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NOTE 1—BUSINESS AND OPERATIONS
Real Industry, Inc. (“Real Industry,” the “Company,” “we,” “us” or “our”), is a Delaware holding company that operates through its operating subsidiaries. Management aims to grow the Company through acquisitions, as well as through organic efforts within existing operations described below. Our business strategy seeks to leverage our public company status, $913.5 million of United States (“U.S.”) federal net operating tax loss carryforwards (“NOLs”) and the experience and focus of our executive management team to acquire operating businesses at prices and on terms that we believe will create a sustainably profitable enterprise.
During the first quarter of 2015, the Company underwent a considerable transformation. On January 9, 2015, we completed the sale of North American Breaker Co., LLC (“NABCO”), previously the primary business within our former Industrial Supply segment. On February 27, 2015, we acquired the global recycling and specification alloys business (the “Real Alloy Business”) of Aleris Corporation (“Aleris”) (the “Real Alloy Acquisition”). A portion of the proceeds from the sale of NABCO were used to fund the Real Alloy Acquisition.
The Real Alloy Business, operating as Real Alloy Holding, Inc. (“Real Alloy”), is a global leader in third-party aluminum recycling, which includes the processing of scrap aluminum and by-products and the manufacturing of wrought, cast and specification or foundry alloys. Real Alloy offers a broad range of products and services to wrought alloy processors, automotive original equipment manufacturers, and foundries and casters. Real Alloy’s customers include companies that participate in or sell to the automotive, consumer packaging, aerospace, building and construction, steel, and durable goods industries. Real Alloy processes aluminum scrap and by-products and delivers recycled metal in liquid or solid form according to customer specifications. Real Alloy’s facilities are capable of processing industrial (new) scrap, post-consumer (old/obsolete) scrap, and various aluminum by-products, providing a great degree of flexibility in reclaiming high-quality recycled aluminum. Real Alloy currently operates twenty-seven facilities strategically located throughout North America and Europe. On November 1, 2016, Real Alloy completed the purchase of select assets of Beck Aluminum Alloys Ltd. (“Beck Alloys”), including an investment in an affiliated trading business (“Beck Trading”). The three acquired Beck Alloys facilities primarily produce high-purity foundry alloys from aluminum scrap to supply the automotive, wheel and recreational equipment casting industries.
Our focus is supporting the performance of Real Alloy, as well as evaluating potential acquisition opportunities. We seek to acquire significant ownership interests in businesses with talented and experienced management teams, strong margins, and sustainable competitive advantages. We regularly consider acquisitions of businesses that operate in undervalued industries, as well as businesses that we believe are in transition or are otherwise misunderstood by the marketplace. Post-acquisition, we plan to operate our acquired businesses as autonomous subsidiaries. We aim to use our common stock, preferred stock and other securities to pursue value-enhancing acquisitions and leverage our considerable tax assets, as well as support the growth needs of our existing operating segments, as necessary.
|
|||
NOTE 2—FINANCIAL STATEMENT PRESENTATION AND RECENT ACCOUNTING UPDATES
The accompanying unaudited condensed consolidated financial statements comprise the accounts of Real Industry and its wholly owned and majority-owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) for interim financial information, and with the instructions to Form 10‑Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The Company evaluates subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”). Operating results for the nine months ended September 30, 2017 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2017. These interim period unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016, which are included in the Company’s Annual Report on Form 10‑K, as filed with the SEC on March 13, 2017 (the “Annual Report”).
Although these unaudited condensed consolidated financial statements include certain assets, liabilities, revenues and expenses related to the former businesses of our subsidiary, SGGH, LLC (“SGGH”), then known as Fremont General Corporation (“Fremont”) and its primary operating subsidiary, Fremont Investment & Loan (“FIL”), which are presented as discontinued operations, during the nine months ended September 30, 2017 and 2016, discontinued operations had insignificant revenues and expenses and, as of September 30, 2017 and December 31, 2016, had insignificant assets and liabilities.
During the quarter ended September 30, 2016, with authorization from the Board of Directors, management initiated a process to sell Cosmedicine, LLC (“Cosmedicine”), or liquidate its assets. Cosmedicine’s major classes of assets held for sale were its inventories and intellectual property, which, as of September 30, 2017, were each written down to an estimated net realizable value of zero. The potential sale or liquidation of Cosmedicine does not represent a major strategic shift in the Company’s operations and will not have a significant effect on the consolidated financial results of Real Industry.
During the quarter ended March 31, 2016, the Company identified and corrected an error in the depreciation expense reported in the December 31, 2015 consolidated financial statements. Each of cost of sales; gross profit; selling, general and administrative (“SG&A”) expenses; operating loss; loss from continuing operations; and net loss were impacted by the correction, with $3.7 million of the adjustment classified in cost of sales and $0.1 million in SG&A expenses presented in the results of operations during the nine months ended September 30, 2016. Management concluded that the error correction in 2016 was not material to the full year results of operations.
For equity investments that are not required to be consolidated under the variable or voting interest model, we evaluate the level of influence we are able to exercise over an entity’s operations to determine whether to use the equity method of accounting. We evaluate our relationships with other entities to identify whether such entities are variable interest entities (“VIEs”) and to assess whether we are the primary beneficiary of such entities. In determining the primary beneficiary of a VIE, qualitative and quantitative factors are considered, including, but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us to provide financial support; our ability to control or significantly influence key decisions for the VIE; and material intercompany transactions. Significant judgments related to these determinations include estimates about the future fair values and performance of these VIEs and general market conditions. In the event that we are a primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE are included in the consolidated financial statements regardless of the percentage of voting interests owned. As of September 30, 2017, we have one VIE that is treated as an unconsolidated investment, Beck Trading, which has a carrying value of $7.9 million. Including trade accounts receivable due from Beck Trading, our maximum loss exposure is $9.1 million.
Recent Accounting Standards Updates
The following provides information about recent Accounting Standards Updates (“ASU” or “Update”) issued by the Financial Accounting Standards Board (“FASB”) that are relevant to the operations of the Company.
Updates effective in 2017
Presentation of Financial Statements – Going Concern (Subtopic 205-40)
In August 2014, the FASB issued ASU 2014‑15, which provides that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The effective date for this Update is for fiscal years beginning after December 15, 2016, however early adoption is permitted. We adopted the amendments provided in ASU 2014‑15 effective January 1, 2017. See Note 16—Going Concern for a full discussion of the circumstances considered, mitigating plans, and conclusions formed as a part of this evaluation.
Statement of Cash Flows: Restricted Cash
In November 2016, the FASB issued ASU 2016‑18, which provides that a statement of cash flows explain the change in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents during the period. The effective date for this Update is for fiscal years beginning after December 15, 2017, however early adoption is permitted.
We early adopted the amendments provided in ASU 2016‑18 in the period ended December 31, 2016 to provide financial statement users with more transparent disclosure about restricted cash and restricted cash equivalents. Upon adoption, the amendments provided in this Update are applied using a retrospective transition method to each period presented. The following table provides details of the impact the amendments in this Update had on our unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2016:
|
|
|
Nine Months Ended September 30, 2016 |
|||||||
|
(In millions) |
|
As Previously |
|
Impact of |
|
As Currently |
|||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities |
|
$ |
(28.3) |
|
$ |
1.5 |
|
$ |
(26.8) |
|
Net cash used in operating activities |
|
|
(9.5) |
|
|
1.5 |
|
|
(8.0) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of NABCO |
|
|
3.9 |
|
|
(3.9) |
|
|
— |
|
Net cash used in investing activities |
|
|
(14.9) |
|
|
(3.9) |
|
|
(18.8) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
23.1 |
|
|
— |
|
|
23.1 |
|
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents |
|
|
0.1 |
|
|
— |
|
|
0.1 |
|
Decrease in cash, cash equivalents, restricted cash and restricted cash equivalents |
|
|
(1.2) |
|
|
(2.4) |
|
|
(3.6) |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period |
|
|
35.8 |
|
|
7.5 |
|
|
43.3 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period |
|
$ |
34.6 |
|
$ |
5.1 |
|
$ |
39.7 |
Updates not yet effective
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014‑09, which requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. Additionally, the Update requires the use of more estimates and judgments than current accounting guidance, as well as additional disclosures. The FASB has issued several updates to the standard that i) defer the original effective date; ii) clarify the application of principal versus agent guidance; iii) clarify the guidance on inconsequential and perfunctory promises and licensing; and iv) clarify the guidance on the derecognition of nonfinancial assets. ASU 2014‑09 and the related updates are effective for fiscal years beginning after December 15, 2017.
We have formed a task force to understand and implement the new revenue recognition standard. The task force is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements. Per this evaluation, we have identified that the new standard may require the Company to change the timing of when it records discounts offered. Currently, these are recorded when earned; after the adoption of ASU 2014‑09, these amounts may be considered a portion of the contract’s transaction cost. The change may result in an acceleration in the timing of costs that could reduce revenue upon adoption. The ultimate impact to the Company’s consolidated financial statements is still being determined. Additionally, we are developing additional controls and procedures to evaluate contracts and the terms and conditions therein to better ensure awareness of when the transfer of control of goods or services occurs for proper revenue recognition.
We plan to adopt ASU 2014‑09 and related updates effective January 1, 2018 using the modified retrospective approach by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity. We also anticipate that the adoption will result in an increase to the revenue disclosures in the Company’s consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016‑02, which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for the Company in fiscal years beginning after December 15, 2018 on a modified retrospective basis and early adoption is permitted. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued ASU 2016‑06, which clarifies what steps are required when assessing whether the economic characteristics and risks of call or put options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when an option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise the option is related to interest rates or credit risks. The amendments provided for in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016‑15, which provides, among other things, that distributions received from equity method investees be classified using one of two possible methods, a cumulative earnings approach or a nature of distribution approach. This Update is effective for fiscal years beginning after December 15, 2017, however early adoption is permitted. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Business Combinations: Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017‑01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This Update is effective for fiscal years beginning after December 15, 2017, however early adoption is permitted. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Compensation—Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU 2017‑07, which provides that an employer report the service cost component of pension and post-retirement benefit costs in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this Update also allow only the service cost component to be eligible for capitalization when applicable.
This Update is effective for fiscal years beginning after December 15, 2017, however early adoption is permitted in the first interim period of any fiscal year presented. The amendments in this Update will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Disclosure that the practical expedient was used is required on a retrospective basis. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017‑09, which provides guidance about changes to the terms or conditions of a share-based payment award that requires an entity to apply modification accounting in Topic 718. This Update is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this Update will be applied prospectively to any awards modified on or after the adoption date. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
|
|||
NOTE 3—BUSINESS COMBINATIONS
On November 1, 2016, Real Alloy, acquired certain assets of Beck Alloys and 49% of the voting interests of Beck Trading from Beck Alloys, Beck Aluminum Corporation and GSB Beck Holdings, Inc. (collectively, the “Beck Sellers”), under an asset and securities purchase agreement. Upon closing, we paid $23.6 million in cash to the Beck Sellers and accounted for the transaction as a business combination (the “Beck Acquisition”), with the purchase price allocated based on the estimated fair values of the assets acquired and liabilities assumed.
The following table provides summary information about the purchase consideration and identifiable assets acquired:
|
(In millions) |
|
|
|
|
Consideration paid at closing |
|
$ |
23.6 |
|
Purchase price allocation: |
|
|
|
|
Inventories |
|
$ |
10.6 |
|
Property, plant and equipment |
|
|
6.8 |
|
Equity method investment |
|
|
6.1 |
|
Prepaid expenses, supplies and other current assets |
|
|
0.1 |
|
Estimated fair value of assets acquired |
|
$ |
23.6 |
Inventories include the estimated fair value of finished goods, work in process and raw materials. The estimated fair value of finished goods was based on analyses of future selling prices and the profit associated with the manufacturing effort. The estimated fair value of work in process considered costs to complete to finished goods and was based on analyses of future selling prices and the profit associated with the manufacturing effort. The estimated fair value of raw materials was based on replacement cost. The $10.6 million of estimated fair value of inventories includes $0.3 million in fair value adjustments, all of which was amortized as noncash charges in cost of sales during the year ended December 31, 2016. See Note 4—Inventories for additional information about inventories.
Property, plant and equipment includes land and site improvements, buildings and building improvements, and machinery, equipment, furniture and fixtures. The preliminary estimated fair value of property, plant and equipment is based on appraisals and replacement cost analyses. The preliminary fair value estimate of property, plant and equipment acquired is as follows:
|
|
|
Estimated Fair |
|
|
(In millions) |
|
Value |
|
|
Land and improvements |
|
$ |
0.7 |
|
Buildings and improvements |
|
|
2.6 |
|
Machinery, equipment, furniture and fixtures |
|
|
3.5 |
|
Property, plant and equipment acquired |
|
$ |
6.8 |
The fair value of prepaid expenses, supplies and other current assets includes inventory supplies and is based on replacement cost.
The fair value of the equity method investment is based on a discounted cash flow model with various assumptions about growth rates and margins, as well as the cash distribution waterfall, under which Real Alloy receives the first $6.0 million of distributions, thereafter distributions will be based on equity ownership percentages. During the nine months ended September 30, 2017, income from the operations of Beck Trading included in the condensed consolidated statement of operations was $2.9 million.
As of September 30, 2017 and December 31, 2016, Real Alloy had trade accounts receivable due from Beck Trading of $1.2 million and $6.8 million, respectively, and trade payables due to Beck Trading of $0.1 million and $0.5 million, respectively. Additionally, as part of the Beck Acquisition, Real Alloy and Beck Trading entered into a Sales Representative and Tolling Agreement whereby, for a defined group of customers, Real Alloy will serve as a sales representative for Beck Trading and will be paid a commission for sales generated. Beck Trading will also serve as a sales representative for Real Alloy, for a defined group of customers, and will be paid a commission for sales generated.
|
|||
NOTE 4—INVENTORIES
The following table presents the components of inventories as of September 30, 2017 and December 31, 2016:
|
|
|
September 30, |
|
December 31, |
||
|
(In millions) |
|
2017 |
|
2016 |
||
|
Finished goods |
|
$ |
44.6 |
|
$ |
45.1 |
|
Raw materials and work in process |
|
|
81.3 |
|
|
73.1 |
|
Total inventories |
|
$ |
125.9 |
|
$ |
118.2 |
|
|||
NOTE 5—GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS, NET
Annual goodwill impairment testing
We initiated a goodwill impairment test as of September 30, 2017, as we determined that a triggering event existed within the Real Alloy North America (“RANA”) operating segment. In conducting our goodwill impairment test, we utilized a combination of discounted cash flow (“DCF”) and guideline public company (“GPC”) approaches to estimate the fair value of our reporting units required to be tested for impairment. Each of the DCF and GPC approaches were weighted 50%. These nonrecurring fair value measurements are primarily determined using unobservable inputs and, accordingly, are categorized within Level 3 of the fair value hierarchy. The DCF and GPC analyses are based on our projected financial information, which includes a variety of estimates and assumptions. While we consider such estimates and assumptions reasonable, they are inherently subject to uncertainties and a wide variety of significant business, economic and competitive risks, many of which are beyond our control and may not materialize. Changes in these estimates and assumptions may have a significant effect on the estimation of the fair value of our reporting units.
Under the DCF approach, we estimate the fair value of a reporting unit based on the present value of future cash flows. Cash flow projections are based on management’s estimate of revenue growth rates and operating margins and take into consideration industry and market conditions, as well as company specific economic factors. The DCF calculations also include a terminal value calculation that is based on an expected long-term growth rate for the applicable reporting unit. The discount rate is based on the weighted average cost of capital adjusted for the relevant risk associated with the business specific characteristics and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. The weighted average cost of capital used in the income approach ranged from 11.0% to 11.5%, as compared to 10.0% to 10.5% as of October 1, 2016, the date of our last annual goodwill impairment test, and a long-term growth rate of 3% was determined and used based on estimated future gross domestic product, which is consistent with the rate used in the prior impairment test. Other significant assumptions include future capital expenditures and changes in working capital requirements.
Under the GPC approach, we identify a group of comparable companies giving consideration to, among other relevant characteristics, similar lines of business, business risks, growth prospects, business maturity, market presence, leverage, and size and scale of operations. The analysis compares the public market implied fair value for each comparable public company to its historical and projected revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”). The calculated range of multiples for the comparable companies used was generally consistent with the purchase multiples in the Real Alloy Acquisition, which was applied to projected EBITDA and revenues to determine a range of fair values as of September 30, 2017.
As of the date of filing this Form 10‑Q for the quarterly period ended September 30, 2017, our impairment test is incomplete. Based on the preliminary results of the goodwill impairment test, margin performance and the year-over-year reduction in volume, we determined that a goodwill impairment is probable and estimable. In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other, as the impairment was probable and estimable, we recorded a goodwill impairment charge of $33.6 million within the RANA operating segment in the three months ended September 30, 2017. Based on our analysis, no triggering event for impairment was identified within the Real Alloy Europe (“RAEU”) operating segment.
The following table reflects activity associated with goodwill during the nine months ended September 30, 2017:
|
(In millions) |
|
RANA |
|
RAEU |
|
Total |
|||
|
Balance, December 31, 2016 |
|
$ |
33.6 |
|
$ |
8.6 |
|
$ |
42.2 |
|
Impairment |
|
|
(33.6) |
|
|
— |
|
|
(33.6) |
|
Currency translation adjustments |
|
|
— |
|
|
1.1 |
|
|
1.1 |
|
Balance, September 30, 2017 |
|
$ |
— |
|
$ |
9.7 |
|
$ |
9.7 |
|
|||
NOTE 6—DEBT AND REDEEMABLE PREFERRED STOCK
The following table presents the Company’s short-term and long-term debt as of September 30, 2017 and December 31, 2016:
|
|
|
September 30, |
|
|
December 31, |
||
|
(In millions) |
|
2017 |
|
|
2016 |
||
|
Long-term debt due within one year, net: |
|
|
|
|
|
|
|
|
Senior Secured Notes: |
|
|
|
|
|
|
|
|
Principal amount outstanding |
|
$ |
305.0 |
|
|
$ |
— |
|
Unamortized original issue discount and debt issuance costs |
|
|
(6.7) |
|
|
|
— |
|
Senior Secured Notes, net |
|
|
298.3 |
|
|
|
— |
|
Revolving credit facilities: |
|
|
|
|
|
|
|
|
Principal amount outstanding |
|
|
86.5 |
|
|
|
— |
|
Unamortized debt issuance costs |
|
|
(0.8) |
|
|
|
— |
|
Revolving credit facilities, net |
|
|
85.7 |
|
|
|
— |
|
Capital leases due within one year |
|
|
3.7 |
|
|
|
2.3 |
|
Total long-term debt due within one year, net |
|
$ |
387.7 |
|
|
$ |
2.3 |
|
Long-term debt, net: |
|
|
|
|
|
|
|
|
Senior Secured Notes: |
|
|
|
|
|
|
|
|
Principal amount outstanding |
|
$ |
— |
|
|
$ |
305.0 |
|
Unamortized original issue discount and debt issuance costs |
|
|
— |
|
|
|
(10.1) |
|
Senior Secured Notes, net |
|
|
— |
|
|
|
294.9 |
|
Revolving credit facilities: |
|
|
|
|
|
|
|
|
Principal amount outstanding |
|
|
— |
|
|
|
57.0 |
|
Unamortized debt issuance costs |
|
|
— |
|
|
|
(1.5) |
|
Revolving credit facilities, net |
|
|
— |
|
|
|
55.5 |
|
Term Loan |
|
|
— |
|
|
|
1.5 |
|
Capital leases |
|
|
5.0 |
|
|
|
2.3 |
|
Total long-term debt, net |
|
|
5.0 |
|
|
|
354.2 |
|
Total debt |
|
$ |
392.7 |
|
|
$ |
356.5 |
Senior Secured Notes
In connection with the Real Alloy Acquisition, Real Alloy issued $305.0 million of senior secured 10.0% notes (the “Senior Secured Notes”) in January 2015. The Senior Secured Notes are due January 15, 2019, with interest payable on January 15 and July 15 of each year through the date of maturity. For the three months ended September 30, 2017 and 2016, interest expense associated with the Senior Secured Notes was $8.8 million and $8.7 million, respectively, including $1.2 million and $1.1 million, respectively, of amortization of debt discount and issuance costs. For the nine months ended September 30, 2017 and 2016, interest expense associated with the Senior Secured Notes was $26.3 million and $25.9 million, respectively, including $3.4 million and $3.1 million, respectively, of amortization of debt discount and issuance costs. As of September 30, 2017, Real Alloy was in compliance with all applicable covenants under the Indenture of the Senior Secured Notes. However, without additional actions being implemented by management, as outlined in Note 16-Going Concern, a violation of certain of the debt covenants under the Senior Secured Notes is probable to occur in the next twelve months. As such, Real Alloy concluded that facts and circumstances would indicate the Senior Secured Notes warrant short-term classification as of September 30, 2017.
Revolving credit facilities
On March 14, 2017, Real Alloy entered into a Revolving Credit Agreement with Bank of America, N.A. (“Bank of America”) for a $110.0 million senior secured revolving asset-based credit facility (the “ABL Facility”). A portion of the proceeds of the ABL Facility were used to repay and terminate the previously outstanding Asset-Based Facility with Wells Fargo.
The ABL Facility expires on the earlier of the instrument’s expiration date, March 14, 2022, or 90 days prior to the maturity date of the Senior Secured Notes or the Company’s Redeemable Preferred Stock, which as of the date that these unaudited financial statements were filed, was October 17, 2018.
The ABL Facility contains customary affirmative, negative and financial covenants including limitations on the borrower and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, disposition of assets, transactions with affiliates and a fixed charge coverage ratio and total leverage ratio.
U.S. dollar denominated revolving loans bear interest, at the Borrowers’ option, either at a LIBOR interest period rate, or the greater of (a) the prime rate announced by Bank of America from time to time, (b) the U.S. Federal Funds Rate plus 0.50%, and (c) the 30-day interest period LIBOR. Canadian dollar denominated loans bear interest, at the Borrowers’ option, either at the CDOR rate for a term comparable to the loan, or floating at the greater of (x) the prime rate announced by Bank of America (Canada) from time to time or (y) the 1-month CDOR plus 1.0%, plus, in each case, a margin based on the amount of the excess availability under the ABL Facility.
In the three months ended September 30, 2017 and 2016, interest expense under the revolving credit facilities was $0.6 million and $0.5 million, respectively, including $0.2 million and $0.2 million, respectively, of scheduled amortization of debt issuance costs. In the nine months ended September 30, 2017 and 2016, interest expense under the revolving credit facilities was $3.3 million and $1.6 million, respectively, including the write-off of $1.4 million of unamortized debt issuance costs associated with the Asset-Based Facility in the first quarter of 2017 and $0.6 million and $0.7 million of scheduled amortization of debt issuance costs in the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, Real Alloy was in compliance with the debt covenants of the ABL Facility. However, without additional actions being implemented by management, as outlined in Note 16 – Going Concern, a violation of certain of the debt covenants under the ABL Facility is probable to occur in the next twelve months. As such, Real Alloy concluded that facts and circumstances would indicate the ABL Facility warrants short-term classification as of September 30, 2017.
Capital leases
In the normal course of operations, Real Alloy enters into capital leases to finance office, mobile and other equipment for its operations. As of September 30, 2017, $3.7 million of the $8.7 million in capital lease obligations are due within the next twelve months.
Redeemable Preferred Stock
The Redeemable Preferred Stock was issued to Aleris on February 27, 2015 as a portion of the purchase price for the Real Alloy Acquisition and has a liquidation preference of $28.5 million as of September 30, 2017. The Redeemable Preferred Stock accrued quarterly dividends at a rate of 7% of the liquidation preference for the first eighteen months after the date of issuance, after which, quarterly dividends accrued at a rate of 8% of the liquidation preference through August 27, 2017, and 9% of the liquidation preference thereafter. As of September 30, 2017, dividends are accrued and paid at 9%. Dividends were paid in-kind for the first two years, and thereafter are accrued and payable in cash. As of September 30, 2017, there are $1.2 million of accrued dividends. Unpaid dividends accumulate interest at a rate of 8% through August 27, 2017, and 9% thereafter. All accrued and accumulated dividends on the Redeemable Preferred Stock will be prior and in preference to any dividend on any of the Company’s common stock or other junior securities.
The Company may generally redeem the shares of Redeemable Preferred Stock at any time at the liquidation preference, and the holders may require the Company to redeem their shares of Redeemable Preferred Stock at the liquidation preference upon a change of control as defined in the Indenture of the Senior Secured Notes (or any debt facility that replaces or redeems the Senior Secured Notes) to the extent that the change of control does not provide for such redemption at the liquidation preference or does not cause a default or prompt an obligation to repurchase or offer to repurchase the Senior Secured Notes under the Indenture. A holder of Redeemable Preferred Stock may require the Company to redeem all, but not less than all, of such holder’s Redeemable Preferred Stock sixty-six months after the issuance date. In addition, the Company will redeem shares of Redeemable Preferred Stock to the extent Aleris is required to indemnify the Company under the Real Alloy Purchase Agreement for the Real Alloy Acquisition. The Redeemable Preferred Stock is not transferrable (other than to another subsidiary of Aleris) for eighteen months following issuance or for such longer period in connection with any ongoing indemnity claims under the Real Alloy Purchase Agreement.
The carrying value of Redeemable Preferred Stock is based on the estimated fair value of the instrument as of the issuance date plus dividends paid in-kind and accretion of the fair value adjustment to the Redeemable Preferred Stock. The difference between the liquidation preference and the estimated fair value as of the issuance date is accreted over the period preceding the holder’s right to redeem the instrument, or sixty-six months from the issue date.
The following table presents activity related to the carrying value of Redeemable Preferred Stock during the nine months ended September 30, 2017:
|
(In millions) |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
24.9 |
|
Accretion of fair value adjustment to Redeemable Preferred Stock |
|
|
0.7 |
|
Balance, September 30, 2017 |
|
$ |
25.6 |
|
|||
NOTE 7—STOCKHOLDERS’ EQUITY (DEFICIT) AND NONCONTROLLING INTEREST
The following table summarizes activity within stockholders’ equity attributable to Real Industry and noncontrolling interest during the nine months ended September 30, 2017:
|
(In millions) |
|
Equity (Deficit) |
|
Noncontrolling |
|
Total Equity (Deficit) |
|||
|
Balance, December 31, 2016 |
|
$ |
33.4 |
|
$ |
1.1 |
|
$ |
34.5 |
|
Net earnings (loss) |
|
|
(58.7) |
|
|
0.7 |
|
|
(58.0) |
|
Distribution to noncontrolling interest |
|
|
— |
|
|
(2.0) |
|
|
(2.0) |
|
Consolidation of noncontrolling interest |
|
|
(0.5) |
|
|
0.5 |
|
|
— |
|
Share-based compensation expense |
|
|
2.0 |
|
|
— |
|
|
2.0 |
|
Dividends on Redeemable Preferred Stock, in cash or accrued |
|
|
(1.7) |
|
|
— |
|
|
(1.7) |
|
Accretion of fair value adjustment to Redeemable Preferred Stock |
|
|
(0.7) |
|
|
— |
|
|
(0.7) |
|
Change in accumulated other comprehensive income (loss) |
|
|
9.2 |
|
|
— |
|
|
9.2 |
|
Balance, September 30, 2017 |
|
$ |
(17.0) |
|
$ |
0.3 |
|
$ |
(16.7) |
The following table reflects changes in the shares of common stock outstanding during the nine months ended September 30, 2017:
|
|
|
Shares of |
|
Balance, December 31, 2016 |
|
29,386,882 |
|
Restricted common stock awards granted, net of forfeitures |
|
391,668 |
|
Restricted stock units converted to common stock, net of reissued treasury shares |
|
21,550 |
|
Common stock options exercised |
|
750 |
|
Balance, September 30, 2017 |
|
29,800,850 |
|
|||
NOTE 8—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes activity within accumulated other comprehensive income (loss) during the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
(In millions) |
|
Currency |
|
Pension Benefit |
|
Other |
|||
|
Balance, December 31, 2016 |
|
$ |
(8.2) |
|
$ |
1.1 |
|
$ |
(7.1) |
|
Current period currency translation adjustments |
|
|
9.1 |
|
|
0.1 |
|
|
9.2 |
|
Balance, September 30, 2017 |
|
$ |
0.9 |
|
$ |
1.2 |
|
$ |
2.1 |
Included in current period currency translation adjustments for the nine months ended September 30, 2017 are $3.1 million of currency translation adjustment gains associated with intercompany loans considered long-term in nature and $6.0 million of gains related to the translation adjustments of accounts denominated in foreign currencies.
|
|||
NOTE 9—INCOME TAXES
At the end of each reporting period, Real Industry estimates its annual effective income tax rate. The estimate used for the nine months ended September 30, 2017 may change in subsequent periods. The effective tax rate for the nine months ended September 30, 2017 differed from the federal statutory rate applied to earnings and losses before income taxes primarily as a result of the mix of earnings, losses, and tax rates between tax jurisdictions, and changes in valuation allowances. There was no income tax expense or benefit for the three months ended September 30, 2017, compared to a $0.5 million income tax benefit for the three months ended September 30, 2016. Income tax expense for the nine months ended September 30, 2017 was $1.9 million, compared to a $0.4 million income tax expense for the nine months ended September 30, 2016.
As of December 31, 2016, the Company has estimated U.S. federal NOLs of $913.5 million and non-U.S. NOLs of $30.6 million. The U.S. federal NOLs have a 20‑year life and begin to expire after the 2027 tax year. Additionally, the Company has state NOLs in amounts that are comparable to the U.S. federal NOLs. Real Industry has valuation allowances recorded to reduce certain deferred tax assets to amounts that are more likely than not to be realized. Real Industry intends to maintain those valuation allowances until sufficient positive evidence exists to support their realization through achieving profitability.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, as well as foreign jurisdictions located in Canada, Mexico, Germany, Norway, and the United Kingdom. With few exceptions, the 2012 through 2016 tax years remain open to examination. In October 2016, the Company was notified by the IRS of its intention to audit Real Industry’s 2014 federal income tax return.
|
|||
NOTE 10—EMPLOYEE BENEFIT PLANS
The following table presents the components of net periodic benefit expense under the German defined benefit pension plans for the three and nine months ended September 30, 2017 and 2016:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
|
||||
|
Service cost |
|
$ |
0.3 |
|
$ |
0.3 |
|
$ |
0.8 |
|
$ |
0.7 |
|
|
Interest cost |
|
|
0.2 |
|
|
0.3 |
|
|
0.6 |
|
|
0.8 |
|
|
Amortization of net actuarial gains |
|
|
— |
|
|
(0.1) |
|
|
— |
|
|
(0.2) |
|
|
Expected return on plan assets |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.1) |
|
|
Net periodic benefit expense |
|
$ |
0.5 |
|
$ |
0.5 |
|
$ |
1.4 |
|
$ |
1.2 |
|
|
|||
NOTE 12—DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Derivatives
Real Alloy may use forward contracts and options, as well as contractual price escalators, to reduce the risks associated with its metal, natural gas, and certain currency exposures. Generally, Real Alloy enters into master netting arrangements with its counterparties and offsets net derivative positions with the same counterparties against amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements in our unaudited condensed consolidated balance sheets. For classification purposes, Real Alloy records the net fair value of each type of derivative position expected to settle in less than one year (by counterparty) as a net current asset or liability and each type of long-term position as a net noncurrent asset or liability.
Metal hedging
Primarily in our RAEU segment (as defined below), London Metal Exchange (“LME”) future swaps or forward contracts are sold as metal is purchased to fill fixed-priced customer sales orders. As sales orders are priced, LME future swaps or forward contracts can be purchased, which generally settle within six months. Real Alloy may also buy put option contracts for managing metal price exposures. Option contracts require the payment of a premium, which is recorded as a realized loss upon settlement or expiration of the option contract. Upon settlement of the put option contracts, Real Alloy receives cash and recognizes a related gain if the LME closing price is less than the strike price of the put option. If the put option strike price is less than the LME closing price, no amount is paid and the option expires. As of September 30, 2017, Real Alloy had 21.2 thousand metric tonnes (“kt”) of metal buy and sell derivative contracts outstanding.
Natural gas hedging
To manage the price exposure for natural gas purchases, Real Alloy may fix the future price of a portion of its natural gas requirements by entering into financial hedge agreements. Under these agreements, payments are made or received based on the differential between the monthly closing price on the New York Mercantile Exchange (“NYMEX”) and the contractual hedge price. Natural gas cost can also be managed through the use of cost escalators included in some long-term supply contracts with customers, which limits exposure to natural gas price risk. As of September 30, 2017, Real Alloy had 1.6 trillion British thermal unit forward buy contracts outstanding.
Currency exchange hedging
From time to time, Real Alloy may enter into currency forwards, futures, call options or similar derivative financial instruments to limit its exposure to fluctuations in currency exchange rates. As of September 30, 2017, no currency derivative contracts were outstanding.
Credit risk
Real Alloy is exposed to losses in the event of nonperformance by the counterparties to the derivative financial instruments discussed above; however, management does not anticipate any nonperformance by the counterparties. The counterparties are evaluated for creditworthiness and risk assessment prior to initiating trading activities with the brokers, and periodically thereafter while actively trading. As of September 30, 2017, no cash collateral was posted or held.
The table below presents gross amounts of recognized derivative assets and liabilities, the amounts offset in the unaudited condensed consolidated balance sheets and the net amounts of derivative assets and liabilities presented therein. As of September 30, 2017 and December 31, 2016, there were no amounts subject to an enforceable master netting arrangement or similar agreement that have not been offset in the unaudited condensed consolidated balance sheets.
|
|
|
|
September 30, 2017 |
|
December 31, 2016 |
|||||||
|
(In millions) |
|
Asset |
|
Liability |
|
Asset |
|
Liability |
||||
|
Metal |
|
$ |
0.2 |
|
$ |
— |
|
$ |
— |
|
$ |
(0.4) |
|
Natural gas |
|
|
— |
|
|
— |
|
|
0.6 |
|
|
— |
|
Net derivative assets (liabilities) as classified in the condensed consolidated balance sheets |
|
$ |
0.2 |
|
$ |
— |
|
$ |
0.6 |
|
$ |
(0.4) |
The following table presents details of the balance sheet classification of the fair value of Real Alloy’s derivative financial instruments as of September 30, 2017 and December 31, 2016:
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
(In millions) |
|
Balance Sheet Classification |
|
|
2017 |
|
2016 |
|
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
Metal |
Prepaid expenses, supplies and other current assets |
$ |
0.2 |
$ |
— |
|||
|
Natural Gas |
|
Prepaid expenses, supplies and other current assets |
|
|
— |
|
|
0.6 |
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
Metal |
|
Accrued liabilities |
|
$ |
— |
|
$ |
(0.4) |
Common stock warrant liability
On June 11, 2010, warrants to purchase 1.5 million shares of Real Industry’s common stock were issued (the “Warrants”). The Warrants had an aggregate purchase price of $0.3 million, an original exercise price of $10.30 per share, expire in June 2020, and are 100% vested. The Warrants were issued without registration in reliance on the exemption set forth in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).
The Warrants include customary terms that provide for certain adjustments of the exercise price and the number of shares of common stock to be issued upon the exercise of the Warrants in the event of stock splits, stock dividends, pro rata distributions, and certain other fundamental transactions. Additionally, the Warrants are subject to pricing protection provisions, which provide that certain issuances of new shares of common stock at prices below the current exercise price of the Warrants automatically reduce the exercise price of the Warrants to the lowest per share purchase price of common stock issued. In February 2015, the Company issued shares of common stock in the Rights Offering at $5.64 per share, thereby reducing the exercise price of the Warrants to $5.64 per share. During the nine months ended September 30, 2017, no Warrants were exercised and, as of September 30, 2017, there were 1,448,333 Warrants outstanding.
The common stock warrant liability is a derivative liability related to the anti-dilution and pricing protection provisions of the Warrants. The fair value of the common stock warrant liability is based on a Monte Carlo simulation that utilizes various assumptions, including estimated volatility of 66.2% and an expected term of 2.7 years as of September 30, 2017, and 47.1% volatility and an expected term of 3.4 years as of December 31, 2016, along with a 60% equity raise probability assumption, and a 25% equity raise price discount assumption in the twelve-month periods following each measurement date. The most significant inputs in determining the fair value of the common stock warrant liability are the price of our common stock on the measurement date, which as of September 30, 2017 and December 31, 2016, was $1.80 per share and $6.10 per share, respectively. Significant decreases in the expected term or the equity raise probability and related assumptions would result in a minor decrease in the estimated fair value of the common stock warrant liability, while significant increases in the expected term or the equity raise probability and related assumptions would result in a minor increase in the estimated fair value of the common stock warrant liability. A 10% increase or decrease in any or all of the unobservable inputs would not have a material impact on the estimated fair value of the common stock warrant liability.
The following table presents changes in the fair value of the common stock warrant liability during the three and nine months ended September 30, 2017 and 2016:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
|
Balance, beginning of period |
|
$ |
2.1 |
|
$ |
6.1 |
|
$ |
4.4 |
|
$ |
6.9 |
|
Warrants exercised |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.1) |
|
Change in fair value of common stock warrant liability |
|
|
(0.9) |
|
|
(1.9) |
|
|
(3.2) |
|
|
(2.6) |
|
Balance, end of period |
|
$ |
1.2 |
|
$ |
4.2 |
|
$ |
1.2 |
|
$ |
4.2 |
Fair values
Derivative contracts are recorded at fair value using quoted market prices and significant other observable inputs. The following table sets forth financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, and their level in the fair value hierarchy:
|
|
|
|
|
Estimated Fair Value |
||||
|
|
|
Fair Value |
|
September 30, |
|
December 31, |
||
|
(In millions) |
|
Hierarchy |
|
2017 |
|
2016 |
||
|
Derivative assets |
|
Level 2 |
|
$ |
0.2 |
|
$ |
0.6 |
|
Derivative liabilities |
|
Level 2 |
|
|
— |
|
|
(0.4) |
|
Net derivative assets |
|
|
|
$ |
0.2 |
|
$ |
0.2 |
|
Common stock warrant liability |
|
Level 3 |
|
$ |
(1.2) |
|
$ |
(4.4) |
Both realized and unrealized gains and losses on derivative financial instruments are included within losses on derivative financial instruments, net in the unaudited condensed consolidated statements of operations. The following table presents losses (gains) on derivative financial instruments during the three and nine months ended September 30, 2017 and 2016:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
|
Realized losses (gains): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal |
|
$ |
0.3 |
|
$ |
0.2 |
|
$ |
1.7 |
|
$ |
0.6 |
|
Natural gas |
|
|
— |
|
|
— |
|
|
(0.1) |
|
|
0.8 |
|
Total realized losses |
|
|
0.3 |
|
|
0.2 |
|
|
1.6 |
|
|
1.4 |
|
Unrealized losses (gains): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal |
|
|
(0.4) |
|
|
0.2 |
|
|
(0.6) |
|
|
(0.2) |
|
Natural gas |
|
|
0.1 |
|
|
0.4 |
|
|
0.7 |
|
|
(0.7) |
|
Total unrealized losses (gains) |
|
|
(0.3) |
|
|
0.6 |
|
|
0.1 |
|
|
(0.9) |
|
Losses on derivative financial instruments, net |
|
$ |
— |
|
$ |
0.8 |
|
$ |
1.7 |
|
$ |
0.5 |
Other Financial Instruments
The following tables present the carrying values and estimated fair values of other financial instruments as of September 30, 2017 and December 31, 2016:
|
|
|
|
|
September 30, 2017 |
||||
|
(In millions) |
|
Fair Value |
|
Carrying Value |
|
Estimated |
||
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
Level 1 |
|
$ |
12.8 |
|
$ |
12.8 |
|
Restricted cash and restricted cash equivalents |
|
Level 1 |
|
|
5.6 |
|
|
5.6 |
|
Financing receivable |
|
Level 2 |
|
|
28.1 |
|
|
28.1 |
|
Loans receivable, net (other noncurrent assets) |
|
Level 3 |
|
|
0.7 |
|
|
0.7 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Long-term debt due within one year, net: |
|
|
|
|
|
|
|
|
|
Senior Secured Notes |
|
Level 1 |
|
$ |
298.3 |
|
$ |
286.7 |
|
ABL Facility |
|
Level 2 |
|
|
85.7 |
|
|
86.5 |
|
Redeemable Preferred Stock |
|
Level 3 |
|
$ |
25.6 |
|
$ |
26.6 |
|
|
|
|
|
December 31, 2016 |
||||
|
(In millions) |
|
Fair Value |
|
Carrying Value |
|
Estimated |
||
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
Level 1 |
|
$ |
27.2 |
|
$ |
27.2 |
|
Restricted cash and restricted cash equivalents |
|
Level 1 |
|
|
5.5 |
|
|
5.5 |
|
Financing receivable |
|
Level 2 |
|
|
28.4 |
|
|
28.4 |
|
Loans receivable, net (other noncurrent assets) |
|
Level 3 |
|
|
0.8 |
|
|
0.8 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
Senior Secured Notes |
|
Level 1 |
|
$ |
294.9 |
|
$ |
307.5 |
|
Asset-Based Facility |
|
Level 2 |
|
|
55.5 |
|
|
57.0 |
|
Term Loan |
|
Level 2 |
|
|
1.5 |
|
|
1.5 |
|
Redeemable Preferred Stock |
|
Level 3 |
|
$ |
24.9 |
|
$ |
26.8 |
The Company used the following methods and assumptions to estimate the fair value of each financial instrument as of September 30, 2017 and December 31, 2016:
Cash and cash equivalents and restricted cash and restricted cash equivalents
Cash and cash equivalents and restricted cash and restricted cash equivalents are recorded at historical cost. The carrying value is a reasonable estimate of fair value as these instruments have short-term maturities and market interest rates.
Financing receivable
Financing receivable represents the net amount due from the sale and transfer of trade accounts receivable under a €50 million factoring facility (the “Factoring Facility”). The Factoring Facility provides for the transfer and sale of eligible receivables to a counterparty, the settlement of which generally occurs within thirty days of transfer, which are accounted for as true sales, and are included in operating cash flows. During the three and nine months ended September 30, 2017, $102.3 million and $290.8 million, respectively, of trade receivables were transferred on a nonrecourse basis, and proceeds of $105.1 million and $288.7 million, respectively, were received. During the three and nine months ended September 30, 2016, $96.7 million and $270.2 million, respectively, of trade receivables were transferred and $92.7 million and $262.7 million, respectively, of proceeds were received. Administrative fees and expenses associated with the Factoring Facility were $0.2 million in each of the three months ended September 30, 2017 and 2016 and $0.6 million in each of the nine months ended September 30, 2017 and 2016.
The transferred receivables are isolated from the accounts of Real Alloy, which maintains continuing involvement with the transferred receivables through limited servicing obligations, primarily related to recordkeeping. Real Alloy retains no rights to the transferred receivables, or associated collateral, and does not collect a servicing fee. Following transfer, Real Alloy has no further rights to any cash flows or other assets to any party related to the transfer.
The carrying value is a reasonable estimate of fair value as the financing receivable is generally outstanding for no more than thirty days and the counterparty is a large creditworthy financial institution.
Loans receivable, net
Loans receivable, net, consists of a pool of commercial real estate loans. The estimated fair value considers the collateral coverage of assets securing the loans and estimated credit losses, as well as variable interest rates, which approximate market interest rates.
Senior Secured Notes
The estimated fair value of the Senior Secured Notes is based on observable market prices.
Revolving credit facilities and Term Loan
The estimated fair values of the Asset-Based and ABL Facilities and the Term Loan is based on their market characteristics, including interest rates and maturity dates generally consistent with market terms.
Redeemable Preferred Stock
The estimated fair value of Redeemable Preferred Stock is determined based on a discounted cash flow analysis using the Hull & White model, with a remaining term of thirty-five months, assuming either the holder will put or the issuer will call at the redemption date. The cash dividend yield and the Redeemable Preferred Stock, including the payment-in-kind Redeemable Preferred Stock, were discounted at the spot rate plus a 16.0% credit spread adjustment to a zero coupon yield curve as of September 30, 2017, based on similar market instruments.
|
|||
NOTE 13—SEGMENT INFORMATION
Segment information is prepared on the same basis that our chief operating decision-maker (“CODM”), who is our chief executive officer, manages the segments, evaluates financial results, and makes key operating decisions, and for which discrete financial information is available. As of September 30, 2017, the Company had two reportable segments: Real Alloy North America (“RANA”) and Real Alloy Europe (“RAEU”).
Measurement of segment profitability
Our CODM and management use several measures of performance for our reportable segments, including earnings before interest, taxes, depreciation and amortization and excludes certain other items (“Segment Adjusted EBITDA”). We use Segment Adjusted EBITDA as our primary financial performance metric and believe this measure provides additional information commonly used by holders of our common stock, as well as the holders of the Senior Secured Notes and parties to the revolving credit facilities with respect to the ongoing performance of our underlying business activities. In addition, Segment Adjusted EBITDA is a component of certain covenants under the Indenture governing the Senior Secured Notes.
Our Segment Adjusted EBITDA calculations represent segment earnings (loss) before interest, taxes, depreciation and amortization, unrealized gains and losses on derivative financial instruments, charges and expenses related to acquisitions, and certain other gains and losses. “Segment Adjusted EBITDA,” as we use the term, may not be comparable to similarly titled measures used by other companies. We calculate Segment Adjusted EBITDA by eliminating the impact of a number of items we do not consider indicative of our ongoing operating performance and certain other items. Readers are encouraged to evaluate each adjustment shown in the reconciliation and the reasons we consider it appropriate for supplemental analysis, however, Segment Adjusted EBITDA is not a financial measurement calculated and presented in accordance with GAAP. When analyzing our operating performance, we encourage investors to use Segment Adjusted EBITDA in addition to, and not as an alternative for, net earnings (loss) derived in accordance with GAAP. Segment Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation, or as a substitute for, or superior to, our measures of financial performance prepared in accordance with GAAP.
These limitations include, but are not limited to the following:
|
· |
Segment Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures, asset replacements or contractual commitments; |
|
· |
Segment Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; |
|
· |
Segment Adjusted EBITDA does not reflect interest expense or cash requirements necessary to service interest and/or principal payments under the Senior Secured Notes or the revolving credit facilities; |
|
· |
Segment Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and |
|
· |
Segment Adjusted EBITDA does not reflect the operating results of Corporate and Other. |
Other companies, including companies in our industry, may calculate Segment Adjusted EBITDA differently and the degree of their usefulness as a comparative measure correspondingly decreases as the number of differences in computations increase.
In addition, in evaluating Segment Adjusted EBITDA it should be noted that in the future we may incur expenses similar to the adjustments in the below presentation. Our presentation of Segment Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
Segment assets and liabilities
Certain of the Company’s assets and liabilities have not been allocated to our reportable segments, including Corporate and Other cash and cash equivalents, the common stock warrant liability, deferred income taxes, and long-term debt, none of which our CODM uses to evaluate the performance of our reportable segments. Additionally, certain of the Company’s corporate administrative expenses are not allocated to the reportable segments.
Reportable segment information
The following tables show segment revenues from external customers (there were no intersegment revenues) and Segment Adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016, and reconciliations of Segment Adjusted EBITDA to net loss for each period presented. Segment Adjusted EBITDA presents only the financial performance of our segments and does not include the results of operations of Corporate and Other.
|
|
|
Three Months Ended September 30, 2017 |
||||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
Corporate and |
|
Total |
||||
|
Revenues |
|
$ |
213.0 |
|
$ |
119.8 |
|
$ |
— |
|
$ |
332.8 |
|
Segment Adjusted EBITDA |
|
$ |
5.6 |
|
$ |
7.9 |
|
|
|
|
$ |
13.5 |
|
|
|
Three Months Ended September 30, 2016 |
||||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
Corporate and |
|
Total |
||||
|
Revenues |
|
$ |
200.5 |
|
$ |
114.4 |
|
$ |
— |
|
$ |
314.9 |
|
Segment Adjusted EBITDA |
|
$ |
9.0 |
|
$ |
7.9 |
|
|
|
|
$ |
16.9 |
|
|
|
Nine Months Ended September 30, 2017 |
||||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
Corporate and Other |
|
Total |
||||
|
Revenues |
|
$ |
673.0 |
|
$ |
347.1 |
|
$ |
— |
|
$ |
1,020.1 |
|
Segment Adjusted EBITDA |
|
$ |
20.6 |
|
$ |
22.4 |
|
|
|
|
$ |
43.0 |
|
|
|
Nine Months Ended September 30, 2016 |
||||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
Corporate and |
|
Total |
||||
|
Revenues |
|
$ |
613.7 |
|
$ |
331.5 |
|
$ |
— |
|
$ |
945.2 |
|
Segment Adjusted EBITDA |
|
$ |
36.5 |
|
$ |
19.6 |
|
|
|
|
$ |
56.1 |
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
|
Segment Adjusted EBITDA |
|
$ |
13.5 |
|
$ |
16.9 |
|
$ |
43.0 |
|
$ |
56.1 |
|
Unrealized gains (losses) on derivative financial instruments |
|
|
0.3 |
|
|
(0.6) |
|
|
(0.1) |
|
|
0.9 |
|
Segment depreciation and amortization |
|
|
(11.8) |
|
|
(11.3) |
|
|
(33.4) |
|
|
(36.6) |
|
Amortization of inventories and supplies purchase accounting adjustments |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.9) |
|
Corporate and Other selling, general and administrative expenses |
|
|
(1.8) |
|
|
(7.5) |
|
|
(7.5) |
|
|
(14.4) |
|
Goodwill impairment |
|
|
(33.6) |
|
|
— |
|
|
(33.6) |
|
|
— |
|
Other, net |
|
|
(1.4) |
|
|
(1.0) |
|
|
(3.0) |
|
|
(2.6) |
|
Operating profit (loss) |
|
|
(34.8) |
|
|
(3.5) |
|
|
(34.6) |
|
|
2.5 |
|
Interest expense, net |
|
|
(9.8) |
|
|
(9.2) |
|
|
(30.4) |
|
|
(27.5) |
|
Change in fair value of common stock warrant liability |
|
|
0.9 |
|
|
1.9 |
|
|
3.2 |
|
|
2.6 |
|
Foreign exchange gains on intercompany loans |
|
|
1.1 |
|
|
— |
|
|
3.3 |
|
|
1.0 |
|
Income from equity method investment |
|
|
2.3 |
|
|
— |
|
|
2.9 |
|
|
— |
|
Other nonoperating expense, net |
|
|
(0.2) |
|
|
(0.5) |
|
|
(0.5) |
|
|
(0.3) |
|
Income tax expense (benefit) |
|
|
— |
|
|
0.5 |
|
|
(1.9) |
|
|
(0.4) |
|
Earnings from discontinued operations, net of income taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
0.1 |
|
Net loss |
|
$ |
(40.5) |
|
$ |
(10.8) |
|
$ |
(58.0) |
|
$ |
(22.0) |
The following tables present summarized balance sheet information for each of our reportable segments and reconciliations to consolidated assets and liabilities as of September 30, 2017 and December 31, 2016:
|
|
|
September 30, 2017 |
|
December 31, 2016 |
||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
RANA |
|
RAEU |
||||
|
Segment Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3.5 |
|
$ |
4.8 |
|
$ |
11.5 |
|
$ |
5.7 |
|
Trade accounts receivable, net |
|
|
85.6 |
|
|
20.3 |
|
|
76.2 |
|
|
12.2 |
|
Financing receivable |
|
|
— |
|
|
28.1 |
|
|
— |
|
|
28.4 |
|
Inventories |
|
|
88.8 |
|
|
37.1 |
|
|
79.3 |
|
|
38.9 |
|
Prepaid expenses, supplies and other current assets |
|
|
17.4 |
|
|
9.7 |
|
|
13.7 |
|
|
6.4 |
|
Total current assets |
|
|
195.3 |
|
|
100.0 |
|
|
180.7 |
|
|
91.6 |
|
Property, plant and equipment, net |
|
|
185.4 |
|
|
104.6 |
|
|
195.0 |
|
|
94.2 |
|
Equity method investment |
|
|
7.9 |
|
|
— |
|
|
5.0 |
|
|
— |
|
Identifiable intangible assets, net |
|
|
10.7 |
|
|
— |
|
|
12.5 |
|
|
— |
|
Goodwill |
|
|
— |
|
|
9.7 |
|
|
33.6 |
|
|
8.6 |
|
Other noncurrent assets |
|
|
6.0 |
|
|
3.2 |
|
|
5.0 |
|
|
3.5 |
|
Total segment assets |
|
$ |
405.3 |
|
$ |
217.5 |
|
$ |
431.8 |
|
$ |
197.9 |
|
Segment Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables |
|
$ |
75.2 |
|
$ |
45.9 |
|
$ |
73.8 |
|
$ |
41.8 |
|
Accrued liabilities |
|
|
19.7 |
|
|
13.9 |
|
|
30.0 |
|
|
13.4 |
|
Total current liabilities |
|
|
94.9 |
|
|
59.8 |
|
|
103.8 |
|
|
55.2 |
|
Accrued pension benefits |
|
|
— |
|
|
47.5 |
|
|
— |
|
|
42.0 |
|
Environmental liabilities |
|
|
11.1 |
|
|
— |
|
|
11.6 |
|
|
— |
|
Other noncurrent liabilities |
|
|
4.8 |
|
|
1.8 |
|
|
4.5 |
|
|
1.8 |
|
Total segment liabilities |
|
$ |
110.8 |
|
$ |
109.1 |
|
$ |
119.9 |
|
$ |
99.0 |
|
|
|
September 30, |
|
December 31, |
||
|
(In millions) |
|
2017 |
|
2016 |
||
|
Assets: |
|
|
|
|
|
|
|
Real Alloy North America |
|
$ |
405.3 |
|
$ |
431.8 |
|
Real Alloy Europe |
|
|
217.5 |
|
|
197.9 |
|
Cash and cash equivalents—Corporate and Other |
|
|
4.5 |
|
|
9.9 |
|
Other unallocated assets |
|
|
1.6 |
|
|
5.9 |
|
Total consolidated assets |
|
$ |
628.8 |
|
$ |
645.5 |
|
Liabilities: |
|
|
|
|
|
|
|
Real Alloy North America |
|
$ |
110.8 |
|
$ |
119.9 |
|
Real Alloy Europe |
|
|
109.1 |
|
|
99.0 |
|
Long-term debt, including amounts due within one year |
|
|
392.7 |
|
|
356.5 |
|
Common stock warrant liability |
|
|
1.2 |
|
|
4.4 |
|
Deferred income taxes, net |
|
|
2.6 |
|
|
2.5 |
|
Other unallocated liabilities |
|
|
3.5 |
|
|
3.8 |
|
Total consolidated liabilities |
|
$ |
619.9 |
|
$ |
586.1 |
|
|||
NOTE 15—COMMITMENTS AND CONTINGENCIES
Environmental Matters
Real Alloy’s operations are subject to environmental laws and regulations governing air emissions, wastewater discharges, the handling, disposal and remediation of hazardous substances and waste, and employee health and safety. These laws and regulations can impose joint and several liabilities for releases or threatened releases of hazardous substances upon statutorily defined parties, including us, regardless of fault or the lawfulness of the original activity or disposal. Given the changing nature of environmental legal requirements, we may be required, from time to time, to take environmental control measures at some of our facilities to meet future requirements. Real Alloy is under regulatory consent orders or directives by agencies in two states and Norway.
Real Alloy’s reserves for environmental remediation liabilities totaled $15.0 million and $15.6 million as of each of September 30, 2017 and December 31, 2016, respectively. Of the total remediation liability, $3.9 million and $4.0 million is classified in accrued liabilities as of September 30, 2017 and December 31, 2016, respectively, with the remaining portion classified as environmental liabilities.
In addition to environmental liabilities, Real Alloy has asset retirement obligations associated with legal requirements primarily related to the normal operation of its landfills and the retirement of the related assets, which represents the most probable costs of remedial actions. Real Alloy’s total asset retirement obligations were $5.6 million and $5.3 million as of September 30, 2017 and December 31, 2016, respectively, of which $0.8 million and $0.9 million were classified as accrued liabilities, respectively, and $4.8 million and $4.4 million as other noncurrent liabilities, respectively.
Legal Proceedings
Real Industry, Real Alloy and SGGH have been named as a defendant in or as a party to a number of legal actions or proceedings that arose in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, management generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any.
In accordance with applicable accounting guidance, management establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. The estimated loss is based upon currently available information and is subject to significant judgment, a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss may change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of loss represents what management believes to be an estimate of loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure.
Based on management’s current understanding of these pending legal actions and proceedings, it does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, would have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages that may be sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
See Note 22—Commitments and Contingencies in the Notes to Consolidated Financial Statements included in Part IV, Item 15 of the Company’s Annual Report for additional information on certain legal proceedings and other matters involving the Company.
|
|||
NOTE 14—SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides a reconciliation of total cash, cash equivalents, restricted cash and restricted cash equivalents as of September 30, 2017 and 2016.
|
|
|
September 30, |
||||
|
(In millions) |
|
2017 |
|
2016 |
||
|
Cash and cash equivalents—continuing operations |
|
$ |
12.8 |
|
$ |
34.6 |
|
Restricted cash and restricted cash equivalents—prepaid expenses, supplies and other current assets |
|
|
0.8 |
|
|
0.7 |
|
Restricted cash and restricted cash equivalents—other noncurrent assets |
|
|
4.8 |
|
|
4.4 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period |
|
$ |
18.4 |
|
$ |
39.7 |
Restricted cash and restricted cash equivalents included in prepaid expenses, supplies and other current assets as of September 30, 2017 and 2016 represents cash supporting a letter of credit associated with the current portion of severance payments due to a former executive and cash deposits held under the ABL Facility. Restricted cash and restricted cash equivalents included in other noncurrent assets as of September 30, 2017 and 2016 generally represents amounts set aside for the remediation of future asset retirement obligations. Also in September 30, 2016, restricted cash and restricted cash equivalents included in other noncurrent assets include amounts representing cash associated with the long-term portion of severance liabilities.
|
|||
NOTE 16—GOING CONCERN
Our ABL Facility expires on the earlier of the instrument’s expiration date, March 14, 2022, or 90 days prior to the maturity date of the Senior Secured Notes due January 19, 2019 (i.e., October 17, 2018). Accordingly, our ABL Facility, which had $86.5 million of principal outstanding as of September 30, 2017, is due within one year of the date that our financial statements for the three months ended September 30, 2017 were issued.
Further, during the nine months ended September 30, 2017, we incurred net losses of $58.0 million and net cash used in operating activities was $20.6 million. As of September 30, 2017, our total liquidity is $51.2 million. However, should we lose the ability to draw necessary funds under the ABL Facility or Factoring Facility due to the application of restrictive or financial covenants or an event of default, or if there is a contraction in trade terms from our suppliers due to concerns over our liquidity thereby requiring payment from Real Alloy in advance or on delivery of products or services, there is substantial doubt that our current liquidity would be sufficient for ongoing operations. In addition, the restrictive covenants in the Senior Secured Notes, ABL Facility and certain other indebtedness require us to maintain specified financial ratios and satisfy other financial conditions and tests. We are in compliance with these debt covenants as of September 30, 2017, however, given the circumstances above, our ability to meet those covenants going forward is subject to uncertainty. Our inability to comply with such covenants could result in the amounts outstanding under our debt to become immediately due. Without additional actions being implemented by management, as discussed below, a violation of certain of the debt covenants under the ABL Facility and the Senior Secured Notes is probable to occur in the next twelve months. As such, Real Alloy concluded that facts and circumstances would indicate the ABL Facility and the Senior Secured Notes warrant short-term classification as of September 30, 2017.
In accordance with ASC 205-40, Presentation of Financial Statements – Going Concern, we performed an evaluation as to whether there is substantial doubt about our ability to continue as a going concern within one year after the date the financial statements for the three months ended September 30, 2017 are issued. Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate it is probable that an entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. The initial evaluation of our ability to continue as a going concern does not take into consideration the potential mitigating effect of our plans that have not been fully implemented as of the date that the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effects of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effects of management’s plans, however, is only considered if they are both probable of being effectively implemented within one year after the date the financial statements are issued, and probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued.
In performing this evaluation, management concluded that the conditions described above raise substantial doubt about our ability to meet our financial obligations as they become due over the next year. A significant factor in mitigating the substantial doubt about our ability to continue as a going concern is our ability to restructure or refinance the Senior Secured Notes, obtain other bridge financing or recapitalize the Company through other means. Our mitigating plans, as announced on September 14, 2017, include engaging Jefferies LLC to assist in the refinancing effort. The refinancing team has met and entered into discussions with our current lenders and bondholders, as well as prospective lenders, investors, hedge funds, credit funds, and private equity firms regarding potential refinancing, bridge financing and recapitalization of the Company through other means, but the terms of a transaction have not yet been agreed upon. While we believe that our plans could alleviate the substantial doubt, there can be no assurance an agreement with respect to a refinancing transaction or other recapitalization will be finalized in a timely manner, or at all. Such plans cannot be considered as mitigating events under the accounting guidance. As such, management has concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements for the three months ended September 30, 2017 are issued.
|
|||
Recent Accounting Standards Updates
The following provides information about recent Accounting Standards Updates (“ASU” or “Update”) issued by the Financial Accounting Standards Board (“FASB”) that are relevant to the operations of the Company.
Updates effective in 2017
Presentation of Financial Statements – Going Concern (Subtopic 205-40)
In August 2014, the FASB issued ASU 2014‑15, which provides that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The effective date for this Update is for fiscal years beginning after December 15, 2016, however early adoption is permitted. We adopted the amendments provided in ASU 2014‑15 effective January 1, 2017. See Note 16—Going Concern for a full discussion of the circumstances considered, mitigating plans, and conclusions formed as a part of this evaluation.
Statement of Cash Flows: Restricted Cash
In November 2016, the FASB issued ASU 2016‑18, which provides that a statement of cash flows explain the change in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents during the period. The effective date for this Update is for fiscal years beginning after December 15, 2017, however early adoption is permitted.
We early adopted the amendments provided in ASU 2016‑18 in the period ended December 31, 2016 to provide financial statement users with more transparent disclosure about restricted cash and restricted cash equivalents. Upon adoption, the amendments provided in this Update are applied using a retrospective transition method to each period presented. The following table provides details of the impact the amendments in this Update had on our unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2016:
|
|
|
Nine Months Ended September 30, 2016 |
|||||||
|
(In millions) |
|
As Previously |
|
Impact of |
|
As Currently |
|||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities |
|
$ |
(28.3) |
|
$ |
1.5 |
|
$ |
(26.8) |
|
Net cash used in operating activities |
|
|
(9.5) |
|
|
1.5 |
|
|
(8.0) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of NABCO |
|
|
3.9 |
|
|
(3.9) |
|
|
— |
|
Net cash used in investing activities |
|
|
(14.9) |
|
|
(3.9) |
|
|
(18.8) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
23.1 |
|
|
— |
|
|
23.1 |
|
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents |
|
|
0.1 |
|
|
— |
|
|
0.1 |
|
Decrease in cash, cash equivalents, restricted cash and restricted cash equivalents |
|
|
(1.2) |
|
|
(2.4) |
|
|
(3.6) |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period |
|
|
35.8 |
|
|
7.5 |
|
|
43.3 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period |
|
$ |
34.6 |
|
$ |
5.1 |
|
$ |
39.7 |
Updates not yet effective
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014‑09, which requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. Additionally, the Update requires the use of more estimates and judgments than current accounting guidance, as well as additional disclosures. The FASB has issued several updates to the standard that i) defer the original effective date; ii) clarify the application of principal versus agent guidance; iii) clarify the guidance on inconsequential and perfunctory promises and licensing; and iv) clarify the guidance on the derecognition of nonfinancial assets. ASU 2014‑09 and the related updates are effective for fiscal years beginning after December 15, 2017.
We have formed a task force to understand and implement the new revenue recognition standard. The task force is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements. Per this evaluation, we have identified that the new standard may require the Company to change the timing of when it records discounts offered. Currently, these are recorded when earned; after the adoption of ASU 2014‑09, these amounts may be considered a portion of the contract’s transaction cost. The change may result in an acceleration in the timing of costs that could reduce revenue upon adoption. The ultimate impact to the Company’s consolidated financial statements is still being determined. Additionally, we are developing additional controls and procedures to evaluate contracts and the terms and conditions therein to better ensure awareness of when the transfer of control of goods or services occurs for proper revenue recognition.
We plan to adopt ASU 2014‑09 and related updates effective January 1, 2018 using the modified retrospective approach by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity. We also anticipate that the adoption will result in an increase to the revenue disclosures in the Company’s consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016‑02, which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for the Company in fiscal years beginning after December 15, 2018 on a modified retrospective basis and early adoption is permitted. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued ASU 2016‑06, which clarifies what steps are required when assessing whether the economic characteristics and risks of call or put options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when an option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise the option is related to interest rates or credit risks. The amendments provided for in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016‑15, which provides, among other things, that distributions received from equity method investees be classified using one of two possible methods, a cumulative earnings approach or a nature of distribution approach. This Update is effective for fiscal years beginning after December 15, 2017, however early adoption is permitted. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Business Combinations: Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017‑01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This Update is effective for fiscal years beginning after December 15, 2017, however early adoption is permitted. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Compensation—Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU 2017‑07, which provides that an employer report the service cost component of pension and post-retirement benefit costs in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this Update also allow only the service cost component to be eligible for capitalization when applicable.
This Update is effective for fiscal years beginning after December 15, 2017, however early adoption is permitted in the first interim period of any fiscal year presented. The amendments in this Update will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Disclosure that the practical expedient was used is required on a retrospective basis. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017‑09, which provides guidance about changes to the terms or conditions of a share-based payment award that requires an entity to apply modification accounting in Topic 718. This Update is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this Update will be applied prospectively to any awards modified on or after the adoption date. We are currently evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
|
|||
|
|
|
Nine Months Ended September 30, 2016 |
|||||||
|
(In millions) |
|
As Previously |
|
Impact of |
|
As Currently |
|||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities |
|
$ |
(28.3) |
|
$ |
1.5 |
|
$ |
(26.8) |
|
Net cash used in operating activities |
|
|
(9.5) |
|
|
1.5 |
|
|
(8.0) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of NABCO |
|
|
3.9 |
|
|
(3.9) |
|
|
— |
|
Net cash used in investing activities |
|
|
(14.9) |
|
|
(3.9) |
|
|
(18.8) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
23.1 |
|
|
— |
|
|
23.1 |
|
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents |
|
|
0.1 |
|
|
— |
|
|
0.1 |
|
Decrease in cash, cash equivalents, restricted cash and restricted cash equivalents |
|
|
(1.2) |
|
|
(2.4) |
|
|
(3.6) |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period |
|
|
35.8 |
|
|
7.5 |
|
|
43.3 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period |
|
$ |
34.6 |
|
$ |
5.1 |
|
$ |
39.7 |
|
|||
The following table provides summary information about the purchase consideration and identifiable assets acquired:
|
(In millions) |
|
|
|
|
Consideration paid at closing |
|
$ |
23.6 |
|
Purchase price allocation: |
|
|
|
|
Inventories |
|
$ |
10.6 |
|
Property, plant and equipment |
|
|
6.8 |
|
Equity method investment |
|
|
6.1 |
|
Prepaid expenses, supplies and other current assets |
|
|
0.1 |
|
Estimated fair value of assets acquired |
|
$ |
23.6 |
The preliminary fair value estimate of property, plant and equipment acquired is as follows:
|
|
|
Estimated Fair |
|
|
(In millions) |
|
Value |
|
|
Land and improvements |
|
$ |
0.7 |
|
Buildings and improvements |
|
|
2.6 |
|
Machinery, equipment, furniture and fixtures |
|
|
3.5 |
|
Property, plant and equipment acquired |
|
$ |
6.8 |
|
|||
The following table presents the components of inventories as of September 30, 2017 and December 31, 2016:
|
|
|
September 30, |
|
December 31, |
||
|
(In millions) |
|
2017 |
|
2016 |
||
|
Finished goods |
|
$ |
44.6 |
|
$ |
45.1 |
|
Raw materials and work in process |
|
|
81.3 |
|
|
73.1 |
|
Total inventories |
|
$ |
125.9 |
|
$ |
118.2 |
|
|||
|
(In millions) |
|
RANA |
|
RAEU |
|
Total |
|||
|
Balance, December 31, 2016 |
|
$ |
33.6 |
|
$ |
8.6 |
|
$ |
42.2 |
|
Impairment |
|
|
(33.6) |
|
|
— |
|
|
(33.6) |
|
Currency translation adjustments |
|
|
— |
|
|
1.1 |
|
|
1.1 |
|
Balance, September 30, 2017 |
|
$ |
— |
|
$ |
9.7 |
|
$ |
9.7 |
|
|||
The following table presents the Company’s short-term and long-term debt as of September 30, 2017 and December 31, 2016:
|
|
|
September 30, |
|
|
December 31, |
||
|
(In millions) |
|
2017 |
|
|
2016 |
||
|
Long-term debt due within one year, net: |
|
|
|
|
|
|
|
|
Senior Secured Notes: |
|
|
|
|
|
|
|
|
Principal amount outstanding |
|
$ |
305.0 |
|
|
$ |
— |
|
Unamortized original issue discount and debt issuance costs |
|
|
(6.7) |
|
|
|
— |
|
Senior Secured Notes, net |
|
|
298.3 |
|
|
|
— |
|
Revolving credit facilities: |
|
|
|
|
|
|
|
|
Principal amount outstanding |
|
|
86.5 |
|
|
|
— |
|
Unamortized debt issuance costs |
|
|
(0.8) |
|
|
|
— |
|
Revolving credit facilities, net |
|
|
85.7 |
|
|
|
— |
|
Capital leases due within one year |
|
|
3.7 |
|
|
|
2.3 |
|
Total long-term debt due within one year, net |
|
$ |
387.7 |
|
|
$ |
2.3 |
|
Long-term debt, net: |
|
|
|
|
|
|
|
|
Senior Secured Notes: |
|
|
|
|
|
|
|
|
Principal amount outstanding |
|
$ |
— |
|
|
$ |
305.0 |
|
Unamortized original issue discount and debt issuance costs |
|
|
— |
|
|
|
(10.1) |
|
Senior Secured Notes, net |
|
|
— |
|
|
|
294.9 |
|
Revolving credit facilities: |
|
|
|
|
|
|
|
|
Principal amount outstanding |
|
|
— |
|
|
|
57.0 |
|
Unamortized debt issuance costs |
|
|
— |
|
|
|
(1.5) |
|
Revolving credit facilities, net |
|
|
— |
|
|
|
55.5 |
|
Term Loan |
|
|
— |
|
|
|
1.5 |
|
Capital leases |
|
|
5.0 |
|
|
|
2.3 |
|
Total long-term debt, net |
|
|
5.0 |
|
|
|
354.2 |
|
Total debt |
|
$ |
392.7 |
|
|
$ |
356.5 |
The following table presents activity related to the carrying value of Redeemable Preferred Stock during the nine months ended September 30, 2017:
|
(In millions) |
|
|
|
|
Balance, December 31, 2016 |
|
$ |
24.9 |
|
Accretion of fair value adjustment to Redeemable Preferred Stock |
|
|
0.7 |
|
Balance, September 30, 2017 |
|
$ |
25.6 |
|
|||
The following table summarizes activity within stockholders’ equity attributable to Real Industry and noncontrolling interest during the nine months ended September 30, 2017:
|
(In millions) |
|
Equity (Deficit) |
|
Noncontrolling |
|
Total Equity (Deficit) |
|||
|
Balance, December 31, 2016 |
|
$ |
33.4 |
|
$ |
1.1 |
|
$ |
34.5 |
|
Net earnings (loss) |
|
|
(58.7) |
|
|
0.7 |
|
|
(58.0) |
|
Distribution to noncontrolling interest |
|
|
— |
|
|
(2.0) |
|
|
(2.0) |
|
Consolidation of noncontrolling interest |
|
|
(0.5) |
|
|
0.5 |
|
|
— |
|
Share-based compensation expense |
|
|
2.0 |
|
|
— |
|
|
2.0 |
|
Dividends on Redeemable Preferred Stock, in cash or accrued |
|
|
(1.7) |
|
|
— |
|
|
(1.7) |
|
Accretion of fair value adjustment to Redeemable Preferred Stock |
|
|
(0.7) |
|
|
— |
|
|
(0.7) |
|
Change in accumulated other comprehensive income (loss) |
|
|
9.2 |
|
|
— |
|
|
9.2 |
|
Balance, September 30, 2017 |
|
$ |
(17.0) |
|
$ |
0.3 |
|
$ |
(16.7) |
The following table reflects changes in the shares of common stock outstanding during the nine months ended September 30, 2017:
|
|
|
Shares of |
|
Balance, December 31, 2016 |
|
29,386,882 |
|
Restricted common stock awards granted, net of forfeitures |
|
391,668 |
|
Restricted stock units converted to common stock, net of reissued treasury shares |
|
21,550 |
|
Common stock options exercised |
|
750 |
|
Balance, September 30, 2017 |
|
29,800,850 |
|
|||
The following table summarizes activity within accumulated other comprehensive income (loss) during the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
(In millions) |
|
Currency |
|
Pension Benefit |
|
Other |
|||
|
Balance, December 31, 2016 |
|
$ |
(8.2) |
|
$ |
1.1 |
|
$ |
(7.1) |
|
Current period currency translation adjustments |
|
|
9.1 |
|
|
0.1 |
|
|
9.2 |
|
Balance, September 30, 2017 |
|
$ |
0.9 |
|
$ |
1.2 |
|
$ |
2.1 |
|
|||
The following table presents the components of net periodic benefit expense under the German defined benefit pension plans for the three and nine months ended September 30, 2017 and 2016:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
|
||||
|
Service cost |
|
$ |
0.3 |
|
$ |
0.3 |
|
$ |
0.8 |
|
$ |
0.7 |
|
|
Interest cost |
|
|
0.2 |
|
|
0.3 |
|
|
0.6 |
|
|
0.8 |
|
|
Amortization of net actuarial gains |
|
|
— |
|
|
(0.1) |
|
|
— |
|
|
(0.2) |
|
|
Expected return on plan assets |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.1) |
|
|
Net periodic benefit expense |
|
$ |
0.5 |
|
$ |
0.5 |
|
$ |
1.4 |
|
$ |
1.2 |
|
|
|||
The table below presents gross amounts of recognized derivative assets and liabilities, the amounts offset in the unaudited condensed consolidated balance sheets and the net amounts of derivative assets and liabilities presented therein. As of September 30, 2017 and December 31, 2016, there were no amounts subject to an enforceable master netting arrangement or similar agreement that have not been offset in the unaudited condensed consolidated balance sheets.
|
|
|
|
September 30, 2017 |
|
December 31, 2016 |
|||||||
|
(In millions) |
|
Asset |
|
Liability |
|
Asset |
|
Liability |
||||
|
Metal |
|
$ |
0.2 |
|
$ |
— |
|
$ |
— |
|
$ |
(0.4) |
|
Natural gas |
|
|
— |
|
|
— |
|
|
0.6 |
|
|
— |
|
Net derivative assets (liabilities) as classified in the condensed consolidated balance sheets |
|
$ |
0.2 |
|
$ |
— |
|
$ |
0.6 |
|
$ |
(0.4) |
The following table presents details of the balance sheet classification of the fair value of Real Alloy’s derivative financial instruments as of September 30, 2017 and December 31, 2016:
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
(In millions) |
|
Balance Sheet Classification |
|
|
2017 |
|
2016 |
|
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
Metal |
Prepaid expenses, supplies and other current assets |
$ |
0.2 |
$ |
— |
|||
|
Natural Gas |
|
Prepaid expenses, supplies and other current assets |
|
|
— |
|
|
0.6 |
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
Metal |
|
Accrued liabilities |
|
$ |
— |
|
$ |
(0.4) |
The following table presents changes in the fair value of the common stock warrant liability during the three and nine months ended September 30, 2017 and 2016:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
|
Balance, beginning of period |
|
$ |
2.1 |
|
$ |
6.1 |
|
$ |
4.4 |
|
$ |
6.9 |
|
Warrants exercised |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.1) |
|
Change in fair value of common stock warrant liability |
|
|
(0.9) |
|
|
(1.9) |
|
|
(3.2) |
|
|
(2.6) |
|
Balance, end of period |
|
$ |
1.2 |
|
$ |
4.2 |
|
$ |
1.2 |
|
$ |
4.2 |
The following table sets forth financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, and their level in the fair value hierarchy:
|
|
|
|
|
Estimated Fair Value |
||||
|
|
|
Fair Value |
|
September 30, |
|
December 31, |
||
|
(In millions) |
|
Hierarchy |
|
2017 |
|
2016 |
||
|
Derivative assets |
|
Level 2 |
|
$ |
0.2 |
|
$ |
0.6 |
|
Derivative liabilities |
|
Level 2 |
|
|
— |
|
|
(0.4) |
|
Net derivative assets |
|
|
|
$ |
0.2 |
|
$ |
0.2 |
|
Common stock warrant liability |
|
Level 3 |
|
$ |
(1.2) |
|
$ |
(4.4) |
The following table presents losses (gains) on derivative financial instruments during the three and nine months ended September 30, 2017 and 2016:
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
|
Realized losses (gains): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal |
|
$ |
0.3 |
|
$ |
0.2 |
|
$ |
1.7 |
|
$ |
0.6 |
|
Natural gas |
|
|
— |
|
|
— |
|
|
(0.1) |
|
|
0.8 |
|
Total realized losses |
|
|
0.3 |
|
|
0.2 |
|
|
1.6 |
|
|
1.4 |
|
Unrealized losses (gains): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal |
|
|
(0.4) |
|
|
0.2 |
|
|
(0.6) |
|
|
(0.2) |
|
Natural gas |
|
|
0.1 |
|
|
0.4 |
|
|
0.7 |
|
|
(0.7) |
|
Total unrealized losses (gains) |
|
|
(0.3) |
|
|
0.6 |
|
|
0.1 |
|
|
(0.9) |
|
Losses on derivative financial instruments, net |
|
$ |
— |
|
$ |
0.8 |
|
$ |
1.7 |
|
$ |
0.5 |
The following tables present the carrying values and estimated fair values of other financial instruments as of September 30, 2017 and December 31, 2016:
|
|
|
|
|
September 30, 2017 |
||||
|
(In millions) |
|
Fair Value |
|
Carrying Value |
|
Estimated |
||
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
Level 1 |
|
$ |
12.8 |
|
$ |
12.8 |
|
Restricted cash and restricted cash equivalents |
|
Level 1 |
|
|
5.6 |
|
|
5.6 |
|
Financing receivable |
|
Level 2 |
|
|
28.1 |
|
|
28.1 |
|
Loans receivable, net (other noncurrent assets) |
|
Level 3 |
|
|
0.7 |
|
|
0.7 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Long-term debt due within one year, net: |
|
|
|
|
|
|
|
|
|
Senior Secured Notes |
|
Level 1 |
|
$ |
298.3 |
|
$ |
286.7 |
|
ABL Facility |
|
Level 2 |
|
|
85.7 |
|
|
86.5 |
|
Redeemable Preferred Stock |
|
Level 3 |
|
$ |
25.6 |
|
$ |
26.6 |
|
|
|
|
|
December 31, 2016 |
||||
|
(In millions) |
|
Fair Value |
|
Carrying Value |
|
Estimated |
||
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
Level 1 |
|
$ |
27.2 |
|
$ |
27.2 |
|
Restricted cash and restricted cash equivalents |
|
Level 1 |
|
|
5.5 |
|
|
5.5 |
|
Financing receivable |
|
Level 2 |
|
|
28.4 |
|
|
28.4 |
|
Loans receivable, net (other noncurrent assets) |
|
Level 3 |
|
|
0.8 |
|
|
0.8 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
Senior Secured Notes |
|
Level 1 |
|
$ |
294.9 |
|
$ |
307.5 |
|
Asset-Based Facility |
|
Level 2 |
|
|
55.5 |
|
|
57.0 |
|
Term Loan |
|
Level 2 |
|
|
1.5 |
|
|
1.5 |
|
Redeemable Preferred Stock |
|
Level 3 |
|
$ |
24.9 |
|
$ |
26.8 |
|
|||
The following tables show segment revenues from external customers (there were no intersegment revenues) and Segment Adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016, and reconciliations of Segment Adjusted EBITDA to net loss for each period presented. Segment Adjusted EBITDA presents only the financial performance of our segments and does not include the results of operations of Corporate and Other.
|
|
|
Three Months Ended September 30, 2017 |
||||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
Corporate and |
|
Total |
||||
|
Revenues |
|
$ |
213.0 |
|
$ |
119.8 |
|
$ |
— |
|
$ |
332.8 |
|
Segment Adjusted EBITDA |
|
$ |
5.6 |
|
$ |
7.9 |
|
|
|
|
$ |
13.5 |
|
|
|
Three Months Ended September 30, 2016 |
||||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
Corporate and |
|
Total |
||||
|
Revenues |
|
$ |
200.5 |
|
$ |
114.4 |
|
$ |
— |
|
$ |
314.9 |
|
Segment Adjusted EBITDA |
|
$ |
9.0 |
|
$ |
7.9 |
|
|
|
|
$ |
16.9 |
|
|
|
Nine Months Ended September 30, 2017 |
||||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
Corporate and Other |
|
Total |
||||
|
Revenues |
|
$ |
673.0 |
|
$ |
347.1 |
|
$ |
— |
|
$ |
1,020.1 |
|
Segment Adjusted EBITDA |
|
$ |
20.6 |
|
$ |
22.4 |
|
|
|
|
$ |
43.0 |
|
|
|
Nine Months Ended September 30, 2016 |
||||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
Corporate and |
|
Total |
||||
|
Revenues |
|
$ |
613.7 |
|
$ |
331.5 |
|
$ |
— |
|
$ |
945.2 |
|
Segment Adjusted EBITDA |
|
$ |
36.5 |
|
$ |
19.6 |
|
|
|
|
$ |
56.1 |
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
(In millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
|
Segment Adjusted EBITDA |
|
$ |
13.5 |
|
$ |
16.9 |
|
$ |
43.0 |
|
$ |
56.1 |
|
Unrealized gains (losses) on derivative financial instruments |
|
|
0.3 |
|
|
(0.6) |
|
|
(0.1) |
|
|
0.9 |
|
Segment depreciation and amortization |
|
|
(11.8) |
|
|
(11.3) |
|
|
(33.4) |
|
|
(36.6) |
|
Amortization of inventories and supplies purchase accounting adjustments |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.9) |
|
Corporate and Other selling, general and administrative expenses |
|
|
(1.8) |
|
|
(7.5) |
|
|
(7.5) |
|
|
(14.4) |
|
Goodwill impairment |
|
|
(33.6) |
|
|
— |
|
|
(33.6) |
|
|
— |
|
Other, net |
|
|
(1.4) |
|
|
(1.0) |
|
|
(3.0) |
|
|
(2.6) |
|
Operating profit (loss) |
|
|
(34.8) |
|
|
(3.5) |
|
|
(34.6) |
|
|
2.5 |
|
Interest expense, net |
|
|
(9.8) |
|
|
(9.2) |
|
|
(30.4) |
|
|
(27.5) |
|
Change in fair value of common stock warrant liability |
|
|
0.9 |
|
|
1.9 |
|
|
3.2 |
|
|
2.6 |
|
Foreign exchange gains on intercompany loans |
|
|
1.1 |
|
|
— |
|
|
3.3 |
|
|
1.0 |
|
Income from equity method investment |
|
|
2.3 |
|
|
— |
|
|
2.9 |
|
|
— |
|
Other nonoperating expense, net |
|
|
(0.2) |
|
|
(0.5) |
|
|
(0.5) |
|
|
(0.3) |
|
Income tax expense (benefit) |
|
|
— |
|
|
0.5 |
|
|
(1.9) |
|
|
(0.4) |
|
Earnings from discontinued operations, net of income taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
0.1 |
|
Net loss |
|
$ |
(40.5) |
|
$ |
(10.8) |
|
$ |
(58.0) |
|
$ |
(22.0) |
The following tables present summarized balance sheet information for each of our reportable segments and reconciliations to consolidated assets and liabilities as of September 30, 2017 and December 31, 2016:
|
|
|
September 30, 2017 |
|
December 31, 2016 |
||||||||
|
(In millions) |
|
RANA |
|
RAEU |
|
RANA |
|
RAEU |
||||
|
Segment Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3.5 |
|
$ |
4.8 |
|
$ |
11.5 |
|
$ |
5.7 |
|
Trade accounts receivable, net |
|
|
85.6 |
|
|
20.3 |
|
|
76.2 |
|
|
12.2 |
|
Financing receivable |
|
|
— |
|
|
28.1 |
|
|
— |
|
|
28.4 |
|
Inventories |
|
|
88.8 |
|
|
37.1 |
|
|
79.3 |
|
|
38.9 |
|
Prepaid expenses, supplies and other current assets |
|
|
17.4 |
|
|
9.7 |
|
|
13.7 |
|
|
6.4 |
|
Total current assets |
|
|
195.3 |
|
|
100.0 |
|
|
180.7 |
|
|
91.6 |
|
Property, plant and equipment, net |
|
|
185.4 |
|
|
104.6 |
|
|
195.0 |
|
|
94.2 |
|
Equity method investment |
|
|
7.9 |
|
|
— |
|
|
5.0 |
|
|
— |
|
Identifiable intangible assets, net |
|
|
10.7 |
|
|
— |
|
|
12.5 |
|
|
— |
|
Goodwill |
|
|
— |
|
|
9.7 |
|
|
33.6 |
|
|
8.6 |
|
Other noncurrent assets |
|
|
6.0 |
|
|
3.2 |
|
|
5.0 |
|
|
3.5 |
|
Total segment assets |
|
$ |
405.3 |
|
$ |
217.5 |
|
$ |
431.8 |
|
$ |
197.9 |
|
Segment Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables |
|
$ |
75.2 |
|
$ |
45.9 |
|
$ |
73.8 |
|
$ |
41.8 |
|
Accrued liabilities |
|
|
19.7 |
|
|
13.9 |
|
|
30.0 |
|
|
13.4 |
|
Total current liabilities |
|
|
94.9 |
|
|
59.8 |
|
|
103.8 |
|
|
55.2 |
|
Accrued pension benefits |
|
|
— |
|
|
47.5 |
|
|
— |
|
|
42.0 |
|
Environmental liabilities |
|
|
11.1 |
|
|
— |
|
|
11.6 |
|
|
— |
|
Other noncurrent liabilities |
|
|
4.8 |
|
|
1.8 |
|
|
4.5 |
|
|
1.8 |
|
Total segment liabilities |
|
$ |
110.8 |
|
$ |
109.1 |
|
$ |
119.9 |
|
$ |
99.0 |
|
|
|
September 30, |
|
December 31, |
||
|
(In millions) |
|
2017 |
|
2016 |
||
|
Assets: |
|
|
|
|
|
|
|
Real Alloy North America |
|
$ |
405.3 |
|
$ |
431.8 |
|
Real Alloy Europe |
|
|
217.5 |
|
|
197.9 |
|
Cash and cash equivalents—Corporate and Other |
|
|
4.5 |
|
|
9.9 |
|
Other unallocated assets |
|
|
1.6 |
|
|
5.9 |
|
Total consolidated assets |
|
$ |
628.8 |
|
$ |
645.5 |
|
Liabilities: |
|
|
|
|
|
|
|
Real Alloy North America |
|
$ |
110.8 |
|
$ |
119.9 |
|
Real Alloy Europe |
|
|
109.1 |
|
|
99.0 |
|
Long-term debt, including amounts due within one year |
|
|
392.7 |
|
|
356.5 |
|
Common stock warrant liability |
|
|
1.2 |
|
|
4.4 |
|
Deferred income taxes, net |
|
|
2.6 |
|
|
2.5 |
|
Other unallocated liabilities |
|
|
3.5 |
|
|
3.8 |
|
Total consolidated liabilities |
|
$ |
619.9 |
|
$ |
586.1 |
|
|||
The following table provides a reconciliation of total cash, cash equivalents, restricted cash and restricted cash equivalents as of September 30, 2017 and 2016.
|
|
|
September 30, |
||||
|
(In millions) |
|
2017 |
|
2016 |
||
|
Cash and cash equivalents—continuing operations |
|
$ |
12.8 |
|
$ |
34.6 |
|
Restricted cash and restricted cash equivalents—prepaid expenses, supplies and other current assets |
|
|
0.8 |
|
|
0.7 |
|
Restricted cash and restricted cash equivalents—other noncurrent assets |
|
|
4.8 |
|
|
4.4 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period |
|
$ |
18.4 |
|
$ |
39.7 |
|
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