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EX-32.1 - GLOBE SPECIALTY METALS INCexhibit321.htm
EX-31.2 - GLOBE SPECIALTY METALS INCexhibit312.htm
EX-10.2 - GLOBE SPECIALTY METALS INCexhibit102.htm
EX-31.1 - GLOBE SPECIALTY METALS INCexhibit311.htm
EX-10.1 - GLOBE SPECIALTY METALS INCexhibit101.htm


 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File Number 001-34420

Globe Specialty Metals, Inc.
(Exact name of registrant as specified in its charter)

Delaware
20-2055624
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

One Penn Plaza
250 West 34th Street, Suite 4125
New York, NY 10119
(Address of principal executive offices, including zip code)

(212) 798-8122
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Each Exchange on Which Registered
Common stock, $0.0001 par value
The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

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

Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company  o
 
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

As of May 11, 2011, the registrant had 75,209,207 shares of common stock outstanding.
 
 
 
 




 
 
 
 

 
 

Globe Specialty Metals, Inc.

 
 
Page
No.       
PART I
 
Item 1.
Financial Statements                                                                                                                                     
 1
Item 2.
 17
Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                     
 26
Item 4.
Controls and Procedures                                                                                                                                     
 26
     
PART II
 
   
Item 1.
Legal Proceedings                                                                                                                                     
 27
Item 1A.
Risk Factors                                                                                                                                     
 27
Item 6.
Exhibits                                                                                                                                     
 27
SIGNATURES                                                                                                                                                    
 28
 
 
 
 
 


 
 

 

PART I


 
1

 

 
GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES
 
 Condensed Consolidated Balance Sheets
March 31, 2011 and June 30, 2010
(In thousands, except share and per share amounts)
(Unaudited)
                 
           
March 31,
2011
 
June 30,
2010
ASSETS
Current assets:
         
 
Cash and cash equivalents
 
$
 155,313
 
 157,029
 
Accounts receivable, net of allowance for doubtful accounts of $738
       
   
and $997 at March 31, 2011 and June 30, 2010, respectively
 
 61,761
 
 55,907
 
Inventories
   
 101,077
 
 87,163
 
Prepaid expenses and other current assets
 
 25,032
 
 23,809
     
Total current assets
   
 343,183
 
 323,908
Property, plant, and equipment, net of accumulated depreciation and amortization
 
 227,819
 
 219,267
Goodwill
     
 53,406
 
 52,025
Other intangible assets
   
 477
 
 477
Investments in unconsolidated affiliates
 
 8,538
 
 8,185
Deferred tax assets
   
 71
 
 71
Other assets
   
 21,033
 
 3,212
     
Total assets
 
$
 654,527
 
 607,145
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
         
 
Accounts payable
 
$
 44,136
 
 47,298
 
Current portion of long-term debt
 
 10
 
 10,092
 
Short-term debt
   
 532
 
 8,067
 
Revolving credit agreements
 
 12,000
 
 -
 
Accrued expenses and other current liabilities
 
 33,504
 
 35,832
     
Total current liabilities
 
 90,182
 
 101,289
Long-term liabilities:
         
 
Revolving credit agreements
 
 34,989
 
 16,000
 
Long-term debt
   
 -
 
 6,920
 
Deferred tax liabilities
   
 14,311
 
 6,645
 
Other long-term liabilities
   
 18,032
 
 17,462
     
Total liabilities
   
 157,514
 
 148,316
Commitments and contingencies (note 11)
       
Stockholders’ equity:
         
 
Common stock, $0.0001 par value. Authorized, 150,000,000 shares;
       
   
issued,75,183,207 and 74,421,826 shares at
       
   
March 31, 2011 and June 30, 2010, respectively
 
 8
 
 7
 
Additional paid-in capital
   
 399,217
 
 390,354
 
Retained earnings
   
 64,755
 
 38,761
 
Accumulated other comprehensive loss
 
 (3,846)
 
 (4,438)
 
Treasury stock at cost, 282,437 and 1,000 shares at
 
 (4)
 
 (4)
   
March 31, 2011 and June 30, 2010, respectively
       
     
Total Globe Specialty Metals, Inc. stockholders’ equity
 
 460,130
 
 424,680
 
Noncontrolling interest
   
 36,883
 
 34,149
     
Total stockholders’ equity
 
 497,013
 
 458,829
     
Total liabilities and stockholders’ equity
$
 654,527
 
 607,145
                 
See accompanying notes to condensed consolidated financial statements.

 
2

 


GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES
 
Condensed Consolidated Income Statements
Three and nine months ended March 31, 2011 and 2010
(In thousands, except per share amounts)
(Unaudited)
                             
             
Three Months Ended
   
Nine Months Ended
             
March 31,
   
March 31,
             
2011
 
2010
   
2011
 
2010
Net sales
     
$
 172,802
 
 112,486
 
$
 465,929
 
 326,222
Cost of goods sold
 
 121,621
 
 99,135
   
 361,722
 
 267,087
Selling, general, and administrative expenses
 
 14,396
 
 10,008
   
 38,920
 
 35,873
Research and development
 
 32
 
 36
   
 77
 
 151
Restructuring charges
 
 -
 
 -
   
 -
 
 (81)
Gain on sale of business
 
 -
 
 -
   
 -
 
 (22,907)
   
Operating income
 
 36,753
 
 3,307
   
 65,210
 
 46,099
Other income (expense):
                 
 
Interest income
 
 24
 
 4
   
 83
 
 205
 
Interest expense, net of capitalized interest
 
 (521)
 
 (997)
   
 (2,210)
 
 (3,416)
 
Foreign exchange gain (loss)
 
 125
 
 (64)
   
 (251)
 
 3,222
 
Other income
 
 94
 
 546
   
 644
 
 738
   
Income before provision for income taxes
 
 36,475
 
 2,796
   
 63,476
 
 46,848
Provision for income taxes
 
 12,982
 
 1,751
   
 23,479
 
 19,702
   
Net income
 
 23,493
 
 1,045
   
 39,997
 
 27,146
(Income) losses attributable to noncontrolling interest, net of tax
 
 (100)
 
 (529)
   
 (2,734)
 
 346
   
Net income attributable to Globe Specialty Metals, Inc.
$
 23,393
 
 516
 
$
 37,263
 
 27,492
Weighted average shares outstanding:
                 
 
Basic
       
 75,078
 
 74,320
   
 74,922
 
 73,239
 
Diluted
     
 76,868
 
 75,570
   
 76,574
 
 74,411
Earnings per common share:
                 
 
Basic
     
$
 0.31
 
 0.01
 
$
 0.50
 
 0.38
 
Diluted
     
 0.30
 
 0.01
   
 0.49
 
 0.37
Cash dividends declared per common share
 
 -
 
 -
   
 0.15
 
 -
                             
See accompanying notes to condensed consolidated financial statements.

 
3

 


GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES
                                                 
Condensed Consolidated Statement of Changes in Stockholders’ Equity
Nine months ended March 31, 2011
(In thousands)
(Unaudited)
                                                 
             
Globe Specialty Metals, Inc. Stockholders’ Equity
           
                               
Accumulated
               
                       
Additional
     
Other
 
Treasury
         
Total
             
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Stock
 
Noncontrolling
 
Comprehensive
 
Stockholders’
             
Shares
   
Amount
 
Capital
 
Earnings
 
(Loss) Income
 
at Cost
 
Interest
 
Income
 
Equity
Balance at June 30, 2010 
74,422   
 
 $
7   
 
390,354   
 
38,761   
 
(4,438)  
 
(4)  
 
34,149   
     
458,829   
Share-based compensation 
4   
   
—    
 
3,875   
 
—    
 
—    
 
—    
 
—    
     
3,875   
Stock option exercises 
757   
   
1   
 
4,988   
 
—    
 
—    
 
—    
 
—    
     
4,989   
Cash dividend declared 
—    
   
—    
 
—    
 
(11,269)  
 
—    
 
—    
 
—    
     
(11,269)  
Comprehensive income:                                     
  Foreign currency translation adjustment 
—    
   
—    
 
—    
 
—    
 
578   
 
—    
 
—    
 
578   
 
578   
 
Pension liability adjustment (net
                                 
  of income tax expense of $8) 
—    
   
—    
 
—    
 
—    
 
14   
 
—    
 
—    
 
14   
 
14   
  Net income   
—    
   
—    
 
—    
 
37,263   
 
—    
 
—    
 
2,734   
 
39,997   
 
39,997   
    Total comprehensive income                               
40,589   
 
40,589   
Balance at March 31, 2011 
75,183   
 
 $
8   
 
399,217   
 
64,755   
 
(3,846)  
 
(4)  
 
36,883   
 
40,589   
 
497,013   
                                                 
See accompanying notes to condensed consolidated financial statements.

 
4

 


GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES
 
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 2011 and 2010
(In thousands)
(Unaudited)
                     
               
Nine Months Ended
               
March 31,
               
2011
 
2010
Cash flows from operating activities:
       
 
Net income
   
$
 39,997
 
 27,146
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
       
     
Depreciation and amortization
 
 18,350
 
 14,868
     
Share-based compensation
 
 3,875
 
 4,491
     
Gain on sale of business
 
 -
 
 (22,907)
     
Deferred taxes
 
 8,580
 
 (74)
     
Changes in operating assets and liabilities:
       
       
Accounts receivable, net
 
 (5,583)
 
 (25,788)
       
Inventories
 
 (14,752)
 
 (5,542)
       
Prepaid expenses and other current assets
 
 (2,426)
 
 (9)
       
Accounts payable
 
 (3,246)
 
 22,569
       
Accrued expenses and other current liabilities
 
 (2,323)
 
 (14,009)
       
Other
   
 201
 
 (28,401)
         
Net cash provided by (used in) operating activities
 
 42,673
 
 (27,656)
Cash flows from investing activities:
       
  Capital expenditures   
 (26,776)
 
 (16,432)
 
Sale of businesses, net of cash disposed of $0 and $16,555, respectively
 
 2,500
 
 58,445
 
Working capital adjustments from acquisition of businesses, net
 
 (2,038)
 
 -
 
Other investing activities
 
 (16,935)
 
 (733)
         
Net cash (used in) provided by investing activities
 
 (43,249)
 
 41,280
Cash flows from financing activities:
       
 
Net payments of long-term debt
 
 (17,002)
 
 (19,750)
 
Net (payments) borrowings of short-term debt
 
 (7,535)
 
 7,170
 
Net borrowings on revolving credit agreements
 
 30,989
 
 22,000
  Dividend payment   
 (11,269)
 
 -
 
Proceeds from stock option exercises
 
 4,989
 
 -
 
Proceeds from warrants exercised
 
 -
 
 1,287
 
Proceeds from UPOs exercised
 
 -
 
 210
 
Sale of noncontrolling interest
 
 -
 
 98,329
 
Sale of common stock
 
 -
 
 36,456
 
Other financing activities
 
 (869)
 
 (1,387)
         
Net cash (used in) provided by financing activities
 
 (697)
 
 144,315
Effect of exchange rate changes on cash and cash equivalents
 
 (443)
 
 (28)
         
Net (decrease) increase in cash and cash equivalents
 
 (1,716)
 
 157,911
Cash and cash equivalents at beginning of period
 
 157,029
 
 61,876
Cash and cash equivalents at end of period
$
 155,313
 
 219,787
                     
Supplemental disclosures of cash flow information:
       
 
Cash paid for interest, net of capitalized interest
$
1,685
 
2,198
 
Cash paid for income taxes, net of refunds totaling $534 and $2,729, respectively
 
4,442
 
50,412
                     
See accompanying notes to condensed consolidated financial statements.

 
5

 


GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements
Three and nine months ended March 31, 2011 and 2010
(Dollars in thousands, expect per share amounts)
(Unaudited)


(1)  Organization and Business Operations

Globe Specialty Metals, Inc. and subsidiary companies (the Company, we, or our) is among the world’s largest producers of silicon metal and silicon-based alloys, important ingredients in a variety of industrial and consumer products. The Company’s customers include major silicone chemical, aluminum and steel manufacturers, auto companies and their suppliers, ductile iron foundries, manufacturers of photovoltaic solar cells and computer chips, and concrete producers.

(2)  Summary of Significant Accounting Policies

a. Basis of Presentation

In the opinion of the Company’s management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) of the results for the interim periods presented and such adjustments are of a normal, recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010. There have been no material changes to the Company’s significant accounting policies during the nine months ended March 31, 2011.

b. Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and related notes. Significant estimates and assumptions in these condensed consolidated financial statements include the valuation of inventories; the carrying amount of property, plant, and equipment; estimates of fair value associated with accounting for business combinations; goodwill and long-lived asset impairment tests; estimates of fair value of investments; income taxes and deferred tax valuation allowances; valuation of derivative instruments; the determination of the discount rate and the rate of return on plan assets for pension expense; and the determination of the fair value of share-based compensation involving assumptions about forfeiture rates, stock volatility, discount rates, and expected time to exercise. During interim periods, provision for income taxes is recognized using an estimated annual effective tax rate. Due to the inherent uncertainty involved in making estimates, actual results could differ from these estimates.

c. Revenue Recognition

Revenue is recognized in accordance with Financial Accounting Standards Board (FASB) ASC Topic 605, Revenue Recognition, when a firm sales agreement is in place, delivery has occurred and title and risks of ownership have passed to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. Shipping and other transportation costs charged to buyers are recorded in both net sales and cost of goods sold. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales. When the Company provides a combination of products and services to customers, the arrangement is evaluated under ASC Subtopic 605-25, Revenue Recognition — Multiple Element Arrangements (ASC 605.25). ASC 605.25 addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue-generating activities. If the Company cannot objectively determine the fair value of any undelivered elements under an arrangement, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

d. Recently Implemented Accounting Pronouncements

In June 2009, the FASB issued an amendment to ASC Subtopic 860-10, Transfers and Servicing. The objective of this amendment is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This amendment improves financial reporting by eliminating (1) the exceptions for qualifying special-purpose entities from the consolidation guidance and (2) the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. This amendment was adopted on July 1, 2010. This change had no effect on the Company’s financial position or results of operations.

In June 2009, the FASB issued an amendment to ASC Subtopic 810-10, Consolidation — Variable Interest Entities. The objective of this amendment is to improve financial reporting by enterprises involved with variable interest entities by eliminating the quantitative-based risks and rewards calculation and requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling interest in a variable interest entity. In addition, the amendment requires an ongoing reassessment of whether an enterprise is the primary beneficiary of a variable interest entity. This amendment was adopted on July 1, 2010. The Company is not currently involved with variable interest entities and, therefore, this change had no effect on the Company’s financial position or results of operations.

In October 2009, the FASB issued an amendment to ASC Subtopic 820-10, Fair Value Measurements and Disclosures (ASC 820). This amendment requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The amendment also clarifies existing fair value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Adoption of this amendment to ASC 820 had no impact on the Company’s financial position and results of operations.

 
6

 
(3)  Business Combinations, Investments, and Divestitures

Dow Corning Transactions:

On November 5, 2009, the Company sold 100% of its interest in Globe Metais Indústria e Comércio S.A. (Globe Metais) pursuant to a purchase agreement entered into on that same date by and among the Company and Dow Corning Corporation (Dow Corning). The sale of the Company’s equity interest in Globe Metais was executed in connection with the sale of a 49% membership interest in WVA Manufacturing, LLC (WVA LLC) to Dow Corning, the execution of a long-term supply agreement, and an amendment to an existing supply agreement between Dow Corning and the Company to reduce the amount required to be sold in calendar year 2010 to 20,000 metric tons of silicon metal.

Core Metals Group Holdings LLC:

On April 1, 2010, the Company purchased all of the ownership interests in Core Metals Group Holdings LLC (Core Metals). The Company engaged a third-party appraisal firm to assist in the process of determining the estimated fair value of certain assets acquired. The Company finalized the purchase price allocation for the Core Metals acquisition during the quarter ended March 31, 2011. Goodwill totaling $1,274 has been recorded and assigned to the GMI operating segment.

In December 2010, the Company completed the divestiture of its 49% ownership interest in Fluorita de Mexico, S.A. de C.V. (FDM) for $2,500. The Company acquired its ownership interest in FDM in connection with the acquisition of Core Metals. FDM operates a fluorite ore mine and fluorspar processing plant located in Mexico, an ancillary business we do not consider critical to our fundamental business strategy. There was no gain or loss associated with the sale of the 49% ownership interest in FDM as the sales price was equal to the recorded book value of this investment.

Nigerian Mining Licenses:

During the three months ended March 31, 2011, the Company made advances totaling approximately $17,000 to acquire exploration mining licenses in Nigeria to mine for manganese ore, a raw material used in the production of certain silicon and manganese based alloys. This investment is recorded in other assets and reflected in other investing activities in the condensed consolidated statement of cash flows.

(4)  Inventories

Inventories comprise the following:


       
March 31,
 
June 30,
       
2011
 
2010
Finished goods
$
25,433   
 
19,655   
Work in process
 
5,860   
 
2,860   
Raw materials
 
59,230   
 
54,988   
Parts and supplies
 
10,554   
 
9,660   
 
Total
 $
101,077   
 
87,163   


At March 31, 2011, $94,411 in inventory is valued using the first-in, first-out method and $6,666 using the average cost method. At June 30, 2010, $80,435 in inventory is valued using the first-in, first-out method and $6,728 using the average cost method.

(5)  Property, Plant, and Equipment

Property, plant, and equipment, net of accumulated depreciation and amortization, comprise the following:


               
March 31
 
June 30,
               
2011
 
2010
Land, land improvements, and land use rights
$
6,671   
 
6,080   
Building and improvements
 
42,325   
 
41,262   
Machinery and equipment
 
90,298   
 
78,370   
Furnaces
       
132,261   
 
124,898   
Other
         
3,978   
 
3,640   
Construction in progress
 
23,509   
 
17,824   
 
Property, plant, and equipment, gross
 
299,042   
 
272,074   
Less accumulated depreciation and amortization
 
(71,223)  
 
(52,807)  
 
Property, plant, and equipment, net of accumulated depreciation and amortization
 $
227,819   
 
219,267   


Depreciation expense for the three months and nine months ended March 31, 2011 was $6,366 and $18,350, of which $6,187 and $17,812 is recorded in cost of goods sold and $179 and $538 is recorded in selling, general, and administrative expenses, respectively. Depreciation expense for the three months and nine months ended March 31, 2010 was $5,055 and $14,558, of which $4,959 and $14,242 is recorded in cost of goods sold and $96 and $316 is recorded in selling, general, and administrative expenses, respectively.

Capitalized interest for the three months and nine months ended March 31, 2011 was $0 and $15, respectively. Capitalized interest for the three months and nine months ended March 31, 2010 was $70 and $368, respectively.

 
7

 
(6)  Goodwill and Other Intangible Assets

Goodwill and other intangible assets presented below have been allocated to the Company’s operating segments.

a. Goodwill

Changes in the carrying amount of goodwill, by reportable segment, during the nine months ended March 31, 2011 are as follows:


                 
Globe
     
               
GMI
Metales
Solsil
Other
Total
                         
Goodwill
     
$
30,405    
14,313    
57,656    
7,307    
109,681    
Accumulated impairment loss
 
—    
—    
(57,656)   
—    
(57,656)   
 
Balance at June 30, 2010
 
30,405    
14,313    
—    
7,307    
52,025    
                         
Core Metals purchase price allocation adjustments
1,124    
—    
—    
—    
1,124    
Foreign exchange rate changes
 
—    
—    
—    
257    
257    
                         
Goodwill
       
31,529    
14,313    
57,656    
7,564    
111,062    
Accumulated impairment loss
 
—    
—    
(57,656)   
—    
(57,656)   
 
Balance at March 31, 2011
 $
31,529    
14,313    
—    
7,564    
53,406    


b. Other Intangible Assets

There were no changes in the value of the Company’s definite lived intangible assets, which are fully amortized, or indefinite lived intangible assets during the nine months ended March 31, 2011. Amortization expense of purchased intangible assets for the three months and nine months ended March 31, 2010 was $0 and $310, respectively, which is recorded in cost of goods sold.
 
   c. Annual Impairment Tests
 
The Company performed its annual goodwill and indefinite lived intangible asset impairment tests during the third quarter of fiscal year 2011. No adjustments to the carrying amount of these assets were required.

(7)  Debt

a. Short-Term Debt

Short-term debt comprises the following:


                   
Weighted
   
               
Outstanding
 
Average
 
Unused
               
Balance
 
Interest Rate
 
Credit Line
March 31, 2011:
           
Type debt:
               
 
Export financing
$
—    
 
—    
$
9,041   
 
Other
       
532   
 
5.65%
 
—    
      Total   
 
$
532   
   
$
9,041   
                         
June 30, 2010:
             
Type debt:
               
 
Export financing
$
—    
 
—    
$
7,041   
 
Other
       
8,067   
 
3.42%
 
446   
      Total   
 
$
8,067   
   
$
7,487   


Export Financing Agreements – The Company’s Argentine subsidiary maintains various short-term export financing agreements. Generally, these arrangements are for periods ranging between seven and eleven months, and require the Company to pledge as collateral certain export receivable. There is no export financing debt outstanding at March 31, 2011 or June 30, 2010.

Other – The balance at June 30, 2010 relates primarily to $5,880 in short-term notes payable to Dow Corning for working capital loans given to WVA LLC. The notes accrued interest at 3.0% and were settled during October 2010.

 
8

 
b. Revolving Credit Agreements

A summary of the Company’s revolving credit agreements at March 31, 2011 is as follows:


                   
Weighted
       
               
Outstanding
 
Average
 
Unused
 
Total
               
Balance
 
Interest Rate
 
Commitment
 
Commitment
Senior credit facility
$
34,989   
 
4.75%
$
52,761   
 
90,000   
Revolving credit facility
 
12,000   
 
2.51%
 
3,000   
 
15,000   


In September 2008, the Company’s subsidiary, Globe Metallurgical, Inc. (GMI), entered into a borrowing arrangement, which included a $35,000 senior credit facility expiring in September 2013 and five-year senior term loan in an aggregate principal amount of $40,000. The senior term loan was subject to certain mandatory prepayments based on excess cash flow, as defined in the loan agreement. Further, as part of the Dow Corning transactions discussed in note 3, the Company agreed to modify certain terms of the borrowing facilities, which included a reduction of revolving credit from $35,000 to $28,000 and a $6,000 prepayment of the senior term loan, in exchange for the release of the assets of West Virginia Alloys, Inc. as a security for these borrowings.

On March 30, 2011, certain of the Company’s domestic subsidiaries (the Borrowers) entered into an agreement to amend and restate the Company’s existing senior credit facility and senior term loan. The amended and restated senior credit agreement provides for a $90,000 revolving credit facility, subject to a defined borrowing base, and matures on March 30, 2014. This facility includes a provision for the issuance of standby letters of credit and a $10,000 sublimit for swingline loans. The facility may be increased from time to time by an amount up to $10,000 in the aggregate at the Company’s election, subject to approval by the existing or additional lenders. Interest on borrowings under the credit agreement is payable, at the Company’s election, at either a base rate (the higher of the U.S. federal funds rate plus 0.50% per annum and the issuing bank’s “prime rate”) plus a margin of 1.50% per annum, or LIBOR plus a margin of 2.25% per annum. Certain commitment fees are also payable under the credit agreement. The facility is guaranteed by certain of the Borrowers’ subsidiaries, and borrowings under the credit agreement are collateralized by the Borrowers’ cash and cash equivalents, accounts receivable, and inventories, and the stock of their subsidiaries. The agreement contains certain restrictive and financial covenants, which include a maximum total debt to capitalization ratio and a minimum combined tangible net worth, as well as a minimum fixed charge coverage ratio and a maximum annual capital expenditure level, both of which are only applicable if availability under the senior credit facility is below minimum levels specified in the credit agreement. The Company was in compliance with the loan covenants at March 31, 2011.

At March 31, 2011, there was a $34,989 balance outstanding on the senior credit facility. The total commitment outstanding on this credit facility includes $440 outstanding letters of credit associated with supplier contracts and a $1,810 outstanding letter of credit associated with a power supply contract. The outstanding balances under the previous senior credit agreement and senior term loan were transferred into the new facility.

The Company classifies borrowings under the senior credit facility as long-term liabilities given our ability to renew and extend borrowings under this agreement beyond one year from the balance sheet date.

On October 1, 2010, the Company entered into a new $15,000 revolving credit facility, and utilized proceeds from borrowings under the revolving credit facility to repay the Company’s $5,880 short-term notes payable to Dow Corning. Total borrowings under this credit facility were $12,000 at March 31, 2011. Interest on advances under the revolving credit facility accrues at LIBOR plus an applicable margin percentage or, at the Company’s option, prime plus an applicable margin percentage. The credit facility is subject to certain restrictive and financial covenants, which include limits on additional debt, a maximum ratio of debt to earnings before interest, taxes, depreciation and amortization and minimum net worth. The Company was in compliance with the loan covenants at March 31, 2011.

The Company classifies borrowings under this revolving credit facility as current liabilities as the arrangement is payable in full upon the earlier of 10 business days following written demand by the lender or the agreement’s expiration on March 31, 2012.

See note 8 (Derivative Instruments) for a discussion of derivative financial instruments entered into to reduce the Company’s exposure to interest rate fluctuations on outstanding debt.

c. Long-Term Debt

Long-term debt comprises the following:


               
March 31,
 
June 30,
               
2011
 
2010
Senior term loan
 
$
—    
 
16,916   
Other
         
10   
 
96   
 
Total
       
10   
 
17,012   
Less current portion of long-term debt
 
(10)  
 
(10,092)  
Long-term debt, net of current portion
$
—    
 
6,920   


Senior Term Loan — As discussed above, the outstanding balance on the senior term loan was transferred to the Company’s amended and restated senior credit facility in March 2011.

d. Fair Value of Debt

The recorded carrying values of our debt balances approximate fair value given our debt is at variable rates tied to market indicators or is short-term in nature.

 
9

 
(8)  Derivative Instruments

The Company enters into derivative instruments to hedge certain interest rate, currency, and commodity price risks. The Company does not engage in interest rate, currency, or commodity speculation, and no derivatives are held for trading purposes. All derivatives are accounted for using mark-to-market accounting. The Company believes it is not practical to designate its derivative instruments as hedging instruments as defined under ASC Subtopic 815-10, Derivatives and Hedging (ASC 815). Accordingly, the Company adjusts its derivative financial instruments to current market value through the condensed consolidated income statement based on the fair value of the agreement as of period-end. Although not designated as hedged items as defined under ASC 815, these derivative instruments serve to significantly offset the Company’s interest rate, currency, and commodity risks. Gains or losses from these transactions offset gains or losses on the assets, liabilities, or transactions being hedged. No credit loss is anticipated as the counterparties to these agreements are major financial institutions that are highly rated.

Interest Rate Risk:

   The Company is exposed to market risk from changes in interest rates on certain of its debt obligations. The Company has entered into an interest rate cap arrangement and three interest rate swap agreements to reduce our exposure to interest rate fluctuations.

In October 2008, the Company entered into an interest rate cap arrangement to cap LIBOR on a $20,000 notional amount of debt, with the notional amount decreasing by $1,053 per quarter through the interest rate cap’s expiration on June 30, 2013. Under the interest rate cap, the Company capped LIBOR at a maximum of 4.5% over the life of the agreement.

In November 2008, the Company entered into an interest rate swap agreement involving the exchange of interest obligations relating to a $13,333 notional amount of debt, with the notional amount decreasing by $702 per quarter. Under the interest rate swap, the Company receives LIBOR in exchange for a fixed interest rate of 2.85% over the life of the agreement. The agreement expires in June 2013.

In January 2009, the Company entered into a second interest rate swap agreement involving the exchange of interest obligations relating to a $12,632 notional amount of debt, with the notional amount decreasing by $702 per quarter. Under the interest rate swap, the Company receives LIBOR in exchange for a fixed interest rate of 1.66% over the life of the agreement. The agreement expires in June 2013.

In April 2009, the Company entered into a third interest rate swap agreement involving the exchange of interest obligations relating to an $11,228 notional amount of debt, with the notional amount decreasing by $702 per quarter. Under the interest rate swap, the Company receives LIBOR in exchange for a fixed interest rate of 2.05% over the life of the agreement. The agreement expires in June 2013.

Foreign Currency Risk:

The Company is exposed to market risk arising from changes in currency exchange rates as a result of its operations outside the United States, principally in Argentina and China. A portion of the Company’s net sales generated from its non-U.S. operations is denominated in currencies other than the U.S. dollar. Most of the Company’s operating costs for its non-U.S. operations are denominated in local currencies, principally the Argentine peso and the Chinese renminbi. Consequently, the translated U.S. dollar value of the Company’s non-U.S. dollar net sales, and related accounts receivable balances, and our operating costs are subject to currency exchange rate fluctuations. Derivative instruments are not used extensively to manage this risk. The Company utilized derivative financial instruments, including foreign exchange forward contracts, to manage a portion of its net foreign currency exposure to the Brazilian real, prior to the sale of Globe Metais discussed in note 3, and the Euro. No foreign currency derivative financial instruments are outstanding at March 31, 2011.

Commodity Price Risk:

The Company is exposed to price risk for certain raw materials and energy used in its production process. The raw materials and energy that the Company uses are largely commodities, subject to price volatility caused by changes in global supply and demand and governmental controls. Derivative financial instruments are not used extensively to manage the Company’s exposure to fluctuations in the cost of commodity products used in its operations. The Company attempts to reduce the impact of increases in its raw material and energy costs by negotiating long-term contracts and through the acquisition of companies or assets for the purpose of increasing its access to raw materials with favorable pricing terms.

In June 2010, the Company entered into a power hedge agreement on a 175,440 MWh notional amount of electricity, representing approximately 20% of the power required by our Niagara Falls, New York plant not supplied by the facility’s long-term power contract over the term of the hedge agreement. The notional amount decreases equally per month through the agreement’s expiration on June 30, 2012. Under the power hedge agreement, the Company fixed the power rate at $39.60 per MWh over the life of the contract. In October 2010, the Company entered into a power hedge agreement on an 87,600 MWh notional amount of electricity, also for power required at our Niagara Falls, New York plant. The notional amount decreases equally per month from the agreement’s July 1, 2012 effective date through its expiration on June 30, 2013. Under this power hedge agreement, the Company fixed the power rate at $39.95 per MWh over the life of the contract.

The effect of the Company’s derivative instruments on the condensed consolidated income statements is summarized in the following table:


               
Gain (Loss) Recognized
 
Gain (Loss) Recognized
   
               
During the Three Months
 
During the Nine Months
   
               
Ended March 31,
 
Ended March 31,
 
Location
               
2011
 
2010
 
2011
 
2010
 
of Gain (Loss)
Interest rate derivatives
$
(21)   
 
(282)   
 
(186)   
 
(1,027)   
 
Interest expense
Foreign exchange forward contracts
 
—    
 
—    
 
(190)   
 
849    
 
Foreign exchange gain (loss)
Power hedges
     
(71)   
 
—    
 
99    
 
—    
 
Cost of goods sold

The fair values of the Company’s derivative instruments at March 31, 2011 are summarized in note 15 (Fair Value Measures). The liabilities associated with the Company’s interest rate derivatives and power hedges of $344 and $144, respectively, are included in other long-term liabilities.

 
10

 
(9)  Pension Plans

The Company’s subsidiary, GMI, sponsors three noncontributory defined benefit pension plans covering certain domestic employees. These plans were frozen in 2003. The Company’s subsidiary, Core Metals, sponsors a noncontributory defined benefit pension plan covering certain domestic employees. This plan was closed to new participants in April 2009. The components of net periodic pension expense for the Company’s defined benefit pension plans are as follows:


     
Three Months Ended
 
Nine Months Ended
     
March 31,
 
March 31,
     
2011
 
2010
 
2011
 
2010
Interest cost
 
359 
 
302 
 
1,079 
 
906 
Service cost
   
29 
 
—  
 
86 
 
— 
Expected return on plan assets
   
(371) 
 
(247) 
 
(1,114) 
 
(740) 
Amortization of net loss
   
170 
 
143 
 
508 
 
429 
     Net periodic pension expense
 
187 
 
198 
 
559 
 
595 


The Company expects to make discretionary contributions of approximately $1,080 to the plans for the fiscal year ended June 30, 2011, of which $801 has been contributed through March 31, 2011.

(10)  Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate, adjusted as necessary for quarterly events. In accordance with ASC Topic 740, Income Taxes — Accounting for Income Taxes in Interim Periods, the Company’s quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries. The effective tax rates for the nine months ended March 31, 2011 and 2010 were based on our forecasted annualized effective tax rates, adjusted for discrete items that occurred within the respective periods.
 
The Company’s effective tax rate for the nine months ended March 31, 2011 was 37.0% compared to 42.1% for the nine months ended March 31, 2010. The annual effective rate excluding discrete items is 33.6% for the nine months ended March 31, 2011. Discrete items for the exercise of stock options and for research and development credit carry forwards have been recorded in the period of $1,510 and ($954), respectively.
 
    The Company maintains valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry back and carry forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. During the nine months ended March 31, 2011, the Company’s net valuation allowances decreased primarily due to the income forecasted for the current year in Poland.
 
The Company files a consolidated U.S. income tax return and tax returns in various state and local jurisdictions. Our subsidiaries also file tax returns in various foreign jurisdictions. The Company’s principal jurisdictions include the U.S., Argentina, Poland, and China. A number of years may elapse before a tax return is audited and finally resolved. The open tax years subject to examination varies depending on the tax jurisdiction. The Company’s major taxing jurisdictions and the related open tax years subject to examination are as follows: the U.S. from 2007 to present, Argentina from 2005 to present, Poland from 2005 to present, and China from 2007 to present. The Company is also subject to tax examinations in Brazil for the period from 2005 to November 5, 2009, the date of sale of our Brazilian manufacturing operations.
 
The Company regularly evaluates its tax positions for additional unrecognized tax benefits and associated interest and penalties, if applicable. There are many factors that are considered when evaluating these tax positions including: interpretation of tax laws, recent tax litigation on a position, past audit or examination history, and subjective estimates and assumptions that have been deemed reasonable by management. However, if management’s estimates are not representative of actual outcomes, the Company’s results could be materially impacted. There were no significant changes in the Company’s uncertain income tax positions during the nine months ended March 31, 2011.

(11)  Commitments and Contingencies

a. Legal Contingencies

The Company is subject to various lawsuits, investigations, claims, and proceedings that arise in the normal course of business, including, but not limited to, employment, commercial, environmental, safety, and health matters, as well as claims associated with our historical acquisitions and divestitures. Although it is not presently possible to determine the outcome of these matters, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

During the nine months ended March 31, 2011, the Company made escrow deposits and received payments, which netted to $2,038, for working capital claims associated with our historical acquisitions. These amounts were accrued as of June 30, 2010.

b. Environmental Contingencies

It is the Company’s policy to accrue for costs associated with environmental assessments, remedial efforts, or other environmental liabilities when it becomes probable that a liability has been incurred and the costs can be reasonably estimated. When a liability for environmental remediation is recorded, such amounts will be recorded without giving effect to any possible future recoveries. At March 31, 2011, there are no significant liabilities recorded for environmental contingencies. With respect to the cost for ongoing environmental compliance, including maintenance and monitoring, such costs are expensed as incurred unless there is a long-term monitoring agreement with a governmental agency, in which case a liability is established at the inception of the agreement.

c. Employee Contracts

As of March 31, 2011, there are 435 employees that are covered by union agreements expiring within one year.

 
11

 
d. Power Commitments

On February 24, 2011, the Company entered into a hydropower contract extension agreement with the New York Power Authority. Under the terms of this commodity purchase agreement, the Company will be supplied up to a maximum of 40,000 kW of hydropower from the Niagara Power Project to operate its Niagara Falls, New York facility. The hydropower will be supplied at preferential power rates plus market-based delivery charges through September 30, 2021. Under the terms of the contract, the Company has committed to specified employment, power utilization, and capital investment levels, which, if not met, could reduce the Company’s power allocation from the Niagara Power Project.

e. Joint Development Supply Agreement

On April 24, 2008, the Company’s subsidiaries, Solsil, Inc. (Solsil) and GMI, entered into a technology license, joint development and supply agreement with BP Solar International Inc. (BP Solar) for the sale of solar grade silicon. As part of this agreement, BP Solar paid Solsil $10,000 as an advance for research and development services and facilities construction. In accordance with ASC 605.25, revenue associated with this agreement was deferred until specific contract milestone had been achieved, or research development services were successful in reducing manufacturing costs. Revenue would then would be recognized ratably as product was delivered to BP Solar, or, if research and development services were performed, but unsuccessful, deferred until contract expiration. In November 2010, the technology license, joint development and supply agreement was terminated, $9,400 in previously deferred revenue was recognized by the Company, and the Company made a $600 payment to BP Solar.

(12)  Stockholders’ Equity

   a. Common Stock

In August 2009, the Company closed on an initial public offering on the NASDAQ Global Select Market of 16,100,000 shares of its common stock at $7.00 per share. Of the shares offered, 5,600,000 new shares were offered by the Company and 10,500,000 existing shares were offered by selling stockholders (which included 2,100,000 shares sold by the selling stockholders pursuant to the exercise of the underwriters’ over-allotment option). Total proceeds of the offering to the Company were $36,456, net of underwriting discounts and commissions totaling $2,744.

b. Treasury Stock

In connection with the Company’s acquisition of approximately 81% of Solsil in February 2008, 562,867 of the 5,628,657 shares issued to the former shareholders and optionholders of Solsil were placed into escrow pending the attainment of certain milestones. In April 2008, 281,430 of these escrow shares were released based on the satisfaction of certain conditions. Upon expiration of the escrow period in February 2011, the remaining 281,437 escrow shares were returned to the Company and are now included in treasury stock at cost, which is equal to their par value.

c. Dividend

On September 16, 2010, the Company’s board of directors approved a dividend of $0.15 per common share. The dividend, totaling $11,269, was paid on October 29, 2010, to stockholders of record as of October 15, 2010.

(13)  Earnings Per Share

Basic earnings per common share are calculated based on the weighted average number of common shares outstanding during the three and nine months ended March 31, 2011 and 2010, respectively. Diluted earnings per common share assumes the exercise of stock options, the vesting of restricted stock grants, as well as the conversion of previously outstanding warrants and unit purchase options, provided in each case the effect is dilutive.

The reconciliation of the amounts used to compute basic and diluted earnings per common share for the three and nine months ended March 31, 2011 and 2010 is as follows:


               
Three Months Ended
 
Nine Months Ended
               
March 31,
 
March 31,
               
2011
 
2010
 
2011
 
2010
Basic earnings per share computation
               
Numerator:
                     
Net income attributable to Globe Specialty Metals, Inc.
$
23,393
 
516
 
37,263
 
27,492
Denominator:
                   
Weighted average basic shares outstanding
 
75,077,739
 
74,320,358
 
74,922,377
 
73,238,833
Basic earnings per common share
$
0.31
 
0.01
 
0.50
 
0.38
Diluted earnings per share computation
               
Numerator:
                     
Net income attributable to Globe Specialty Metals, Inc.
$
23,393
 
516
 
37,263
 
27,492
Denominator:
                   
Weighted average basic shares outstanding
 
75,077,739
 
74,320,358
 
74,922,377
 
73,238,833
Effect of dilutive securities
 
1,789,845
 
1,249,635
 
1,651,128
 
1,172,638
Weighted average diluted shares outstanding
 
76,867,584
 
75,569,993
 
76,573,505
 
74,411,471
Diluted earnings per common share
$
0.30
 
0.01
 
0.49
 
0.37


Potential common shares associated with outstanding stock options totaling 100,000 and 160,000 for both the three and nine months ended March 31, 2011 and 2010, respectively, were excluded from the calculation of diluted earnings per common share because their effect would be anti-dilutive.

 
12

 
(14)  Share-Based Compensation

The Company’s share-based compensation program consists of the Globe Specialty Metals, Inc. 2006 Employee, Director and Consultant Stock Plan (the Stock Plan). The Stock Plan was initially approved by the Company’s stockholders on November 10, 2006, and was amended and approved by the Company’s stockholders on December 6, 2010 to increase by 1,000,000 the number of shares of common stock authorized for issuance under the Stock Plan. The Stock Plan, as amended, provides for the issuance of a maximum of 6,000,000 shares of common stock for the granting of incentive stock options, nonqualified options, stock grants, and share-based awards. Any remaining shares available for grant, but not yet granted, will be carried over and used in the following fiscal years. During the nine months ended March 31, 2011, share-based compensation awards were limited to the issuance of 7,960 nonqualified stock options, 112,274 restricted stock grants, and 4,356 common stock grants.

At March 31, 2011, there were 1,513,579 shares available for grant. 3,527,250 outstanding incentive stock options, of which 332,250 were exercised through March 31, 2011, vest and become exercisable in equal one-quarter increments every six months from the date of grant or date of modification. 810,000 option grants, of which 523,333 were exercised through March 31, 2011, vest and become exercisable in equal one-third increments on the first, second, and third anniversaries of the date of grant. 7,960 option grants and 3,696 restricted stock grants vest and become exercisable on June 30, 2011. 108,578 restricted stock grants vest and become exercisable on November 13, 2020. 21,500 option grants and 4,356 common stock grants were issued as immediately vested at the date of grant. All option grants have maximum contractual terms ranging from 5 to 10 years.

A summary of the changes in options outstanding under the Stock Plan during the nine months ended March 31, 2011 is presented below:
 
                         
Weighted-
     
                         
Average
     
                     
Weighted-
 
Remaining
   
Aggregate
               
Number of
   
Average
 
Contractual
   
Intrinsic
               
Options
   
Exercise Price
 
Term in Years
   
Value
Outstanding as of June 30, 2010
 
4,266,442  
 
 $
5.18  
 
3.89  
 
 $
23,509  
Granted
       
7,960  
   
16.23  
         
Exercised
       
(757,025)  
   
6.59  
         
Forfeited and expired
 
(6,250)  
   
4.00  
         
Outstanding as of March 31, 2011
 
3,511,127  
 
 $
4.91  
 
3.42  
 
 $
63,000  
                                 
Exercisable as of March 31, 2011
 
2,578,916  
 
 $
4.79  
 
3.48  
 
 $
46,422  
 
During the nine months ended March 31, 2011, 927,166 options vested, resulting in total vested options of 3,434,499. There are 932,211 nonvested options outstanding with a grant date fair value, as modified, of $1.78. The weighted average per share fair value of stock option grants outstanding at March 31, 2011 is $2.86.

For the three and nine months ended March 31, 2011, share-based compensation expense was $1,326 ($716 after tax) and $3,875 ($2,090 after tax), respectively. For the three and nine months ended March 31, 2010, share-based compensation expense was $1,260 ($680 after tax) and $4,491 ($2,423 after tax), respectively. The expense is reported within selling, general, and administrative expenses.

As of March 31, 2011, the Company has unearned compensation expense of $574, before income taxes, related to nonvested stock option awards. The unrecognized compensation expense is expected to be recognized over the following periods ending on June 30:
 
               
2011
 
2012
 
2013
 
2014
 
2015
Share-based compensation (pretax)
$
459   
 
113   
 
2   
 
—    
 
—    
 
It is the Company’s policy to issue new shares to satisfy the requirements of its share-based compensation plan. The Company does not expect to repurchase shares in the future to support its share-based compensation plan.

In addition to share-based awards issued under the Stock Plan, the Company issued 35,225 restricted stock units on January 1, 2011 under the terms of the Company’s executive bonus plans. The restricted stock units proportionally vest over three years, but are not delivered until the end of the third year. The Company will settle these awards by cash transfer, based on the Company’s stock price of the date of such transfer. For both the three and nine months ended March 31, 2011, share-based compensation expense for these restricted stock units was $65 ($35 after tax).

(15)  Fair Value Measures

ASC 820, Fair Value Measures and Disclosures, establishes a fair value hierarchy for disclosure of fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to value the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3 — Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. For example, cash flow modeling using inputs based on management’s assumptions.

 
13

 
The Company does not have any assets that were required to be remeasured at fair value at March 31, 2011 or June 30, 2010. The following table summarizes the liabilities measured at fair value on a recurring basis, all of which were measured on Level 2 inputs:


               
March 31,
2011
 
June 30,
2010
Interest rate derivatives
$
344  
 
476  
Foreign exchange forward contracts
 
—  
 
77  
Power hedges
   
144  
 
243  
 
Total
     
$
488  
 
796  


Derivative liabilities relate to the interest rate cap and interest rate swap agreements, the foreign exchange forward contracts, and power hedge agreements summarized in note 8 (Derivative Instruments). Fair values are determined by independent brokers using quantitative models based on readily observable market data. See note 7 (Debt) for information regarding the fair value of our outstanding debt.

(16)  Related Party Transactions

From time to time, the Company enters into transactions in the normal course of business with related parties. Management believes that such transactions are at arm’s length and for terms that would have been obtained from unaffiliated third parties.

A current and a former member of the board of directors are affiliated with Marco International and Marco Realty. During the three and nine months ended March 31, 2011 and 2010, the Company:

 
Paid Marco Realty $0 and $51 during the three months ended March 31, 2011 and 2010, respectively, and $0 and $149 during the nine months ended March 31, 2011 and 2010, respectively, to rent office space for its corporate headquarters in New York City, New York.

 
Entered into agreements with Marco International to purchase carbon electrodes. Marco International billed $6,344 and $3,462 during the three months ended March 31, 2011 and 2010, respectively, and $16,209 and $6,485 during the nine months ended March 31, 2011 and 2010, respectively, under these agreements. At March 31, 2011 and June 30, 2010, payables to Marco International under these agreements totaled $5,049 and $8,162, respectively.

 
Entered into an agreement to sell ferrosilicon to Marco International. Net sales were $187 and $107 during the three months ended March 31, 2011 and 2010, respectively, and $511 and $373 during the nine months ended March 31, 2011 and 2010, respectively, under this agreement.

 
Entered into agreements to sell calcium silicon powder to Marco International. Net sales were $859 and $0 during the three months ended March 31, 2011 and 2010, respectively, and $3,354 and $0 during the nine months ended March 31, 2011 and 2010, respectively, under this agreement.

The Company is affiliated with Norchem, Inc. (Norchem) through its 50.0% equity interest. During the three months ended March 31, 2011 and 2010, the Company sold Norchem product valued at $1,271 and $1,219, respectively. During the nine months ended March 31, 2011 and 2010, the Company sold Norchem product valued at $4,029 and $3,218, respectively. At March 31, 2011 and June 30, 2010, receivables from Norchem totaled $620 and $747, respectively.

Prior to our purchase of a majority interest in Ningxia Yonvey Coal Industrial Co., Ltd (Yonvey), Yonvey’s predecessor had entered into a lending agreement with the remaining minority stockholder. At March 31, 2011 and June 30, 2010, $897 and $849, respectively, remained payable to Yonvey from this related party.

(17)  Operating Segments

Operating segments are based upon the Company’s management reporting structure and include the following six reportable segments:

 
GMI — a manufacturer of silicon metal and silicon-based alloys located in the United States.

 
Globe Metais — a distributor of silicon metal manufactured in Brazil. This segment includes the historical Brazilian manufacturing operations, comprised of a manufacturing plant, mining operations, and forest reserves, which were sold on November 5, 2009. Subsequent to this divestiture, Globe Metais’ net sales relate only to the fulfillment of certain retained customer contracts, which were completed as of December 31, 2010.

 
Globe Metales — a manufacturer of silicon-based alloys located in Argentina.

 
Solsil — a manufacturer of upgraded metallurgical grade silicon metal located in the United States.

 
Corporate — general corporate expenses, investments, and related investment income.

 
Other — operations that do not fit into the above reportable segments and are immaterial for purposes of separate disclosure. The operating segments include Yonvey’s electrode production operations and certain other distribution operations for the sale of silicon metal and silicon-based alloys.

Each of our reportable segments distributes its products in both its country of domicile, as well as to other international customers. The following presents the Company’s consolidated net sales by product line:


   
Three Months Ended
 
Nine Months Ended
   
March 31,
 
March 31,
   
2011
 
2010
 
2011
 
2010
Silicon metal
$
 99,084
 
 73,006
 
 248,149
 
 216,592
Silicon-based alloys
 
 61,149
 
 34,192
 
 174,120
 
 94,098
Other
 
 12,569
 
 5,288
 
 43,660
 
 15,532
Total
$
 172,802
 
 112,486
 
 465,929
 
 326,222
 
 
14

 
a. Segment Data

Summarized financial information for our reportable segments as of, and for, the three and nine months ended March 31, 2011 and 2010, is shown in the following tables:


   
Three Months Ended
 
Three Months Ended
   
March 31,
 
March 31,
   
2011
 
2010
   
Net Sales
Operating Income (Loss)
Income (Loss) Before Income Taxes
 
Net Sales
Operating Income (Loss)
Income (Loss) Before Income Taxes
GMI
$
 155,638
 40,625
 40,373
 
 86,693
 4,913
 4,404
Globe Metais
 
 -
 449
 449
 
 12,623
 210
 204
Globe Metales
 
 16,712
 4,279
 4,160
 
 11,979
 2,009
 2,141
Solsil
 
 20
 (201)
 (201)
 
 -
 (295)
 (295)
Corporate
 
 -
 (6,723)
 (6,768)
 
 -
 (3,012)
 (2,777)
Other
 
 7,570
 (1,790)
 (1,652)
 
 3,309
 (844)
 (1,207)
Eliminations
 
 (7,138)
 114
 114
 
 (2,118)
 326
 326
     Total
$
 172,802
 36,753
 36,475
 
 112,486
 3,307
 2,796



   
Nine Months Ended
 
Nine Months Ended
   
March 31,
 
March 31,
   
2011
 
2010
   
Net Sales
Operating Income (Loss)
Income (Loss) Before Income Taxes
Total Assets
 
Net Sales
Operating Income (Loss)
Income (Loss) Before Income Taxes
GMI
$
 392,007
 66,866
 65,881
 387,988
 
 234,068
 26,840
 25,501
Globe Metais
 
 15,421
 377
 378
 2,129
 
 53,603
 4,159
 7,485
Globe Metales
 
 46,455
 9,823
 9,099
 77,021
 
 35,502
 8,243
 7,645
Solsil
 
 9,420
 8,876
 8,876
 30,142
 
 20
 (1,186)
 (1,216)
Corporate
 
 -
 (17,763)
 (18,135)
 398,509
 
 -
 10,858
 10,696
Other
 
 24,222
 (1,225)
 (879)
 41,350
 
 8,932
 (3,495)
 (3,943)
Eliminations
 
 (21,596)
 (1,744)
 (1,744)
 (282,612)
 
 (5,903)
 680
 680
     Total
$
 465,929
 65,210
 63,476
 654,527
 
 326,222
 46,099
 46,848

The accounting policies of our operating segments are the same as those disclosed in note 2 (Summary of Significant Accounting Policies) to our June 30, 2010 financial statements. We evaluate segment performance principally based on operating income (loss).

b. Geographic Data

Net sales are attributed to geographic regions based upon the location of the selling unit. Net sales by geographic region for the three and nine months ended March 31, 2011 and 2010 consist of the following:


       
Three Months Ended
 
Nine Months Ended
       
March 31,
 
March 31,
       
2011
 
2010
 
2011
 
2010
United States
$
155,614  
 
99,318  
 
416,770  
 
274,721  
Argentina
 
13,758  
 
10,387  
 
40,540  
 
30,597  
Brazil
 
—  
 
—  
 
—  
 
12,820  
China
 
158  
 
48  
 
369  
 
472  
Poland
 
3,272  
 
2,733  
 
8,250  
 
7,612  
 
Total
$
172,802  
 
112,486  
 
465,929  
 
326,222  


Long-lived assets by geographical region at March 31, 2011 and June 30, 2010 consist of the following:


       
March 31,
 
June 30,
       
2011
 
2010
United States
$
 222,099
 
 211,876
Argentina
 
 31,317
 
 31,665
China
 
 27,438
 
 27,428
Poland
 
 848
 
 800
 
Total
$
281,702
 
271,769


Long-lived assets consist of property, plant, and equipment, net of accumulated depreciation and amortization, and goodwill and other intangible assets.

 
15

 
c. Major Customer Data

The following is a summary of the Company’s major customers and their respective percentages of consolidated net sales for the three and nine months ended March 31, 2011 and 2010:


 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2011
 
2010
 
2011
 
2010
Dow Corning
20%
 
10%
 
18%
 
14%
All other customers
80
 
90
 
82
 
86
     Total
100%
 
100%
 
100%
 
100%


The majority of sales to Dow Corning for the three and nine months ended March 31, 2011 are associated with Dow Corning’s 49% ownership interest in WVA LLC. In addition, the Company maintained a four year arrangement in which Dow Corning was to purchase 30,000 metric tons of silicon metal per calendar year through December 31, 2010. This contract was amended in November 2008 to provide for the sale of an additional 17,000 metric tons of silicon metal to be purchased in calendar year 2009. The contract was further amended in connection with the Dow Corning transactions discussed in note 3 to reduce the amount required to be sold in calendar year 2010 to 20,000 metric tons of silicon metal. In December 2010, the Company agreed to pay $4,276 to Dow Corning to settle certain remaining sales obligations under this contract. The settlement cost was recorded in cost of goods sold in December 2010.

(18)  Subsequent Events

The Company has evaluated subsequent events through the date these financial statements were issued, and determined there have been no events that have occurred that would require adjustments to our condensed consolidated financial statements.


 
16

 


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Certain statements made in this quarterly report involve risks and uncertainties. These forward-looking statements reflect the Company’s best judgment based on our current expectations, assumptions, estimates, and projections about us and our industry, and although we base these statements on circumstances that we believe to be reasonable when made, there can be no assurance that future events will not affect the accuracy of such forward-looking information. As such, the forward-looking statements are not guarantees of future performance, and actual results may vary materially from the results and expectations discussed in this report. Factors that might cause the Company’s actual results to differ materially from those anticipated in forward-looking statements are more fully described in the “Risk Factors” sections contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and in this Quarterly Report. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report, as well as the more detailed information in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Introduction

Globe Specialty Metals, Inc., together with its subsidiaries (collectively, GSM, we, or our) is one of the leading manufacturers of silicon metal and silicon-based alloys. As of March 31, 2011, we owned and operated six principal manufacturing facilities, in two primary operating segments: GMI, our U.S. operations and, Globe Metales, our Argentine operations.

Business Segments

We operate in six reportable segments:

 
GMI — a manufacturer of silicon metal and silicon-based alloys located in the United States with plants in Beverly, Ohio, Alloy, West Virginia, Niagara Falls, New York, Selma, Alabama, and Bridgeport, Alabama;

 
Globe Metais — a distributor of silicon metal manufactured in Brazil. This segment includes the historical Brazilian manufacturing operations, comprised of a manufacturing plant in Breu Branco and mining operations and forest reserves, which were all sold on November 5, 2009. Subsequent to this divestiture, Globe Metais’ net sales relate only to the fulfillment of certain retained customer contracts, which were completed as of December 31, 2010;

 
Globe Metales — a manufacturer of silicon-based alloys located in Argentina with a silicon-based alloys plant in Mendoza and a cored-wire fabrication facility in San Luis;

 
Solsil — a developer and manufacturer of upgraded metallurgical grade silicon metal located in the United States with operations in Beverly, Ohio;

 
Corporate — a corporate office including general expenses, investments, and related investment income; and

 
Other — includes an electrode production operation in China (Yonvey) and a cored-wire production facility located in Poland. These operations do not fit into the above reportable segments, and are immaterial for purposes of separate disclosure.

Overview and Recent Developments

Customer demand and pricing continue to remain strong as our end markets for silicon metal and silicon-based alloys, which include chemicals, steel, aluminum, and solar, continue to grow. In our chemicals end market, which represents producers of silicones, the single largest application for silicon metal, the large manufacturers continue to perform well and announce price increases. Polysilicon production and solar cell demand is also continuing its growth with new production capacity coming on line around the world, including two new plants being built in Tennessee. Steel capacity utilization and auto production, two significant end markets, are both expected to grow, and aluminum production is also expected to increase. We are presently running all of our furnaces in our six primary plants at full capacity, subject to maintenance outages.

During the quarter ended March 31, 2011, we converted one furnace in our Beverly, Ohio plant to produce silicon metal from silicon-based alloys, to capitalize on market prices. This conversion process required approximately twenty days, during which time the furnace produced lower than normal output. During the quarter, we also had a planned outage of an additional furnace in our Beverly, Ohio plant for approximately thirty-five days for the installation of a new furnace hood and pressure rings, and planned maintenance outages of less than ten days each for the two furnaces at our Niagara Falls, New York plant. We produced and shipped approximately the same amount of material in this quarter as we did in the immediately preceding quarter, which included a planned outage and an unplanned outage. In the next quarter, we expect to have only one planned outage.

During the quarter ended March 31, 2011, we announced our intention to build a 40,000 metric ton silicon metal plant in Iceland. We are building the plant with a minority partner, Tomahawk Development Company (Tomahawk), who secured substantially all the environmental and operating permits and the land, and who will own approximately 15% of the plant. We obtained an 18 year, competitively priced power contract for 66 megawatts. Prior to beginning construction, which is expected to take place in the second half of calendar 2011, we have a few remaining steps to complete, including obtaining final board of directors approval. The plant is expected to be operational in the second half of calendar 2013. The total project will cost approximately €115,000,000 and will be financed with €78,000,000 of limited recourse project financing provided by two commercial banks, approximately €34,000,000 of cash from GSM, and €2,000,000 from Tomahawk.

Net sales for the quarter ended March 31, 2011 increased $17,027,000, or 11%, from the preceding quarter ended December 31, 2010, as a result of an 18% increase in average selling price on roughly the same tons shipped. Revenue increased 18% in the quarter, excluding the recognition of $9,400,000 of deferred revenue from our Solsil business unit in the quarter ended December 31, 2010. The average selling price of silicon metal increased 20% in the quarter, as all of our long-term and annual 2010 contracts expired on December 31, 2010, and we entered into annual 2011 contracts with higher pricing, reflecting the spot pricing at the time we entered into those contracts in the fourth quarter of calendar 2010. The average selling price of silicon-based alloys increased 12%, as a result of higher pricing of all alloy products, which reset each quarter. The price of each of our four alloy products increased in the quarter, and, as a result of the furnace conversion in Beverly, Ohio, we had a mix shift towards the higher priced alloys.

During the quarter ended March 31, 2011, we incurred $1,350,000 of transaction-related expenses.

 
17

 
Income before provision for income taxes totaled $36,475,000 in the quarter ended March 31, 2011, and included $1,350,000 of transaction expenses. This compares to income before provision for income taxes in the preceding quarter ended December 31, 2010 of $19,789,000, which included the recognition of $9,400,000 of deferred revenue described above, $4,300,000 of expense related to the satisfaction of a long-term supply contract, and $1,000,000 of transaction expenses.

During the quarter, we advanced $17,000,000 to acquire exploration mining licenses in Nigeria to mine for manganese ore, a raw material used in the production of certain silicon and manganese based alloys. Manganese is an ore we have used in the past for production of certain alloys, and this investment gives us the ability to expand our current product line. We are currently developing an exploration and mining plan, and will conduct geological and geophysical studies to determine the total reserves and to refine our estimate of the capital requirements and operating costs associated with this venture.

Outlook

Demand for our products continues to remain strong as our end markets continue to grow. We are operating at full capacity, subject to maintenance outages. As demand has continued to improve, and all Western world suppliers appear to be running at full capacity, spot prices for our products have increased. We benefited from this increase in silicon metal pricing in the quarter, as all of our long-term and annual 2010 contracts for silicon metal expired on December 31, 2010, and we entered into annual 2011 contracts at higher pricing, reflecting the spot pricing at the time we entered into those contracts in the fourth quarter of calendar 2010. We expect our average selling price of silicon metal to remain relatively stable for the remainder of calendar 2011. Silicon-based alloy pricing resets each quarter, and pricing is a function of overall supply and demand. Demand is largely derived from steel capacity utilization and auto production.

We expect a modest increase in silicon metal tons sold in the quarter ending June 30, 2011, as we converted one furnace in our Beverly, Ohio plant from silicon-based alloys to silicon metal, and we expect fewer furnace outages for planned maintenance during this quarter. We expect a modest decline in silicon-based alloy tons sold in the quarter ending June 30, 2011, as our Bridgeport, Alabama plant was without power for five days in late April and early May as a result of tornados. The plant was not damaged, but the power company lost significant transmission capability from the storms. In addition, the Bridgeport plant is due for a 30 day planned maintenance outage in June, which will affect tons shipped in June and July.

Critical Accounting Policies

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the disclosure of contingent assets and liabilities. Management bases our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from the estimates used under different assumptions or conditions. We have provided a description of our significant accounting policies in the notes to our condensed consolidated financial statements and our Annual Report on Form 10-K for the fiscal year ended June 30, 2010. Our critical accounting policies have not significantly changed from those discussed in “Part II — Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, except as follows:

Income Taxes

In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on our expected annual income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Subsequent recognition, derecognition, and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur.

Results of Operations

GSM Three Months Ended March 31, 2011 vs. 2010

Consolidated Operations:


   
Three Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 172,802
 
 112,486
 
 60,316
 
53.6%
Cost of goods sold
 
 121,621
 
 99,135
 
 22,486
 
22.7%
Selling, general and administrative expenses
 
 14,396
 
 10,008
 
 4,388
 
43.8%
Research and development
 
 32
 
 36
 
 (4)
 
(11.1%)
Operating income
 
 36,753
 
 3,307
 
 33,446
 
1,011.4%
Interest expense, net
 
 (497)
 
 (993)
 
 496
 
(49.9%)
Other income
 
 219
 
 482
 
 (263)
 
(54.6%)
Income before provision for income taxes
 
 36,475
 
 2,796
 
 33,679
 
1,204.5%
Provision for income taxes
 
 12,982
 
 1,751
 
 11,231
 
641.4%
      Net income
 
 23,493
 
 1,045
 
 22,448
 
2,148.1%
Income attributable to noncontrolling interest, net of tax
 
 (100)
 
 (529)
 
 429
 
(81.1%)
Net income attributable to Globe Specialty Metals, Inc.
$
 23,393
 
 516
 
 22,877
 
4,433.5%


 
18

 
Net Sales:


                               
   
Three Months Ended March 31, 2011
   
Three Months Ended March 31, 2010
   
Net Sales
   
Net Sales
   
$ (in 000s)
 
MT
   
$/MT
   
$ (in 000s)
 
MT
   
$/MT
Silicon metal
$
 99,084
 
 32,266
   $
3,071
 
$
 73,006
 
 30,681
   $
2,380
Silicon-based alloys
 
61,149
 
 27,010
   
2,264
   
34,192
 
 17,003
   
2,011
Silicon metal and silicon-based alloys
 
160,233
 
59,276
   
2,703
   
107,198
 
47,684
   
2,248
Silica fume and other
 
12,569
             
 5,288
         
Total net sales
$
172,802
           
$
112,486
         


Net sales increased $60,316,000, or 54%, from the prior year to $172,802,000 primarily as a result of a 24% increase in metric tons sold and an increase in average selling price of 20%. The increase in metric tons sold resulted in an increase in net sales of $23,895,000 and was related to a 5% increase in silicon metal and a 59% increase in silicon-based alloy metric tons sold. Silicon metal volume sold was higher due to increased demand, which led us to reopen our Selma, Alabama facility in January 2010, which contributed approximately 2,700 incremental metric tons sold during the third quarter of fiscal year 2011. This increase was offset by the decrease in volume due to the timing of the sale of our Brazilian manufacturing operations on November 5, 2009. Subsequent to this divestiture, remaining Globe Metais sales related only to the fulfillment of certain retained customer contracts with product purchased from our former Brazilian manufacturing operations at a purchase price equal to our sales price. These customer contracts were fulfilled at the end of the second quarter of fiscal year 2011, and no further sales will be made under this arrangement. The increase in silicon-based alloy volume includes the impact of the Core Metals Group Holdings LLC (Core Metals) acquisition, which contributed approximately 8,700 metric tons of ferrosilicon in the third quarter of fiscal year 2011. Additionally, end market demand for ferrosilicon and magnesium ferrosilicon increased in the third quarter of fiscal year 2011 due to the economic recovery, particularly in steel and automotive production.

The average selling price of silicon metal increased by 29%, and the average selling price of silicon-based alloys increased by 13%. The increase in silicon metal pricing was primarily due to significantly higher pricing on annual calendar 2011 contracts, which replaced the long-term and annual 2010 contracts that expired on December 31, 2010. The increase in silicon-based alloy pricing was due to significant pricing increases in ferrosilicon and magnesium ferrosilicon resulting from the economic recovery. This impact was offset by the acquisition of Core Metals in the fourth quarter of fiscal year 2010, which resulted in a mix shift towards the production of ferrosilicon, which is our lowest priced alloy and also has the lowest cost of production. The mix shift was slightly offset by the conversion of our furnace in Beverly, Ohio from ferrosilicon to silicon metal in January 2011. Other revenue increased by $7,281,000, primarily as a result of $5,307,000 of other sales from Core Metals.

Cost of Goods Sold:

The $22,486,000, or 23%, increase in cost of goods sold was a result of a 24% increase in metric tons sold, offset by a 1% decrease in our cost per ton sold. This decrease in cost per ton sold was primarily the result of the mix shift to ferrosilicon, which has our lowest cost of production, and start-up costs of approximately $3,000,000 at our Niagara Falls and Selma plants in the third quarter of fiscal year 2010, offset by the impact of planned furnace maintenance outages and higher power rates at GMI.

Gross margin represented approximately 12% of net sales in the third quarter of fiscal year 2010 and increased to approximately 30% of net sales in the third quarter of fiscal year 2011, primarily as a result of higher silicon metal and silicon-based alloy selling prices, offset by higher power costs at GMI.

Selling, General and Administrative Expenses:

The increase in selling, general and administrative expenses of $4,388,000, or 44%, was primarily due to the impact of the acquisition of Core Metals, which increased expense by $681,000, and increases at Corporate in transaction-related costs of approximately $829,000 and in bonus expense of approximately $2,756,000 due to increased profitability year over year.

Net Interest Expense:

Net interest expense decreased by $496,000 primarily due to lower interest rate swap expense at GMI of approximately $263,000, as well as reduced interest expense resulting from a lower senior term loan balance during the third quarter of fiscal year 2011.

Other Income:

Other income decreased by $263,000 due primarily to a year over year decrease in income from GMI’s Norchem, Inc. affiliate of approximately $222,000, as well as lower hydropower dividends at Globe Metales of approximately $172,000, offset by foreign exchange gains due to currency fluctuations associated with the Euro and the Chinese renminbi.

Provision for Income Taxes:

Provision for income taxes as a percentage of pre-tax income was approximately 36%, or $12,982,000, in the third quarter of fiscal year 2011 and was approximately 63%, or $1,751,000, in the third quarter of fiscal year 2010. The decrease in the effective tax rate is due primarily to a change in our estimated annual effective tax rate in the third quarter of fiscal year 2010, which had a significant impact as a percentage of pre-tax income given pre-tax income of $2,796,000.


 
19

 
Segment Operations

GMI


   
Three Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 155,638
 
 86,693
 
 68,945
 
79.5%
Cost of goods sold
 
 108,885
 
 76,370
 
 32,515
 
42.6%
Selling, general and administrative expenses
 
 6,128
 
 5,410
 
 718
 
13.3%
Operating income
$
 40,625
 
 4,913
 
 35,712
 
726.9%


Net sales increased $68,945,000, or 80%, from the prior year to $155,638,000. The increase was primarily attributable to a 44% increase in metric tons sold and a 22% increase in average selling price. Silicon metal volume was higher by 25% primarily due to increased demand, which led us to reopen our Selma, Alabama facility in January 2010, which contributed approximately 2,700 incremental metric tons sold during the third quarter of fiscal year 2011. Silicon-based alloy volume was higher by 87% due to the acquisition of Core Metals and an increase in end market demand, primarily from the steel and automotive industries, for ferrosilicon and magnesium ferrosilicon in the third quarter of fiscal year 2011. The increase in silicon-based alloy volume includes the impact of the Core Metals acquisition, which contributed approximately 8,700 metric tons of ferrosilicon in the third quarter of fiscal year 2011. Pricing for silicon metal increased 32% due to significantly higher pricing of the annual calendar 2011 contracts. All of our long-term and annual 2010 contracts expired on December 31, 2010. Silicon-based alloy pricing increased by 12% due to significant price increases in ferrosilicon and magnesium ferrosilicon, resulting from the economic recovery, offset by the impact of the acquisition of Core Metals in the fourth quarter of fiscal year 2010. This acquisition caused a product mix shift towards ferrosilicon, which is our lowest priced alloy and also has the lowest cost of production. The mix shift was slightly offset by the conversion of one furnace at Beverly, Ohio from ferrosilicon to silicon metal in January 2011.

Operating income increased by $35,712,000 from the prior year quarter to $40,625,000. This increase was primarily due to higher volumes shipped of silicon metal and silicon-based alloys and higher average selling prices for silicon metal. Cost of goods sold increased by 43%, while volumes increased by 44%. This caused a decrease in the cost per ton sold, which reflects the impact of start-up costs of approximately $3,000,000 at our Niagara Falls and Selma plants in the third quarter of fiscal year 2010, offset by planned furnace maintenance outages and higher power rates during the third quarter of fiscal year 2011. The addition of Core Metals contributed $681,000 to selling, general and administrative expenses in the third quarter of fiscal year 2011.

Globe Metais


   
Three Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 -
 
 12,623
 
 (12,623)
 
(100.0%)
Cost of goods sold
 
 (448)
 
 12,319
 
 (12,767)
 
(103.6%)
Selling, general and administrative expenses
 
 (1)
 
 94
 
 (95)
 
(101.1%)
Operating income
$
 449
 
 210
 
 239
 
113.8%


Net sales decreased $12,623,000, or 100%, from the prior year to $0. The decrease in volume was due to the timing of the sale of our Brazilian manufacturing operations on November 5, 2009. Subsequent to this divestiture, remaining Globe Metais sales related only to the fulfillment of certain retained customer contracts with product purchased from our former Brazilian manufacturing operations at a purchase price equal to our sales price. These customer contracts were fulfilled at the end of the second quarter of fiscal year 2011, and no further sales will be made under this arrangement.

Operating income increased by $239,000, or 114%, from the prior year to $449,000. The increase was primarily due to the timing of the sale of our Brazilian manufacturing operations and final material cost adjustments associated with the fulfillment of customer contracts.

Globe Metales


   
Three Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 16,712
 
 11,979
 
 4,733
 
39.5%
Cost of goods sold
 
 11,473
 
 9,150
 
 2,323
 
25.4%
Selling, general and administrative expenses
 
 960
 
 820
 
 140
 
17.1%
Operating income
$
 4,279
 
 2,009
 
 2,270
 
113.0%
 
 

 
20

 
Net sales increased $4,733,000, or 40%, from the prior year to $16,712,000. This increase was primarily attributable to a 27% increase in average selling prices and a 10% increase in metric tons sold. Pricing increased on calcium silicon and magnesium ferrosilicon due to improving demand, especially in the steel and automotive markets. Additionally, pricing increased due to a mix shift from ferrosilicon, the lowest priced alloy, to calcium silicon and magnesium ferrosilicon. The increase in metric tons sold was due to increased demand for calcium silicon as general market conditions improved year over year.

Operating income increased by $2,270,000 from the prior year to $4,279,000. The increase was primarily due to an increase in average selling prices, offset by the impact of higher production costs. Cost of goods sold increased by 25%, primarily due to higher power and other raw material costs, while volumes increased by only 10%.

Solsil


   
Three Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 20
 
 -
 
 20
 
NA
Cost of goods sold
 
 161
 
 166
 
 (5)
 
(3.0%)
Selling, general and administrative expenses
 
 28
 
 93
 
 (65)
 
(69.9%)
Research and development
 
 32
 
 36
 
 (4)
 
(11.1%)
Operating loss
$
 (201)
 
 (295)
 
 94
 
(31.9%)


Net sales increased $20,000 from the prior year to $20,000. This increase was due to the timing of spot shipments of product during the third quarter of fiscal year 2011.

Operating loss decreased by $94,000 from the prior year to $201,000. The primary driver of this decrease was lower selling, general and administrative expenses of $65,000 as a result of Solsil’s suspension of commercial production and enhanced focus on refining its production processes to improve yield and reduce the cost of production.

Corporate


   
Three Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Selling, general and administrative expenses
$
 6,723
 
 3,012
 
 3,711
 
123.2%
Operating loss
$
 (6,723)
 
 (3,012)
 
 (3,711)
 
123.2%


Operating loss increased by $3,711,000 from the prior year to $6,723,000. Selling, general and administrative expenses increased by $3,711,000 primarily due to an increase in transaction-related costs of approximately $829,000 and an increase in bonus expense of approximately $2,756,000 due to increased profitability year over year.

GSM Nine Months Ended March 31, 2011 vs. 2010

Consolidated Operations:

   
Nine Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 465,929
 
 326,222
 
 139,707
 
42.8%
Cost of goods sold
 
 361,722
 
 267,087
 
 94,635
 
35.4%
Selling, general and administrative expenses
 
 38,920
 
 35,873
 
 3,047
 
8.5%
Research and development
 
 77
 
 151
 
 (74)
 
(49.0%)
Restructuring charges
 
 -
 
 (81)
 
 81
 
NA
Gain on sale of business
 
 -
 
 (22,907)
 
 22,907
 
NA
Operating income
 
 65,210
 
 46,099
 
 19,111
 
41.5%
Interest expense, net
 
 (2,127)
 
 (3,211)
 
 1,084
 
(33.8%)
Other income
 
 393
 
 3,960
 
 (3,567)
 
(90.1%)
Income before provision for income taxes
 
 63,476
 
 46,848
 
 16,628
 
35.5%
Provision for income taxes
 
 23,479
 
 19,702
 
 3,777
 
19.2%
      Net income
 
 39,997
 
 27,146
 
 12,851
 
47.3%
(Income) losses attributable to noncontrolling interest, net of tax
 
 (2,734)
 
 346
 
 (3,080)
 
(890.2%)
Net income attributable to Globe Specialty Metals, Inc.
$
 37,263
 
 27,492
 
 9,771
 
35.5%


 
21

 
The following table presents consolidated operating results:

Net Sales:


                               
   
Nine Months Ended March 31, 2011
   
Nine Months Ended March 31, 2010
   
Net Sales
   
Net Sales
   
$ (in 000s)
 
MT
   
$/MT
   
$ (in 000s)
 
MT
   
$/MT
Silicon metal
$
 248,149
 
 91,511
   $
2,712
 
$
 216,592
 
 85,402
   $
2,536
Silicon-based alloys
 
174,120
 
 85,384
   
2,039
   
94,098
 
 46,862
   
2,008
Silicon metal and silicon-based alloys
 
422,269
 
176,895
   
2,387
   
310,690
 
132,264
   
2,349
Silica fume and other
 
43,660
             
 15,532
         
Total net sales
$
465,929
           
$
326,222
         


Net sales increased $139,707,000, or 43%, from the prior year to $465,929,000 primarily as a result of a 34% increase in metric tons sold and a 2% increase in our average selling price. The increase in metric tons sold resulted in an increase in net sales of $92,845,000 and was related to a 7% increase in silicon metal and an 82% increase in silicon-based alloy metric tons sold. Silicon metal volume sold was higher due to increased demand, which led us to reopen our Niagara Falls, New York facility in November 2009, which contributed approximately 7,200 incremental metric tons, and our Selma, Alabama facility in January 2010, which contributed approximately 11,200 incremental metric tons sold during the first nine months of fiscal year 2011. These increases were offset by the decrease in volume due to the timing of the sale of our Brazilian manufacturing operations on November 5, 2009. Subsequent to this divestiture, remaining Globe Metais sales relate only to the fulfillment of certain retained customer contracts with product purchased from our former Brazilian manufacturing operations at a purchase price equal to our sales price. The increase in silicon-based alloy volume includes the impact of the Core Metals acquisition, which contributed approximately 27,300 metric tons of ferrosilicon in the first nine months of fiscal year 2011. Additionally, end market demand for ferrosilicon and magnesium ferrosilicon increased in the first nine months of fiscal year 2011 due to the economic recovery, particularly in steel and automotive production.

The increase in average selling price resulted in increased net sales of approximately $18,734,000 and was a result of a 7% increase in the average selling price of silicon metal and a 2% increase in the average selling price of silicon-based alloys. The increase in silicon metal pricing was primarily due to higher pricing of the annual calendar 2011 contracts and higher spot pricing. The increase in silicon-based alloy pricing was due to improved demand from the economic recovery, offset by the impact of the acquisition of Core Metals in the fourth quarter of fiscal year 2010, which resulted in a mix shift towards the production of ferrosilicon. Ferrosilicon is our lowest priced alloy and also has the lowest cost of production. Other revenue increased by $28,128,000 as a result of $14,687,000 of other sales from Core Metals during the first nine months of fiscal year 2011 and the recognition of $9,400,000 in previously deferred revenue from Solsil as the technology license, joint development and supply agreement with BP Solar International Inc. (BP Solar) was terminated in the second quarter of fiscal year 2011.

Cost of Goods Sold:

The $94,635,000, or 35%, increase in cost of goods sold was a result of a 34% increase in metric tons sold, as well as a 1% increase in our cost per ton sold. This increase in cost per ton sold was primarily due to the impact of planned furnace maintenance outages at GMI, higher power rates at GMI, and $4,300,000 of expense related to satisfaction of the long-term supply contract in the first nine months of fiscal year 2011. These cost increases were partially offset by the impact of reduced start-up costs of approximately $3,400,000 at our Niagara Falls and Selma plants in the nine month year over year period, the mix shift to ferrosilicon, which has our lowest cost of production, and the timing of the sale of our Brazilian manufacturing operations on November 5, 2009.

Gross margin represented approximately 18% of net sales in the first nine months of fiscal year 2010 and increased to approximately 22% of net sales in the first nine months of fiscal year 2011, primarily as a result of higher silicon metal and silicon-based alloy selling prices, offset by higher power costs at Globe Metales and GMI, as well as the impact of reduced margins on the sale of product purchased from our former Brazilian manufacturing operations.

Selling, General and Administrative Expenses:

The increase in selling, general and administrative expenses of $3,047,000, or 9%, was primarily a result of the impact of the acquisition of Core Metals, which increased expense by $1,762,000, and an increase in transaction-related costs, wages and benefits, and audit and other professional fees, including Sarbanes-Oxley Act compliance related expenditures, of approximately $1,764,000, $476,000, and $637,000, respectively, at Corporate. Additionally, bonus expense at Corporate increased approximately $698,000 due to profitability improvement year over year. These cost increases were partially offset by a decrease of approximately $2,624,000 at Globe Metais due to the timing of the sale of our Brazilian manufacturing operations.

Gain on Sale of Business:

Gain on sale of business for the first nine months of fiscal year 2010 was associated with the sale of our Brazilian manufacturing operations on November 5, 2009.

Net Interest Expense:

Net interest expense decreased by $1,084,000 primarily due to lower interest rate swap expense of approximately $617,000 at GMI, as well as the timing of the sale of our Brazilian manufacturing operations on November 5, 2009, which resulted in a reduction in net interest expense of $347,000.

Other Income:

Other income decreased by $3,567,000 due primarily to a foreign exchange gain of $3,790,000 at Globe Metais in the first nine months of fiscal year 2010. The foreign exchange gain at Globe Metais consisted of foreign exchange gains of $2,941,000, primarily associated with the revaluation of long-term reais denominated tax liabilities, and a gain of $849,000 on our foreign exchange forward contracts. These foreign exchange fluctuations no longer occur following the sale of our Brazilian manufacturing operations on November 5, 2009. Additionally, other income was reduced by approximately $172,000 due to lower year over year hydropower dividends at Globe Metales. The impact of these prior year gains was offset by current year foreign exchange gains due to currency fluctuations associated with the Euro and the Chinese renminbi.

 
22

 
Provision for Income Taxes:

Provision for income taxes as a percentage of pre-tax income was approximately 37%, or $23,479,000, in the first nine months of fiscal year 2011 and was approximately 42%, or $19,702,000, in the first nine months of fiscal year 2010.  The decrease in the effective tax rate is due primarily to the recognition of $9,395,000 in income tax expense associated with the sale of our Brazilian manufacturing operations in the first nine months of fiscal year 2010.

Segment Operations

GMI


   
Nine Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 392,007
 
 234,068
 
 157,939
 
67.5%
Cost of goods sold
 
 308,743
 
 192,291
 
 116,452
 
60.6%
Selling, general and administrative expenses
 
 16,398
 
 15,018
 
 1,380
 
9.2%
Restructuring charges
 
 -
 
 (81)
 
 81
 
NA
Operating income
$
 66,866
 
 26,840
 
 40,026
 
149.1%


Net sales increased $157,939,000, or 68%, from the prior year to $392,007,000. The increase was primarily attributable to a 56% increase in metric tons sold. Silicon metal volume was higher by 25% primarily due to increased demand, which led us to reopen our Niagara Falls, New York facility in November 2009, which contributed approximately 7,200 incremental metric tons, and our Selma, Alabama facility in January 2010, which contributed approximately 11,200 incremental metric tons sold during the first nine months of fiscal year 2011. Silicon-based alloy volume was higher by 124% due to the acquisition of Core Metals and an increase in end market demand, primarily from the steel and automotive industries for ferrosilicon and magnesium ferrosilicon in the first nine months of fiscal year 2011. The Core Metals acquisition contributed approximately 27,300 metric tons of ferrosilicon in the first nine months of fiscal year 2011. Pricing for silicon metal increased 12% due to higher pricing of the annual calendar 2011 contracts and improved spot pricing in the first nine months of fiscal year 2011, offset by the impact of the Alloy joint venture pricing. As a result of the acquisition of Core Metals in the fourth quarter of fiscal year 2010, there was a product mix shift towards ferrosilicon, which is our lowest priced alloy and also has the lowest cost of production. This impact was offset by higher pricing on ferrosilicon and magnesium ferrosilicon products due to increased market demand.

The GMI segment includes the Alloy joint venture, which was entered into on November 5, 2009, and sells 49% of the output of the Alloy plant to Dow Corning Corporation (Dow Corning) at cost. We control the joint venture and consolidate its results in our financial statements. As a result of the joint venture, GMI’s gross margin has been negatively impacted by virtue of the material sold to Dow Corning at cost. The increase in pricing for silicon metal during the first nine months of fiscal year 2011 more than offset this impact and resulted in increased gross margin year over year.

Operating income increased by $40,026,000 from the prior year to $66,866,000. This increase was primarily due to higher volumes shipped of silicon-based alloys and silicon metal and higher average selling prices for silicon metal. Cost of goods sold increased by 61%, while volumes increased by only 56%. This was a result of an increase in the cost per ton sold due to the impact of planned furnace maintenance outages, higher power rates, and $4,300,000 of expense related to satisfaction of the long-term supply contract in the first nine months of fiscal year 2011, offset by the impact of reduced start-up costs of approximately $3,400,000 at our Niagara Falls and Selma plants in the nine month year over year period. The addition of Core Metals contributed $1,762,000 to selling, general and administrative expenses in the first nine months of fiscal year 2011.

Globe Metais


   
Nine Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 15,421
 
 53,603
 
 (38,182)
 
(71.2%)
Cost of goods sold
 
 14,973
 
 44,990
 
 (30,017)
 
(66.7%)
Selling, general and administrative expenses
 
 71
 
 2,695
 
 (2,624)
 
(97.4%)
Research and development
 
 -
 
 11
 
 (11)
 
NA
Loss on sale of business
 
 -
 
 1,748
 
 (1,748)
 
NA
Operating income
$
 377
 
 4,159
 
 (3,782)
 
(90.9%)


Net sales decreased $38,182,000, or 71%, from the prior year to $15,421,000. The decrease was primarily attributable to a decrease in metric tons sold of 63% and a decrease in average selling prices of 20%. The decrease in volume was due to the timing of the sale of our Brazilian manufacturing operations on November 5, 2009. Subsequent to this divestiture, remaining Globe Metais sales related only to the fulfillment of certain retained customer contracts with product purchased from our former Brazilian manufacturing operations at a purchase price equal to our sales price. These customer contracts were fulfilled at the end of the second quarter of fiscal year 2011, and no further sales will be made under this arrangement. The decrease in pricing was due to the year over year currency impact of Euro denominated contracts.

Operating income decreased by $3,782,000, or 91%, from the prior year to $377,000. The decrease was primarily due to the timing of the sale of our Brazilian manufacturing operations, which led to lower sales volumes, as well as the impact of reduced margins on the sale of product purchased from our former Brazilian manufacturing operations. Selling, general and administrative expenses decreased by $2,624,000 primarily due to the timing of the sale of our Brazilian manufacturing operations on November 5, 2009. Results in the first nine months of fiscal year 2010 also included transaction costs of $1,748,000 associated with the sale of the Brazilian manufacturing operations.

 
23

 
Globe Metales


   
Nine Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 46,455
 
 35,502
 
 10,953
 
30.9%
Cost of goods sold
 
 33,928
 
 24,911
 
 9,017
 
36.2%
Selling, general and administrative expenses
 
 2,704
 
 2,348
 
 356
 
15.2%
Operating income
$
 9,823
 
 8,243
 
 1,580
 
19.2%


Net sales increased $10,953,000, or 31%, from the prior year to $46,455,000. This increase was primarily attributable to a 19% increase in average selling prices, as well as a 9% increase in metric tons sold. Pricing increased on magnesium ferrosilicon due to improving demand, especially in the automotive market. Additionally, pricing increased due to a mix shift from ferrosilicon, the lowest priced alloy, to calcium silicon and magnesium ferrosilicon. Volumes increased from higher shipments of magnesium ferrosilicon and calcium silicon as demand in the automotive and steel end markets continues to recover.

Operating income increased by $1,580,000 from the prior year to $9,823,000. The increase was primarily due to higher average selling prices offset by higher production costs. Cost of goods sold increased by 36%, primarily due to higher power and other raw material costs, while volumes increased by only 9%. Power costs increased beginning in November 2009 as our long-term power agreement expired. Additionally, selling, general and administrative expenses increased $356,000, primarily due to higher wage expense as a result of the terms of the union contract signed at the beginning of fiscal year 2011.

Solsil


   
Nine Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Net sales
$
 9,420
 
 20
 
 9,400
 
NA
Cost of goods sold
 
 331
 
 690
 
 (359)
 
(52.0%)
Selling, general and administrative expenses
 
 136
 
 378
 
 (242)
 
(64.0%)
Research and development
 
 77
 
 138
 
 (61)
 
(44.2%)
Operating income (loss)
$
 8,876
 
 (1,186)
 
 10,062
 
(848.4%)


Net sales increased $9,400,000 from the prior year to $9,420,000. This increase was primarily due to the recognition of $9,400,000 in previously deferred revenue as the BP Solar technology license, joint development and supply agreement was terminated during the second quarter of fiscal year 2011.

Operating income (loss) increased by $10,062,000 from the prior year to $8,876,000. The primary driver of this increase was the recognition of $9,400,000 in previously deferred revenue as the BP Solar technology license, joint development and supply agreement was terminated during the second quarter of fiscal year 2011. The decrease in cost of goods sold of $359,000 from the prior year to $331,000 was a result of Solsil’s suspension of commercial production and enhanced focus on refining its production processes to improve yield and reduce the cost of production. As a result of these changes, selling, general and administrative expenses decreased $242,000 and research and development expenses decreased $61,000.

Corporate


   
Nine Months Ended
       
   
March 31,
 
Increase
 
Percentage
   
2011
 
2010
 
(Decrease)
 
Change
   
(Dollars in thousands)
Results of Operations
               
Selling, general and administrative expenses
$
 17,763