Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance to management and the board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. We conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission (2013 Framework). Based on our assessment, we believe that, as of December 31, 2020, our internal control over financial reporting is effective.
The effectiveness of internal control over financial reporting as of December 31, 2020 has been audited by Schneider Downs & Co. Inc., an independent registered public accounting firm which also audited our consolidated financial statements. Schneider Downs’ attestation report on the consolidated financial statements and management’s maintenance of effective internal control over financial reporting is included under the heading “Report of Independent Registered Public Accounting Firm.”
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Note 1: Significant Accounting Policies
Basis of Consolidation. The consolidated financial statements include the accounts of Universal Stainless & Alloy Products, Inc. and its wholly-owned subsidiaries and variable interest entities (collectively, “we,” “us,” “our,” or the “Company”). All intercompany accounts and transactions have been eliminated in consolidation. We have no interests in any unconsolidated entity.
Use of Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. The estimates and assumptions used in these consolidated financial statements are based on known information available as of the balance sheet date. Actual results could differ from those estimates.
Concentration of Credit Risk. We limit our credit risk on accounts receivable by performing ongoing credit evaluations and, when necessary, require letters of credit, guarantees or cash collateral. During 2020, we had one customer which accounted for approximately 23% of our total net sales and 8% of our total accounts receivable balance. The percent of accounts receivable made up by our largest customer is lower than the percent of sales primarily due to timing, as sales to that customer were lowest in the fourth quarter compared to each of the first three quarters. During 2019, we had one customer which accounted for approximately 27% of our total net sales and 9% of our total accounts receivable, and a second customer which accounted for approximately 11% of our total net sales and 17% of our total accounts receivable. During 2018, we had one customer which accounted for approximately 18% of our total net sales and 6% of our total accounts receivable balance.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are presented net of the allowance for doubtful accounts on our consolidated balance sheets. We market our products to a diverse customer base, primarily throughout the United States. International sales approximated 7% of 2020 total net sales, 7% of 2019 total net sales, and 8% of 2018 total net sales. The allowance for doubtful accounts includes specific reserves for the value of outstanding invoices issued to customers that are deemed potentially not collectible. Receivables are charged-off to the allowance when they are deemed to be uncollectible. There was no bad debt expense recorded for the years ended December 31, 2020, 2019 and 2018.
Inventories. Inventories are stated at the lower of cost or net realizable value with cost principally determined by the weighted average cost method. Such costs include the acquisition cost for raw materials and operating supplies, direct labor and applied manufacturing overhead within the guidelines of normal plant capacity. We reserve for slow-moving inventory and inventory that is being evaluated under our quality control process. The reserves are based upon management’s expected method of disposition. The net change in inventory reserves for the year ended December 31, 2020 was an increase of $1.1 million. The net change for the year ended December 31, 2019 was an increase of $0.2 million, and the net change for the year ended December 31, 2018 was an increase of $0.4 million.
Included in inventory are operating materials consisting of forge dies and production molds and rolls that are consumed over their useful lives. During the years ended December 31, 2020, 2019 and 2018, we amortized these operating materials in the amount of $1.7 million, $2.3 million and $2.3 million, respectively. This expense is recorded as a component of cost of products sold on the consolidated statements of operations and included as a part of our total depreciation and amortization on the consolidated statements of cash flows.
We experienced significantly lower activity levels at our production facilities during 2020 caused primarily by the impacts of the COVID-19 pandemic. Due to the lower activity levels, management revised its accounting estimates for the absorption of costs into inventory and, as a result, $8.3 million of fixed overhead costs were not absorbed into inventory and $4.9 million of negative operating efficiency variances were incurred. The total impact of $13.2 million was charged directly to expense during 2020.
Property, Plant and Equipment. Property, plant and equipment is recorded at cost or its fair value at acquisition date. No depreciation is recognized on assets until they are placed in service. Assets which have been retired or disposed of are removed from cost and accumulated depreciation accounts, with the gain or loss generally reflected in cost of goods sold on the consolidated statements of operations.
Major equipment maintenance costs are capitalized as incurred and included in other current assets. These costs are amortized to cost of products sold within a 12 to 36 month period. Other maintenance costs are expensed as incurred. Costs of improvements and renewals are capitalized. Our maintenance expense for the years ended December 31, 2020, 2019 and 2018 was $15.9 million, $19.7 million and $18.3 million, respectively, which is included as a component of cost of products sold.
32
Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets. The estimated useful lives of buildings and land improvements are between 10 and 39 years, and the estimated useful lives of machinery and equipment are between five and 20 years. Our total depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $17.5 million, $16.7 million and $16.4 million, respectively, of which $17.0 million, $16.1 million and $15.9 million, respectively, was included as a component of cost of products sold while the remainder was included in selling, general and administrative expense.
Long-Lived Asset Impairment. Long-lived assets, including property, plant and equipment and intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in relation to the operating performance and future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of expected future cash flows is less than the book value. Based on management’s assessment of the carrying values of long-lived assets, no impairment reserve was necessary as of December 31, 2020, 2019 and 2018.
Deferred Financing Costs. Deferred financing costs are amortized up to the maturity date of the related financial instrument using the straight-line method, which approximates the effective interest method. Deferred financing cost amortization for the years ended December 31, 2020, 2019 and 2018 was $0.2 million, $0.2 million and $0.3 million, respectively, and is included as a component of interest expense and other financing costs on the consolidated statements of operations and included as part of total depreciation and amortization on the consolidated statements of cash flows. At December 31, 2020 and 2019, we had $1.2 million and $1.4 million, respectively, of unamortized deferred financing costs included on our consolidated balance sheets as a reduction of debt.
Revenue Recognition. The Company’s revenues are primarily composed of sales of products. Revenue from the sale of products is recognized when the Company satisfies its performance obligations under a contract by transferring control of the promised product to its customer (“point-in-time”). Sales of certain specified product grades and shapes, and sales from conversion services, are recognized over-time. These sales qualify for over-time revenue recognition as the Company does not produce an asset with alternative use when completing its performance obligations with regard to these items, and maintains an enforceable right to payment in the event of contract termination.
Invoiced shipping and handling costs are also accounted for as revenue. Customer claims, which are not material, are accounted for primarily as a reduction to gross sales after the matter has been researched and an acceptable resolution has been reached.
Income Taxes. Deferred income taxes are provided for net operating losses, unused tax credits earned and the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. We use the liability method to account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid. Valuation allowances are provided for a deferred tax asset when it is more likely than not that the asset will not be realized. Income tax penalties and interest are included in the provision for income tax expense.
We evaluate the tax positions taken or expected to be taken in our tax returns. A tax position should only be recognized in the financial statements if we determine that it is more-likely-than-not that the tax position will be sustained upon examination by the tax authorities, based upon the technical merits of the position. For those tax positions that should be recognized, the measurement of a tax position is determined as being the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. We believe there are no material uncertain tax positions at December 31, 2020, 2019 and 2018.
We recognize excess tax benefits as a result of the exercise of employee stock options within the consolidated statements of operations.
Share-based Compensation Plans. We recognize compensation expense based on the grant-date fair value of the awards. The fair value of the stock option grants is estimated on the date of grant using the Black-Scholes option-pricing model, and is recognized ratably over the service/vesting period of the award. The fair value of time-based restricted stock grants and restricted stock units is calculated using the market value of the stock on the date of issuance, and is recognized ratably over the service/vesting period of the award.
Net (Loss) Income per Common Share. Net (loss) income per common share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding plus all dilutive potential common shares outstanding during the period.
33
Treasury Stock. We account for treasury stock under the cost method and include such shares as a reduction of total stockholders’ equity. During 2020, we retired all treasury stock previously acquired.
Financial Instruments. Financial instruments held by us include cash, accounts receivable, and accounts payable and current and long-term debt. The carrying value of cash, accounts receivable and accounts payable is considered to be representative of fair value because of the short maturity of these instruments. Refer to Note 8 for fair value disclosures of our financial instruments.
Segment Reporting. Our operating facilities are integrated, and therefore our chief operating decision maker (“CODM”) views the Company as one business unit. Our CODM sets performance goals, assesses performance and makes decisions about resource allocations on a consolidated basis. As a result of these factors, as well as the nature of the financial information available which is reviewed by our CODM, we maintain one reportable segment.
Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the removal of certain disclosure requirements. The amendments in the ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until the effective date. We adopted this guidance as of January 1, 2020 and the adoption did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740),” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments in this ASU also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU will be applied using different approaches depending on what the specific amendment relates to and, for public entities, are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. An entity is permitted to early adopt the guidance, and we early adopted ASU 2019-12 as of January 1, 2020. The adoption did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
The Company considers the applicability and impact of all ASUs. Recently issued ASUs not listed were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.
Note 2: Revenue Recognition
The Company’s revenues are primarily comprised of sales of products. Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue.
The Company’s revenue is primarily from products transferred to customers at a point in time. The Company recognizes revenue at the point in time in which the customer obtains control of the product, which is generally when product title passes to the customer upon shipment.
We have determined that there are certain customer agreements involving production of specified product grades and shapes that require revenue to be recognized over time, in advance of shipment, due to there being no alternative use for these grades and shapes without significant economic loss. Also, the Company maintains an enforceable right to payment including a normal profit margin from the customer in the event of contract termination. Contract assets related to services performed, not yet billed of $2.3 million and $2.2 million are included in Accounts Receivable in the Consolidated Balance Sheets at December 31, 2020 and December 31, 2019, respectively.
34
The Company has elected the following practical expedients allowed under ASU 2014-09:
|
•
|
Shipping activities are not considered to be separate performance obligations.
|
|
•
|
Performance obligations are satisfied within one year from a given reporting date, and consequently we omit disclosure of the transaction price apportioned to remaining performance obligations on open orders.
|
The following summarizes our revenue by melt type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
Specialty alloys
|
|
$
|
|
141,838
|
|
|
|
|
201,120
|
|
Premium alloys (A)
|
|
|
|
35,239
|
|
|
|
|
37,618
|
|
Conversion services and other sales
|
|
|
2,654
|
|
|
|
|
4,269
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
|
179,731
|
|
|
$
|
|
243,007
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Premium alloys represent all vacuum induction melted (VIM) products.
|
|
Note 3: Inventory
The major classes of inventory are as follows:
December 31,
|
|
2020
|
|
|
2019
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Raw materials and starting stock
|
|
$
|
|
9,286
|
|
|
$
|
|
9,815
|
|
Semi-finished and finished steel products
|
|
|
|
94,928
|
|
|
|
|
127,713
|
|
Operating materials
|
|
|
|
11,502
|
|
|
|
|
13,090
|
|
Gross inventory
|
|
|
|
115,716
|
|
|
|
|
150,618
|
|
Inventory reserves
|
|
|
|
(4,336
|
)
|
|
|
|
(3,216
|
)
|
Total inventory, net
|
|
$
|
|
111,380
|
|
|
$
|
|
147,402
|
|
Note 4: Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
|
|
2020
|
|
|
2019
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
|
7,847
|
|
|
$
|
|
7,847
|
|
Buildings
|
|
|
|
52,160
|
|
|
|
|
50,974
|
|
Machinery and equipment
|
|
|
|
291,134
|
|
|
|
|
281,008
|
|
Construction in progress
|
|
|
|
4,664
|
|
|
|
|
9,441
|
|
Gross property, plant and equipment
|
|
|
|
355,805
|
|
|
|
|
349,270
|
|
Accumulated depreciation
|
|
|
|
(190,822
|
)
|
|
|
|
(173,209
|
)
|
Property, plant and equipment, net
|
|
$
|
|
164,983
|
|
|
$
|
|
176,061
|
|
35
Note 5: Long-Term Debt
Long-term debt consists of the following:
December 31,
|
|
2020
|
|
|
2019
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
|
6,786
|
|
|
$
|
|
8,215
|
|
Revolving credit facility
|
|
|
|
18,479
|
|
|
|
|
39,480
|
|
Notes
|
|
|
|
15,000
|
|
|
|
|
17,000
|
|
Paycheck Protection Program Note
|
|
|
|
10,000
|
|
|
|
|
-
|
|
Finance leases
|
|
|
|
1,070
|
|
|
|
|
1,026
|
|
|
|
|
|
51,335
|
|
|
|
|
65,721
|
|
Less: current portion of long-term debt
|
|
|
|
(16,713
|
)
|
|
|
|
(3,934
|
)
|
Less: deferred financing costs
|
|
|
|
(1,151
|
)
|
|
|
|
(1,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
|
33,471
|
|
|
$
|
|
60,411
|
|
Credit Facility
On August 3, 2018, we entered into the Credit Agreement with PNC Bank, National Association, as administrative agent and co-collateral agent, Bank of America, N.A., as co-collateral agent, and PNC Capital Markets LLC, as sole lead arranger and sole bookrunner. The Credit Agreement provides for a senior secured revolving credit facility not to exceed $110.0 million (“Revolving Credit Facility”) and a senior secured term loan facility (“Term Loan”) in the amount of $10.0 million (together with the Revolving Credit Facility, the “Facilities”). The Company was in compliance with all applicable covenants at December 31, 2020.
The Facilities, which expire on August 3, 2023 (the ‘Expiration Date”), are collateralized by a first lien in substantially all of the assets of the Company and its subsidiaries, except that no real property is collateral under the Facilities other than Company’s real property in North Jackson, Ohio.
Availability under the Credit Agreement is based on eligible accounts receivable and inventory. Further, the Company must maintain undrawn availability under the Credit Agreement at certain times of at least an amount equal to payments due on the notes issued in connection with the acquisition of the North Jackson facility, as defined in the Credit Agreement, plus 12.5% of the maximum borrowing amount of $110.0 million “(Minimum Liquidity”). This requirement exists until the Notes are paid in full, refinanced or extended. At December 31, 2020, the Company was in compliance with the Minimum Liquidity calculation.
The Company is required to pay a commitment fee of 0.25% based on the daily unused portion of the Revolving Credit Facility.
With respect to the Term Loan, the Company must pay quarterly installments of the principal of approximately $0.4 million, plus accrued and unpaid interest, on the first day of each fiscal quarter beginning on September 30, 2018. To the extent not previously paid, the Term Loan will become due and payable in full on the Expiration Date.
Amounts outstanding under the Facilities, at the Company’s option, will bear interest at either a base rate or a LIBOR based rate, in either case calculated in accordance with the terms of the Credit Agreement. Interest under the Credit Agreement is payable monthly. We elected to use the LIBOR based rate for the majority of the debt outstanding under the Facilities during 2020. At December 31, 2020, the LIBOR based rate was 2.16% on our Revolving Credit Facility and 2.66% for the Term Loan.
The Credit Agreement contains customary affirmative and negative covenants. If a triggering event occurs as defined in the Credit Agreement, the Company must maintain a fixed charge coverage ratio of not less than 1.10 to 1.0 measured on a rolling four quarter basis and calculated in accordance with the terms of the Credit Agreement.
36
At December 31, 2020 and 2019, we had net Credit Agreement related deferred financing costs of approximately $0.5 million and $0.7 million, respectively. We amortized $0.2 million of those deferred financing costs during each of the years ended December 31, 2020 and 2019. We did not record any additional deferred financing costs to the Consolidated Balance Sheet during 2020 or 2019.
The aggregate annual principal payments due under our Credit Agreement at December 31, 2020, are as follows:
(dollars in thousands)
|
|
|
|
|
|
2021
|
|
$
|
|
1,429
|
|
2022
|
|
|
|
1,429
|
|
2023
|
|
|
|
1,429
|
|
2024
|
|
|
|
20,978
|
|
|
|
$
|
|
25,265
|
|
Paycheck Protection Program Term Note
On April 16, 2020, the Company entered into a promissory note, dated April 15, 2020, with PNC Bank, National Association, evidencing an unsecured loan with a principal amount of $10.0 million made to the Company pursuant to the Paycheck Protection Program (the “PPP Term Note”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Term Note is guaranteed by the United States Small Business Administration.
The PPP Term Note bears interest at a fixed annual rate of 1.00%, with the first six months of interest deferred. According to the terms of the PPP Term Note, the Company would begin to make 18 equal monthly payments of principal and interest in November 2020 with the final payment due in April 2022. The PPP Term Note may be accelerated upon the occurrence of an event of default. The Company applied for forgiveness of the PPP Term Note during the third quarter of 2020. As of December 31, 2020, the Company has not made any principal or interest payments related to the PPP Term Note.
The Company anticipates forgiveness of the entire amount of the PPP Term Note; however, we are unable to estimate the timing of the completion of the forgiveness process. We have elected to classify the entire principal balance of the PPP Term Note within Long-term debt, net on the consolidated balance sheet as of December 31, 2020. Under the existing terms of the PPP Term Note, if no forgiveness were granted approximately $7.7 million of the principal amount would be due within twelve months
The proceeds may be used to maintain payroll or make certain covered interest payments, lease payments and utility payments. Under the terms of the CARES Act, the Company may be granted forgiveness for all or a portion of the loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of certain covered lease and utility payments.
Notes
In connection with the acquisition of the North Jackson facility in 2011, we issued $20.0 million in Notes to the sellers of the facility as partial consideration in the transaction.
On January 21, 2016, the Company entered into Amended and Restated Notes in the aggregate principal amount of $20.0 million, each in favor of Gorbert Inc. (“Holder”). The Company’s obligations under the Notes are collateralized by a second lien on the same assets of the Company that collateralize the obligations of the Company under the Facilities. The Holder had the right to elect at any time on or prior to August 17, 2017 to convert all or any portion of the outstanding principal amount of the Notes. The Holder’s conversion rights expired and are no longer subject to exercise.
The Notes were originally scheduled to mature on March 17, 2019. On March 30, 2018, the Company provided notification of its intent to extend the maturity date to March 17, 2020 in accordance with the terms of the Notes. Upon the Company’s extension of the maturity date of the Notes to March 17, 2020, principal payments in the aggregate amount of $2.0 million were made in March 2019. On March 18, 2019, the Company provided notification of its intent to extend the maturity date to March 17, 2021 in accordance with the terms of the Notes. Upon the Company’s extension of the maturity date of the Notes to March 17, 2021, principal payments in the aggregate amount of $2.0 million were made in March 2020.
There are no further extension options remaining, and the remaining aggregate principal balance of the Notes outstanding of $15.0 million has been classified within Current portion of long-term debt as of December 31, 2020. The classification is consistent with our intent to pay the notes off in the first quarter of 2021.
In accordance with the terms of the Notes, the Notes have borne interest at a rate of 6.0% per year since August 17, 2017. All accrued and unpaid interest is payable quarterly in arrears on each September 18, December 18, March 18 and June 18.
37
Note 6: Leases
The Company periodically enters into leases in its normal course of business. At December 31, 2020, the leases in effect were primarily related to mobile and other production equipment. The term of our leases is generally 60 months or less, and the leases do not have significant restrictions, covenants, or other nonstandard terms.
We adopted the guidance effective in Leases (Topic 842) on January 1, 2019. Adoption of this guidance did not change the balance sheet recognition of our finance leases or the income statement recognition of our finance or operating leases. As a result of adopting the guidance, the Company recorded lease liabilities and right-of-use assets related to its operating leases. The impact at adoption was immaterial to the Company’s consolidated financial statements.
Right-of-use assets and lease liabilities are recorded at the present value of minimum lease payments. For our operating leases, the assets are included in Other long-term assets on the consolidated balance sheets and are amortized within operating income over the respective lease terms. The long-term component of the lease liability is included in Other long-term liabilities, net, and the current component is included in Other current liabilities. For our finance leases, the assets are included in Property, plant and equipment, net on the consolidated balance sheets and are depreciated over the respective lease terms which range from three to five years. The long-term component of the lease liability is included in Long-term debt and the current component is included in Current portion of long-term debt.
As of December 31, 2020, future minimum lease payments applicable to operating and finance leases were as follows:
|
Operating Leases
|
|
|
Finance Leases
|
|
2021
|
$
|
|
269
|
|
|
$
|
|
344
|
|
2022
|
|
|
258
|
|
|
|
|
319
|
|
2023
|
|
|
165
|
|
|
|
|
240
|
|
2024
|
|
|
71
|
|
|
|
|
240
|
|
2025
|
|
|
3
|
|
|
|
|
80
|
|
Total minimum lease payments
|
$
|
|
766
|
|
|
$
|
|
1,223
|
|
Less amounts representing interest
|
|
|
(33
|
)
|
|
|
|
(153
|
)
|
Present value of minimum lease payments
|
$
|
|
733
|
|
|
$
|
|
1,070
|
|
Less current obligations
|
|
|
(265
|
)
|
|
|
|
(284
|
)
|
Total long-term lease obligations, net
|
$
|
|
468
|
|
|
$
|
|
786
|
|
Weighted-average remaining lease term
|
|
3 years
|
|
|
|
3.5 years
|
|
Right-of-use assets recorded to the consolidated balance sheet at December 31, 2020 were $0.7 million for operating leases and $0.8 million for finance leases. For the twelve months ended December 31, 2020, the amortization of finance lease assets was $0.4 million and was included in cost of products sold in the Consolidated Statements of Operations.
The Company elected the practical expedient allowed under Leases (Topic 842) to exclude leases with a term of 12 months or less from the calculation of our lease liabilities and right-of-use assets.
In determining the lease liability and corresponding right-of-use asset for each lease, the Company calculated the present value of future lease payments using the interest rate implicit in the lease, when available, or the Company’s incremental borrowing rate. The incremental borrowing rate was determined with reference to the interest rate applicable under our senior secured revolving credit facility discussed in Note 5, as this facility is collateralized by a first lien on substantially all of the assets of the Company and its term is similar to the term of our leases.
Note 7: New Markets Tax Credit Financing Transaction
On March 9, 2018, the Company entered into a New Markets Tax Credit financing program with PNC New Markets Investment Partners, LLC and Boston Community Capital, Inc. related to a new mid-size bar cell capital project at the Company’s Dunkirk, NY facility. PNC New Markets Investment Partners, LLC made a capital contribution and the Company made a loan to Dunkirk Investment Fund, LLC (“Investment Fund”) under the qualified NMTC financing program. Through this financing transaction, the Company secured low interest financing and the potential for other future benefits related to its mid-size bar cell capital project.
In connection with the financing transaction, the Company loaned $6.7 million aggregate principal amount (“Leverage Loan”) due in March 2048 to the Investment Fund. Additionally, PNC New Markets Investment Partners, LLC contributed $3.5 million to the Investment Fund, and as such, PNC New Markets Investment Partners, LLC is entitled to substantially all tax and other benefits derived from the NMTC. The Investment Fund then contributed the proceeds to a community
38
development entity (“CDE”). The CDE then loaned the funds, on similar terms, as the Leverage Loan to Dunkirk Specialty Steel, LLC, a wholly-owned subsidiary of the Company. The CDE loan proceeds are restricted for use on the mid-size bar cell capital project.
The NMTC is subject to 100 percent recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to comply with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, require the Company to indemnify PNC New Markets Investment Partners, LLC for any loss or recapture of NMTCs related to the financing until the Company’s obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.
As of December 31, 2020 and 2019, the Company recorded $2.8 million within Other long-term liabilities related to this transaction, which represents the funds contributed to the Investment Fund by PNC New Markets Investment Partners, LLC.
This transaction also includes a put/call provision whereby the Company may be obligated or entitled to repurchase PNC New Markets Investment Partners, LLC’s interest in the Investment Fund. The Company believes that PNC New Markets Investment Partners, LLC will exercise the put option in March 2025, at the end of the recapture period, resulting in a gain of $2.8 million at that time. The value attributed to the put/call is negligible.
Direct costs incurred in structuring this financing transaction totaled $0.7 million. These costs were deferred and are amortized over the term of the loans.
The Company has determined that the Investment Fund and CDE are each a VIE, and that it is the primary beneficiary of each VIE. This conclusion was reached based on the following:
|
•
|
The ongoing activities of the VIE, collecting and remitting interest and fees, and NMTC compliance were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIE;
|
|
•
|
Contractual arrangements obligate the Company to comply with NMTC rules and regulations and provide various other guarantees to the Investment Fund and CDE;
|
|
•
|
PNC New Markets Investment Partners, LLC lacks a material interest in the underlying economics of the project; and
|
|
•
|
The Company is obligated to absorb losses of the VIE.
|
Because the Company is the primary beneficiary of each VIE, these entities have been included in the Company’s Consolidated Financial Statements.
Note 8: Fair Value Measurements
The fair value hierarchy has three levels based on the inputs used to determine fair value, which are as follows:
Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.
Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
39
The carrying amounts of our cash, accounts receivable and accounts payable approximated fair value at December 31, 2020 and 2019 due to their short-term nature (Level 1). The fair value of the Term Loan and Revolver at December 31, 2020 and 2019 approximated the carrying amount as the interest rate is based upon floating short-term interest rates (Level 2). The fair value of the Notes was approximately $15.0 million at December 31, 2020 and $16.9 million at December 31, 2019 (Level 2).
Note 9: Derivatives and Hedging
The Company invoices certain customers in foreign currencies. In order to mitigate the risks associated with fluctuations in exchange rates with the US Dollar, the Company enters into foreign exchange forward contracts for a portion of these sales and has designated these contracts as cash flow hedges.
The notional value of these contracts was $1.2 million at December 31, 2020 and $4.9 million at December 31, 2019. The contracts had a related unrealized loss recorded in accumulated other comprehensive income of less than $0.1 million at December 31, 2020 and 2019.
Additionally, the Company entered into a forward interest rate swap contract during 2020 to fix the interest rate on a portion of its variable-rate debt from January 1, 2021 to June 30, 2023. The forward interest rate swap was designated as a cash flow hedge. The notional amount of the contract at its inception was $16 million, and the notional amount will step down throughout the term. The contract had a related unrealized loss recorded in accumulated other comprehensive income of less than $0.1 million at December 31, 2020.
Note 10: Income Taxes
The income tax benefit attributable to continuing operations during the years ended December 31, 2020, 2019 and 2018 is as follows:
Components of the benefit from income taxes are as follows:
For the years ended December 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current (benefit) provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
(16
|
)
|
|
$
|
|
(7
|
)
|
|
$
|
|
(1
|
)
|
|
State
|
|
|
|
-
|
|
|
|
|
22
|
|
|
|
|
86
|
|
|
Deferred (benefit) provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
(5,154
|
)
|
|
|
|
(279
|
)
|
|
|
|
2,100
|
|
|
State
|
|
|
|
(77
|
)
|
|
|
|
(238
|
)
|
|
|
|
(250
|
)
|
|
(Benefit) provision for income taxes
|
|
$
|
|
(5,247
|
)
|
|
$
|
|
(502
|
)
|
|
$
|
|
1,935
|
|
|
The income tax (benefit) provision reconciled to taxes computed at the statutory federal rate is as follows:
For the years ended December 31,
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Tax (benefit) provision at statutory tax rate
|
|
$
|
|
(5,102
|
)
|
|
$
|
|
792
|
|
|
$
|
|
2,645
|
|
|
State income taxes, net of federal impact
|
|
|
|
(129
|
)
|
|
|
|
38
|
|
|
|
|
74
|
|
|
Research and development tax credit
|
|
|
|
(372
|
)
|
|
|
|
(1,233
|
)
|
|
|
|
(874
|
)
|
|
Valuation allowance, net of federal impact
|
|
|
|
-
|
|
|
|
|
(193
|
)
|
|
|
|
(167
|
)
|
|
Adjustments to deferred taxes
|
|
|
|
279
|
|
|
|
|
41
|
|
|
|
|
277
|
|
|
Other, net
|
|
|
|
77
|
|
|
|
|
53
|
|
|
|
|
(20
|
)
|
|
(Benefit) provision for income taxes
|
|
$
|
|
(5,247
|
)
|
|
$
|
|
(502
|
)
|
|
$
|
|
1,935
|
|
|
We continue to record a full valuation allowance against our New York deferred tax assets due to the zero percent state income tax rate for qualified manufacturers. We continue to record a partial valuation allowance against our Pennsylvania net operating loss deferred tax asset due to annual usage limitations. We have determined that federal and other state deferred tax assets are expected to be realized and have not recorded any additional valuation allowances.
40
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred taxes related to continuing operations are as follows:
December 31,
|
|
2020
|
|
|
2019
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred income taxes:
|
|
|
|
|
|
|
|
|
|
|
Federal and state tax carryforwards
|
|
$
|
|
10,950
|
|
|
$
|
|
7,659
|
|
Inventory
|
|
|
|
1,409
|
|
|
|
|
970
|
|
Share-based compensation
|
|
|
|
1,919
|
|
|
|
|
2,029
|
|
Receivables
|
|
|
|
59
|
|
|
|
|
166
|
|
Accrued liabilities
|
|
|
|
271
|
|
|
|
|
333
|
|
Other
|
|
|
|
12
|
|
|
|
|
7
|
|
Total deferred tax assets
|
|
$
|
|
14,620
|
|
|
$
|
|
11,164
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
|
19,672
|
|
|
$
|
|
21,312
|
|
Other
|
|
|
|
673
|
|
|
|
|
814
|
|
Total deferred tax liabilities
|
|
$
|
|
20,345
|
|
|
$
|
|
22,126
|
|
Total noncurrent deferred income taxes
|
|
$
|
|
5,725
|
|
|
$
|
|
10,962
|
|
We file a U.S. federal income tax return and various state income tax returns. For federal income tax purposes, we had $22.1 million and $8.6 million of net operating loss carryforwards at December 31, 2020 and 2019, respectively. The net operating loss carryforwards begin to expire in 2033. In addition, we have credit carryforwards associated with our research and development activities of $5.6 million and $5.2 million as of December 31, 2020 and 2019, respectively. The research and development credit carryforwards begin to expire in 2030.
We have state net operating loss carryforwards of $9.9 million at December 31, 2020 and $8.8 million at December 31, 2019, and the related valuation allowances were $2.8 million at each date. We have state credit carryforwards of $0.2 million at December 31, 2020 and 2019. The state net operating loss carryforwards begin to expire in 2031. The state credit carryforwards begin to expire in 2027.
We are routinely under audit by federal or state authorities. Our federal tax returns are subject to examination by the IRS for tax years after 2016. We are subject to examination by most state tax jurisdictions for tax years after 2016.
Note 11: Net Income (Loss) Per Common Share
The computation of basic and diluted net income (loss) per common share for the years ended December 31, 2020, 2019 and 2018 is as follows:
For the years ended December 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
|
(19,047
|
)
|
|
$
|
|
4,275
|
|
|
$
|
|
10,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding
|
|
|
|
8,818,974
|
|
|
|
|
8,778,753
|
|
|
|
|
8,132,632
|
|
Weighted average effect of dilutive share-based compensation
|
|
|
|
-
|
|
|
|
|
94,966
|
|
|
|
|
215,060
|
|
Diluted weighted average number of shares of common stock outstanding
|
|
|
8,818,974
|
|
|
|
|
8,873,719
|
|
|
|
|
8,347,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
|
(2.16
|
)
|
|
$
|
|
0.49
|
|
|
$
|
|
1.31
|
|
Diluted earnings per share
|
|
$
|
|
(2.16
|
)
|
|
$
|
|
0.48
|
|
|
$
|
|
1.28
|
|
On May 25, 2018, the Company completed an underwritten, public offering involving the issuance and sale by the Company of 1,224,490 shares of common stock at a public offering price of $24.50 per share. In addition, the Company granted the underwriters a 30-day option to purchase up to an additional 183,673 shares of common stock. On June 1, 2018, the underwriters exercised the option in full, and an additional 183,673 shares of common stock were issued and sold on June 5,
41
2018. The public offering resulted in gross proceeds to the Company of approximately $34.5 million, or $32.2 million net of the underwriting discount and other offering fees and expenses. We used the net proceeds from the public offering to repay amounts outstanding under the Company’s revolving credit facility. The public offering’s impact on the weighted average number of shares for the year ended December 31, 2018 was 0.8 million shares.
There were 776,025, 593,975 and 323,250 options to purchase shares of common stock, at an average price of $22.02, $26.91, and $32.36 for the years ended December 31, 2020, 2019 and 2018, respectively, that were not included in the computation of diluted net income per common share because their respective exercise prices were greater than the average market price of our common stock.
Note 12: Share-Based Plans
At December 31, 2020, we had the following share-based compensation plans:
Universal Stainless & Alloy Products, Inc. 2017 Equity Incentive Plan
We maintain the Universal Stainless & Alloy Products, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which was approved by our stockholders in May 2017. The 2017 Plan permits the issuance of stock options, restricted stock, restricted stock units, other share-based awards and performance awards to officers, employees, non-employee directors, and consultants and advisors to the Company. At inception, there were 568,357 shares authorized for issuance under the 2017 Plan.
When adopted, the 2017 Plan replaced the Omnibus Incentive Plan (“OIP”). Any awards outstanding under the OIP will remain subject to and be paid under the OIP. No new awards will be granted under the OIP. Any shares subject to outstanding awards under the OIP that cease to be subject to such awards after the adoption of the 2017 Plan will increase the shares authorized under the 2017 Plan. At December 31, 2020, there were 310,142 shares available for grant under the 2017 Plan.
Omnibus Incentive Plan
We maintain the OIP which was approved by our stockholders in May 2012. The OIP permitted the issuance of stock options, restricted stock, restricted stock units and other share-based awards to non-employee directors, other than those directors owning more than 5% of our outstanding common stock, consultants, officers and other key employees who were expected to contribute to our future growth and success. With the adoption of the 2017 Plan, no shares of common stock were available for grant at December 31, 2020 under the OIP.
Stock Options
The price for options granted under the both the 2017 Plan and OIP is equal to the fair market value of the common stock at the date of grant. Options granted to non-employee directors vest over a three-year period, and options granted to employees vest over a four-year period. All options under both the 2017 Plan and OIP will expire no later than ten years after the grant date. Forfeited options may be reissued and are included in the amount available for grants.
A summary of stock option activity as of and for the year ended December 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested stock
|
|
|
Stock options
|
|
|
|
options outstanding
|
|
|
outstanding
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
|
Number
|
|
|
grant-date
|
|
|
Number
|
|
|
exercise
|
|
|
contractual
|
|
|
|
of shares
|
|
|
fair value
|
|
|
of shares
|
|
|
price
|
|
|
term (years)
|
|
Outstanding at December 31, 2019
|
|
|
252,736
|
|
|
$
|
|
8.45
|
|
|
|
896,800
|
|
|
$
|
|
22.01
|
|
|
|
|
|
Stock options granted
|
|
|
122,300
|
|
|
|
|
2.99
|
|
|
|
122,300
|
|
|
|
|
6.91
|
|
|
|
|
|
Stock options vested
|
|
|
(94,230
|
)
|
|
|
|
8.35
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
Stock options forfeited
|
|
|
(36,050
|
)
|
|
|
|
7.43
|
|
|
|
(125,525
|
)
|
|
|
|
21.57
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
244,756
|
|
|
$
|
|
5.87
|
|
|
|
893,575
|
|
|
$
|
|
20.00
|
|
|
|
5.7
|
|
Exercisable at December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
648,819
|
|
|
$
|
|
22.77
|
|
|
|
4.4
|
|
42
There were no proceeds from stock option exercises during 2020. Proceeds from stock option exercises totaled $0.1 million and $0.7 million for the years ended December 31, 2019 and 2018, respectively. Shares issued in connection with stock option exercises are issued from available authorized shares.
Based upon the closing stock price of $7.48 at December 31, 2020, the aggregate intrinsic value of outstanding stock options was $0.1 million, of which a nominal amount was related to options that were exercisable. Intrinsic value of stock options is calculated as the amount by which the market price of our common stock exceeds the exercise price of the options. There were no stock options exercised for the year ended December 31, 2020. The aggregate intrinsic value of stock options exercised for the year ended December 31, 2019 was less than $0.1 million.
The total fair value of stock option awards vested during each of the years ended December 31, 2020, 2019 and 2018 was approximately $0.8 million.
Share-based compensation to employees and directors is recognized as compensation expense in the consolidated statements of operations based on the stock options fair value on the measurement date, which is the date of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. The compensation expense recognized, and its related tax effects, are included in additional paid-in capital.
Share-based compensation expense related to stock options totaled $0.8 million for each of the years ended December 31, 2020, 2019 and 2018, respectively. Share-based compensation expense is recognized ratably over the requisite service period for all stock option awards. Unrecognized share-based compensation expense related to non-vested stock option awards totaled $1.2 million at December 31, 2020, and the weighted-average period over which this unrecognized expense was expected to be recognized was 2.8 years.
The fair value of our stock options granted is estimated on the measurement date, which is the date of grant. We use the Black-Scholes option-pricing model. Our determination of fair value of stock option awards on the date of grant is affected by our stock price as well as assumptions regarding our expected stock price volatility over the term of the awards, and actual and projected stock option exercise behaviors. The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2020, 2019 and 2018 was $2.99, $6.71 and $10.33, respectively.
The assumptions used to determine the fair value of stock options granted are detailed in the table below:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
0.37% to 0.94%
|
|
|
1.41% to 2.56%
|
|
|
2.63% to 3.10%
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected market price volatility
|
|
46% to 51%
|
|
|
47% to 52%
|
|
|
45% to 52%
|
|
Weighted-average expected market price volatility
|
|
|
49.2
|
%
|
|
|
49.4
|
%
|
|
|
49.1
|
%
|
Expected term
|
|
4.6 to 6.5 years
|
|
|
4.6 to 6.5 years
|
|
|
4.7 to 6.8 years
|
|
The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the stock options at the grant date. No dividend yield was assumed because we do not pay cash dividends on common stock and currently have no plans to pay a dividend. Expected volatility is based on the long-term historical volatility (estimated over a period equal to the expected term of the stock options) of our common stock. In estimating the fair value of stock options under the Black-Scholes option-pricing model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected term of options granted represents the period of time that options granted are expected to be outstanding.
43
Restricted Stock and Restricted Stock Units
A summary of restricted stock activity for the years ended December 31, 2020 and 2019 is presented below:
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
Number
|
|
|
|
grant-date
|
|
|
|
of shares
|
|
|
|
fair value
|
|
Balance, December 31, 2018
|
|
|
80,352
|
|
|
$
|
|
17.97
|
|
Restricted stock granted in May
|
|
|
6,368
|
|
|
|
|
12.88
|
|
Restricted stock vested in May
|
|
|
(4,528
|
)
|
|
|
|
20.56
|
|
Restricted stock granted in November
|
|
|
18,000
|
|
|
|
|
14.39
|
|
Balance, December 31, 2019
|
|
|
100,192
|
|
|
|
|
16.89
|
|
Restricted stock granted in May
|
|
|
6,308
|
|
|
|
|
7.84
|
|
Restricted stock vested in May
|
|
|
(6,652
|
)
|
|
|
|
18.11
|
|
Restricted stock granted in October
|
|
|
11,866
|
|
|
|
|
5.80
|
|
Restricted stock granted in November
|
|
|
139,500
|
|
|
|
|
6.42
|
|
Restricted stock vested in December
|
|
|
(44,000
|
)
|
|
|
|
14.75
|
|
Balance, December 31, 2020
|
|
|
207,214
|
|
|
$
|
|
9.25
|
|
Share-based compensation expense related to restricted stock totaled $0.5 million, $0.4 million, and $0.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
During the years ended December 31, 2020 and 2019, we granted 157,674 and 24,368 time-based restricted stock units, respectively, to certain employees and directors. The restricted stock units typically vest over four years for employees and three years for directors. The fair value of the non-vested time-based restricted common stock awards was calculated using the market value of the stock on the date of issuance.
As of December 31, 2020, total unrecognized compensation cost related to non-vested time-based restricted stock units was $1.9 million. That cost is expected to be recognized over a weighted-average period of 3.4 years.
Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan, as amended (the “Plan”), the Company is authorized to issue up to 300,000 shares of common stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees can choose as of January 1 and July 1 of each year to have up to 10% of their total earnings withheld to purchase up to 100 shares of our common stock each six-month period. The purchase price of the stock is 85% of the lower of its beginning-of-the-period or end-of-the-period market prices. At December 31, 2020, we have issued 273,307 shares of common stock since the Plan’s inception.
Tax Benefits Preservation Plan
On August 24, 2020, the Company's Board of Directors (the “Board”) adopted the Tax Benefits Preservation Plan (“Rights Agreement”), which is a stockholder rights plan designed to reduce the risk that the Company’s ability to use its net operating loss carryforwards and certain other tax attributes to reduce potential future income tax obligations would become subject to limitation by reason of the Company experiencing an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986.
Under the Rights Agreement, the Board declared a dividend of one right (a “Right”) for each of the Company’s issued and outstanding shares of common stock, par value $0.001 per share (“Common Stock”). The dividend will be paid to the stockholders of record at the close of business on September 3, 2020 (the “Record Date”). Each Right entitles the registered holder, subject to the terms of the Rights Agreement (as defined below), to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”), at a price of $35.00 (the “Exercise Price”), subject to certain adjustments. The fair value of the Rights was not significant.
The Rights will not be exercisable until the earlier to occur of (i) the close of business on the tenth business day after a public announcement or filing that a person or group of affiliated or associated persons has become an “Acquiring Person,” which is defined as a person or group of affiliated or associated persons that, at any time after the date of the Rights Agreement, has acquired, or obtained the right to acquire, beneficial ownership of 4.95% or more of the Company’s outstanding shares of Common Stock, subject to certain exceptions or (ii) the close of business on the tenth business day after the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person becoming an Acquiring Person (the earlier of such dates being called the “Distribution Date”).
44
The Rights, which are not exercisable until the Distribution Date, will expire at or prior to the earliest of (i) the close of business on August 24, 2023; (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement; (iii) the time at which the Rights are exchanged pursuant to the Rights Agreement; (iv) the time at which the Rights are terminated upon the occurrence of certain mergers or other transactions approved in advance by the Board; and (v) the close of business on the date set by the Board following a determination by the Board that (x) the Rights Agreement is no longer necessary or desirable for the preservation of the Tax Benefits or (y) no Tax Benefits are available to be carried forward or are otherwise available.
There were no issuances of Series A Preferred Stock during the twelve months ended December 31, 2020.
Note 13: Retirement Plans
We have a defined contribution retirement plan (“401(k) plan”) that covers substantially all employees. Pursuant to the 401(k) plan, participants may elect to make pre-tax and after-tax contributions, subject to certain limitations imposed under the Internal Revenue Code of 1986, as amended. In addition, we make periodic contributions to the 401(k) plan based on service for the North Jackson, Titusville and Dunkirk hourly employees. Prior to the North Jackson initial collective bargaining agreement, periodic contributions to the 401(k) plan were based on age for hourly employees at the North Jackson facility. We make periodic contributions for the salaried employees at all locations based upon their service and their individual contribution to the 401(k) plan.
We also participate in the Steelworkers Pension Trust (the “Trust”), a multi-employer defined-benefit pension plan that is open to all hourly and salary employees associated with the Bridgeville facility. We make periodic contributions to the Trust based on hours worked at a fixed rate for each hourly employee, as determined by the collective bargaining agreement, and a fixed monthly contribution on behalf of each salary employee. The trustees of the Trust have provided us with the latest data available for the Trust year ended December 31, 2019. As of that date, the Trust is not fully funded. We could be held liable to the Trust for our own obligations, as well as those of other employers, due to our participation in the Trust. Contribution rates could increase if the Trust is required to adopt a funding improvement plan or a rehabilitation plan, if the performance of the Trust assets do not meet expectations, or as a result of future collectively-bargained wage and benefit agreements. If we choose to stop participating in the Trust, we may be required to pay the Trust an amount based on the underfunded status of the Trust, referred to as a withdrawal liability.
The Pension Protection Act (PPA) defines a zone status for each trust. Trusts in the green zone are at least 80% funded, trusts in the yellow zone are at least 65% funded, and trusts in the red zone are generally less than 65% funded. The Trust recertified its zone status after using the extended amortization provisions as allowed by law. The Trust has not implemented a funding improvement or rehabilitation plan, nor are such plans pending. Our contributions to the Trust have not exceeded more than 5% of the total contributions to the Trust.
|
|
Trusts employer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
identification
|
|
|
|
|
|
Funding plan
|
|
Company contributions to the Trust
|
|
|
|
Pension
|
|
number /
|
|
PPA zone status
|
|
pending /
|
|
(dollars in thousands)
|
|
|
Surcharge
|
fund
|
|
plan number
|
|
2020
|
|
2019
|
|
implemented
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
imposed
|
Trust
|
|
23-6648508 / 499
|
|
Green
|
|
Green
|
|
No
|
|
$
|
|
711
|
|
|
$
|
|
945
|
|
|
$
|
|
880
|
|
|
No
|
The total expense of all retirement plans for the years ended December 31, 2020, 2019 and 2018 was $1.8 million, $2.1 million and $2.1 million, respectively. No other post-retirement benefit plans exist.
Note 14: Commitments and Contingencies
From time to time, various lawsuits and claims have been or may be asserted against us relating to the conduct of our business, including routine litigation relating to commercial and employment matters. The ultimate cost and outcome of any litigation or claim cannot be predicted with certainty. Management believes, based on information presently available, that the likelihood that the ultimate outcome of any such pending matter will have a material adverse effect on our financial condition, or liquidity or a material impact to our results of operations is remote, although the resolution of one or more of these matters may have a material adverse effect on our results of operations for the period in which the resolution occurs.
We, as well as other steel companies, are subject to demanding environmental standards imposed by federal, state and local environmental laws and regulations. We are not aware of any environmental condition that currently exists at any of our facilities that would cause a material adverse effect on our financial condition, results of operations or liquidity in a particular future quarter or year.
Our purchase obligations include the value of all open purchase orders with established quantities and purchase prices, as well as minimum purchase commitments, all made in the normal course of business. At December 31, 2020, our total purchase obligations were approximately $19.3 million, of which approximately $16.9 million will be due in 2021.
45