% of the eligible accounts receivable factored, with recourse, up to 6.5 million euros (the “Foreign Line of Credit”).
Our substantial level of indebtedness could have significant effects on our business, including the following:
it may be more difficult for us to satisfy our financial obligations;
our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions or general corporate purposes may be impaired;
we must use a substantial portion of our cash flow from operations to pay interest on our indebtedness, which will reduce the funds available to use for operations and other purposes, including potentially accretive acquisitions;
our ability to fund a change of control offer under our debt instruments may be limited;
our substantial level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and
our substantial level of indebtedness may make us more vulnerable to economic downturns and adverse developments in our business.
The Expanded ABL Credit Agreement provides for a $125.0 million senior secured, revolving credit facility ("Revolving A Credit Facility") and 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 "Expanded Credit Facility"). We expect to obtain the funds to pay our expenses and to satisfy our debt obligations from our operations and available resources under the Expanded Credit Facility. Our ability to meet our expenses and make these principal and interest payments as they come due, therefore, depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, and our anticipated revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness or to fund other liquidity needs. If we do not have enough funds, we may be required to refinance

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all or part of our then existing debt, sell assets or borrow more funds, which we may not be able to accomplish on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives which could have an adverse effect on our financial condition or liquidity.
We may not be able to generate sufficient cash to service all of our existing debt service obligations, and may be forced to take other actions to satisfy our obligations under our debt agreements, which may not be successful.
Our total outstanding debt under our Expanded Credit Facility, the Second Lien Notes, including MIP Notes, and the Foreign Line of Credit has an aggregate principal amount of $317.8 million as of December 31, 2018. Our ability to make scheduled payments on or to refinance our debt obligations depends on our future financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. Therefore, we may not be able to maintain or realize a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments, capital expenditures or potentially accretive acquisitions, sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous borrowing covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations which could have an adverse effect on our financial condition or liquidity.
Our debt instruments impose significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions and our failure to comply with the covenants contained in our debt instruments could result in an event of default that could adversely affect our operating results.
Our debt agreements impose, and future debt agreements may impose, operating and financial restrictions on us. These restrictions limit or prohibit, among other things, our ability to:
incur additional indebtedness, or issue disqualified capital stock;
pay dividends, redeem subordinated debt or make other restricted payments;
make certain investments or acquisitions;
grant or permit certain liens on our assets;
enter into certain transactions with affiliates;
merge, consolidate or transfer substantially all of our assets;
incur dividend or other payment restrictions affecting certain of our subsidiaries;
transfer, sell or acquire assets; and
change the business we conduct.
These covenants could adversely affect our ability to finance our future operations or capital needs, withstand a future downturn in our business or the economy in general, engage in business activities, including future opportunities that may be in our interest, and plan for or react to market conditions or otherwise execute our business strategies. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, in certain circumstances, the relevant lenders or holders of such indebtedness could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. If the maturity of our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and may not be able to continue our operations as planned.
Our future operating results are impacted by the volatility of the prices of metals, which could cause our results to be adversely affected.
The prices we pay for metal raw materials and the prices we charge for products may fluctuate depending on many factors, including general economic conditions (both domestic and international), competition, production levels, import tariffs, duties, and other trade restrictions, and currency fluctuations. To the extent metal prices decline, we would generally expect lower sales, pricing and possibly lower operating income. Depending on the timing of the price changes and to the extent we are not able to pass on to our customers any increases in our metal raw materials prices, our

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operating results may be adversely affected. In addition, because we maintain substantial inventories of metals in order to meet short lead-times and the just-in-time delivery requirements of our customers, a reduction in our selling prices could result in lower profitability or, in some cases, losses, either of which could adversely impact our ability to remain in compliance with certain provisions of our debt instruments, as well as result in us incurring impairment charges.
The Company’s actual financial results may vary materially from the projections that it filed with the bankruptcy court in connection with the confirmation of the Company’s plan of reorganization.
In connection with the disclosure statement the Company filed with the bankruptcy court, and the hearing to consider confirmation of its plan of reorganization, the Company prepared projected financial information to demonstrate to the bankruptcy court the feasibility of the plan of reorganization and its ability to continue operations upon its emergence from bankruptcy. Those projections were prepared solely for the purpose of the bankruptcy proceedings and have not been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning the Company’s anticipated future performance and with respect to prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results will likely vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections.
The Company’s financial condition and results of operations for periods after the effective date of the Company’s plan of reorganization are not comparable to the financial condition and results of operations for periods prior to the effective date of the Company’s plan of reorganization and historical financial information may not be indicative of the Company’s future financial performance.
On August 31, 2017, the effective date of the Company’s plan of reorganization, the Company adopted fresh-start reporting as a result of the bankruptcy reorganization as prescribed in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP") and the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 852, "Reorganizations". As required by fresh-start reporting, the Company’s assets and liabilities were recorded at fair value by allocating the reorganization value determined in connection with the plan of reorganization. Accordingly, the Company’s financial condition and results of operations from and after the effective date of the Company’s plan of reorganization are not comparable, in various material respects, to the financial condition and results of operations prior to the effective date of the Company’s plan of reorganization. Further, as a result of the implementation of the Company’s plan of reorganization and the transactions contemplated thereby, the Company’s historical financial information may not be indicative of its future financial performance.
Our common stock is traded on the OTCQX® Best Market (the “OTCQX”), which could have an adverse impact on the market price and liquidity of our common stock and could involve additional risks compared to being listed on a national securities exchange.
Effective January 10, 2019, the Company’s Common Stock is traded on the OTCQX under the ticker “CTAM”, after previously trading on the OTCQB® Venture Market. The trading of our common stock in the OTC market rather than a national securities exchange may negatively impact the trading price of our common stock and the levels of liquidity available to our shareholders. Securities traded in the OTC market generally have less liquidity due to factors such as the reduced number of investors that will consider investing in the securities, the reduced number of market makers in the securities, and the reduced number of securities analysts that follow such securities. As a result, holders of shares of our common stock may find it difficult to resell their shares at prices quoted in the market or at all.
Furthermore, because of the limited market and generally low volume of trading in our common stock that could occur, the share price of our common stock could be more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the markets perception of our business, and announcements made by us, our competitors, or parties with whom we have business relationships.
Because our common stock trades on the OTCQX, in some cases, we may be subject to additional compliance requirements under applicable state laws in the issuance of our securities. The lack of liquidity in our common stock may also make it difficult for us to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future. Accordingly, we urge that extreme caution be exercised with respect to existing and future investments in our common stock

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Holders of our Second Lien Notes can require us to repurchase their Second Lien Notes following a fundamental change, which includes, among other things, the acquisition of more than 50% of our outstanding voting power by a person or group. We may not have sufficient funds to satisfy such cash obligations.
As of December 31, 2018, we had approximately $180.9 million of aggregate principal amount outstanding under the Second Lien Notes, including $2.4 million of MIP Notes. Interest on the Second Lien Notes accrues at the rate of 5.00% if paid in cash and 7.00% if paid in kind. Pursuant to the terms of the Second Lien Notes Indenture, we are currently paying interest on the Second Lien Notes in kind. Upon the occurrence of a fundamental change (as defined in the indenture for the Second Lien Notes), which includes the acquisition of more than 50% of our outstanding voting power by a person or group, we may be required to repurchase some or all of the Second Lien Notes for cash at a repurchase price equal to 100% of the principal amount of the Second Lien Notes being repurchased, plus any accrued and unpaid interest up to but excluding the relevant fundamental change repurchase date. We may not have sufficient funds to satisfy such cash obligations and, in such circumstances, may not be able to arrange the necessary financing on favorable terms or at all. In addition, our ability to satisfy such cash obligations will be restricted pursuant to covenants contained in the indenture for the Second Lien Notes and will be permitted to be paid only in limited circumstances. We may also be limited in our ability to satisfy such cash obligations by applicable law or the terms of other instruments governing our indebtedness. Our inability to make any cash payments that may be required to satisfy the obligations described above would trigger an event of default under the Second Lien Notes, which in turn could constitute an event of default under our other outstanding indebtedness, thereby potentially resulting in the acceleration of certain of such indebtedness, the prepayment of which could further restrict our ability to satisfy such cash obligations.
The conversion of our Second Lien Notes into common stock will dilute the ownership interest of our existing shareholders.
Any issuance by us of our common stock upon conversion of our Second Lien Notes will dilute the ownership interest of our existing shareholders. In addition, any such issuance of common stock could have a dilutive effect on our net income per share to the extent that the average stock price during the period is greater than the conversion prices and exercise prices of the Second Lien Notes. Furthermore, any sales in the public market of our common stock issuable upon conversion of the Second Lien Notes could adversely affect prevailing market prices of our common stock.
We service industries that are highly cyclical, and any downturn in our customers’ industries could reduce our revenue and profitability.
Many of our products are sold to customers in industries that experience significant fluctuations in demand based on economic conditions, energy prices, consumer demand, availability of adequate credit and financing, customer inventory levels, changes in governmental policies and other factors beyond our control. As a result of this volatility in the industries we serve, when one or more of our customers’ industries experiences a decline, we may have difficulty increasing or maintaining our level of sales or profitability if we are not able to divert sales of our products to customers in other industries. Historically, we have made a strategic decision to focus sales resources on certain industries, specifically the aerospace, heavy equipment, machine tools and general industrial equipment industries. A downturn in these industries has had, and may in the future continue to have, an adverse effect on our operating results. We are also particularly sensitive to market trends in the manufacturing sectors of the North American economy and the two primary markets which we serve, aerospace and industrial.
Our industry is highly competitive, which may force us to lower our prices and may have an adverse effect on our operating results.
The principal markets that we serve, aerospace and industrial, are highly competitive. Competition is based principally on price, service, quality, processing capabilities, inventory availability and timely delivery. We compete in a highly fragmented industry. Competition in the various markets in which we participate comes from a large number of value-added metals processors and service centers on a regional and local basis, some of which have greater financial resources than we do and some of which have more established brand names in the local markets we serve. We also compete to a lesser extent with primary metals producers who typically sell to very large customers requiring shipments of large volumes of metal. Increased competition could force us to lower our prices or to offer increased services at a higher cost to us, which could have an adverse effect on our operating results.
Our operating results are subject to the seasonal nature of our customers’ businesses.
A portion of our customers experience seasonal slowdowns. Historically, our revenues in the months of July, November and December have been lower than in other months because of a reduced number of shipping days and holiday or vacation closures for some customers. Dependent on market and economic conditions, our sales in the first two quarters of the year, therefore, can be higher than in the third and fourth quarters due to this seasonality. As a result,

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analysts and investors may inaccurately estimate the effects of seasonality on our operating results in one or more future quarters and, consequently, our operating results may fall below expectations.
An impairment or additional restructuring charge could have an adverse effect on our operating results.
We continue to evaluate opportunities to reduce costs and improve operating performance. These actions could result in restructuring and related charges, including but not limited to asset impairments, employee termination costs, charges for pension benefits, and pension settlement and/or curtailments, which could be significant and could adversely affect our financial condition and results of operations.
We have a significant amount of long-lived assets. We review the recoverability of long-lived assets whenever significant events or changes occur which might impair the recovery of recorded costs, making certain assumptions regarding future operating performance. The results of these calculations may be affected by the current demand and any decline in market conditions for our products, as well as interest rates and general economic conditions. If impairment is determined to exist, we will incur impairment losses, which may have an adverse effect on our operating results.
Our ability to use our net operating loss carryforwards ("NOLs") is limited.
We have incurred substantial losses since 2008. As of December 31, 2018, we had United States (“U.S.”) federal net operating loss carryforwards, or NOLs, of $2.1 million. The U.S. federal NOLs will expire in various years beginning with 2032. These U.S. federal NOLs reflect the attribute reduction for the cancellation of indebtedness resulting from our bankruptcy proceedings, as well as the write-off of the statutorily limited losses, which the Company will never be able to utilize due to Internal Revenue Code (“IRC”) section 382 limitations. We have determined that an ownership shift of greater than fifty percent occurred in 2015, 2016 and 2017 and as such, a significant portion of the pre-ownership shift NOLs are subject to an annual utilization under IRC section 382 limitation that will act to prevent the Company from utilizing most of its losses against future taxable income. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership that we cannot predict or control that could result in further limitations being placed on our ability to utilize our federal NOLs. In addition, we may not generate future taxable income so that we can use our available NOLs as an offset. As of December 31, 2018, we have a full valuation allowance against our federal and state NOLs that we do not expect to utilize under IRC section 382 as we have concluded, based on all available evidence, that it is more likely than not that we will not utilize these federal and state NOLs prior to their respective expiration.
Changes in United States tax laws could have a material adverse effect on our business, cash flow, results of operations or financial condition.
On December 22, 2017, the U.S. enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (also known as “The Tax Cuts and Jobs Act”). The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined. Legislative or regulatory measures by states or non-U.S. governments in response to the Tax Act or otherwise, or rules and interpretations under the Tax Act, further changes in corporate tax rates, the realizability of the deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses (such as executive compensation) contained in the Tax Act or other tax reform legislation could have a material impact on the value of our deferred tax assets and/or liabilities, could result in significant charges in the current or future taxable years, and could increase our future U.S. tax expense. Furthermore, changes to the taxation of undistributed foreign earnings could change our future intentions regarding the reinvestment of such earnings. The foregoing items could have a material adverse effect on our business, cash flow, results of operations or financial condition.
Disruptions or shortages in the supply of raw materials could adversely affect our operating results and our ability to meet our customers’ demands.
Our business requires materials that are sourced from third party suppliers. If, for any reason, our primary suppliers of metals should curtail or discontinue their delivery of raw materials to us at competitive prices and in a timely manner, our operating results could suffer. Unforeseen disruptions in our supply bases could materially impact our ability to deliver products to customers. The number of available suppliers could be reduced by factors such as industry consolidation and bankruptcies affecting metals producers, or suppliers may be unwilling or unable to meet our demand due to industry supply conditions. If we are unable to obtain sufficient amounts of raw materials from our traditional suppliers, we may not be able to obtain such raw materials from alternative sources at competitive prices to meet our delivery schedules, which could have an adverse impact on our operating results. To the extent we have quoted prices to customers and accepted orders for products prior to purchasing necessary raw materials, or have existing contracts,

9





we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials to our customers.
In some cases the availability of raw materials requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. If we are unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely supply customers with sufficient quantities of products. This could cause us to lose sales, incur additional costs, or suffer harm to our reputation, all of which may adversely affect our operating results.
Increases in freight and energy prices would increase our operating costs and we may be unable to pass these increases on to our customers in the form of higher prices, which may adversely affect our operating results.
We use energy to process and transport our products. The prices for and availability of energy resources are subject to volatile market conditions, which are affected by political, economic and regulatory factors beyond our control. Our operating costs increase if energy costs, including electricity, diesel fuel and natural gas, rise. During periods of higher freight and energy costs, we may not be able to recover our operating cost increases through price increases without reducing demand for our products. In addition, we typically do not hedge our exposure to higher freight or energy prices.
We operate in international markets, which expose us to a number of risks.
Although a majority of our business activity takes place in the United States, we serve and operate in certain international markets, which exposes us to political, economic and currency related risks, including the following:
potential for adverse change in the local political or social climate or in government policies, laws and regulations;
difficulty staffing and managing geographically diverse operations and the application of foreign labor regulations;
restrictions on imports and exports or sources of supply;
currency exchange rate risk; and
changes in duties and taxes.
In addition to the United States, we operate in Canada, Mexico, France, Singapore, and China. An act of war or terrorism or major pandemic event could disrupt international shipping schedules, cause additional delays in importing or exporting products into or out of any of these countries, including the United States, or increase the costs required to do so. In addition, acts of crime or violence in these international markets could adversely affect our operating results. Fluctuations in the value of the U.S. dollar versus foreign currencies could reduce the value of these assets as reported in our consolidated financial statements, which could reduce our stockholders’ equity. If we do not adequately anticipate and respond to these risks and the other risks inherent in international operations, it could have a material adverse impact on our operating results.
The imposition of tariffs or duties on imported metals could significantly increase the price of the metals we purchase from international suppliers and/or result in shortages in the supply of raw materials.
On April 19 and 26, 2017, the U.S. Department of Commerce (the "DOC") initiated investigations under Section 232 of the Trade Expansion Act of 1962 to determine the effects of steel and aluminum imports, respectively, on U.S. national security. On January 11, 2018, the DOC submitted its investigation reports to the President, who, on March 8, 2018, signed two Presidential Proclamations imposing a 25% tariff on steel, and a 10% tariff on aluminum, imported from all countries except Canada and Mexico (and later, other countries granted temporary exemptions), which began on March 23, 2018. On May 31, 2018, the President eliminated the previously granted temporary exemptions, added exemptions for countries that had agreed to quantitative export limits, and imposed additional tariffs on steel and aluminum imported from everywhere else, including Canada and Mexico, effective June 1, 2018. A number of jurisdictions, including Canada and Mexico, the European Union, and others, imposed retaliatory duties on articles of the United States in response.
The imposition of these trade measures, other similar measures imposed by the U.S. government, and retaliatory/corresponding measure by other countries, is expected to continue to have a pervasive impact on the metals market in which we operate. For example, we may be unable to pass through the higher costs to our customers for the metals we buy internationally, which could adversely impact our financial condition and operating results. Similarly, further decreases in imports could cause a disruption or shortage in the availability of the raw materials that we buy, which could limit our ability to meet customer's demand or to purchase material at competitive prices. This could cause us

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to lose sales, incur additional costs, or suffer harm to our reputation, all of which may adversely affect our operating results.
Political and economic uncertainty arising from the outcome of the referendum on the membership of the United Kingdom in the European Union could adversely impact our financial condition and operating results.
On June 23, 2016, the United Kingdom ("UK") voted to leave the European Union (the “EU”). The UK’s vote to voluntarily exit from the EU, generally referred to as the “Brexit,” triggered short-term financial volatility, including a decline in the value of the Great Britain Pound ("GBP") in comparison to both the U.S. dollar and the EU countries' euro. In addition, discussions and negotiations to determine the future terms of the UK’s relationship with the EU are ongoing, and the legal and regulatory framework that will be applicable in the UK may change. The ongoing uncertainty could have a negative economic impact and result in further volatility in the markets for several years. The impact of the Brexit referendum and such ongoing uncertainty may result in various economic and financial consequences for businesses operating in the UK, the EU and beyond.
We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks inherent in doing business in other countries. The majority of our European sales are attributable to our operations in France, with a much smaller portion attributable to our operations in the UK. In the year ended December 31, 2018 (Successor), 0.1% of our consolidated net sales were attributable to our operations in the UK, and 8.9% of our consolidated net sales were attributable to our operations in Europe overall. During the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), 0.1% and 2.3% of our consolidated net sales were attributable to our operations in the UK, respectively, and 9.3% and 9.4% of our consolidated net sales were attributable to our operations in Europe, respectively. As of December 31, 2018, the Company has ceased its operations in the UK and does not expect to have a significant amount of sales directly to the UK in future periods. The Company and its various subsidiaries hold financial assets and liabilities denominated in GBP and Euro, including cash and cash equivalents, accounts receivable, and accounts payable, and the future impacts of the UK’s exit from the EU could have a materially adverse impact on our financial condition and operating results.
A portion of our workforce is represented by collective bargaining units, which may lead to work stoppages.
As of December 31, 2018, approximately 20% of our U.S. employees were represented by the United Steelworkers of America (“USW”) under collective bargaining agreements, including hourly warehouse employees at our distribution centers in Cleveland, Ohio and Hammond, Indiana. As these agreements expire, there can be no assurance that we will succeed in concluding collective bargaining agreements with the USW to replace those that expire. Although we believe that our labor relations have generally been satisfactory, we cannot predict how stable our relationships with the USW will be or whether we will be able to meet the USW requirements without impacting our operating results and financial condition. The USW may also limit our flexibility in dealing with our workforce. Work stoppages and instability in our relationship with the USW could negatively impact the timely processing and shipment of our products, which could strain relationships with customers or suppliers and adversely affect our operating results. Effective May 15, 2018, we entered into a four-year collective bargaining agreement with the USW, which covers approximately 106 employees at our largest facility in Cleveland, Ohio. Approximately 29 employees at our Hammond, Indiana facility are covered by a separate collective bargaining agreement with the USW that was renegotiated effective September 1, 2016 and expires on August 31, 2020.
We rely upon our suppliers as to the specifications of the metals we purchase from them.
We rely on mill or supplier certifications that attest to the physical and chemical specifications of the metals received from our suppliers for resale and generally, consistent with industry practice, do not undertake independent testing of such metals. We rely on our customers to notify us of any product that does not conform to the specifications certified by the supplier or ordered by the customer. Although our primary sources of products have been domestic suppliers, we have and will continue to purchase product from foreign suppliers when we believe it is appropriate. In the event that metal purchased from domestic suppliers is deemed to not meet quality specifications as set forth in the mill or supplier certifications or customer specifications, we generally have recourse against these suppliers for both the cost of the products purchased and possible claims from our customers. However, such recourse will not compensate us for the damage to our reputation that may arise from sub-standard products and possible losses of customers. Moreover, there is a greater level of risk that similar recourse will not be available to us in the event of claims by our customers related to products from foreign suppliers that do not meet the specifications set forth in the mill or supplier certifications. In such circumstances, we may be at greater risk of loss for claims for which we do not carry, or do not carry sufficient, insurance.

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Our business could be adversely affected by a disruption to our primary distribution hubs.
Our largest facilities, in Cleveland (Ohio), Hammond (Indiana), and Janesville (Wisconsin) serve as primary distribution centers that ship product to our other facilities as well as external customers. Our business could be adversely impacted by a major disruption at any of these facilities due to unforeseen developments occurring in or around the facility, such as:
damage to or inoperability of our warehouse or related systems;
a prolonged power or telecommunication failure;
a natural disaster, environmental or public health issue, or an act of war or terrorism on-site.
A prolonged disruption of the services and capabilities of these or other of our facilities could adversely impact our operating results.
Damage to or a disruption in our information technology systems could impact our ability to conduct business and could subject us to liability for failure to comply with privacy and information security laws.
Difficulties associated with the design and implementation of our enterprise resource planning (“ERP”) or other information technology systems could adversely affect our business, our customer service and our operating results.
We rely primarily on one information technology system to provide inventory availability to our sales and operating personnel, improve customer service through better order and product reference data and monitor operating results. Difficulties associated with upgrades or integration with new systems could lead to business interruption that could harm our reputation, increase our operating costs and decrease profitability. In addition, any significant disruption relating to our current information technology systems, whether resulting from such things as fire, flood, tornado and other natural disasters, power loss, network failures, loss of data, security breaches and computer viruses, or otherwise, may have an adverse effect on our business, our operating results and our ability to report our financial performance in a timely manner.
Our business could be negatively impacted by cyber and other security threats or disruptions.
We face various cyber and other security threats, including attempts to gain unauthorized access to our sensitive information and computer networks. Unauthorized or inappropriate access to, or use of, our computer networks or systems may be intentional, unintentional or a result of criminal activity. Such unauthorized or inappropriate access may lead to the corruption of data, which could cause interruption in our operations or damage our computer systems or those of our customers or vendors. A party that is able to circumvent our security measures could also gain unauthorized access to confidential, proprietary, personal or other sensitive information or capabilities, which may belong to third parties, our employees or us.
The occurrence of such threats, attacks or incidents exposes us to risk of loss and possible claims brought by our customers, employees or other parties with whom we have commercial relationships, as well as actions by government regulators. In addition to potential legal liability, these activities may interfere with our ability to provide our products and services. Further, a perception that our security measures are ineffective against security incidents could damage our reputation, and we could lose employees, customers or vendors. Any of these occurrences could have an adverse impact on our financial condition and results of operations.
Thus, the success of our business depends on the security of our computer networks and systems and, in part, on the security of the computer networks and systems of our third-party vendors. Although we utilize various procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures and controls will be sufficient. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, we may be unable to anticipate these techniques or to implement adequate preventative measures. We also cannot give assurance that the security measures of our third-party vendors, including network and system providers, providers of customer and vendor support services and other vendors will be adequate. Thus, we may need to expend significant resources to protect against security breaches or to address problems caused by such breaches.
Ownership of our stock is concentrated, which may limit stockholders’ ability to influence corporate matters.
The Company’s ownership is concentrated among a small group of institutional investors and/or hedge funds and the Company’s management team. Certain directors, their affiliates, and/or any other concentrated ownership interests may have the voting power to substantially affect or control the outcome of matters requiring a stockholder vote including the election of directors and the approval of significant corporate matters. Such a concentration of control could

12





adversely affect the market price of our common stock or prevent a change in control or other business combinations that might be beneficial to us.
We could be vulnerable to interest rate fluctuations on our indebtedness, which could hurt our operating results.
We are exposed to various interest rate risks that arise in the normal course of business. Market risk arises from changes in interest rates. We currently finance our operations with both fixed rate and variable rate borrowings, and the market value of our $203.8 million of fixed rate borrowings may be impacted by changes in interest rates. In addition, if in the future interest rates subsequently increase significantly, it could significantly increase the interest expense on our variable rate borrowings which could have an adverse effect on our operating results and liquidity.
We may face risks associated with current or future litigation and claims.
From time to time, we are involved in a variety of lawsuits, claims and other proceedings relating to the conduct of our business. These suits concern issues including contract disputes, employment actions, employee benefits, taxes, environmental, health and safety, personal injury and product liability matters. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While it is not feasible to predict the outcome of all pending lawsuits and claims, we do not believe that the disposition of any such pending matters is likely to have a materially adverse effect on our financial condition or liquidity, although the resolution in any reporting period of one of more of these matters could have an adverse effect on our operating results for that period. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results.
We could incur substantial costs in order to comply with, or to address any violations under, environmental and employee health and safety laws, which could adversely affect our operating results.
Our operations are subject to various environmental statutes and regulations, including laws and regulations governing materials we use and our facilities. In addition, certain of our operations are subject to international, federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Our operations are also subject to various employee safety and health laws and regulations, including those concerning occupational injury and illness, employee exposure to hazardous materials and employee complaints. Certain of our facilities are located in industrial areas, have a history of heavy industrial use and have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Currently unknown cleanup obligations at these facilities, or at off-site locations at which materials from our operations were disposed, could result in future expenditures that cannot be currently quantified, but which could have a material adverse effect on our financial condition, liquidity or operating results.
Potential environmental legislative and regulatory actions could impose significant costs on the operations of our customers and suppliers, which could have a material adverse impact on our results of operations, financial condition and cash flows.
As a metals distributor, our operations do not emit significant amounts of greenhouse gas ("GHG"). However, the manufacturing processes of many of our suppliers and customers are energy intensive and generate carbon dioxide and other GHG emissions. Any adopted future climate change and GHG legislative or regulatory measures may impose significant costs on the operations of our customers and suppliers and indirectly impact our operations. Until the timing, scope and extent of any future legislation and regulation becomes known, we cannot predict the effect on our results of operations, financial condition and cash flows.
We have various mechanisms in place that may prevent a change in control that stockholders may otherwise consider favorable.
We are subject to the anti-takeover provisions of the Maryland General Corporation Law (the “MGCL”) that prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of five years after the date of the transaction in which the person first becomes an “interested stockholder,” unless the business combination or stockholder interest is approved in a prescribed manner. The application of these and certain other provisions of our charter or the MGCL could have the effect of delaying or preventing a change of control, which could adversely affect the market price of our common stock.

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The provisions of our debt instruments also contain limitations on our ability to enter into change of control transactions. In addition, the repurchase rights in our Second Lien Notes triggered by the occurrence of a fundamental change (as defined in the indenture for the Second Lien Notes), and the additional shares of our common stock by which the conversion rate is increased in connection with certain fundamental change transactions, as described in the indenture for the Second Lien Notes, could discourage a potential acquirer.
ITEM 1B — Unresolved Staff Comments
None.

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ITEM 2 — Properties
The Company’s corporate headquarters are located in Oak Brook, Illinois. All properties and equipment are sufficient for the Company’s current level of activities. As of December 31, 2018, distribution centers and sales offices are maintained at each of the following locations, most of which are leased, except as indicated:
Locations
Approximate
Floor Area in
Square Feet

 
North America
 
 
Bedford Heights, Ohio
374,400

(1)
Charlotte, North Carolina
116,500

(1)
Fairless Hills, Pennsylvania
71,600

(1)
Fort Smith, Arkansas
28,000

 
Grand Prairie, Texas
78,000

(1)
Hammond, Indiana (H-A Industries)
252,595

  
Janesville, Wisconsin
208,000

 
Kennesaw, Georgia
87,500

  
Mexicali, Mexico
160,220

 
Mississauga, Ontario
57,000

  
Paramount, California
155,568

  
Queretaro, Mexico
32,291

 
Santa Cantarina, Nuevo Leon, Mexico
97,692

  
Saskatoon, Saskatchewan
15,000

  
Selkirk, Manitoba
50,000

(1)
Stockton, California
60,000

  
Wichita, Kansas
68,900

  
Europe
 
 
Tarbes, France
36,705

 
Montoir de Bretagne, France
38,940

  
Asia
 
 
Shanghai, China
45,700

  
Singapore
39,578

 
Sales Offices
 
 
Auburn, Massachusetts
(Intentionally left blank)

 
Bilbao, Spain
(Intentionally left blank)

 
Sub-Total
2,074,189

  
 
 
 
Headquarters
 
 
Oak Brook, Illinois
39,361

(2)
GRAND TOTAL
2,113,550

  
 
(1)
Represents owned facility.
(2)
The Company’s principal executive office does not include a distribution center.

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ITEM 3 — Legal Proceedings
The Company is party to a variety of legal proceedings, claims, and inquiries, including proceedings or inquiries by governmental authorities, which arise from the operation of its business. These proceedings, claims, and inquiries are incidental to and occur in the normal course of the Company's business affairs. The majority of these proceedings, claims, and inquiries relate to commercial disputes with customers, suppliers, and others; employment and employee benefits-related disputes; product quality disputes with vendors and/or customers; and environmental, health and safety claims. It is the opinion of management that the currently expected outcome of these proceedings, claims, and inquiries, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on the consolidated results of operations, financial condition or cash flows of the Company.
ITEM 4 — Mine Safety Disclosures
Not applicable.

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Executive Officers of the Registrant
The following selected information for each of our current executive officers (as defined by regulations of the SEC) was prepared as of March 15, 2019.
Name and Title
Age
 
Business Experience
Patrick R. Anderson
Executive Vice President, Finance & Administration
47

 
Mr. Anderson began his employment with the registrant in 2007 as Vice President, Corporate Controller and Chief Accounting Officer. In September 2014, he was appointed to the position of Interim Vice President, Chief Financial Officer and Treasurer, and in May 2015 was appointed to the position of Executive Vice President, Chief Financial Officer & Treasurer. In December 2018, he was appointed to the position of Executive Vice President, Finance & Administration. Prior to joining the registrant, he was employed with Deloitte & Touche LLP (a global accounting firm) from 1994 to 2007.
Marec E. Edgar
President
43

 
Mr. Edgar began his employment with the registrant in April 2014, as Vice President, General Counsel and Secretary. In May 2015, he was appointed to the position of Executive Vice President, General Counsel, Secretary & Chief Administrative Officer. In November 2018, he was promoted to the position of President. Prior to joining the registrant, he held positions of increasing responsibility with Gardner Denver, Inc. (a global manufacturer of industrial compressors, blowers, pumps, loading arms and fuel systems) from 2004 to 2014. Before joining the registrant, he served as Assistant General Counsel and Risk Manager and Chief Compliance Officer of Gardner Denver.
Steven W. Scheinkman
Chairman & Chief Executive Officer

65

 
Mr. Scheinkman began his employment with the registrant in April 2015 as President & Chief Executive Officer, and became Chairman of the registrant's Board of Directors in September 2017. Mr. Scheinkman resigned as President of the registrant in November 2018, concurrent with Mr. Edgar's promotion to President. Mr. Scheinkman was an independent member of the Company’s Board of Directors from March 2015 to April 2015. Prior to joining the registrant, Mr. Scheinkman served as President and Chief Executive Officer and a director of Innovative Building Systems LLC, and certain of its affiliates and predecessor entities (a leading customer modular home producer) beginning in 2010. He served as a director of Claymont Steel Holdings, Inc. (a manufacturer of custom discrete steel plate) from 2006 to 2008. He served as the President and Chief Executive Officer and a director of Transtar Metals Corp. (“Transtar”) (a supply chain manager/distributor of high alloy metal products for the transportation, aerospace and defense industries) from 1999 to 2006. Following Transtar’s acquisition by the Company in September 2006, he served as President of Transtar Metals Holdings, Inc. until September 2007, and thereafter served as its advisor until December 2007. He served in various capacities as an executive officer of Macsteel Service Centers USA (a distributor and processor of steel products) including President, Chief Operating Officer and Chief Financial Officer, from 1986 to 1999.


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PART II
ITEM 5 — Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is traded on the OTCQX tier of the OTC Markets Group, Inc. ("OTCQX") under the symbol "CTAM".
As of December 31, 2018, there were approximately 335 stockholders of record of our common stock, which excludes stockholders whose shares were held in nominee or street name by brokers.
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, for information regarding common stock authorized for issuance under equity compensation plans.


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ITEM 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Information regarding the business and markets of A.M. Castle & Co. and its subsidiaries (the “Company”) is included in Item 1 “Business” of this annual report on Form 10-K.
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.
EXECUTIVE OVERVIEW
Presentation of Predecessor and Successor
The Company adopted fresh-start reporting as of August 31, 2017, the date the Company and four of its subsidiaries' (together with the A.M. Castle & Co., the "Debtors") Amended Prepackaged Joint Chapter 11 Plan of Reorganization filed with the United States Bankruptcy Court for the District of Delaware in Wilmington, Delaware on July 25, 2017 (the "Plan") became effective (the "Effective Date") pursuant to its terms, and the Debtors emerged from their chapter 11 cases. As a result of the application of fresh-start reporting, the Company's financial statements for periods prior to the Effective Date are not comparable to those for periods subsequent to the Effective Date. References in this report to “Successor” refer to the Company on or after the Effective Date. References to “Predecessor” refer to the Company prior to the Effective Date. Operating results for the Successor and Predecessor periods are not necessarily indicative of the results to be expected for a full fiscal year. References such as the “Company,” “we,” “our” and “us” refer to A.M. Castle & Co. and its consolidated subsidiaries, whether Predecessor and/or Successor, as appropriate.
In the following discussion and analysis of the results of operations and liquidity, the Company compares certain financial information for the year ended December 31, 2018 to the year ended December 31, 2017. The Company believes that in certain instances, combining the financial results when discussing the Predecessor and Successor periods within the year ended December 31, 2017 is useful for management and investors to assess the Company's ongoing financial and operational performance and trends.
Financial Results Summary
The Company’s strategy is to become a leading global provider of metals products and services and specialized supply chain solutions to targeted global industries.
During the year ended December 31, 2018 (Successor):
Net sales increased by 12.2% compared to the prior year combined periods of September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor). The increase in net sales in the current year was driven primarily by a substantial increase in commodities pricing as well as the favorable impact of the announced imposition of tariffs buy the U.S. on imports of steel and aluminum from certain countries.
Operating loss improved from a loss of $13.1 million in the period September 1, 2017 through December 31, 2017 (Successor) and $14.4 million in the period January 1, 2017 through August 31, 2017 (Predecessor) to an operating loss of $16.7 million in the year ended December 31, 2018 (Successor).
Operating cash flows improved from a use of cash of $20.6 million in the period September 1, 2017 through December 31, 2017 (Successor) and $50.3 million in the period January 1, 2017 through August 31, 2017 (Predecessor) to a use of cash of $23.8 million in the year ended December 31, 2018 (Successor).
On June 1, 2018, the Company entered into an Amendment No. 1 to Revolving Credit and Security Agreement, which amended its existing $125.0 million revolving credit facility to provide for additional borrowing capacity of $25.0 million. Refer to Note 4 - Debt, to the Notes to the Consolidated Financial Statements for further details.
Recent Market and Pricing Trends
After several years of a challenging pricing environment within the metals market, commodities pricing improved significantly in 2018. The higher pricing of its products favorably impacted the Company's overall operating results in 2018, as opposed to the prior years in which the lower pricing of its products unfavorably impacted the Company's

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overall operating results. Management believes the Company's overall operating results will continue to be significantly impacted by the pricing of its products. To the extent that the Company can pass through higher material costs to its contractual customers, higher prices within the metals market will have an overall favorable impact on the Company's operating results. If higher material costs are not passed through to its contractual customers, or if prices begin to decrease within the metals market, the Company's operating results will be adversely impacted.
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.
The U.S. government's imposition of tariffs on all imports of steel and aluminum as a result of Section 232 of the Trade Expansion Act of 1962 ("Section 232") favorably impacted product pricing in 2018 which, in turn, favorably impacted the Company's operating results. In the year ended December 31, 2018 (Successor), the Company's year over year net sales increased $63.2 million, or 12.2%, compared to the combined periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), driven by sales price increases on the majority of the products the Company sells. The Company's operating loss improved by $10.8 million, or 39.3%, from an operating loss of $27.5 million in the combined periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) to an operating loss of $16.7 million in the year ended December 31, 2018 (Successor). Because of its long-standing relationships with domestic steel mills, the Company believes it was well-positioned to take advantage of an increasing pricing environment resulting from the Section 232 tariffs as compared to U.S. based metals service centers that are more reliant on imported steel and aluminum products.
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. As witnessed in 2018, industry regulation, such as that under Section 232, and 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 its recent restructuring activities have put the Company is a better position to react to variability in end-market demand and to manage the impact that demand variability might have on operating margins.
Industry data provided by the Metals Service Center Institute ("MSCI") indicates that overall 2018 U.S. steel service center shipment volumes increased 4% compared to 2017 levels. According to MSCI data, industry sales volumes of products consistent with the Company's product mix increased 5% in 2018 compared to 2017. Of the U.S. steel service center products tracked by the MSCI, shipment volumes for aluminum, stainless, and carbon flat rolled, plate, pipe and tube, and structural products had the most significant increases 2018 compared to 2017 with carbon bars only having a modest increase compared to last year.
Demand for the Company's products remained steady in 2018. Tons sold per day increased compared to the prior year for many of the products the Company sells. Most notably, the Company experienced an increase in demand for its aluminum and stainless products in 2018 compared to the prior year, primarily the result of strength in the aerospace market, a trend the Company expects to continue. Tons sold per day of alloy bar also increased in 2018 compared to 2017. Offsetting these increases in demand was a decrease in tons sold per day of carbon and alloy plate and SBQ bar.
The Company's gross material margin, calculated as net sales less cost of materials (exclusive of depreciation and amortization) divided by net sales, improved to 24.9% in 2018 compared to 24.0% in the combined Successor and Predecessor periods in 2017. Along with being favorably impacted by sales price increases, the Company improved its gross margin in 2018 by implementing improved inventory management strategies and by better matching sales prices with the inventory replacement cost. The Company expects its margins will continue to improve in 2019 as its excess inventory is sold and replaced with inventory better matched to the current market conditions, and to the extent

20





that the pricing environment remains strong and the Company is able to pass through higher material costs from its suppliers.
Current Business Outlook
The Company is principally focused on two key markets, aerospace and industrial.
The aerospace market continues to be strong with defense and commercial spending driving the demand for the Company's aluminum, stainless, and titanium products. The Company expects the aerospace market to remain stable and for business to improve, particularly where the Company has long-term contracts with subcontractors who support platforms that are anticipated to grow. However, the Company does anticipate continued pressure on transactional pricing resulting from competition in the market.
After exhibiting weakness the last several years, the industrial market has shown signs of stabilizing. General sentiment in the industrial market has improved with mining, heavy machinery and light vehicles all having a positive outlook. Given the Company's lower cost structure, which is the result of its restructuring activities, it does see an opportunity to grow market share by continuing to improve its conversion rate on transactional business on a competitive basis at still accretive net margins.
The Company expects Section 232 tariffs to continue to have a favorable impact on the pricing of the Company's products, although it also expects U.S. mill pricing to increase, resulting in higher material costs. However, given its long-standing relationships with domestic steel mills, the Company also believes it is currently well-positioned to take advantage of an increasing pricing environment expected to result from the tariffs and may have a competitive price advantage relative to other U.S.-based steel service centers that are more reliant on imported steel and aluminum products. Further, as the U.S. government continues to negotiate trade deals with foreign nations, which will impact future tariffs or duties on the importing of steel or aluminum, the Company expects uncertainty to contribute to a competitive pricing environment in 2019.
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) Income.
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 freight charges, excluding depreciation and amortization which are 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 and amortization expenses, including depreciation for all owned property and equipment, and amortization of various intangible assets (amortization in Predecessor period only).

21





Year Ended December 31, 2018 (Successor) Compared to the Periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor)
The following table sets forth certain statement of operations data in the year ended December 31, 2018 (Successor) and in the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor).
 
Successor
 
 
Predecessor
 
 
 
 
 
Year Ended December 31, 2018
 
September 1, 2017 through
December 31, 2017
*As Adjusted
 
 
January 1, 2017 through
August 31, 2017
*As Adjusted
 
Favorable/
(Unfavorable)
 (Dollar amounts in millions)
$
 
% of Net Sales
 
$
 
% of Net Sales
 
 
$
 
% of Net Sales
 
Year-over-Year $ Change
 
Year-over-Year % Change
Net sales
$
582.0

 
100.0
 %
 
$
164.9

 
100.0
 %
 
 
$
353.9

 
100.0
 %
 
$
63.2

 
12.2
 %
Cost of materials (exclusive of depreciation and amortization)
437.1

 
75.1
 %
 
127.8

 
77.5
 %
 
 
266.5

 
75.3
 %
 
(42.8
)
 
(10.9
)%
Operating costs and expenses
161.7

 
27.8
 %
 
50.2

 
30.4
 %
 
 
101.8

 
28.8
 %
 
(9.7
)
 
(6.4
)%
Operating loss
$
(16.7
)
 
(2.9
)%
 
$
(13.1
)
 
(7.9
)%
 
 
$
(14.4
)
 
(4.1
)%
 
$
10.8

 
39.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Adjusted due to the adoption of ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." See Note 1 - Basis of Presentation and Significant Accounting Policies, for additional information.
Net Sales
Net sales of $582.0 million in the year ended December 31, 2018 (Successor) were an increase of $63.2 million, or 12.2%, compared to $164.9 million in the period September 1, 2017 through December 31, 2017 (Successor) and $353.9 million in the period January 1, 2017 through August 31, 2017 (Predecessor). The increase in net sales in the current year was driven primarily by a substantial increase in commodities pricing as well as the favorable impact of the announced imposition of tariffs by the U.S. on all imports of steel and aluminum. Overall, average selling prices increased 12.6% in the year ended December 31, 2018 (Successor) compared to the prior year with favorable selling prices realized on every product the Company sells. The most favorable selling prices were realized on the majority of the Company's highest selling products including all carbon and alloy products, as well as SBQ, aluminum and stainless. Tons sold per day remained virtually flat in the year ended December 31, 2018 (Successor) compared to the same period last year.
Cost of Materials
Cost of materials (exclusive of depreciation and amortization) were $437.1 million in the year ended December 31, 2018 (Successor) compared to $127.8 million in the period September 1, 2017 through December 31, 2017 (Successor) and $266.5 million in the period January 1, 2017 through August 31, 2017 (Predecessor). The $42.8 million, or 10.9%, increase in the year ended December 31, 2018 (Successor) compared to the same combined periods in 2017 was primarily due to an increase in product mill pricing resulting from higher market demand for metals and higher commodity pricing.
Cost of materials (exclusive of depreciation and amortization) decreased to 75.1% of net sales in the year ended December 31, 2018 (Successor) compared to 77.5% of net sales in the period September 1, 2017 through December 31, 2017 (Successor) and 75.3% of net sales in the period January 1, 2017 through August 31, 2017 (Predecessor) due mainly to imposition of tariffs, which favorably impacted the Company's gross material margin (calculated as net sales less cost of materials divided by net sales) as the Company experienced an overall increase in its average selling prices per ton sold. Gross material margins were also beneficially impacted by the elimination of some lower margin sales in the current year as compared to the prior year, as well as the negative impacts of the Company's bankruptcy proceedings on gross material margins in the prior year.

22





Operating Costs and Expenses and Operating Loss
Operating costs and expenses in the year ended December 31, 2018 (Successor) and in the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) were as follows:
 
Successor
 
 
Predecessor
 
Favorable/
(Unfavorable)
 
Year Ended December 31, 2018
 
September 1, 2017
through
December 31, 2017
* As Adjusted
 
 
January 1, 2017
through
August 31, 2017
*As Adjusted
 
Year-over-Year $ Change
 
Year-over-Year % Change
 (Dollar amounts in millions)
 
 
 
 
 
Warehouse, processing and delivery expense
$
83.7

 
$
25.4

 
 
$
50.2

 
$
(8.1
)
 
(10.7
)%
Sales, general and administrative expense
68.9

 
21.6

 
 
40.8

 
(6.5
)
 
(10.4
)%
Restructuring expense, net

 

 
 
0.6

 
0.6

 
n/a
Depreciation and amortization expense
9.1

 
3.2

 
 
10.2

 
4.3

 
32.1
 %
Total operating costs and expenses
$
161.7

 
$
50.2

 
 
$
101.8

 
$
(9.7
)
 
(6.4
)%
 
 
 
 
 
 
 
 
 
 
 
* Adjusted due to the adoption of ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." See Note 1 - Basis of Presentation and Significant Accounting Policies, for additional information.

Total operating costs and expenses increased by $9.7 million to $161.7 million in the year ended December 31, 2018 (Successor) from $50.2 million in the period September 1, 2017 through December 31, 2017 (Successor) and $101.8 million in the period January 1, 2017 through August 31, 2017 (Predecessor):
Warehouse, processing and delivery expense increased by $8.1 million primarily as a result of higher payroll and benefits costs, as well as higher warehouse and freight costs attributable to an increase in labor costs and fuel prices. Also, the prior year was favorably impacted by the timing of the resolution of certain real estate and personal property tax matters associated with two facilities which were closed in the first quarter of 2016. The resolution of these matters contributed a $3.9 million offset to the warehouse, processing, and delivery expense in the prior year.
Sales, general and administrative expense increased by $6.5 million mainly as a result of higher payroll and benefit costs, as well as costs incurred for outside professional services for the review of the Company’s information technology security processes and protocol for potential enhancement. Also included in sales, general and administrative expenses in the year ended December 31, 2018 (Successor) were costs associated with the Company's business development initiatives.
Depreciation and amortization expense decreased by $4.3 million due mainly to no amortization of intangible assets in the year ended December 31, 2018 (Successor). Prior to the Effective Date, the Predecessor had definite-lived intangible assets, which were amortized over the period January 1, 2017 through August 31, 2017 (Predecessor). After the application of fresh start accounting, the Company did not have any amortizable intangible assets.
Operating loss in the year ended December 31, 2018 (Successor) was $16.7 million compared to $13.1 million in the period September 1, 2017 through December 31, 2017 (Successor) and $14.4 million in the period January 1, 2017 through August 31, 2017 (Predecessor).
Other Income and Expense, Income Taxes and Net Loss
See Note - 1 Basis of Presentation and Significant Accounting Policies to the Notes to the Consolidated Financial Statements for further discussion of amounts reclassified in prior year financial statements as a result of the adoption of Accounting Standards Update ("ASU") No. 2017-07.
Interest expense, net was $33.2 million in the year ended December 31, 2018 (Successor) compared to $9.2 million in the period September 1, 2017 through December 31, 2017 (Successor) and $26.6 million in the period January 1, 2017 through August 31, 2017 (Predecessor). The Company has reduced its debt and contractual interest burden from what it had been in the prepetition periods resulting in lower interest expense from debt in the year ended December 31, 2018 (Successor) compared to the same period last year.

23





Financial restructuring expense of $7.0 million in the period January 1, 2017 through August 31, 2017 (Predecessor) was comprised of legal and other professional fees incurred prior to filing the chapter 11 bankruptcy petitions in connection with the financial restructuring of the debt and equity of the Company.
The unrealized gain on embedded conversion option of $2.4 million in the period September 1, 2017 through December 31, 2017 (Successor) is the result of the mark-to-market adjustment associated with the bifurcated embedded derivative liability of the Company's 5.00% / 7.00% Convertible Senior Secured PIK Toggle Notes due 2022 (the "Second Lien Notes"). On December 31, 2017, the Company determined that the condition that caused the conversion option to not meet the criteria to be considered indexed to the Company’s common stock was no longer in effect, and the conversion option met the criteria to be considered indexed to the Company’s common stock effective December 31, 2017 (see Note 4 - Debt, in the Notes to the Consolidated Financial Statements). Accordingly, the previously bifurcated embedded conversion option was remeasured to a fair value and reclassified from a liability to additional paid-in capital.
Other income, net, was $8.0 million in the year ended December 31, 2018 (Successor) compared to $5.6 million in the period September 1, 2017 through December 31, 2017 (Successor) and $8.4 million the period January 1, 2017 through August 31, 2017 (Predecessor). Included in other income, net in the year ended December 31, 2018 (Successor) was net pension benefit of $7.9 million. Included in other income, net in the periods September 1, 2017 through September 30, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) were net pension benefits of $2.8 million and $4.9 million, respectively. The remaining other income, net for the comparative periods is comprised mostly of foreign currency transaction gains. The Company recorded a foreign currency transaction gain of $0.1 million in the year ended December 31, 2018 (Successor), compared to a foreign currency transaction gain of $3.6 million in each of the periods September 1, 2017 through September 30, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor).
Reorganization items, net, in the period September 1, 2017 through December 31, 2017 (Successor) was an expense of $2.1 million and a gain of $74.5 million in the period January 1, 2017 through August 31, 2017 (Predecessor). Amounts recorded relate to expenses and income directly associated with the chapter 11 proceedings and incurred during or, in the case of some professional fees, after the pendency of the Company's chapter 11 cases. The balance for the period September 1, 2017 through December 31, 2017 (Successor) is comprised solely of professional fees. The balance for the period January 1, 2017 through August 31, 2017 (Predecessor) is comprised of a gain on extinguishment of debt of $90.0 million and a gain on fresh-start revaluation of $16.6 million. Offsetting these gains are $10.3 million related to the write-off of debt issuance costs and discounts related to the Company’s 12.75% Senior Secured Notes due 2018 (the "Pre-Bankruptcy Secured Notes") and the Company’s 5.25% Convertible Senior Secured Notes due 2019 (the "Pre-Bankruptcy Convertible Notes"), prepayment penalties and debt related fees of $13.2 million, professional fees of $7.3 million, and key employee incentive plan expense of $1.2 million (refer to Note 2 - Bankruptcy Relates Disclosures, in the Notes to the Consolidated Financial Statements).
The Company recorded an income tax benefit of $4.8 million in the year ended December 31, 2018 (Successor) compared to an income tax benefit of $3.2 million in the period September 1, 2017 through December 31, 2017 (Successor) and $1.4 million in the period January 1, 2017 through August 31, 2017 (Predecessor). The Company’s effective tax rate is expressed as income tax expense benefit as a percentage of (loss) income before income taxes. The effective tax rate was 11.4% in the year ended December 31, 2018 (Successor), and 19.3% and (4.0)% in the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), respectively. The change in the effective tax rate between periods resulted from changes in the geographic mix and timing of income (losses), the inability to benefit from current year losses due to valuation allowance positions in the U.S., the impact of the recent U.S. tax reform, and the impact of intraperiod allocations.
Net loss was $37.1 million in the year ended December 31, 2018 (Successor) compared to net loss $13.3 million in the period September 1, 2017 through December 31, 2017 (Successor) and net income of $36.2 million in the period January 1, 2017 through August 31, 2017 (Predecessor). Net income in the period January 1, 2017 through August 31, 2017 (Predecessor) includes the gain of $74.5 million for reorganization items, net.

24





Liquidity and Capital Resources
Cash and cash equivalents increased (decreased) as follows:
 
Successor
 
 
Predecessor
 
Year Ended December 31, 2018
 
September 1, 2017
Through
December 31, 2017
 
 
January 1, 2017
Through
August 31, 2017
(Dollar amounts in millions)
 
 
 
Net cash used in operating activities
$
(23.8
)
 
$
(20.6
)
 
 
$
(50.3
)
Net cash (used in) from investing activities
(5.6
)
 
(3.7
)
 
 
5.3

Net cash from financing activities
27.3

 
24.7

 
 
18.6

Effect of exchange rate changes on cash and cash equivalents
(0.3
)
 
0.6

 
 
0.9

Net change in cash and cash equivalents
$
(2.4
)
 
$
1.0

 
 
$
(25.6
)
The Company’s principal sources of liquidity are cash provided by operations and proceeds from borrowings under its revolving credit facilities. As discussed in further detail below and in Note 4 - Debt, in the Notes to the Consolidated Financial Statements, on June 1, 2018, the Company entered into an amendment to its existing credit agreement governing its revolving credit facility (the "Credit Agreement Amendment") which increased the maximum borrowing availability under its existing revolving credit facilities by $25.0 million, to a total maximum borrowing capacity of $150.0 million.
In periods of market growth, such as those currently being experienced, a substantial amount of the Company's principal sources of liquidity are invested in working capital to support the growth. Accordingly, the Company expects working capital increases to result in a cash flow use from operations in the near term, supported by continued higher borrowings under its revolving credit facilities.
Specific components of the change in working capital (defined as current assets less current liabilities) are highlighted below:
Increases in accounts receivable in the year ended December 31, 2018 (Successor), and both the period September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) resulted in a $6.1 million, $2.2 million and $6.1 million cash flow use, respectively. The higher accounts receivable balance in each respective period is primarily attributable to increased sales. Average receivable days outstanding was 54.4 days in the year ended December 31, 2018 and 53.3 days in the year ended December 31, 2017.
Increases in inventory levels in the year ended December 31, 2018 (Successor), and both the period September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) resulted in a $7.7 million, $2.0 million and $2.7 million cash flow use, respectively. The higher inventory balance in each respective period is primarily attributable to increased investment in inventory to support the Company's sales growth, as well as the higher price of the inventory due to pricing increases from the Company's suppliers. Average days sales in inventory were 133.5 days in the year ended December 31, 2018 as compared to 140.6 days in the year ended December 31, 2017. The decrease in average days sales in inventory in 2018 compared to 2017 resulted primarily from improved inventory management. The Company's inventory management strategy is focused on adjusting its inventory deployment initiatives to better align inventory at its facilities with the needs of the customers specific to that facility.
Total accounts payable, accrued payroll and employee benefits, and accrued and other current liabilities provided a cash flow source of $3.7 million in the year ended December 31, 2018 (Successor), a cash flow use of $4.4 million in the period September 1, 2017 through December 31, 2017 (Successor), and a cash flow use of $2.6 million in the period January 1, 2017 through August 31, 2017 (Predecessor). Accounts payable days outstanding were 41.9 days in the year ended December 31, 2018 and 41.4 days in the same period last year.
Net cash used in investing activities of $5.6 million in the year ended December 31, 2018 (Successor) and $3.7 million in the period September 1, 2017 through December 31, 2017 (Successor) was almost entirely the result of cash paid for capital expenditures. Net cash from investing activities of $5.3 million in the period January 1, 2017 through August 31, 2017 (Predecessor) was mainly due to a $7.5 million reduction in the cash collateralization requirements of outstanding letters of credit, partially offset by cash paid for capital expenditures of $2.9 million in the period.

25





Net cash from financing activities of $27.3 million in the year ended December 31, 2018 (Successor) was mainly attributable to net proceeds from borrowings under the Company's Expanded ABL Credit Agreement (defined below), partially offset by payments of $0.9 million made in connection with the Company's build-to-suit liability associated with its warehouse in Janesville, WI. During the period September 1, 2017 through December 31, 2017 (Successor), net cash from financing activities of $24.7 million was mainly attributable to borrowings under the Company's Revolving Credit and Security Agreement (the "ABL Credit Agreement") dated as of August 31, 2017 with PNC Bank, National Association ("PNC"), as lender and as administrative and collateral agent (the “Agent”) which, provided for a $125.0 million senior secured, revolving credit facility for the Company (the "Revolving A Credit Facility"). Finally, during the period January 1, 2017 through August 31, 2017 (Predecessor), net cash from financing activities of $18.6 million was mainly attributable to proceeds and repayments of debt in connection with the Company's 2017 bankruptcy proceedings, as well as net proceeds from short-term borrowings under the Company's foreign line of credit. Partially offsetting these net cash proceeds were payments of $3.0 million made in connection with the Company's build-to-suit liability associated with its warehouse in Janesville, WI.
As fully discussed at Note 2 - Bankruptcy Related Disclosures, in the Notes to the Consolidated Financial Statements, on August 31, 2017, the Company's bankruptcy plan became effective pursuant to its terms and the Debtors emerged from their chapter 11 cases. By operation of the Plan, all outstanding indebtedness, accrued interest, and related fees of the Debtors under the Credit and Guaranty Agreement, dated December 8, 2016, by and among the Company, Highbridge International Capital Management, LLC, Corre Partners Management, LLC, Whitebox Credit Partners, L.P., WFF Cayman II Limited, and SGF, LLC and Cantor Fitzgerald Securities, among others (as amended, the “Pre-Bankruptcy Credit Facilities Agreement”), amounting to $49.4 million, was paid in full with the proceeds of borrowings under the Revolving A Credit Facility and the issuance of Second Lien Notes under the Indenture dated August 31, 2017 ("Second Lien Notes Indenture"). Also, on the Effective Date and by operation of the Plan, all outstanding indebtedness of the Debtors under (i) the Company's Indenture dated February 8, 2016, by and between the Company, as issuer, its guarantors, and U.S. Bank National Association, as trustee (the "Pre-Bankruptcy Secured Notes Indenture"), and the Pre-Bankruptcy Secured Notes issued pursuant thereto, and (ii) the Company's Indenture dated May 19, 2016, by and between the Company, as issuer, its guarantors, and U.S. Bank National Association, as trustee (the "Pre-Bankruptcy Convertible Notes Indenture"), and the Pre-Bankruptcy Convertible Notes issues pursuant thereto, were discharged and canceled.
The ABL Credit Agreement provided for a $125.0 million senior secured, revolving credit facility under which the Company and four of its subsidiaries each are borrowers (collectively, in such capacity, the “Borrowers”). On June 1, 2018, the Company entered into the Credit Agreement Amendment by and among the Company, the Borrowers and guarantors party thereto, and the Agent and the lenders party thereto, which amended the ABL Credit Agreement (as amended by the Credit Agreement Amendment, the "Expanded ABL Credit Agreement") to provide for additional borrowing capacity. The Expanded 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 "Expanded Credit Facility") made available in part by way of a participation in the Revolving B Credit Facility by certain of the Company’s shareholders. Borrowings under the Expanded Credit Facility will mature on February 28, 2022.
Subject to certain exceptions and permitted encumbrances, the obligations under the Expanded Credit Facility are secured by a first priority security interest in substantially all of the assets of each of the Borrowers and certain of their foreign subsidiaries. The proceeds of the advances under the Expanded Credit Facility may only be used to (i) pay certain fees and expenses to the Agent and the lenders under the Expanded Credit Facility, (ii) provide for 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 June 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 Expanded ABL Credit Agreement.
The Company may prepay its obligations under the Expanded Credit Facility 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 June 1, 2020, a 0.50% fee shall be due for the period from June 1, 2018 through May 31, 2019 and 0.25% for the period from June 1, 2019 through May 31, 2020, in each case on the amount of such commitment reduction, subject to reduction as set forth in the Expanded ABL Credit Agreement. Indebtedness for borrowings under the Expanded Credit Facility is subject to acceleration upon the occurrence of specified defaults or events of default, including failure to pay principal or interest, the inaccuracy of any representation or warranty of a loan party, failure by a loan party to perform certain covenants, defaults under indebtedness owed to third parties, certain liability producing

26





events relating to ERISA, the invalidity or impairment of the Agent’s lien on its collateral or of any applicable guarantee, and 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 Expanded 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 Expanded 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 Expanded Credit Facility, 0.375% per annum) multiplied by (ii) the amount by which the maximum advance amount of the Expanded Credit Facility exceeds such average daily Expanded Credit Facility usage for such month.
Under the Expanded 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, 2018 (Successor), the weighted average advance rates used in the borrowing base calculation are 85.0% on eligible accounts receivable and 71.3% on eligible inventory.
The Company's Expanded ABL Credit Agreement contains certain covenants and restrictions customary to an asset-based revolving loan. Indebtedness for borrowings under the Expanded ABL Credit Agreement is subject to acceleration upon the occurrence of specified defaults or events of default, including failure to pay principal or interest, the inaccuracy of any representation or warranty of a loan party, failure by a loan party to perform certain covenants, defaults under indebtedness owed to third parties, certain liability producing events relating to ERISA, the invalidity or impairment of the Agent’s lien on its collateral or of any applicable guarantee, and certain adverse bankruptcy-related and other events.
The Company's Expanded 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 when the Company's cash liquidity (as defined in the Expanded Credit Facility Agreement, inclusive of certain cash balances in North America) is less than $12.5 million for five consecutive days. The Company was not in a covenant testing period as of and for the year ended December 31, 2018 (Successor).
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 Expanded Credit Facility Agreement, inclusive of certain cash balances) 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 Expanded Credit Facility 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.
Additional unrestricted borrowing capacity under the Revolving A Credit Facility at December 31, 2018 (Successor) was as follows (in millions):
Maximum borrowing capacity
$
125.0

Letters of credit and other reserves
(2.3
)
Current maximum borrowing capacity
122.7

Current borrowings
(108.5
)
Additional unrestricted borrowing capacity
$
14.2

The Second Lien Notes are five-year senior obligations of the Company and certain of its subsidiaries, 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 Expanded ABL Credit Agreement.
The Second Lien 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 Second Lien Notes Indenture. The value of shares of the Company’s common stock for purposes of the settlement of the conversion right will be calculated as provided in the Second Lien Notes Indenture, using a 20 trading day observation period. Upon conversion, 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.

27





The terms of the Second Lien 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.
The Second Lien Notes may not be redeemed by the Company in whole or in part at any time, subject to certain exceptions provided under the Second Lien Notes Indenture. In addition, if a Fundamental Change occurs at any time, each holder of any Second Lien Notes has the right to require the Company to repurchase such holder’s Second Lien 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.
The Company must use the net proceeds of material sales of collateral, which proceeds are not used for other permissible purposes, to make an offer of repurchase to holders of the Second Lien Notes. Indebtedness for borrowings under the Second Lien Notes Indenture is subject to acceleration upon the occurrence of specified defaults or events of default, including failure to pay principal or interest, the inaccuracy of any representation or warranty of any obligor under the Second Lien Notes, failure by an obligor under the Second Lien Notes to perform certain covenants, the invalidity or impairment of the Indenture Agent’s lien on its collateral or of any applicable guarantee, and certain adverse bankruptcy-related and other events.
Interest on the Second Lien Notes accrues at the rate of 5.00% if paid in cash and at the rate of 7.00% if paid in kind. Pursuant to the terms of the Second Lien Note Indenture, the Company is currently paying interest on the Second Lien Notes in kind.
Interest expense, net was $33.2 million in the year ended December 31, 2018 (Successor), of which $21.7 million was non-cash interest related to long term debt and $4.9 million was non-cash interest related to the pension plan.
In July 2017, the Company's French subsidiary entered into a local credit facility under which it may borrow against 100% of the eligible accounts receivable factored, with recourse, up to 6.5 million euros, subject to factoring fees and floating Euribor or LIBOR interest rates, plus a 1.0% margin. The French subsidiary utilizes the local credit facility to support its operating cash needs. As of December 31, 2018 (Successor), the French subsidiary has borrowings of $5.5 million under the credit facility, which is recorded as short-term borrowings at the Consolidated Balance Sheets.
As of December 31, 2018 (Successor), the Company had $2.3 million of irrevocable letters of credit outstanding.
The Company's debt agreements impose significant operating and financial restrictions which may prevent the Company from executing certain business opportunities, such as making acquisitions or paying dividends, among other things. 
For additional information regarding the terms of the Expanded ABL Credit Agreement, the Second Lien Notes, and the French credit facility refer to Note 4 - Debt, in the Notes to the Consolidated Financial Statements.
The Company is committed to achieving a strong financial position while maintaining sufficient levels of available liquidity, managing working capital and monitoring the Company’s overall capitalization. Cash and cash equivalents at December 31, 2018 (Successor) were $8.7 million, with approximately $3.4 million of the Company’s consolidated cash and cash equivalents balance residing in the United States.

28





Working capital, defined as current assets less current liabilities, and the balances of its significant components were as follows:
 
Successor
 
Working Capital
(Dollar amounts in millions)

December 31, 2018
 
December 31, 2017
 
Increase (Decrease)
Working capital
$
198.2

 
$
191.9

 
$
6.3

Inventory
160.7

 
154.5

 
6.2

Accounts receivable
79.8

 
74.4

 
5.4

Accounts payable
42.7

 
41.8

 
(0.9
)
Accrued and other current liabilities
5.3

 
6.0

 
0.7

Accrued payroll and employee benefits
11.3

 
8.0

 
(3.3
)
Cash and cash equivalents
8.7

 
11.1

 
(2.4
)
The Company currently plans that it will have sufficient cash flows from its operations to continue as a going concern.
Capital Expenditures
Cash paid for capital expenditures was $5.7 million in the year ended December 31, 2018 (Successor) and $3.7 million and $2.9 million in the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), respectively. Expenditures in the 2018 periods include $1.4 million related to software licenses and IT equipment. The balance of the capital expenditures in 2018 is the result of normal equipment purchases, building improvements, and furniture and fixture upgrades throughout the year. Management believes that capital expenditures will be approximately $6.0 million to $8.0 million in 2019.
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, 2018, the Company does not anticipate making significant cash contributions to the pension plans in 2019.
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 9 - Employee Benefit Plans to the consolidated financial statements for additional details regarding other plan assumptions.
Off-Balance Sheet Arrangements
With the exception of operating lease financing on certain buildings and equipment used in the operation of the business, it is not the Company’s general practice to use off-balance sheet arrangements, such as third-party special-purpose entities or guarantees of third parties.
Critical Accounting Policies
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the 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.

29





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 sources of taxable income is considered in arriving at a conclusion about the need for and amount of a valuation allowance. See Note 10 - 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 in the United States, United Kingdom and Canada have generated pre-tax losses for the three-year period ended December 31, 2018.  As a result of the Company having recorded deferred tax assets in these jurisdictions as December 31, 2018 and 2017, 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 in United Kingdom and Canada and certain of the deferred income tax assets recorded by the United States operations at December 31, 2018.
The Company is subject to taxation in the United States, various states and foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording the related income tax assets and liabilities. It is possible that actual results could differ from the estimates that management has used to determine its consolidated income tax expense.
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 pension expense; higher discount rates decrease present values and subsequent-year pension expense. Discount rates used for determining the Company’s projected benefit obligation for its pension plans were 4.00 - 4.06% at December 31, 2018 (Successor) 3.51 - 3.58% at December 31, 2017 (Successor) and 3.52 - 3.62% at August 31, 2017 (Predecessor).
The Company’s pension plan asset portfolio as of December 31, 2018 (Successor) is primarily invested in fixed income securities with a duration of approximately 9 years. The assets generally fall within Level 2 of the fair value hierarchy. Assets in the Company’s pension plans have earned approximately 7% since 2008 when the Company changed its target investment allocation to focus primarily on fixed income securities. In 2018, the pension plan assets realized an investment loss of approximately 4%. 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 deficit of approximately 2% at December 31, 2018 (Successor) compared to a funding surplus of 3% at December 31, 2017 (Successor).
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.

30





The Company used the following weighted average discount rates and expected return on plan assets to determine the net periodic pension cost:
 
Successor
 
 
Predecessor
 
Year Ended December 31, 2018
 
September 1, 2017 through
December 31, 2017
 
 
January 1, 2017
through
August 31, 2017
 
 
 
 
Discount rate
3.51 - 3.58%
 
3.52 - 3.62%
 
 
3.70 - 3.83%
Expected long-term rate of return on plan assets
5.00%
 
5.00%
 
 
5.25%
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:
 (Dollar amounts in millions)
Impact on 2019
Expenses -
Increase (Decrease)
100 basis point decrease in discount rate
$1.0
100 basis point increase in discount rate
0.6
100 basis point decrease in expected long-term rate of return on plan assets
1.4
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.

31





ITEM 8 — Financial Statements and Supplementary Data
(Amounts in thousands, except par value and per share data)

A.M. Castle & Co.
Consolidated Statements of Operations
and Comprehensive (Loss) Income

 
Successor
 
 
Predecessor
 
Year Ended December 31, 2018
 
September 1, 2017 through
December 31, 2017
*As Adjusted
 
 
January 1, 2017
through
August 31, 2017
*As Adjusted
 
 
 
 
Net sales
$
581,970

 
$
164,942

 
 
$
353,926

Costs and expenses:
 
 
 
 
 
 
Cost of materials (exclusive of depreciation and amortization)
437,052

 
127,828

 
 
266,495

Warehouse, processing and delivery expense
83,635

 
25,353

 
 
50,314

Sales, general and administrative expense
68,933

 
21,645

 
 
40,766

Restructuring expense, net

 

 
 
566

Depreciation and amortization expense
9,082

 
3,213

 
 
10,150

Total costs and expenses
598,702

 
178,039

 
 
368,291

Operating loss
(16,732
)
 
(13,097
)
 
 
(14,365
)
Interest expense, net
33,172

 
9,220

 
 
26,629

Financial restructuring expense

 

 
 
7,024

Unrealized (gain) loss on embedded debt conversion option

 
(2,352
)
 
 
146

Other income, net
(7,980
)
 
(5,591
)
 
 
(8,436
)
Reorganization items, net

 
2,141

 
 
(74,531
)
(Loss) income before income taxes
(41,924
)
 
(16,515
)
 
 
34,803

Income tax benefit
(4,779
)
 
(3,188
)
 
 
(1,387
)
Net (loss) income
$
(37,145
)
 
$
(13,327
)
 
 
$
36,190

 
 
 
 
 
 
 
Basic and diluted (loss) income per common share
$
(18.57
)
 
$
(6.66
)
 
 
$
1.12

 
 
 
 
 
 
 
Comprehensive (loss) income:
 
 
 
 
 
 
Net (loss) income
$
(37,145
)
 
$
(13,327
)
 
 
$
36,190

Change in unrecognized pension and postretirement benefit costs, net of tax effect of $3,060, $0, and $0
(9,187
)
 
34

 
 
9,797

Foreign currency translation adjustments, net of tax
(2,492
)
 
(2,703
)
 
 
16,142

Comprehensive (loss) income
$
(48,824
)
 
$
(15,996
)
 
 
$
62,129

 
 
 
 
 
 
 
* Adjusted due to the adoption of ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." See Note 1 - Basis of Presentation and Significant Accounting Policies, for additional information.
The accompanying notes are an integral part of these statements.

32






A.M. Castle & Co.
Consolidated Balance Sheets
 
Successor
 
December 31,
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,668

 
$
11,104

Accounts receivable, less allowances of $1,364 and $1,586, respectively
79,757

 
74,370

Inventories
160,686

 
154,491

Prepaid expenses and other current assets
14,344

 
12,274

Income tax receivable
1,268

 
1,576

Total current assets
264,723

 
253,815

Goodwill and intangible assets, net
8,176

 
8,176

Prepaid pension cost
1,754

 
10,745

Deferred income taxes
1,261

 
1,278

Other noncurrent assets
1,278

 
1,344

Property, plant and equipment:
 
 
 
Land
5,577

 
5,581

Buildings
21,218

 
21,296

Machinery and equipment
38,394

 
33,011

Property, plant and equipment, at cost
65,189

 
59,888

Accumulated depreciation
(11,989
)
 
(2,961
)
Property, plant and equipment, net
53,200

 
56,927

Total assets
$
330,392

 
$
332,285

Liabilities and Stockholders’ (Deficit) Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
42,719

 
$
41,757

Accrued payroll and employee benefits
11,307

 
7,963

Accrued and other current liabilities
5,324

 
5,968

Income tax payable
1,589

 
262

Short-term borrowings
5,498

 
5,854

Current portion of long-term debt
119

 
118

Total current liabilities
66,556

 
61,922

Long-term debt, less current portion
246,027

 
199,903

Deferred income taxes
7,540

 
16,166

Build-to-suit liability
9,975

 
10,148

Other noncurrent liabilities
3,334

 
3,784

Pension and postretirement benefit obligations
6,321

 
6,377

Commitments and contingencies (Note 11)

 

Stockholders’ (deficit) equity:
 
 
 
Common stock, $0.01 par value—200,000 Class A shares authorized with 3,803 shares issued and outstanding at December 31, 2018 and 3,734 shares issued and outstanding at December 31, 2017
38

 
37

Additional paid-in capital
55,421

 
49,944

Accumulated deficit
(50,472
)
 
(13,327
)
Accumulated other comprehensive loss
(14,348
)
 
(2,669
)
Total stockholders’ (deficit) equity
(9,361
)
 
33,985

Total liabilities and stockholders’ (deficit) equity
$
330,392

 
$
332,285

The accompanying notes are an integral part of these statements.

33






A.M. Castle & Co.
Consolidated Statements of Cash Flows
 
Successor
 
 
Predecessor
 
Year Ended
December 31, 2018
 
September 1, 2017
through
December 31, 2017
 
 
January 1, 2017
through
August 31, 2017
 
 
 
 
Operating activities:
 
 
 
 
 
 
Net (loss) income
$
(37,145
)
 
$
(13,327
)
 
 
$
36,190

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
 
 
 
Depreciation and amortization
9,082

 
3,213

 
 
10,150

Amortization of deferred financing costs and debt discount
8,160

 
1,958

 
 
3,810

Unrealized (gain) loss on embedded debt conversion option

 
(2,352
)
 
 
146

Noncash interest paid in kind
13,502

 
3,865

 
 

Noncash reorganization items, net

 

 
 
(87,107
)
Loss on sale of property, plant & equipment
64

 
26

 
 
7

Unrealized foreign currency transaction loss (gain)
580

 
(1,709
)
 
 
(4,439
)
Deferred income taxes
(7,071
)
 
(3,437
)
 
 
(953
)
Non-cash compensation expense
2,784

 
866

 
 
630

Other, net
631

 
634

 
 
537

Changes in assets and liabilities:
 
 
 
 
 
 
Accounts receivable
(6,100
)
 
(2,205
)
 
 
(6,061
)
Inventories
(7,730
)
 
(1,978
)
 
 
(2,703
)
Prepaid expenses and other current assets
(2,955
)
 
752

 
 
(3,100
)
Other noncurrent assets
740

 
324

 
 
1,664

Prepaid pension costs
(2,717
)
 
(1,395
)
 
 
(849
)
Accounts payable
1,370

 
(4,548
)
 
 
8,602

Accrued payroll and employee benefits
3,453

 
945

 
 
(2,670
)
Income tax payable and receivable
1,624

 
(828
)
 
 
(340
)
Accrued and other current liabilities
(1,120
)
 
(773
)
 
 
(3,332
)
Postretirement benefit obligations and other noncurrent liabilities
(933
)
 
(585
)
 
 
(471
)
Net cash used in operating activities

(23,781
)
 
(20,554
)
 
 
(50,289
)
Investing activities:
 
 
 
 
 
 
Capital expenditures
(5,687
)
 
(3,742
)
 
 
(2,850
)
Proceeds from sale of property, plant and equipment
77

 
31

 
 
619

Cash collateralization of letters of credit

 

 
 
7,492

Net cash (used in) from investing activities
(5,610
)
 
(3,711
)
 
 
5,261

Financing activities:
 
 
 
 
 
 
Short-term borrowings, net
(115
)
 
1,720

 
 
3,797

Proceeds from long-term debt including credit facilities
49,954

 
22,973

 
 
195,026

Repayments of long-term debt including credit facilities
(21,130
)
 
(25
)
 
 
(175,414
)
Payments of debt issue costs
(499
)
 

 
 
(1,831
)
Payments of build-to-suit liability
(897
)
 

 
 
(3,000
)
Net cash from financing activities
27,313

 
24,668

 
 
18,578

Effect of exchange rate changes on cash and cash equivalents
(358
)
 
637

 
 
890

Net change in cash and cash equivalents
(2,436
)
 
1,040

 
 
(25,560
)
Cash and cash equivalents—beginning of period
11,104

 
10,064

 
 
35,624

Cash and cash equivalents—end of period
$
8,668

 
$
11,104

 
 
$
10,064

See Note 1 - Basis of Presentation and Significant Accounting Policies to the consolidated financial statements for supplemental cash flow disclosures.
The accompanying notes are an integral part of these statements.

34






A.M. Castle & Co.
Consolidated Statements of Stockholders' Equity (Deficit)
 
Common
Shares
 
Treasury
Shares
 
Preferred
Stock
(Predecessor)
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
(Accumulated Deficit) Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Total
Balance at January 1, 2017 - Predecessor
32,768

 
(202
)
 
$

 
$
327

 
$
(1,049
)
 
$
244,825

 
$
(253,291
)
 
$
(25,939
)
 
$
(35,127
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
36,190

 
 
 
36,190

Foreign currency translation, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
385

 
385

Change in unrecognized pension and postretirement benefit costs, $0 tax effect
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,008
)
 
(1,008
)
Share-based compensation
 
 
 
 
 
 
 
 
 
 
630

 
 
 
 
 
630

Exercise of stock options and other
 
 
(80
)
 
 
 
 
 
(29
)
 
91

 
 
 
 
 
62

Balance at August 31, 2017 - Predecessor
32,768

 
(282
)
 
$

 
$
327

 
$
(1,078
)
 
$
245,546

 
$
(217,101
)
 
$
(26,562
)
 
$
1,132

Cancellation of Predecessor equity
(32,768
)
 
282

 
 
 
(327
)
 
1,078

 
(245,546
)
 
217,101

 
26,562

 
(1,132
)
Issuance of Successor common stock
2,000

 
 
 
 
 
20

 
 
 
5,640

 
 
 
 
 
5,660

Balance at August 31, 2017 - Successor
2,000

 

 
 
 
$
20

 
$

 
$
5,640

 
$

 
$

 
$
5,660

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 1, 2017 - Successor
2,000

 

 
 
 
$
20

 
$

 
$
5,640

 
$

 
$

 
$
5,660

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
(13,327
)
 
 
 
(13,327
)
Foreign currency translation, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,703
)
 
(2,703
)
Change in unrecognized pension and postretirement benefit costs, $0 tax effect
 
 
 
 
 
 
 
 
 
 
 
 
 
 
34

 
34

Reclassification of conversion option to equity, net of $17,044 tax effect (Note 7)
 
 
 
 
 
 
 
 
 
 
43,716

 
 
 
 
 
43,716

Share-based compensation
 
 
 
 
 
 
 
 
 
 
605

 
 
 
 
 
605

Issuance of restricted shares
1,734

 
 
 
 
 
17

 
 
 
(17
)
 
 
 
 
 

Balance at December 31, 2017 - Successor
3,734

 

 
 
 
$
37

 
$

 
$
49,944

 
$
(13,327
)
 
$
(2,669
)
 
$
33,985

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
(37,145
)
 
 
 
(37,145
)
Foreign currency translation, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,492
)
 
(2,492
)
Change in unrecognized pension and postretirement benefit costs, $3,060 tax effect
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(9,187
)
 
(9,187
)
Reclassification to equity of interest paid in kind attributable to conversion option, net of $1,208 tax effect (Note 7)
 
 
 
 
 
 
 
 
 
 
3,430

 
 
 
 
 
3,430

Share-based compensation
 
 
 
 
 
 
 
 
 
 
1,816

 
 
 
 
 
1,816

Issuance of restricted shares
69

 
 
 
 
 
1

 
 
 
231

 
 
 
 
 
232

Balance at December 31, 2018 - Successor
3,803

 

 
 
 
$
38

 
$

 
$
55,421

 
$
(50,472
)
 
$
(14,348
)
 
$
(9,361
)
The accompanying notes are an integral part of these statements.

35





A. M. Castle & Co.
Notes to Consolidated Financial Statements
(Amounts in thousands except par value and per share data)
(1) Basis of Presentation and Significant Accounting Policies
Nature of operations — A.M. Castle & Co. and its subsidiaries (the “Company”) is a specialty metals distribution serving customers on a global basis. The Company has operations in the United States, Canada, Mexico, France, Spain, China and Singapore. The Company provides a broad range of products and value-added processing and supply chain services to a wide array of customers. The Company's customers are principally within the producer durable equipment, aerospace, heavy industrial equipment, industrial goods, construction equipment, and retail sectors of the global economy. Particular focus is placed on the aerospace and defense, power generation, mining, heavy industrial equipment, and general manufacturing industries, as well as general engineering applications.
The Company’s corporate headquarters is located in Oak Brook, Illinois. The Company has 21 operational service centers located throughout North America (17), Europe (2) and Asia (2).
The Company purchases metals from many producers. Purchases are made in large lots and held in distribution centers until sold, usually in smaller quantities and often with value-added processing services performed. Orders are primarily filled with materials shipped from the Company's stock. The materials required to fill the balance of sales are obtained from other sources, such as direct mill shipments to customers or purchases from other distributors. Thousands of customers from a wide array of industries are serviced primarily through the Company’s own sales organization.
Basis of presentation — On June 18, 2017 (the "Petition Date"), A. M. Castle & Co. and four of its subsidiaries (together with A.M. Castle & Co., the "Debtors") filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware in Wilmington, Delaware (the "Bankruptcy Court"). Also on June 18, 2017, the Debtors filed the Debtors' Prepackaged Joint Chapter 11 Plan of Reorganization with the Bankruptcy Court and on July 25, 2017, the Debtors filed the Debtors' Amended Prepackaged Joint Chapter 11 Plan of Reorganization (the "Plan") with the Bankruptcy Court. On August 2, 2017, the Bankruptcy Court entered an order (the "Confirmation Order") confirming the Plan. On August 31, 2017 (the “Effective Date”), the Plan became effective pursuant to its terms and the Debtors emerged from their chapter 11 cases.
The consolidated financial statements included herein have been prepared to reflect the application of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 852, "Reorganizations" and ASC No. 805, "Business Combinations". Accordingly, the Company adopted fresh-start accounting upon emergence from their chapter 11 cases and became a new entity for financial reporting purposes as of September 1, 2017. For accounting purposes, all emergence related transactions of the Predecessor including the impact of the issuance of the Successor common stock, the entry into a new asset-based revolving credit facility and new senior secured convertible notes, and the accelerated debt obligations of the Company that were satisfied pursuant to the terms of the Plan, were recorded as of August 31, 2017. Accordingly, the consolidated financial statements for the Successor are not comparable to the consolidated financial statements for the Predecessor.
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), and accounting principles generally accepted in the United States of America (“U.S. GAAP”). This report contains consolidated financial statements of the Company as of and for the year ended December 31, 2018 (Successor), for the period from January 1, 2017 to August 31, 2017 (Predecessor), and for the period from September 1, 2017 to December 31, 2017 (Successor).
The accompanying consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for a reasonable period of time. The Company's principal source of liquidity is cash flows from operations and borrowings under its asset-based revolving credit facilities.
Use of estimates — The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates 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. Actual results could differ from those estimates. The principal areas of estimation reflected in the consolidated financial statements are accounts receivable allowances, inventory reserves, the valuation of goodwill and intangible assets, the valuation of deferred income taxes, the fair value of the Company's 5.00% / 7.00% Convertible Senior Secured Paid-in-Kind ("PIK") Toggle Notes due 2022 (the “Second Lien Notes”) and Revolving B Credit Facility (defined at Note 4 - Debt, in the Notes to the Consolidated Financial Statements), pension and other post-employment benefits, and share-based compensation.

36





Revenue recognition — On January 1, 2018, the Company adopted ASC 606, "Revenue for Contracts with Customers (Topic 606)" ("ASC 606") using the modified retrospective method in which the cumulative effect of initially applying the new standard was applied to contracts not completed as of that date. The adoption of ASC 606 did not have a material effect on the Company’s financial position or results of operations.
Revenue from the sale of products is recognized when control of the product has transferred to the customer, which is primarily at the time of shipment to the customer. Revenue recognized other than at the time of shipment represented less than 1% of the Company’s consolidated net sales in the year ended December 31, 2018 (Successor) and the periods ended September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), respectively. Customer payment terms are established prior to the time of shipment. Provisions for allowances related to sales discounts and rebates are recorded based on terms of the sale in the period that the sale is recorded. Management utilizes historical information and the current sales trends of the business to estimate such provisions. The provisions related to discounts and rebates due to customers are recorded as a reduction within net sales.
Revenue from shipping and handling charges is recorded in net sales. Costs incurred in connection with shipping and handling the Company’s products, which are related to third-party carriers or performed by Company personnel, are included in warehouse, processing and delivery expenses. In the year ended December 31, 2018 (Successor) and the periods ended September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), shipping and handling costs included in warehouse, processing and delivery expenses were $26,704, $8,120, and $16,292, respectively. As a practical expedient under ASC 606, the Company has elected to account for shipping and handling activities as fulfillment costs and not a promised good or service. As a result, there is no change to the Company's accounting for revenue from shipping and handling charges under ASC 606.
The Company maintains an allowance for doubtful accounts related to the potential inability of customers to make required payments. The allowance for doubtful accounts is maintained at a level considered appropriate based on historical experience and specific identification of customer receivable balances for which collection is unlikely. The provision for doubtful accounts is recorded in sales, general and administrative expense in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. Estimates of doubtful accounts are based on historical write-off experience as a percentage of net sales and judgments about the probable effects of economic conditions on certain customers.
The Company also maintains an allowance for credit memos for estimated credit memos to be issued against current sales. Estimates of allowance for credit memos are based upon the application of a historical issuance lag period to the average credit memos issued each month.
Accounts receivable allowance for doubtful accounts and credit memos activity is presented in the table below:
 
Successor
 
 
Predecessor
 
Year Ended December 31, 2018
 
September 1, 2017 through
December 31, 2017
 
 
January 1, 2017 through August 31, 2017
 
 
 
 
Balance, beginning of period
$
1,586

 
$

 
 
$
1,945

Add Provision charged to expense(a)
379

 
1,735

 
 
34

Recoveries
44

 
13

 
 
25

Less Charges against allowance
(645
)
 
(162
)
 
 
(316
)
Fresh-start accounting adjustment

 

 
 
(1,688
)
Balance, end of period
$
1,364

 
$
1,586

 
 
$

(a) Includes the net amount of credit memos reserved and issued.
The Company does not incur significant incremental costs when obtaining customer contracts and any costs that are incurred are generally not recoverable from its customers. Substantially all of the Company's customer contracts are for a duration of less than one year. As a practical expedient under ASC 606, the Company has elected to continue to recognize incremental costs of obtaining a contract, if any, as an expense when incurred if the amortization period of the asset would have been one year or less. The Company does not have any costs to obtain a contract that are capitalized under ASC 606.
Information regarding the disaggregation of the Company's revenue by geographic region can be found at Note 12 Segment Reporting.

37





Cost of materials — Cost of materials consists of the costs the Company pays for metals and related inbound freight charges. It excludes depreciation and amortization which is discussed below.
Operating 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 attributable to accounting and legal advisory services, bad debt expenses, data communication costs, computer hardware and maintenance expenses and occupancy costs for non-warehouse locations; and
Depreciation and amortization expenses, including depreciation for all owned property and equipment. For periods after the Effective Date, the Company no longer has any intangible assets that are subject to amortization.
Cash equivalents — Cash equivalents are highly liquid, short-term investments that have an original maturity of 90 days or less.
Statement of cash flows — Non-cash investing and financing activities and supplemental disclosures of consolidated cash flow information are as follows:
 
Successor
 
 
Predecessor
 
Year Ended December 31, 2018
 
September 1, 2017 through
December 31, 2017
 
 
January 1, 2017
through
August 31, 2017
 
 
 
 
Non-cash investing and financing activities:
 
 
 
 
 
 
Capital expenditures financed by accounts payable
$
115

 
$
356

 
 
$
45

Reclassification of conversion option from debt to equity, net (Note 7)
3,430

 
43,716

 
 

Cash paid during the period for:
 
 
 
 
 
 
Interest
5,110

 
1,209

 
 
13,332

Income taxes
866

 
495

 
 
1,889

Cash received during the period for:
 
 
 
 
 
 
Income tax refunds
37

 
49

 
 
201

Inventories — Inventories consist primarily of finished goods. All of the Company's continuing operations use the average cost method in determining the cost 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 on previous sales experience.
Excess and obsolete inventory allowance activity is presented in the table below:
 
Successor
 
 
Predecessor
 
Year Ended December 31, 2018
 
September 1, 2017 through
December 31, 2017
 
 
January 1, 2017
through
August 31, 2017
 
 
 
 
Balance, beginning of period
$
1,680

 
$

 
 
$
7,877

Adjustments to provision
3,612

 
1,736

 
 
(945
)
Charges against allowance
(2,018
)
 
(56
)
 
 
(1,661
)
Fresh-start accounting adjustment

 

 
 
(5,271
)
Balance, end of period
$
3,274

 
$
1,680

 
 
$

Property, plant and equipment — Property, plant and equipment are stated at cost and include assets held under capital leases. Expenditures for major additions and improvements are capitalized, while maintenance and repair costs that do not substantially improve or extend the useful lives of the respective assets are expensed in the period in which

38





they are incurred. When items are disposed, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income.
In connection with the Company’s adoption of fresh-start accounting, on the Effective Date the Company made adjustments to increase the carrying value of certain property, plant and equipment to their estimated fair value. The Company’s overall range of useful lives from an accounting policy perspective did not change. However, when the fair value of each asset was adjusted, a new remaining useful life was assigned to each asset, and the new value will be depreciated over that time period, which may be different from the remaining depreciable life of that asset at the end of the Predecessor period.
The Company provides for depreciation of plant and equipment sufficient to amortize the cost over their estimated useful lives as follows:
 
Successor
Buildings and building improvements
5 – 40 years
Plant equipment
5 – 20 years
Furniture and fixtures
2 – 10 years
Vehicles and office equipment
3 – 10 years
Leasehold improvements are depreciated over the shorter of their useful lives or the remaining term of the lease. Depreciation is calculated using the straight-line method. Depreciation expense in the year ended December 31, 2018 (Successor) was $9,082 and in the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor) was $3,213 and $6,062, respectively.
Long-lived assets — The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset or asset group. If future net cash flows are less than the carrying value, the asset or asset group may be impaired. If such assets are impaired, the impairment charge is calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. The Company derives the required undiscounted cash flow estimates from historical experience and internal business plans.
Goodwill and intangible assets — In connection with the Company’s adoption of fresh-start accounting on the Effective Date, the Company recorded $2,675 of goodwill representing the excess of reorganization value over the fair value of identifiable tangible and intangible assets. The Company currently has one reporting unit. The Company tests goodwill for impairment at the reporting unit level on an annual basis at December 1 of each year or more frequently if a significant event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company assesses, at least quarterly, whether any events or circumstances have significantly changed which may imply that the carrying amount of its reporting unit's goodwill is in excess of its fair value. Based on the results of the Company's goodwill impairment testing it has recorded no impairment charges in the year ended December 31, 2018 (Successor) or since the goodwill was originally recognized.
The determination of the fair value of the reporting unit requires significant estimates and assumptions to be made by management. The fair value of the reporting unit is estimated using a combination of an income approach, which estimates fair value based on a discounted cash flow analysis using historical data, estimates of future cash flows and discount rates based on the view of a market participant, and a market approach, which estimates fair value using market multiples of various financial measures of comparable public companies. In selecting the appropriate assumptions, the Company considers the following: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industry in which the Company competes; discount rates; terminal growth rates; long-term projections of future financial performance; and relative weighting of income and market approaches. The long-term projections used in the valuation are developed as part of the Company’s annual long-term planning process. The discount rates used to determine the fair values of the reporting unit is that of a hypothetical market participant which are developed based upon an analysis of comparable companies and include adjustments made to account for any individual reporting unit specific attributes such as, size and industry.

39





Also as part of fresh-start accounting, the Company recorded an adjustment of $5,500 representing the fair value of the intangible asset of the Successor (refer to Note 2 - Bankruptcy Related Disclosures). The intangible asset of the Successor is comprised of an indefinite-lived trade name, which is not subject to amortization. The fair value of the Successor trade name intangible asset was determined based on the relief from royalty method, which estimates the savings that the owner of the asset would realize rather than paying a royalty to use the asset, using forecasted net sales attributable to the trade name and applying a royalty rate, assumed to be 0.1% to those net sales.
The indefinite-lived trade name intangible asset is tested for impairment on an annual basis on December 1 of each year or more frequently if significant events or changes in circumstances occur which may indicate that the carrying amount of the asset may not be recoverable, as measured by comparing carrying value to the estimated future cash flows generated by its use. An impaired asset is recorded at estimated fair value, determined principally using an income-based approach similar to the relief from royalty method used in the initial valuation of the indefinite-lived intangible asset, with the excess amount of carrying value over the fair value representing the amount of the impairment. Assumptions used in the income-based approach including projected revenues and assumed royalty rate, long-term growth and discount rates. The Company recorded no impairment charges related to its indefinite-lived trade name intangible assets in the year ended December 31, 2018 (Successor) or since the intangible asset was originally recorded.
Income taxes — The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records valuation allowances against its deferred tax assets when it is more likely than not that the amounts will not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and recent results of operations. In the event the Company determines it would not be able to realize its deferred tax assets, a valuation allowance is recorded, which increases the provision for income taxes in the period in which that determination is made.
During 2018, the Company's foreign assets remained pledged as collateral for certain borrowings. This continues to result in a taxable income inclusion in the U.S. of the annual earnings generated by its foreign subsidiaries. As a result of the enactment of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (also known as “The Tax Cuts and Jobs Act”) and this pledge of foreign assets, there are no remaining undistributed earnings which have not been subject to U.S. income taxation as of December 31, 2018 (Successor) on which the Company would need to record any additional U.S. deferred tax liability.
For uncertain tax positions, if any, the Company applies the provisions of relevant authoritative guidance, which requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. The Company’s ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company’s effective tax rate as well as impact operating results. As of December 31, 2018 (Successor), the Company has no uncertain tax positions for which a tax or interest reserve has been recognized.
The Company recognizes interest and penalties related to unrecognized tax benefits, if any, within income tax expense. Accrued interest and penalties are included within income tax payable in the Consolidated Balance Sheets. As of December 31, 2018 (Successor), the Company has accrued no interest and penalties associated with unrecognized tax benefits.
Insurance plans — The Company is a member of a group captive insurance company (the “Captive”) domiciled in Grand Cayman Island. The Captive reinsures losses related to certain of the Company’s workers’ compensation, automobile and general liability risks that occur subsequent to August 2009. Premiums are based on the Company’s loss experience and are accrued as expenses for the period to which the premium relates. Premiums are credited to the Company’s “loss fund” and earn investment income until claims are actually paid. For claims that were incurred prior to August 2009, the Company is self-insured. Self-insurance amounts are capped, for individual claims and in the aggregate, for each policy year by an insurance company. Self-insurance reserves are based on unpaid, known claims (including related administrative fees assessed by the insurance company for claims processing) and a reserve for incurred but not reported claims based on the Company’s historical claims experience and development.

40





The Company is self-insured up to a retention amount for medical insurance for its domestic operations. Self-insurance reserves are maintained based on incurred but not paid claims based on a historical lag.
Foreign currency — For the majority of the Company’s operations, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using year-end exchange rates, and income and expenses are translated using the average exchange rates for the reporting period. The currency effects of translating financial statements of the Company’s non-U.S. operations which operate in local currency environments are recorded in accumulated other comprehensive loss, a separate component of stockholders’ (deficit) equity. Transaction gains or losses resulting from foreign currency transactions have historically been primarily related to unhedged intercompany financing arrangements between the United States and the United Kingdom and Canada.
(Loss) earnings per share — Diluted (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of shares of common stock plus outstanding common stock equivalents. Common stock equivalents consist of employee and director stock options (Predecessor), restricted stock awards (Predecessor and Successor), other share-based payment awards (Predecessor), and contingently issuable shares related to the Company’s 5.25% Convertible Senior Secured Notes due 2019 (the "Pre-Bankruptcy Convertible Notes"), and the Company's Second Lien Notes (Successor), which are included in the calculation of weighted average shares outstanding using the if-converted method. Refer to Note 4 - Debt, for further description of the Pre-Bankruptcy Convertible Notes and Second Lien Notes.
The following table is a reconciliation of the basic and diluted loss (earnings) per share calculations:
 
Successor
 
 
Predecessor
 
Year Ended December 31, 2018
 
September 1, 2017 through
December 31, 2017
 
 
January 1, 2017
through
August 31, 2017
 
 
 
 
Numerator:
 
 
 
 
 
 
Net (loss) income
$
(37,145
)
 
$
(13,327
)
 
 
$
36,190

Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
2,000

 
2,000

 
 
32,174

Effect of dilutive securities:
 
 
 
 
 
 
Outstanding common stock equivalents

 

 
 

Denominator for diluted (loss) earnings per share
2,000

 
2,000

 
 
32,174

 
 
 
 
 
 
 
Net basic (loss) earnings per common share
$
(18.57
)
 
$
(6.66
)
 
 
$
1.12

 
 
 
 
 
 
 
Net diluted (loss) earnings per common share
$
(18.57
)
 
$
(6.66
)
 
 
$
1.12

Excluded outstanding share-based awards having an anti-dilutive effect
1,803

 
1,734

 
 

The computation of diluted loss per common share does not include common shares issuable upon conversion of the Company’s outstanding Second Lien Notes (Successor) or the Pre-Bankruptcy Convertible Notes (Predecessor), as they were anti-dilutive under the if-converted method.
The Second Lien Notes (Successor) are convertible into shares of the Company's common stock at any time at the initial conversion price of $3.77 per share. In future periods, absent a fundamental change (as defined in the Second Lien Notes Indenture), the outstanding Second Lien Notes could increase diluted average shares outstanding by a maximum of approximately 48,000 shares.
Concentrations — The Company serves a wide range of customers within the producer durable equipment, aerospace, heavy industrial equipment, industrial goods, construction equipment, retail, marine and automotive sectors of the economy. Its customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized firms spread across the entire spectrum of metals-using industries. The Company’s customer base is well diversified and, therefore, the Company does not have dependence upon any single customer or a few customers. No single customer represented more than 5% of the Company’s total net sales in either the year ended December 31, 2018 (Successor) or the periods September 1, 2017 through December 31, 2017 (Successor) or January 1, 2017 through August 31, 2017 (Predecessor). Approximately 65% of the Company’s net sales the year ended December 31, 2018

41





(Successor) and 65% and 63% of the Company’s net sales in the periods September 1, 2017 through December 31, 2017 (Successor) and January 1, 2017 through August 31, 2017 (Predecessor), respectively, were from locations in the United States.
Share-based compensation — On the Effective Date, the new A.M. Castle & Co. 2017 Management Incentive Plan (the "MIP"), under which persons eligible to receive awards include directors, officers and employees of the Company and its subsidiaries, became effective. The types of awards that may be granted under the MIP include stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other forms of cash or stock based awards. Under the MIP, the Company has issued restricted shares, restricted Second Lien Notes and performance share units.
Compensation expense related to restricted share awards made to directors, officers and employees of the Company is recognized on a straight-line basis over the vesting period based on the estimated grant date fair value of the award. The Company accounts for forfeitures as they occur. Compensation expense related to performance share unit awards made to senior level managers and other select personnel is based on management’s expectation of future performance compared to the pre-established performance goals. If the performance goals are not expected to be met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
New Accounting Standards
Recently Adopted Accounting Standards
In March 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." Under the new guidance, employers must present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. The other components of net periodic benefit cost must be reported separately from the line item(s) that includes the service cost component and outside of any subtotal of operating income, if one is presented. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. The guidance on the income statement presentation of the components of net periodic benefit cost must be applied retrospectively, while the guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component must be applied prospectively. The Company adopted ASU 2017-07 in the first quarter of 2018 and concluded it had no impact on its net loss before income taxes. Prior to the adoption of ASU No. 2017-07, the Company's net periodic pension and postretirement benefit costs were reported as sales, general and administrative expense on the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income. As a result of the adoption of ASU No. 2017-07, the Company reclassified the interest cost component of net periodic pension and postretirement benefit costs of $1,586 from sales, general and administrative expense to interest expense and a net periodic pension and postretirement benefit of $2,767 from sales, general and administrative expense to other expense (income), net on the Consolidated Statements of Operations and Comprehensive (Loss) Income in the period September 1, 2017 through September 30, 2017 (Successor). The Company reclassified the interest cost component of net periodic pension and postretirement benefit costs of $3,227 from sales, general and administrative expense to interest expense and a net periodic pension and postretirement benefit of $4,854 from sales, general and administrative expense to other expense (income), net on the Consolidated Statements of Operations and Comprehensive (Loss) Income in the period January 1, 2017 through August 31, 2017 (Predecessor).
In January 2017, the FASB issued ASU 2017-04, "Intangibles – Goodwill and Other (Topic 350)", which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. ASU No. 2017-04 is effective for annual and interim impairment tests beginning January 1, 2020 for the Company and is required to be adopted using a prospective approach. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the new guidance in the first quarter of 2018 and as a result, will no longer apply step two from the goodwill impairment test when performing its annual or interim goodwill impairment testing, if necessary. The Company performed its annual goodwill impairment testing on December 1, 2018 and determined that its goodwill was not impaired.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," to reduce the existing diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The amendments in ASU No. 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under Topic 230. The provisions of ASU No. 2016-15 must be applied retrospectively to all periods presented with limited exceptions. For public companies, the amendments in ASU No. 2016-15 were effective for fiscal

42





years beginning after December 15, 2017, and interim periods within those years. The Company's adoption of ASU No. 2016-15 on January 1, 2018 had no financial statement impact and the Company will apply the presentation and statement of cash flows classification guidance going forward.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" and has subsequently issued several supplemental and/or clarifying ASUs (collectively, "ASC 606"). The underlying principle of ASC 606 is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in prior accounting guidance.
The Company adopted the requirements of ASC 606 on January 1, 2018 using the modified retrospective method, which requires the recognition of the cumulative effect of initially applying the standard (if any) as an adjustment to opening retained earnings for the fiscal year beginning January 1, 2018. The adoption of ASC 606 did not result in the recognition of a cumulative adjustment to opening retained earnings under the modified retrospective approach, nor did it have a material effect on the Company’s financial position or results of operations. The adoption of ASC 606 did result in the addition of required disclosures within the notes to the financial statements and the modification of certain significant accounting policies, which are included herein.
Recently Issued Account Standards Not Yet Effective
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 amends Fair Value Measurement (Topic 820) to add, remove, and modify fair value measurement disclosure requirements. The ASU’s changes to disclosures aim to improve the effectiveness of Topic 820's disclosure requirements under the aforementioned FASB disclosure framework project. ASU No. 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within the year of adoption. Early adoption is permitted for any eliminated or modified disclosures prescribed by the ASU. The Company will adopt the disclosure requirements of ASU No. 2018-13 in fiscal year 2020.
Also in August 2018, the FASB issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans - General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plan.” ASU No. 2018-14 amends Compensation - Retirement Benefits (Topic 715) to add or remove certain disclosure requirements related to defined benefit pension and other postretirement plans. The ASU’s changes to disclosures aim to improve the effectiveness of Topic 715's disclosure requirements under the FASB’s disclosure framework project. ASU No. 2018-14 is effective for public entities for fiscal years beginning after December 15, 2020. ASU No. 2018-14 does not impact the interim disclosure requirements of Topic 715. Early adoption is permitted. The Company will adopt the disclosure requirements of this new guidance in fiscal year 2021.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position. ASU No. 2016-02 also requires additional disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The provisions of ASU No. 2016-02 are to be applied using a modified retrospective approach, and are effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period. Topic 842 was subsequently amended by ASU No. 2018-01, “Land Easement Practical Expedient for Transition to Topic 842”; ASU No. 2018-10, “Codification Improvements to Topic 842, Leases”; ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”); and ASU No. 2018-20, “Narrow-Scope Improvements for Lessors”. ASU 2018-11 provides clarity on separating components of a lease contract and includes an option to not restate comparative periods in transition and elect to use the effective date of Topic 842 as the date of initial application.
The Company adopted ASU No. 2016-02 effective January 1, 2019 using the modified retrospective approach, as required. The Company elected the transition method that allows it to apply the new standard only to leases existing at the date of initial application, January 1, 2019, and recognized the cumulative effect of initially applying the standard (if any) as an adjustment to opening retained earnings for the fiscal year beginning January 1, 2019. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The Company has also elected the package of practical expedients permitted under the transition guidance, which among other things, allows the Company to carryforward the historical lease classification. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has made an accounting policy election

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to keep leases with an initial term of 12 months or less off the balance sheet and recognize those lease payments in the Consolidated Statements of Operations and Comprehensive (Loss) Income on a straight-line basis over the lease term. The Company has also elected the practical expedient to not separate lease and non-lease components for all of its real estate leases.
While the Company is still finalizing the adoption procedures, the Company estimates that the adoption of this standard will result in recognition of additional lease assets and lease liabilities on its consolidated balance sheet as of January 1, 2019 of approximately $35.0 million. Additionally, the Company’s build-to-suit financing obligation will be classified as a finance lease liability, resulting in an insignificant adjustment to the Company’s beginning accumulated deficit. The Company does not believe the adoption of ASU No. 2016-02 will materially affect its consolidated net loss or liquidity.
(2) Bankruptcy Related Disclosures
Chapter 11 Bankruptcy Filing
On the Petition Date, the Debtors filed voluntary chapter 11 petitions for reorganization under the Bankruptcy Code with the Bankruptcy Court pursuant to the terms of a Restructuring Support Agreement (as defined below) that contemplated the reorganization of the Debtors pursuant to a prepackaged plan of reorganization. The chapter 11 cases were consolidated for procedural purposes only and were administered jointly under the caption In re Keystone Tube Company, LLC, et al. (Case No. 17-11330). No trustee was appointed in the chapter 11 cases, and during the pendency of the chapter 11 cases, the Debtors continued to operate their business as “debtors-in-possession” subject to the supervision and orders of the Bankruptcy Court in accordance with the Bankruptcy Code.
The filing of the bankruptcy petitions constituted a default or event of default that accelerated the Company’s obligations under (i) the Pre-Bankruptcy Credit Facilities Agreement (as defined below) and the 11.00% Senior Secured Term Loan Credit Facilities due 2018 issued pursuant thereto (the "Pre-Bankruptcy Credit Facilities"), (ii) the Indenture dated February 8, 2016 (the "Pre-Bankruptcy Senior Notes Indenture") and the 12.75% Senior Secured Notes due 2018 issued pursuant thereto (the "Pre-Bankruptcy Secured Notes"), and (iii) the Indenture dated May 19, 2016 (the "Pre-Bankruptcy Convertible Notes Indenture") and the Pre-Bankruptcy Convertible Notes. The Pre-Bankruptcy Credit Facilities Agreement, the Pre-Bankruptcy Senior Notes Indenture, and the Pre-Bankruptcy Convertible Notes Indenture provide that, as a result of the filing of the bankruptcy petitions, all outstanding indebtedness due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Pre-Bankruptcy Credit Facilities Agreement, the Pre-Bankruptcy Senior Notes Indenture, and the Pre-Bankruptcy Convertible Notes Indenture were automatically stayed as a result of the bankruptcy petitions, and the creditors’ rights of enforcement in respect of the Pre-Bankruptcy Credit Facilities Agreement, the Pre-Bankruptcy Senior Notes Indenture, and the Pre-Bankruptcy Convertible Notes Indenture are subject to the applicable provisions of the Restructuring Support Agreement (as defined below) and the Bankruptcy Code.
Prior to the Petition Date, on June 16, 2017, the Debtors entered into an agreement (the "Commitment Agreement") with certain of their creditors (the "Commitment Parties"). The Commitment Parties are the holders (or the investment advisors or managers for the holders) of the Pre-Bankruptcy Credit Facility term loans made to the Company under a Credit and Guaranty Agreement, dated December 8, 2016, by and among the Company, Highbridge International Capital Management, LLC, Corre Partners Management, LLC, Whitebox Credit Partners, L.P., WFF Cayman II Limited, and SGF, LLC and Cantor Fitzgerald Securities, among others (as amended, the “Pre-Bankruptcy Credit Facilities Agreement").
The Commitment Agreement was entered into pursuant to a Restructuring Support Agreement dated April 6, 2017, as amended, by and among the Debtors and certain of their creditors, including the Commitment Parties (the "RSA"). The RSA provides for a consensual restructuring of the debt and equity of the Company, which the Company seeks to effect by means of the Plan.
The Company continued its operations without interruption during the pendency of the chapter 11 cases and reorganization process. To maintain and continue ordinary course operations without interruption, the Company received approval from the Bankruptcy Court of a variety of “first day” motions seeking certain relief and authorizing the Company to maintain its operations and pay trade claims in the ordinary course.
Plan of Reorganization and Emergence from Chapter 11
Pursuant to the terms of the RSA, on the Petition Date, the Debtors filed the Plan with the Bankruptcy Court.
The Plan allowed general unsecured claims and claims that are unimpaired under the Plan to be paid in full in cash.

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On August 2, 2017, the Bankruptcy Court entered the Confirmation Order approving and confirming the Plan. On the Effective Date, the Plan became effective pursuant to the terms described above and the Debtors emerged from their chapter 11 cases.
Key components of the Plan, which became effective on August 31, 2017, include:
Entry into a Revolving Credit and Security Agreement (the "ABL Credit Agreement") dated as of August 31, 2017 with PNC Bank, National Association ("PNC"), as lender and as administrative and collateral agent (the “Agent”), and the other lenders party thereto, which provided for a $125,000 senior secured, revolving credit facility for the Company (the "Revolving A Credit Facility"). Refer to Note 4 - Debt, for further details.
On the Effective Date, in connection with its entering into the ABL Credit Agreement, the Company borrowed an aggregate amount equal to $78,797, proceeds from which, along with proceeds of the New Money Notes (defined below) of $38,002, were used to pay down all outstanding indebtedness, accrued interest, and related fees of the Company under the Pre-Bankruptcy Credit Facilities Agreement and the borrowings outstanding under the Debtor-In-Possession Revolving Credit and Security Agreement dated as of June 10, 2017 (the "DIP Facility").
Entry into an Indenture (the “Second Lien Notes Indenture”) with Wilmington Savings Fund Society, FSB (“WSFS, FSB”), as trustee and collateral agent (“Indenture Agent”) and, pursuant thereto, issued approximately$162,502 in aggregate original principal amount of its Second Lien Notes, excluding restricted notes issued under the MIP.
The Second Lien Notes were issued as follows:
$111,875 in aggregate principal Second Lien Notes issued to holders of Prepetition Second Lien Secured Claims in partial satisfaction of their claims;
$3,125 in aggregate principal Second Lien Notes issued to holders of Prepetition Third Lien Secured Claims in partial satisfaction of their claims; and
$47,502 in aggregate principal Second Lien Notes issued to the Commitment Parties pursuant to the Commitment Agreement (the "New Money Notes").
As a result of these Plan actions, all of the outstanding indebtedness of the Pre-Bankruptcy Secured Notes and the Pre-Bankruptcy Convertible Notes was discharged and canceled.
Issuance of an aggregate of 2,000 shares of a new class of common stock, par value $0.01 per share (the “New Common Stock”), as follows:
1,300 shares issued to holders of Prepetition Second Lien Secured Claims in partial satisfaction of their claims;
300 shares issued to holders of Prepetition Third Lien Secured Claims in partial satisfaction of their claims; and
400 shares issued to participating holders of the Company's outstanding common stock as of August 2, 2017.
Payment in full of all general unsecured claims and claims that were unimpaired under the Plan in cash in the ordinary course of business.
Cash payment of $6,646 to holders of Prepetition Second Lien Secured Claims.
Cash payment of a put option fee of $2,000 to the Commitment Parties pursuant to the Commitment Agreement.
All agreements, instruments, and other documents evidencing, relating to or connected with any equity interests of the Company (which include the Company's prior common stock, warrants to purchase the Company’s prior common stock and unvested/unexercised awards under any management equity incentive plans adopted before the Effective Date) were canceled and extinguished without recovery.
All prior director, officer and employee incentive plans, as well as the awards issued thereunder, were canceled. The MIP, under which persons eligible to receive awards include directors, officers and employees of the Company and its subsidiaries, became effective.    

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Reporting During Bankruptcy
During the pendency of the Company's chapter 11 cases, expenses and income directly associated with the chapter 11 proceedings were reported separately in reorganization items, net in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. Reorganization items, net also include adjustments to reflect the carrying value of liabilities subject to compromise ("LSTC") at their estimated allowed claim amounts, as such adjustments were determined. In addition, effective as of the Petition Date and during the pendency of the Company's chapter 11 cases, the Company discontinued recording interest expense on outstanding prepetition debt classified as LSTC. Interest expense reported in the Consolidated Statement of Operations and Comprehensive (Loss) Income for the period from the Effective Date through August 31, 2017 does not include $4,880 in contractual interest on prepetition debt classified as LSTC, which was stayed by the Bankruptcy Court effective on the Petition Date.
Upon the Company's emergence from its chapter 11 cases, the Company settled and extinguished or reinstated liabilities that were subject to compromise.
Fresh-Start Accounting
Under ASC No. 852, "Reorganizations", fresh-start accounting is required upon emergence from chapter 11 if (i) the reorganization value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all post-petition liabilities and allowed claims; and (ii) holders of existing voting shares immediately before confirmation receive less than 50% of the voting shares of the emerging entity. The Company qualified for and adopted fresh-start accounting as of the Effective Date. Adopting fresh-start accounting results in a new reporting entity with no beginning retained earnings or deficits. The cancellation of all existing common shares outstanding on the Effective Date and issuance of new shares of the reorganized entity resulted in a change of control of the Company under ASC No. 852, "Reorganizations".
Adoption of fresh-start accounting resulted in the Company becoming a new entity for financial reporting purposes and the recording of the Company’s assets and liabilities at their fair value as of the Effective Date, with the excess of reorganization value over net asset values recorded as goodwill, in conformity with ASC No. 805, "Business Combinations". The estimated fair values of the Company’s assets and liabilities as of that date differed from the recorded values of its assets and liabilities as reflected in its historical consolidated financial statements. In addition, the Company’s adoption of fresh-start accounting affected its results of operations following the fresh-start reporting date, as the Company had a new basis in its assets and liabilities. Consequently, the Company’s financial statements on or after the Effective Date are not comparable with the financial statements prior to that date and the historical financial statements before the Effective Date are not reliable indicators of its financial condition and results of operations for any period after it adopted fresh-start accounting.
Reorganization Items, Net
During the pendency of the Company's chapter 11 cases, expenses and income directly associated with the chapter 11 proceedings were reported separately in reorganization items, net in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. There were no expenses nor income directly associated with the chapter 11 proceedings that were reported separately in reorganization items, net for the year ended December 31, 2018. Reorganization items, net also include adjustments to reflect the carrying value of LSTC at their estimated allowed claim amounts, as such adjustments were determined. The following table presents reorganization items incurred in the periods after the Effective Date, as reported in the accompanying Consolidated Statement of Operations and Comprehensive (Loss) Income:
 
Successor
 
 
Predecessor
 
September 1, 2017
Through
December 31, 2017
 
 
January 1, 2017
Through
August 31, 2017
Gain on extinguishment of debt

 
 
(89,989
)
Gain on fresh-start revaluation

 
 
(16,566
)
Write-off of unamortized debt issuance costs and discounts

 
 
10,262

Prepayment penalties and debt-related fees

 
 
13,191

Professional fees
2,141

 
 
7,342

Key employee incentive plan

 
 
1,229

Reorganization items, net
$
2,141

 
 
$
(74,531
)

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For the period from January 31, 2017 through August 31, 2017 (Predecessor), the cash reorganization items included approximately $8,571 of professional fees and employee incentives and $3,673 of debt issuance and repayment costs. Cash reorganization items included approximately $2,141 for professional fees for the period from September 1, 2017 through December 31, 2017 (Successor). The cash outflow is included in net cash provided by operating activities in our Consolidated Statements of Cash Flows for the periods presented.
(3) Goodwill and Intangible Assets
In connection with the Company’s adoption of fresh-start accounting on the Effective Date, the Company recorded $2,675 of goodwill representing the excess of reorganization value over the fair value of identifiable tangible and intangible assets. The goodwill is not tax deductible. There was no change in the carrying value of goodwill recognized in the year ended December 31, 2018 (Successor). Also as part of fresh-start accounting, the Company recorded an intangible asset comprised of the indefinite-lived trade name of the Successor, which is not subject to amortization. The gross carrying value of the trade name intangible asset was $5,500 at both December 31, 2018 (Successor) and December 31, 2017 (Successor).
There was no amortization expense recorded in the year ended December 31, 2018 (Successor) or the period September 1, 2017 through December 31, 2017 (Successor). Related to the customer relationships intangible asset of the Predecessor, which was subject to amortization, the Company recorded amortization expense of $4,088 in the period January 1, 2017 through August 31, 2017 (Predecessor).
The Company tests both goodwill and its intangible asset for impairment on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or the intangible asset, as applicable, below its carrying value.
(4) Debt
Long-term debt consisted of the following: