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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

OR

 

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

For the transition period from                    to                    

Commission file number 333-174896

 

 

 

LOGO

WireCo WorldGroup Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-0061302

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

12200 NW Ambassador Drive

Kansas City, MO 64163

(816) 270-4700

(address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date 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  x    NO  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    YES  ¨    NO  x

There is no market for the Registrant’s equity, all of which is held by affiliates of WireCo WorldGroup (Cayman) Inc. (the “Company”). As of April 30, 2012, the Company had 2,011,411 shares of common stock outstanding, all of which was held by affiliates.

 

 

 


Table of Contents

WireCo WorldGroup Inc.

Quarterly Report

For the period ended March 31, 2012

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

     1   

ITEM 1. FINANCIAL STATEMENTS

     1   

Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     1   

Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (unaudited)

     2   

Consolidated Statements of Comprehensive Income for the three months ended March  31, 2012 and 2011 (unaudited)

     3   

Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

     4   

Notes to Consolidated Financial Statements (unaudited)

     5   

ITEM  2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     16   

ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     26   

ITEM 4. CONTROLS AND PROCEDURES

     27   

PART II – OTHER INFORMATION

     28   

ITEM 1. LEGAL PROCEEDINGS

     28   

ITEM 1A. RISK FACTORS

     28   

ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     28   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     28   

ITEM 4. MINE SAFETY DISCLOSURES

     28   

ITEM 5. OTHER INFORMATION

     28   

ITEM 6. EXHIBITS

     28   

SIGNATURES

     29   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share data)

 

      March 31,
2012
    December 31,
2011
 
     (unaudited)        
Assets     

Current assets:

    

Cash and cash equivalents

   $ 29,278     $ 27,663  

Accounts receivable, less allowance for doubtful accounts of $2,336 and $2,294, respectively

     121,169        108,607  

Other receivables

     2,221       3,499  

Inventories, net

     191,537       187,544  

Prepaid expenses and other current assets

     11,894       6,919  

Current deferred income tax assets

     3,680       3,422  
  

 

 

   

 

 

 

Total current assets

     359,779       337,654  

Property, plant and equipment, less accumulated depreciation of $94,201, and $85,004, respectively

     250,013       236,146  

Intangible assets, net

     109,480       109,773  

Goodwill

     170,370       168,831  

Deferred financing fees, net

     17,961       19,192  

Noncurrent deferred income tax assets

     3,699       3,437  

Other noncurrent assets

     11,638       10,670  
  

 

 

   

 

 

 

Total assets

   $ 922,940     $ 885,703  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Borrowings under revolving credit agreement

   $ 18,739     $ 16,101  

Current maturities of long-term debt

     9,652       13,416  

Interest payable

     16,575       6,481  

Accounts payable

     57,492       59,741  

Accrued compensation and benefits

     15,208       14,765  

Acquisition installment payments

     6,288       9,802  

Other current accrued liabilities

     18,142       14,641  
  

 

 

   

 

 

 

Total current liabilities

     142,096       134,947  

Long-term debt, excluding current maturities

     571,685       565,044  

Noncurrent deferred income tax liabilities

     30,875       28,963  

Other noncurrent accrued liabilities

     27,974       27,213  
  

 

 

   

 

 

 

Total liabilities

     772,630       756,167  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Common shares, $0.01 par value. Authorized 3,000,000 shares; 2,011,411 shares issued at March 31, 2012 and December 31, 2011

     20        20  

Additional paid-in capital

     217,193       216,924  

Accumulated other comprehensive loss

     (23,087     (34,392

Accumulated deficit

     (43,771     (52,886
  

 

 

   

 

 

 

Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.

     150,355       129,666  

Non-controlling interests

     (45     (130
  

 

 

   

 

 

 

Total stockholders’ equity

     150,310       129,536  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 922,940     $ 885,703  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

1


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands)

(unaudited)

 

     Three months ended
March 31,
 
     2012     2011  

Net sales

   $ 166,475     $ 138,721  

Cost of sales

     (127,083     (102,114
  

 

 

   

 

 

 

Gross profit

     39,392       36,607  
  

 

 

   

 

 

 

Other operating expenses:

    

Selling expenses

     (6,345     (5,743

Administrative expenses

     (12,229     (13,196

Amortization expense

     (3,202     (3,255
  

 

 

   

 

 

 

Total other operating expenses

     (21,776     (22,194
  

 

 

   

 

 

 

Operating income

     17,616       14,413  
  

 

 

   

 

 

 

Other income (expense):

    

Interest expense, net

     (11,570     (10,952

Loss on investment in and advances to the China joint venture

     (440     (3,077

Foreign currency exchange gains, net

     8,063       6,593  

Other expense, net

     (10     (295
  

 

 

   

 

 

 

Total other expense, net

     (3,957     (7,731
  

 

 

   

 

 

 

Income before income taxes

     13,659       6,682  

Income tax expense

     (4,949     (2,519
  

 

 

   

 

 

 

Net income

     8,710       4,163  

Less: Net income (loss) attributable to non-controlling interests

     (405     28  
  

 

 

   

 

 

 

Net income attributable to WireCo WorldGroup (Cayman), Inc.

   $ 9,115     $ 4,135  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

2


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

     Three months ended
March 31,
 
     2012      2011  

Net income including non-controlling interests

   $ 8,710      $ 4,163  

Other comprehensive income:

     

Foreign currency translation gain

     11,795        7,873  
  

 

 

    

 

 

 

Comprehensive income including non-controlling interests

     20,505        12,036  

Less: Comprehensive income attributable to non-controlling interests

     85         720   
  

 

 

    

 

 

 

Comprehensive income attributable to WireCo WorldGroup (Cayman) Inc.

   $ 20,420      $ 11,316  
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Three months ended
March 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 8,710     $ 4,163  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     10,035       9,523  

Amortization of debt issuance costs and discounts/premium

     1,719       1,307  

Loss on investment in and advances to the China joint venture

     440       3,077  

Shared-based compensation

     269       972  

Other, net

     (1,870     512  

Unrealized foreign currency exchange gains, net

     (8,233     (7,224

Changes in deferred income taxes

     374       53  

Changes in assets and liabilities:

    

Accounts receivable

     (8,720     (14,020

Inventories

     1,823       (7,105

Prepaids and other assets

     (3,345     1,607  

Interest payable

     10,093       6,599  

Accounts payable

     (5,224     3,641  

Other accrued liabilities

     3,893       5,979  
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,964       9,084  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (7,131     (4,156

Advances to the China joint venture

     (442     (431
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,573     (4,587
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal payments on long-term debt

     (4,790     (652

Debt issuance costs paid

     —          (148

Net borrowings under revolving credit agreements

     6,893       —     

Acquisition installment payment

     (4,255     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,152     (800

Effect of exchange rates on cash and cash equivalents

     1,376       683  
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     1,615       4,380  

Cash and cash equivalents, beginning of period

     27,663       53,880  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 29,278     $ 58,260  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest, net of interest capitalized

   $ (46   $ 3,542  

Cash paid (received) for income taxes, net

     (399     1,941  

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands)

(unaudited)

 

(1) Interim Financial Statement Presentation

The financial information included in Item 1 and Item 2 of Part I of this quarterly report on Form 10-Q are those of WireCo WorldGroup (Cayman) Inc. and its consolidated subsidiaries (the “Company”), the indirect parent of WireCo WorldGroup Inc. (“WireCo WorldGroup”), and contain certain footnote disclosures regarding the financial information of WireCo WorldGroup (Cayman) Inc. and certain of its wholly-owned subsidiaries that guarantee, subject to customary release provisions, substantially all of the outstanding indebtedness of WireCo WorldGroup. All intercompany transactions and balances have been eliminated in consolidation.

The Company is a manufacturer of wire rope, synthetic rope, electromechanical cable, fabricated products and specialty wire. The Company has five operating segments that are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure. The five operating segments reflect geographic regions of the Company’s manufacturing facilities, including the United States, Mexico, Germany, Portugal and Poland.

The accompanying unaudited interim consolidated financial statements included herein have been prepared in United States (“U.S.”) dollars and in accordance with U.S. generally accepted accounting principles (“GAAP”) by the Company without audit in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for quarterly reports on Form 10-Q and, accordingly, do not include all of the annual disclosures required by U.S. GAAP. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

In the opinion of management, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented using management’s best estimates and assumptions where appropriate. Management’s estimates and assumptions about future events affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates are inherently subject to judgment and actual results could differ.

Accounting Pronouncements Adopted During 2012

In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU 2011-04 was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This standard is effective for interim and annual reporting periods beginning after December 15, 2011. The Company adopted this new guidance on January 1, 2012 with no material impact to the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU 2011-05 requires an entity to present total net income and its components, total other comprehensive income and its components and total of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this new guidance on January 1, 2012 with no material impact to the consolidated financial statements. The accompanying interim consolidated financial statements include separate Consolidated Statements of Comprehensive Income and the Company’s Condensed Consolidating Financial Statements set forth in Note 11—“Condensed Consolidating Financial Statements” present net income and comprehensive income in a single continuous statement.

 

5


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

Immaterial Correction of Error

Prior to 2012, the Company had not capitalized interest on construction in process for property, plant and equipment at the Company’s Mexican subsidiaries. In 2012, the Company recorded an entry that decreased interest expense and increased the cost of property, plant and equipment by $1,870 to correct the effects of previous errors resulting from the Mexican subsidiaries’ non-GAAP accounting policy. These errors were not material to the current and any previously-reported periods. The adjustment is reflected in Other, net as a non-cash reconciling item on the consolidated statement of cash flows. The Company recorded depreciation expense of $415 related to this adjustment during the three months ended March 31, 2012.

 

(2) Inventories

The major classes of inventories were as follows as of the dates indicated:

 

     March 31,
2012
     December 31,
2011
 

Raw materials

   $ 72,987      $ 77,033  

Work in process

     16,029        14,287  

Finished goods, net

     102,521        96,224  
  

 

 

    

 

 

 

Inventories, net

   $ 191,537      $ 187,544  
  

 

 

    

 

 

 

 

(3) Intangible Assets and Goodwill

The components of intangible assets were as follows as of the dates indicated:

 

     Gross
carrying
amount
     Weighted-
average
amortization
period
   Accumulated
amortization
    Net
carrying
amount
 

March 31, 2012:

          

Customer and distributor relationships

   $ 107,084       10 years    $ (57,348   $ 49,736   

Trade names - non-amortizing

     49,850       Indefinite      —          49,850   

Trade name - amortizing

     682       15 years      (231     451   

Technology and patents

     16,025       13 years      (6,765     9,260   

Other

     6,105       7 years      (5,922     183   
  

 

 

       

 

 

   

 

 

 

Total intangible assets

   $ 179,746          $ (70,266   $ 109,480   
  

 

 

       

 

 

   

 

 

 

December 31, 2011:

          

Customer and distributor relationships

   $ 105,191       10 years    $ (53,477   $ 51,714   

Trade names - non-amortizing

     48,140       Indefinite      —          48,140   

Trade name - amortizing

     682       15 years      (220     462   

Technology and patents

     15,739       13 years      (6,449     9,290   

Other

     6,002       7 years      (5,835     167   
  

 

 

       

 

 

   

 

 

 

Total intangible assets

   $ 175,754          $ (65,981   $ 109,773   
  

 

 

       

 

 

   

 

 

 

 

6


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

The change in the carrying value of goodwill for the three-month period ended March 31, 2012 was as follows:

 

Balance as of December 31, 2011

   $ 168,831   

Foreign currency translation

     1,539   
  

 

 

 

Balance as of March 31, 2012

   $ 170,370   
  

 

 

 

 

(4) Investment in and Advances to the China Joint Venture

As the Company’s investment in the China JV was zero as of December 31, 2011, the Company has discontinued applying the equity method until the China JV subsequently reports sufficient net income to cover the net losses not recognized during the period the equity method was suspended. During the first quarter of 2012, the Company made advances to the China JV relating primarily to capital expenditures and professional services the Company paid on behalf of the China JV and travel expenses of Company employees assisting with training, engineering and other matters. The Company fully reserved $442 against these advances, which was recorded in Loss on investment in and advances to the China joint venture in the accompanying statement of operations.

Summarized financial information for the China JV was as follows for the dates indicated:

 

     Three months ended
March 31,
 
     2012     2011  

Net sales

   $ 3,283      $ 2,715   

Gross profit

     (2,689     (2,714

Net loss

     (6,109     (5,869

Pursuant to a resolution from the China JV’s Board of Directors dated February 23, 2012, the China JV Partner committed to provide entrusted loans to the China JV in the aggregate amount of RMB 100,000 (equivalent of $15,878 at March 31, 2012) for the repayment of bank loan principal and interest and funding of operating cash flow in 2012. As of May 11, 2012, RMB 80,000 out of the total RMB 100,000 was made available to the China JV and the related loan contracts were executed.

Due to the continued losses and reduced liquidity, there is substantial doubt as to the China JV’s ability to continue as a going concern. As of March 31, 2012, the Company’s exposure to loss as a result of its involvement with the China JV is limited to prepaid inventory of $2,175. The Company does not guarantee the debts of the China JV in whole or in part.

 

7


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

(5) Borrowings

Long-term debt consists of the following as of the dates indicated:

 

     March 31,
2012
    December 31,
2011
 

Term Loan, variable interest rate, 5.00% at March 31, 2012, due 2014

   $ 99,000     $ 99,250  

Senior Notes due 2017

     425,000       425,000  

Polish Debt due 2014

     25,748       28,034  

Other indebtedness

     679       658  

Borrowings under revolving credit facilities

     52,657       44,696  
  

 

 

   

 

 

 

Total debt at face value

     603,084       597,638  

Less: Unamortized premium (discount), net

     (3,008     (3,077

Less: Current maturities of long-term debt

     (9,652     (13,416

Less: Borrowings under revolving credit facilities which are classified as current

     (18,739     (16,101
  

 

 

   

 

 

 

Total long-term debt

   $ 571,685     $ 565,044  
  

 

 

   

 

 

 

Certain subsidiaries jointly and severally and fully and unconditionally guarantee, subject to customary release provisions, substantially all of the outstanding long-term debt. As of March 31, 2012, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. For a detailed discussion of our borrowings, see Note 8—”Borrowings” to our audited consolidated financial statements in Item 8, Financials Statements and Supplementary Data, of our annual report on Form 10-K for the year ended December 31, 2011.

Revolving Credit Facilities

The Company has three revolving credit facilities: a revolving credit agreement with HSBC Bank USA, National Association (“HSBC”) (“Revolving Credit Agreement”), a revolving credit agreement with BGL BNP Paribas S.A. (“CASAR Revolving Credit Agreement”) and a revolving credit agreement with Deutsche Bank AG, London Branch and Goldman Sachs Bank USA (“Euro Facility”). At March 31, 2012, the Company’s maximum borrowing capacity under all of these revolving credit agreements was an aggregate principal amount of $116,068. This amount was subject to adjusted borrowing base calculations based on specified advance rates against the value of eligible accounts receivable and inventory and further reduced by outstanding borrowings and letters of credit. The Company had borrowed $18,739 under the Revolving Credit Agreement and $33,918 under the Euro Facility as of March 31, 2012. The Company’s availability under these revolving credit agreements was $56,640 at March 31, 2012. The interest rate on outstanding balances under the Revolving Credit Agreement and Euro Facility was 4.00% and 4.90%, respectively, at March 31, 2012. Borrowings under the Revolving Credit Agreement are classified as a current liability as the Company pays down its outstanding revolver balance daily with lockbox receipts.

 

8


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

Interest Expense, net

Net interest expense consists of:

 

     Three months ended
March 31,
 
     2012     2011  

Interest on long-term debt

   $ 11,792     $ 9,690  

Interest on revolving credit facilities classified as current

     242       —     

Amortization of debt issuance costs and discounts/premium

     1,719       1,307  

Interest rate swap settlements

     —          467  

Interest rate swap mark-to-market adjustments

     —          (453

Capitalized interest

     (2,120     (29

Other

     (63     (30
  

 

 

   

 

 

 

Interest expense, net

   $ 11,570     $ 10,952  
  

 

 

   

 

 

 

 

(6) Fair Value Measurements

The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, other receivables, borrowings under revolving credit agreements classified as current, accounts payable and other accrued liabilities. The carrying amounts reported on the consolidated balance sheets for these items approximate fair market value due to their relative short-term nature.

The carrying amounts and estimated fair values of the Company’s long-term debt at March 31, 2012 were as follows:

 

     Carrying
amount
     Estimated
fair value
 

Term Loan

   $ 99,000       $ 97,020   

Senior Notes

     425,909         429,250   

Polish Debt

     21,831         21,528   

Euro Facility

     33,918         33,918   

The estimated fair value of the Company’s Term Loan is based on rates currently available for obligations with similar terms and maturities (Level 2 inputs), the estimated fair value of the Senior Notes is based on current market rates in inactive markets (Level 2 inputs) and the estimated fair value of the Polish Debt, which is not actively traded, is determined using a discounted cash flow model (Level 3 inputs) at a discount rate of 10.00%, the Company’s incremental long-term borrowing rate. As the Euro Facility is a revolving credit agreement, the carrying amount approximates fair value.

 

(7) Restructuring

During 2011, the Company implemented a workforce reduction plan at certain European manufacturing facilities to increase operating efficiencies and utilize synergies. Additionally, the Company closed two distribution centers due to a consolidation and reorganization of the Company’s distribution network. As a result of these closures, the Company terminated employees and recorded employee termination benefits and other associated costs in Administrative expenses in the consolidated statement of operations during the fourth quarter of 2011. As of March 31, 2012, $952 was accrued for severance and other related restructuring costs in Accrued compensation and benefits and Other current accrued liabilities, respectively.

 

9


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

A rollforward of the restructuring activities is set forth below:

 

Balance at December 31, 2011

   $ 2,294  

Restructuring charges

     —     

Payments

     (1,342
  

 

 

 

Balance at March 31, 2012

   $ 952   
  

 

 

 

 

(8) Income Taxes

The Company determines the tax provision for interim periods using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. For the three months ended March 31, 2012 and 2011, the Company determined the interim tax expense using an estimate of annual earnings and annual tax to determine the effective tax rate by jurisdiction. The effective income tax rate was an expense of 36% and 38% for the three months ended March 31, 2012 and 2011, respectively. The decrease in the effective tax rate is due in part to a greater portion of income in lower taxable jurisdictions. Operating losses in the U.S. result in tax benefits that the Company does not expect to realize and are therefore offset by an increased valuation allowance of $1,502. Unrecognized tax benefits increased $1,394 for the three months ended March 31, 2012.

 

(9) Related Party Transactions

Paine & Partners, LLC (“Paine & Partners”), which manages the funds that control the Company, has entered into agreements with the Company to provide administrative and other support services. The Company recorded management fees of $721 and $575 for the three months ended March 31, 2012 and 2011, respectively, in Administrative expenses in the consolidated statements of operations.

 

(10) Contingencies

The Company is involved in various claims and legal actions arising in the ordinary course of business, which are incidental to its operations. The Company currently maintains insurance coverage for certain risks, such as product liability and workers’ compensation. In accordance with ASC Topic 450, Contingencies, the Company establishes accruals for litigation matters when the Company believes it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. As of March 31, 2012, the Company has accrued approximately $540 for certain outstanding legal proceedings.

If the Company has not accrued an amount because the litigation does not meet the criteria for accrual as set forth above, the Company discloses the matter if a material loss is reasonably possible and the Company is able to estimate a range of possible losses. At March 31, 2012, none of the Company’s legal proceedings met the reasonably possible criterion.

 

(11) Condensed Consolidating Financial Statements

Guarantees of the Senior Notes

The Company has Senior Notes, which are unsecured obligations of WireCo WorldGroup Inc. (the “Issuer”). These obligations are jointly and severally and fully and unconditionally guaranteed by WireCo WorldGroup (Cayman) Inc., the ultimate parent company. Certain entities controlled by the Company (collectively referred to as the “Guarantors”) also jointly and severally and fully and unconditionally guarantee these obligations, subject to customary release provisions. All voting shares for the entities presented in the “Guarantors” column are 100% owned by the Company. WRCA Hong Kong Holding Company Limited, which holds the investment in the China JV, and the Mexican subsidiaries of WireCo WorldGroup Inc. are collectively referred to as the “Non-Guarantor Subsidiaries”. There are currently no significant restrictions on the ability of WireCo WorldGroup Inc. or any guarantor to obtain funds from its subsidiaries by dividend or loan.

The following condensed consolidating financial statements are prepared with each entity’s investment in subsidiaries accounted for under the equity method, as applicable. The adjustments eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions. During the fourth quarter of 2011, WireCo WorldGroup Limited (Cyprus) (“WireCo Cyprus”) was redomiciled to the Cayman Islands and merged with WireCo WorldGroup (Cayman) Inc. and as such, activity for the first quarter of 2012 is included in the parent column. Prior to the merger, WireCo Cyprus was reflected in the “Guarantors” column.

 

10


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

Condensed Consolidating Balance Sheets

 

     March 31, 2012  
      WireCo
WorldGroup
(Cayman)
Inc. (Parent)
     WireCo
WorldGroup
Inc. (Issuer)
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Elimination
Adjustments
    Consolidated  
Assets                

Current assets:

               

Cash and cash equivalents

   $ —         $ 2,814      $ 24,456     $ 2,008      $ —        $ 29,278  

Accounts receivable, less allowance for doubtful accounts

     —           53,065        46,158       21,946        —          121,169  

Intercompany accounts receivable

     15,357        38,295        51,915       25,929        (131,496 )     —     

Other receivables

     —           552        1,669       —           —          2,221  

Inventories, net

     —           103,882        73,417       27,636        (13,398 )     191,537  

Prepaid expenses and other current assets

     —           4,182        4,268       3,444        —          11,894  

Current deferred income tax assets

     —           —           1,892       1,632        156       3,680  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     15,357        202,790        203,775       82,595        (144,738 )     359,779  

Intercompany notes receivable

     —           167,926        —          2,623        (170,549 )     —     

Property, plant and equipment, net

     —           67,814        116,397       65,802        —          250,013  

Intangible assets, net

     —           47,114        52,014       10,352        —          109,480  

Goodwill

     —           117,855        44,399       8,116        —          170,370  

Investment in subsidiaries

     157,653        144,850        53,385       —           (355,888 )     —     

Deferred financing fees, net

     —           17,961        —          —           —          17,961  

Noncurrent deferred income tax assets

     —           984        2,715       —           —          3,699  

Other noncurrent assets

     —           434        10,594       610        —          11,638  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 173,010      $ 767,728      $ 483,279     $ 170,098      $ (671,175 )   $ 922,940  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
Liabilities and Stockholders’ Equity                

Current liabilities:

               

Borrowings under revolving credit agreement

   $ —         $ 18,739      $ —        $ —         $ —        $ 18,739  

Current maturities of long-term debt

     —           1,000        8,652       —           —          9,652  

Interest payable

     —           16,564        11       —           —          16,575  

Accounts payable

     —           16,068        19,032       22,392        —          57,492  

Accrued compensation and benefits

     —           6,216        7,652       1,340        —          15,208  

Intercompany accounts payable

     1,510        88,172        32,909       5,707        (128,298 )     —     

Intercompany notes payable

     —           —           3,163       —           (3,163 )     —     

Acquisition installment payments

     —           —           6,288       —           —          6,288  

Other current accrued liabilities

     —           3,521        10,309       4,348        (36 )     18,142  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,510        150,280        88,016       33,787        (131,497 )     142,096  

Long-term debt, excluding current maturities

     —           557,827        13,858       —           —          571,685  

Intercompany notes payable

     —           —           170,549       —           (170,549 )     —     

Noncurrent deferred income tax liabilities

     —           4,133        20,874       5,868        —          30,875  

Other noncurrent accrued liabilities

     —           9,881        13,925       4,168        —          27,974  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,510        722,121        307,222       43,823        (302,046 )     772,630  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Stockholders’ equity:

               

Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.

     171,500         45,607        176,102       126,275        (369,129 )     150,355  

Non-controlling interests

     —           —           (45 )     —           —          (45 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     171,500        45,607        176,057       126,275        (369,129 )     150,310  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 173,010      $ 767,728      $ 483,279     $ 170,098      $ (671,175 )   $ 922,940  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

11


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

     December 31, 2011  
      WireCo
WorldGroup
(Cayman)
Inc. (Parent)
     WireCo
WorldGroup
Inc. (Issuer)
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Elimination
Adjustments
    Consolidated  
Assets                

Current assets:

               

Cash and cash equivalents

   $ 3      $ 2,265      $ 18,324     $ 7,071      $ —        $ 27,663  

Accounts receivable, less allowance for doubtful accounts

     —           43,998        46,374       18,235        —          108,607  

Intercompany accounts receivable

     15,144        36,822        38,117       23,255        (113,338 )     —     

Other receivables

     —           552        2,947       —           —          3,499  

Inventories, net

     —           100,829        70,265       28,395        (11,945 )     187,544  

Prepaid expenses and other current assets

     —           2,965        1,553       2,401        —          6,919  

Current deferred income tax assets

     —           —           1,766       1,500        156       3,422  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     15,147        187,431        179,346       80,857        (125,127 )     337,654  

Intercompany notes receivable

     —           161,693        —          2,623        (164,316 )     —     

Property, plant and equipment, net

     —           68,658        110,327       57,161        —          236,146  

Intangible assets, net

     —           48,546        51,215       10,012        —          109,773  

Goodwill

     —           117,855        43,467       7,509        —          168,831  

Investment in subsidiaries

     148,257        142,707        61,175       —           (352,139 )     —     

Deferred financing fees, net

     —           19,192        —          —           —          19,192  

Noncurrent deferred income tax assets

     —           984        2,453       —           —          3,437  

Other noncurrent assets

     —           426        9,692       552        —          10,670  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 163,404      $ 747,492      $ 457,675     $ 158,714      $ (641,582 )   $ 885,703  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
Liabilities and Stockholders’ Equity                

Current liabilities:

               

Borrowings under revolving credit agreement

   $ —         $ 16,101      $ —        $ —         $ —        $ 16,101  

Current maturities of long-term debt

     —           1,000        12,416       —           —          13,416  

Interest payable

     —           6,475        6       —           —          6,481  

Accounts payable

     74        18,143        14,417       27,107        —          59,741  

Accrued compensation and benefits

     —           7,027        6,579       1,159        —          14,765  

Intercompany accounts payable

     1,132        73,434        31,126       4,461        (110,153 )     —     

Intercompany notes payable

     —           —           3,163       —           (3,163 )     —     

Acquisition installment payments

     —           —           9,802       —           —          9,802  

Other current accrued liabilities

     82        4,916        6,970       2,695        (22 )     14,641  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,288        127,096        84,479       35,422        (113,338 )     134,947  

Long-term debt, excluding current maturities

     —           552,798        12,246       —           —          565,044  

Intercompany notes payable

     —           —           164,307       —           (164,307 )     —     

Noncurrent deferred income tax liabilities

     —           3,771        19,793       5,399        —          28,963  

Other noncurrent accrued liabilities

     —           9,823        13,681       3,718        (9 )     27,213  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,288        693,488        294,506       44,539        (277,654 )     756,167  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Stockholders’ equity:

               

Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.

     162,116         54,004        163,299       114,175        (363,928 )     129,666  

Non-controlling interests

     —           —           (130 )     —           —          (130 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     162,116        54,004        163,169       114,175        (363,928 )     129,536  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 163,404      $ 747,492      $ 457,675     $ 158,714      $ (641,582 )   $ 885,703  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

12


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

Condensed Consolidating Statements of Comprehensive Income (Loss)

 

     Three months ended March 31, 2012  
     WireCo
WorldGroup
(Cayman)
Inc. (Parent)
    WireCo
WorldGroup
Inc. (Issuer)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination
Adjustments
    Consolidated  

Net sales

   $ —        $ 83,991     $ 71,986     $ 44,544     $ (34,046 )   $ 166,475  

Cost of sales

     —          (66,448 )     (52,914 )     (40,312 )     32,591       (127,083 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          17,543       19,072       4,232       (1,455 )     39,392  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses:

            

Selling expenses

     —          (2,962 )     (2,972 )     (411 )     —          (6,345 )

Administrative expenses

     (282 )     (12,613 )     1,633       (967 )     —          (12,229 )

Amortization expense

     —          (1,432 )     (1,294 )     (476 )     —          (3,202 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating expenses

     (282 )     (17,007 )     (2,633 )     (1,854 )     —          (21,776 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (282 )     536       16,439       2,378       (1,455 )     17,616  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

            

Interest expense, net

     —          (9,024 )     (4,747 )     2,201       —          (11,570 )

Loss on investment in and advances to the China JV

     —          (442 )     —          —          2       (440 )

Equity earnings (losses) from subsidiaries

     9,396       2,143       (7,790 )     —          (3,749 )     —     

Foreign currency exchange gains (losses)

     1       (1,074 )     9,949       (813 )     —          8,063  

Other income (expense), net

     —          (74 )     (6 )     70       —          (10 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     9,397       (8,471 )     (2,594 )     1,458       (3,747 )     (3,957 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     9,115       (7,935 )     13,845       3,836       (5,202 )     13,659  

Income tax expense

     —          (462 )     (2,723 )     (1,764 )     —          (4,949 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     9,115       (8,397 )     11,122       2,072       (5,202 )     8,710  

Less: Net loss attributable to non-controlling interests

     —          —          (405 )     —          —          (405 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to WireCo WorldGroup (Cayman), Inc.

   $ 9,115     $ (8,397 )   $ 11,527     $ 2,072     $ (5,202 )   $ 9,115  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 9,115     $ (8,397 )   $ 12,879     $ 12,110     $ (5,202 )   $ 20,505  

 

13


Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

     Three months ended March 31, 2011  
     WireCo
WorldGroup
(Cayman)
Inc. (Parent)
    WireCo
WorldGroup
Inc. (Issuer)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination
Adjustments
    Consolidated  

Net sales

   $ —        $ 76,043     $ 58,497     $ 41,119     $ (36,938 )   $ 138,721  

Cost of sales

     —          (59,591 )     (42,653 )     (34,911 )     35,041       (102,114 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          16,452       15,844       6,208       (1,897 )     36,607  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses:

            

Selling expenses

     —          (2,647 )     (2,793 )     (303 )     —          (5,743 )

Administrative expenses

     (8 )     (7,454 )     (4,498 )     (1,236 )     —          (13,196 )

Amortization expense

     —          (1,432 )     (1,319 )     (504 )     —          (3,255 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating expenses

     (8 )     (11,533 )     (8,610 )     (2,043 )     —          (22,194 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (8 )     4,919       7,234       4,165       (1,897 )     14,413  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

            

Interest expense, net

     —          (8,640 )     (1,965 )     (347 )     —          (10,952 )

Loss on investment in China joint venture

     —          —          —          (3,077 )     —          (3,077 )

Equity earnings (losses) from subsidiaries

     4,143       3,047       (2,118 )     —          (5,072 )     —     

Foreign currency exchange gains (losses)

     —          (776 )     7,705       (336 )     —          6,593  

Other income (expense), net

     —          (405 )     (25 )     135       —          (295 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     4,143       (6,774 )     3,597       (3,625 )     (5,072 )     (7,731 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     4,135       (1,855 )     10,831       540       (6,969 )     6,682  

Income tax expense

     —          (124 )     (1,201 )     (1,194 )     —          (2,519 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     4,135       (1,979 )     9,630       (654 )     (6,969 )     4,163  

Less: Net income attributable to non-controlling interests

     —          —          28       —          —          28  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.

   $ 4,135     $ (1,979 )   $ 9,602     $ (654 )   $ (6,969 )   $ 4,135  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 4,135     $ (1,979 )   $ 13,076     $ 3,773     $ (6,969 )   $ 12,036  

 

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Table of Contents

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements – (Continued)

(in thousands)

(unaudited)

 

Condensed Consolidating Statements of Cash Flows

 

     Three months ended March 31, 2012  
     WireCo
WorldGroup
(Cayman)
Inc. (Parent)
    WireCo
WorldGroup
Inc. (Issuer)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination
Adjustments
     Consolidated  

Net cash provided by (used in) operating activities

   $ (3 )   $ 2,671     $ 9,326     $ (2,030 )   $ —         $ 9,964  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities:

             

Capital expenditures

     —          (2,090 )     (1,445 )     (3,596 )     —           (7,131 )

Advances to the China joint venture

     —          (442 )     —          —          —           (442 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (2,532 )     (1,445 )     (3,596 )     —           (7,573 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities:

             

Principal payments on long-term debt

     —          (250 )     (4,540 )     —          —           (4,790 )

Net borrowings under revolving credit agreements

     —          6,893       —          —          —           6,893  

Increases (decreases) in intercompany notes

     —          (6,233 )     6,233       —          —           —     

Acquisition installment payment

     —          —          (4,255 )     —          —           (4,255 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     —          410       (2,562 )     —          —           (2,152 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchange rates on cash and cash equivalents

     —          —          813       563       —           1,376  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Increase (decrease) in cash and cash equivalents

     (3 )     549       6,132       (5,063 )     —           1,615  

Cash and cash equivalents, beginning of period

     3       2,265       18,324       7,071       —           27,663  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ —        $ 2,814     $ 24,456     $ 2,008     $ —         $ 29,278  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Three months ended March 31, 2011  
     WireCo
WorldGroup
(Cayman)
Inc. (Parent)
     WireCo
WorldGroup
Inc. (Issuer)
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination
Adjustments
     Consolidated  

Net cash provided by (used in) operating activities

   $ —         $ 15,118     $ (6,670   $ 636     $ —         $ 9,084  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities:

              

Capital expenditures

     —           (2,563     (465     (1,128     —           (4,156

Advances to the China joint venture

     —           (431     —          —          —           (431
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —           (2,994     (465     (1,128     —           (4,587
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities:

              

Principal payments on long-term debt

     —           (606     (46     —          —           (652

Debt issuance costs paid

     —           (148     —          —          —           (148
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     —           (754     (46     —          —           (800
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchange rates on cash and cash equivalents

     —           —          615       68       —           683  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Increase (decrease) in cash and cash equivalents

     —           11,370       (6,566     (424     —           4,380  

Cash and cash equivalents, beginning of period

     —           35,481       16,838       1,561       —           53,880  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ —         $ 46,851     $ 10,272     $ 1,137     $ —         $ 58,260  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

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

Unless the context otherwise requires, the use of the terms “WireCo,” the “Company,” “we,” “our” or “us” in the following refers to WireCo WorldGroup (Cayman) Inc. and its subsidiaries.

Management’s Discussion and Analysis (“MD&A”) provides a reader of our financial statements with a narrative from the perspective of our management on our consolidated financial condition, results of operations, liquidity and capital resources on a historical basis and certain other factors that have affected recent earnings, as well as those factors that may affect future earnings. This MD&A is provided as a supplement to, and should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes included in this quarterly report. Additionally, our MD&A should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2011.

Forward-Looking Statements

This quarterly report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations. In some cases, forward-looking statements are identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek” or “continue” or the negative of those terms or other comparable terminology. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this quarterly report are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. You are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements as a result of various factors, including but not limited to those set forth under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2011. Such factors include, among others:

 

   

the general political, economic and competitive conditions in markets and countries where we have operations, including, inflation or deflation and changes in tax rates;

 

   

foreign currency exchange fluctuations;

 

   

our failure to meet quality standards;

 

   

our ability to successfully execute and integrate acquisitions;

 

   

changes in our operating strategy or development plans;

 

   

our ability to attract, hire and retain qualified personnel, including our ability to maintain our highly skilled executives, sales and engineering staff;

 

   

changes in the availability or cost of raw materials, energy and labor;

 

   

our ability to develop and maintain competitive advantages;

 

   

risks associated with our manufacturing activities;

 

   

labor disturbances, including any resulting from the suspension or termination of our collective bargaining agreements;

 

   

the impact of environmental and safety issues and changes in environmental and safety laws and regulations;

 

   

changes in the cost and availability of transportation;

 

   

our reliance on distributors;

 

   

additional tax liabilities we may incur;

 

   

the impact of trade regulations;

 

   

availability of credit, both to us and our customers;

 

   

the competitive environment in the wire rope, synthetic rope, electromechanical cable (“EMC”) and specialty wire industries, both in the U.S. and abroad;

 

   

the substantial doubt of the China joint venture’s ability to continue operating;

 

   

our significant indebtedness;

 

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Table of Contents
   

interest rate fluctuations and changes in capital market conditions; and

 

   

our ability to implement and maintain sufficient internal controls.

Any forward-looking statements that we make in this quarterly report speak only as of the date of such statement and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

Business Overview

We believe we are the largest global manufacturer of high-performance wire rope and one of the leading worldwide manufacturers of synthetic rope, electromechanical cable, fabricated products and specialty wire. Our highly engineered and specialized products have a reputation for quality, performance and safety, and are marketed under well-known brands such as Union®, Camesa®, MacWhyte®, CASAR®, Wireline Works™, U.S. Reel™, Phillystran®, Oliveira™, Drumet® and Union International. Our proprietary technical and manufacturing expertise utilizes advanced metallurgical and material technologies to develop highly engineered and specialized ropes which are “mission-critical” operating components used in heavy lifting, pulling, supporting and suspension applications, where functionality and safety are the top priority. We maintain a comprehensive product portfolio across the diverse end markets we serve, including crane, oil and gas, mining, fishing, marine, structures and general industrial. Our global manufacturing footprint with 13 facilities is supplemented by a global network of company-owned distribution facilities and independent distributors. Our China joint venture (“China JV”) also provides additional manufacturing capacity in Wuhan, China. We currently have global capacity to annually produce approximately 408,000 tons of wire and approximately 230,000 tons of wire rope. We aggregate our five operating segments that reflect geographic regions, including the United States, Mexico, Germany, Portugal and Poland into one reportable segment as they have similar economic and other characteristics, such as the production and distribution processes, similar product offerings and similar customers.

First Quarter Highlights

During the first quarter, we continued to work towards our strategic objectives for 2012, with notable achievements in organic growth through global expansion and optimizing our global assets through supply chain management; however, we experienced some challenges within certain European markets. We continued to see strong activity in key end markets, such as oil and gas, mining and aftermarket crane sales in North America, leveraged our multi-tiered branding strategy by selling our Oliveira brand for the first time in new markets and increased our internal wire consumption rates following our July 18, 2011 acquisition of Drumet. Our sales and gross profit as a percentage of sales (“gross margin”), exclusive of our recent acquisition, were, however, lower due to a decrease in European crane rope sales. Our operating costs increased primarily due to market inflation for petroleum-based raw materials and increased utility costs. Also, the effect of fluctuations in the value of the euro, Mexican peso and Polish złoty against the United States (“U.S.”) dollar decreased our revenues and expenses when comparing first quarter of 2012 with first quarter of 2011.

Our organizational structure continues to evolve. To globalize our customer care function, we established a European customer care group headquartered in Germany to support the Eastern Hemisphere. We also have added engineering support functions in key markets to support expansion of our international sales efforts, including a European Head of Engineering.

For the three months ended March 31, 2012, we recorded net sales of $166.5 million, an increase of $27.7 million, or 20%, over reported net sales of $138.7 million for the first quarter of 2011. If we had acquired Drumet on January 1, 2011, our pro forma net sales for the three months ended March 31, 2011 would have been $167.4 million. Acquisition Adjusted EBITDA was $30.6 million and net income was $8.7 million for the three months ended March 31, 2012, compared to Acquisition Adjusted EBITDA of $32.3 million, which includes Drumet pro forma EBITDA of $3.0 million, and net income of $4.2 million for the same period in 2011. For the definition of Acquisition Adjusted EBITDA, see the section titled “Non-GAAP Financial Measures”.

Results of Operations

This section focuses on significant items that impacted our operating results during the three months ended March 31, 2012. Most notably, our recent acquisition of Drumet, also referred to as our Polish subsidiary, on July 18, 2011 affects the comparability of period-over-period results. Also, our revenues and certain expenses are affected by fluctuations in the value of the U.S. dollar against the value of the euro, Mexican peso and Polish złoty. The results of operations for any quarter or partial fiscal year are not necessarily indicative of the results to be expected for other periods or the full fiscal year.

 

 

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Table of Contents

Three months ended March 31, 2012 compared to three months ended March 31, 2011

The following table presents selected consolidated financial data for the first quarters of 2012 and 2011:

 

     Three months ended
March 31,
    Change  
     2012     2011     Dollars     Percent  
     (dollars in thousands)  

Net sales

   $ 166,475      $ 138,721      $ 27,754        20
  

 

 

   

 

 

   

 

 

   

Gross profit

     39,392        36,607        2,785        8

Other operating expenses

     (21,776     (22,194     418        (2 %) 

Other expense, net

     (3,957     (7,731     3,774        (49 %) 

Income tax expense

     (4,949     (2,519     (2,430     NM   
  

 

 

   

 

 

   

 

 

   

Net income

   $ 8,710      $ 4,163      $ 4,547        NM   
  

 

 

   

 

 

   

 

 

   

Gross profit as % of net sales

     24     26    

Other operating expenses as % of net sales

     13     16    

NM = Not Meaningful

Net sales

Our net sales increased $27.8 million, or 20%, during the three months ended March 31, 2012 as compared to the same period in 2011. Of the increase, $20.0 million was attributable to our Polish subsidiary acquired on July 18, 2011.

Our wire rope sales, excluding the impact of our most recent acquisition, increased $5.1 million, or 6%. Net sales of wire rope into the oil and gas end market contributed $4.5 million of the increase in net sales for the three months ended March 31, 2012. The price of oil increased approximately 8% from March 2011 to March 2012 driving the demand for drilling and exploration activity. The worldwide active rig count increased 7% from March 2011 to March 2012. Net sales of wire rope into the mining end market contributed $1.4 million of the increase in net sales for the three months ended March 31, 2012. Net sales into the crane end market were nearly flat when comparing first quarter of 2012 to first quarter of 2011. Our crane rope sales increased in North America primarily related to increased sales to aftermarket crane customers. In contrast, we experienced a decline in crane rope sales to the Original Equipment Manufacturers (“OEMs”) in the European markets. Wire rope sales represented 57% of our total consolidated net sales for the three months ended March 31, 2012 compared to 61% for the same period in 2011.

Excluding our Polish subsidiary, wire sales for the three months ended March 31, 2012 increased 16%, or $3.9 million, over the prior period. This increase in specialty wire sales was largely due to increasing market share and demand for infrastructure projects in Mexico. Wire sales represented 23% of our total consolidated net sales for the three months ended March 31, 2012 compared to 18% for the same period in 2011.

Net sales of EMC and synthetic rope did not significantly change over prior year.

Product prices have remained relatively stable to comparative prior year during the first quarter of 2012. As the dollar strengthened in relation to the euro and Mexican peso during the first quarter of 2012 compared to the first quarter of 2011, our net sales decreased approximately $3.3 million for the three months ended March 31, 2012 due to changes in foreign currency exchange rate fluctuations.

 

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Table of Contents

Gross profit

Gross profit increased $2.8 million, but gross margin decreased to 24% in the first quarter of 2012 from 26% for the same period in 2011. The decrease in gross margin is primarily driven by product mix as our Polish subsidiary has a higher percentage of wire and general purpose sales. Production of wire and general purpose wire rope is less complex and therefore has lower margins than our value-added products, such as specialty wire rope, synthetic rope and EMC. Prior to the acquisition of Drumet, wire sales and general purpose rope represented 18% and 10%, respectively, of our total consolidated net sales compared to 23% and 12%, respectively, currently. This decrease in gross margin was partially offset by reduced wire costs as we have increased consumption of internally produced wire at our European manufacturing facilities as a result of the purchase of Drumet.

The price of steel rod, our primary raw material in wire and wire rope, increased slightly in the first quarter compared to the same period in 2011, but decreased compared to year end 2011. The cost of other raw material components, such as polyethylene and polypropylene used to produce our synthetic rope products also increased. We monitor the cost of our raw materials and pass along price increases and decreases to our customers accordingly.

Other operating expenses

 

     Three months ended              
     March 31,     Change  
     2012     2011     Dollars     Percent  
     (dollars in thousands)  

Selling expenses

   $ (6,345   $ (5,743   $ (602     10

Administrative expenses

     (12,229     (13,196     967        (7 %) 

Amortization expense

     (3,202     (3,255     53        (2 %) 
  

 

 

   

 

 

   

 

 

   

Other operating expenses

   $ (21,776   $ (22,194   $ 418        (2 %) 

Other operating expenses decreased $0.4 million, or 2%, for the three months ended March 31, 2012 compared to the same period of 2011. Overall, total other operating expenses declined as a percentage of net sales from 16% for the three months ended March 31, 2011 to 13% for the three months ended March 31, 2012. Foreign currency exchange rate fluctuations accounted for $0.3 million of the decrease in other operating expenses for the three months ended March 31, 2012.

Selling expenses increased $0.6 million, or 10%, over prior period. Of the increase, $0.2 million is related to our acquisition of Drumet and the remainder is primarily due to the increase in expenses that vary with sales volume exclusive of the acquisition.

Administrative expenses decreased $1.0 million, or 7%, over prior period despite the fact that we incurred $1.0 million in additional administrative expenses during the first quarter of 2012 as a result of the acquisition of Drumet. The decrease was due to lower incentive compensation earned of $0.8 million in the first quarter of 2012 compared to the first quarter of 2011 as most of our compensation programs are based on quarterly profitability compared to budget. Additionally, our share-based compensation expense decreased $0.7 million as a result of 84% of outstanding stock option awards fully vesting in 2011. Acquisition costs incurred in the first quarter of 2012 were $0.7 million lower than first quarter of 2011 due to the timing of our purchase activity. We purchased Oliveira on November 16, 2010 and Drumet on July 18, 2011. These decreases in administrative expenses are partially offset by increased bank fees and management fees in 2012 of $0.4 million as compared to the same period last year.

 

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Table of Contents

Other expense, net

Other expense decreased by $3.8 million for the three months ended March 31, 2012, compared to the same period in 2011. Significant components of this change were as follows:

 

     Three months ended              
     March 31,     Change  
     2012     2011     Dollars     Percent  
     (dollars in thousands)  

Interest expense, net

     (11,570     (10,952     (618     6

Loss on investment in and advances to the China JV

     (440     (3,077     2,637        (86 %) 

Foreign currency exchange gains, net

     8,063        6,593        1,470        22

Other expense, net

     (10     (295     285        (97 %) 
  

 

 

   

 

 

   

 

 

   

Total other expense, net

     (3,957     (7,731     3,774        (49 %) 

 

   

Interest expense increased $0.6 million for the three months ended March 31, 2012. In June 2011, we issued an additional $150.0 million of 9.5% Senior Notes, resulting in approximately $3.6 million of increased interest expense for the three months ended March 31, 2012. This increase in outstanding debt was offset by a partial principal paydown on the Term Loan in June 2011, which resulted in interest expense savings of $1.7 million in the current quarter. Additionally, we incurred $0.7 million of interest expense related to borrowings under our revolving credit facilities. During the first quarter of 2011, we had not borrowed under our revolving credit facilities. The amortization of debt issuance costs and the discount/premium related to this debt issuance and modification, including amortization of the discount on our Polish Debt acquired in July 2011, resulted in an additional $0.4 million in interest expense for the three months ended March 31, 2012. Interest expense for the three months ended March 31, 2012 was partially offset by an increase in capitalized interest recorded of $2.1 million, which reflects a $1.9 million entry that decreased interest expense and increased the cost of property, plant and equipment to correct the effects of previous errors resulting from the Mexican subsidiaries’ non-GAAP accounting policy. Prior to 2012, we did not capitalize interest on construction in process for property, plant and equipment at our Mexican subsidiaries. These errors were not material to the current and any previously-reported periods.

 

   

The loss on investment in and advances to the China JV decreased $2.6 million for the three months ended March 31, 2012 compared to the same period in 2011. We discontinued applying the equity method during the first quarter of 2012 because our investment in the China JV was $0 at December 31, 2011. Pursuant to U.S. GAAP, we will not resume applying the equity method until the China JV subsequently reports sufficient net income to cover the net losses not recognized during the period the equity method is suspended. The losses incurred in the first quarter of 2012 related to advances, against which we fully reserved.

 

   

For the three months ended March 31, 2012, foreign currency exchange gains were $8.1 million compared to foreign currency exchange gains of $6.6 million for the same period in 2011. At March 31, 2012 and 2011, we had intercompany loans that required remeasurement in the aggregate amounts of $184.4 million and $120.3 million, respectively. The revaluation of intercompany loans denominated in U.S. dollars for subsidiaries whose functional currency is the Polish złoty resulted in $5.5 million of the gains recognized during the first quarter of 2012. The U.S. dollar to Polish złoty exchange rate at December 31, 2011 was $1.00 to zł.3.4127 compared to $1.00 to zł.3.1063 at March 31, 2012. The revaluation of intercompany loans denominated in U.S. dollars for subsidiaries whose functional currency is the euro resulted in $3.9 million of the gains recognized during the current quarter. The U.S. dollar to euro exchange rate at December 31, 2011 was $1.00 to €0.7729 compared to $1.00 to €0.7487 at March 31, 2012. The current year foreign currency exchange gains were partially offset by a $1.1 million foreign currency exchange loss related to the revaluation of the outstanding borrowings under the Euro Revolver by our U.S. subsidiary. The net foreign currency exchange gain recognized on the revaluation of intercompany loans in 2011 was due to the appreciation of the euro during the first quarter of 2011. The exchange rate at December 31, 2010 was $1.00 to €0.7484 compared to $1.00 to €0.7039 at March 31, 2011.

 

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Table of Contents

Income taxes

For the three months ended March 31, 2012, the Company incurred income tax expense of $4.9 million compared to $2.5 million for the three months ended March 31, 2011. The change in tax expense is primarily driven by increased book income in certain foreign jurisdictions. Continued operating losses in the U.S. results in tax benefits that the Company does not expect to realize and are therefore offset by an increased valuation allowance. The effective tax rate was 36% and 38% for the three months ended March 31, 2012 and 2011, respectively. The decrease in the effective tax rate is due in part to a greater portion of income in lower taxable jurisdictions. Unrecognized tax benefits increased $1.4 million for the three months ended March 31, 2012.

Non-GAAP Financial Measures

We define Adjusted EBITDA as net income (loss) plus, without duplication: interest expense, income tax expense (benefit), depreciation and amortization, as further adjusted by (i) other non-cash expenses, such as loss on our investment in the China JV, foreign currency exchange losses (gains) and share-based compensation expense, (ii) non-operating expenses, (iii) all fees, costs, expenses incurred in connection with any merger, consolidation, acquisition or offering of debt or equity securities, (iv) payments of the management fees pursuant to the Management Fee Letter with Paine & Partners, LLC (“Paine & Partners”), (v) reorganization or restructuring charges, reserves or expenses and (vi) all amounts deducted in arriving at net income (loss) in respect of severance packages payable in connection with the termination of any officer, director or employee. We define Acquisition Adjusted EBITDA as Adjusted EBITDA plus pro forma adjustments for acquisitions (EBITDA prior to the date of acquisition).

We have disclosed Adjusted EBITDA and Acquisition Adjusted EBITDA, non-GAAP performance and liquidity measures, as a means to enhance communications with security holders. Management uses Adjusted EBITDA as a measure for internal evaluation of performance and incentive plan purposes. Acquisition Adjusted EBITDA is used to compare our financial measure to those of our peers and for debt covenant calculations. The Senior Notes include a covenant that requires the Company to maintain a senior secured debt to Acquisition Adjusted EBITDA ratio that does not exceed 2.75 to 1.0 measured at the end of each quarter using the preceding four quarters consolidated Acquisition Adjusted EBITDA.

Adjusted EBITDA and Acquisition Adjusted EBITDA differ from net income (loss) and cash flows from operating activities, the most comparable GAAP financial measures, in that they exclude and add back certain items. These items are excluded or included by management to better evaluate normalized operational earnings and to evaluate liquidity using the ratio of Acquisition Adjusted EBITDA to total debt. As a result, Adjusted EBITDA and Acquisition Adjusted EBITDA may not reflect important aspects of the results of our operations and cash flows. Our presentation and calculation of Adjusted EBITDA and Acquisition Adjusted EBITDA may not be comparable to that of other companies. The concepts of Adjusted EBITDA and Acquisition Adjusted EBITDA have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA and Acquisition Adjusted EBITDA exclude certain tax payments that may represent a reduction in cash available to us; do not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; do not reflect capital cash expenditures, future requirements for capital expenditures or contractual commitments; do not reflect changes in, or cash requirements for, our working capital needs; and do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness.

 

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The following is a reconciliation of net income to Adjusted EBITDA and Acquisition Adjusted EBITDA:

 

     Three months ended  
     March 31,  
     2012     2011  
     (dollars in thousands)  

Net income

   $ 8,710      $ 4,163   

Plus:

    

Interest expense, net

     11,570        10,952   

Income tax expense

     4,949        2,519   

Depreciation and amortization

     10,035        9,523   

Loss on investment in and advances to the China JV

     440        3,077   

Foreign currency exchange gains, net

     (8,063     (6,593

Share-based compensation

     269        972   

Other expense, net

     10        295   

Acquisition costs

     219        950   

Purchase accounting (inventory step-up)

     —          1,289   

Bank fees

     482        244   

Management fee and board payments

     851        733   

Restructuring costs (a)

     851        931   

Other adjustments

     318        261   
  

 

 

   

 

 

 

Adjusted EBITDA

     30,641        29,316   

Drumet pro forma EBITDA (b)

     —          3,025   
  

 

 

   

 

 

 

Acquisition Adjusted EBITDA

   $ 30,641      $ 32,341   
  

 

 

   

 

 

 

 

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The following is a reconciliation of cash flows from operating activities to Adjusted EBITDA and Acquisition Adjusted EBITDA:

 

     Three months ended  
     March 31,  
     2012     2011  
     (dollars in thousands)  

Net cash provided by operating activities

   $ 9,964      $ 9,084   

Plus: Adjustments to reconcile net income to Adjusted EBITDA:

    

Interest expense, net

     11,570        10,952   

Income tax expense

     4,949        2,519   

Foreign currency exchange gains, net

     (8,063     (6,593

Other expense, net

     10        295   

Acquisition costs

     219        950   

Purchase accounting (inventory step-up)

     —          1,289   

Bank fees

     482        244   

Management fee and board payments

     851        733   

Restructuring costs (a)

     851        931   

Other adjustments

     318        261   

Less: Cash flow adjustments to net income not included in Adjusted EBITDA

    

Amortization of debt issuance costs and discount/premium

     (1,719     (1,307

Other, net

     1,870       (512

Unrealized foreign currency exchange gains, net

     8,233        7,224   

Changes in deferred income taxes

     (374     (53

Changes in assets and liabilities

     1,480        3,299   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 30,641      $ 29,316   

Drumet pro forma EBITDA (b)

     —          3,025   
  

 

 

   

 

 

 

Acquisition Adjusted EBITDA

   $ 30,641      $ 32,341   
  

 

 

   

 

 

 

 

(a) In 2012, restructuring costs consisted primarily of consultation fees for legal entity restructurings, professional service costs for our registration statement filing with the SEC, which was declared effective on February 7, 2012, severance costs and additional costs incurred with warehouse closures. In 2011, restructuring costs consisted primarily of legal fees and other costs associated with entity restructuring activities, consulting fees associated with our SEC registration statement filing, litigation of various claims and severance costs at our Mexican subsidiaries.
(b) The Drumet acquisition closed on July 18, 2011 and its results have been included in our consolidated statement of operations for the three months ended March 31, 2012. A pro forma adjustment was included for the three months ended March 31, 2011 as if the acquisition had been consummated on the first day of 2011 for comparative purposes. This amount represents the net income of Drumet before interest, taxes, depreciation and amortization and is converted from Polish złotys to U.S. dollars using the average exchange rate for the first quarter of 2011. The amount for the three months ended March 31, 2011 was converted from Polish złotys to U.S. dollars using $1.00 to zł.2.8868.

Liquidity and Capital Resources

Overview

Total available liquidity, defined as total availability under our revolving credit facilities plus cash and cash equivalents, was $85.9 million at March 31, 2012, compared to $86.9 million at December 31, 2011. Our principal sources of liquidity consist of cash from operations and borrowings under our revolving credit agreements and access to debt markets. From time to time, we may use external sources of cash, principally bank debt and public and private debt, to refinance existing indebtedness and fund acquisitions. Our principal uses of cash are to support operations and service our debt. Our liquidity is influenced by many factors, including the amount and timing of our cash collections from our customers, fluctuations in the cost of our raw materials and the amount we invest in acquisitions and capital expenditures. We monitor the cost of our raw materials and pass along price increases and decreases accordingly. We currently have no plans to enter into derivative agreements to mitigate raw material price changes in any of our facilities.

 

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We reinvest the earnings of substantially all of our non-U.S. subsidiaries in those respective operations. The foreign operating subsidiaries use cash generated from earnings to fund working capital, invest in capital expenditures and service interest and principal payments on intercompany debt. Our outstanding debt is issued by the U.S. operating subsidiary and there are intercompany loans within the corporate legal structure that are paid with earnings from the operating subsidiaries in foreign jurisdictions to provide liquidity in the U.S. for interest and principal payments on our outstanding debt. Of the consolidated cash and cash equivalents balance of $29.3 million at March 31, 2012, cash and cash equivalents held in foreign countries were $26.9 million, of which substantially all was held in the subsidiaries’ local currency. The cash balances in currencies other than the U.S. dollar are primarily in the euro, the Mexican peso and the Polish złoty, all of which can be readily converted to U.S. dollars. As part of our business strategy, we plan to indefinitely reinvest the earnings of our foreign operations outside of the U.S.; however, should the cash held at our Mexican subsidiaries, which are the only foreign subsidiaries of our U.S. operations, be repatriated to the U.S., we would be required to accrue and pay U.S. income taxes to repatriate these funds, which could be material.

Based on current expectations, management believes that existing cash balances, operating cash flows, credit facilities and access to debt and other available financing resources will be sufficient to fund anticipated operating, capital and debt service requirements and other commitments in the foreseeable future. However, there can be no assurance of the cost or availability of future borrowings, if any, under our credit facilities or in the debt markets.

Revolving Credit Facility Activity

During the quarter ended March 31, 2012, we borrowed an additional $6.9 million under our revolving credit agreements for general corporate purposes. Of the $116.1 million of borrowing capacity under our three revolving credit agreements, we had borrowed $52.7 million as of March 31, 2012, leaving $56.6 million of availability at March 31, 2012 after taking into consideration outstanding letters of credit and borrowing base calculations. Detail of our revolving credit activity for the first three months of 2012 was as follows:

Revolving Credit Agreement, classified as a current liability

 

     Amount      Weighted-
average
interest
rate
 
     (dollars in thousands)  

Amount outstanding at March 31, 2012

   $ 18,739         4.00

Average amount outstanding during the period ended March 31, 2012

     25,621         4.00

Maximum amount outstanding during the period ended March 31, 2012

     32,339         4.00

Euro Facility, classified as long-term debt

 

     Amount      Weighted-
average
interest
rate
 
     (dollars in thousands)  

Amount outstanding at March 31, 2012

   $ 33,918         4.90

Average amount outstanding during the period ended March 31, 2012

     33,784         5.09

Maximum amount outstanding during the period ended March 31, 2012

     34,139         5.06

For a detailed discussion of our borrowings, see Note 8—”Borrowings” to our audited consolidated financial statements in Item 8, Financials Statements and Supplementary Data, of our annual report on Form 10-K for the year ended December 31, 2011.

 

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Cash Flow Information

The following table summarizes our cash flows from operating, investing and financing activities in the first three months of 2012 and 2011:

 

     Three months ended  
     March 31,  
     2012     2011  
     (dollars in thousands)  

Cash flows provided by (used in)

    

Operating activities

   $ 9,964      $ 9,084   

Investing activities

     (7,573     (4,587

Financing activities

     (2,152     (800

Effect of exchange rates on cash and cash equivalents

     1,376        683   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,615        4,380   

Cash and cash equivalents, beginning of period

     27,663        53,880   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 29,278      $ 58,260   
  

 

 

   

 

 

 

Operating Activities

Cash flow from operating activities increased slightly in the first three months of 2012 as compared to the same period in 2011 due primarily to a decrease in cash earnings offset by an increase in cash provided by working capital changes. The increase in cash provided by working capital changes includes an increase of $10.1 million in accrued interest that is payable in the second quarter of 2012.

Investing Activities

Net investing cash outflows increased $3.0 million primarily due to an increase in capital spending in our operating facilities of $3.0 million. Capital expenditures totaled approximately $7.1 million and $4.1 million for the three months ended March 31, 2012 and 2011, respectively. We estimate that our planned capital spending will be between $32.0 million and $35.0 million for 2012. Actual capital expenditures for the remainder of 2012 may differ materially from our estimate.

Financing Activities

For the three months ended March 31, 2012, cash flows used in financing activities was $2.2 million compared to $0.8 million for the three months ended March 31, 2011. In 2012, we borrowed $6.9 million under our revolving credit agreements, which were offset by principal payments of $4.8 million, which includes a $4.5 million payment on debt acquired with the purchase of Drumet and an installment payment of $4.3 million related to the acquisition of Drumet. In 2011, there was no borrowing or repayment activity under our revolving credit agreements.

Off-balance Sheet Arrangements

Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases.

Contractual Obligations and Commitments

The following table provides information regarding our contractual obligations and commitments as of March 31, 2012. Amounts payable in a currency other than the U.S. dollar have been translated using the foreign currency exchange rate in effect as of March 31, 2012. Amounts drawn under our revolving credit facilities are presented in the table based on our presentation in the financial statements. The Revolving Credit Agreement is classified as current and amounts drawn are denoted as due within one year and the Euro Facility is classified as long-term and amounts drawn are denoted as due based on the earliest contractual maturity date.

 

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We believe we will be able to fund these obligations through cash generated from our operations, available credit facilities, refinancing or changes to our capital structure. Our contractual obligations will have an impact on our future liquidity.

 

     Payments due by period  
     Total      Remainder
of 2012
     2013      2014      2015      2016      Thereafter  
     (dollars in thousands)  

Revolving Credit Agreement

   $ 18,739       $ 18,739       $ —         $ —         $ —         $ —         $ —     

Long-term debt

     584,345         9,428         9,654         139,899         97         97         425,170   

Interest on long-term debt (1)

     229,751         45,315         46,918         41,765         40,375         40,375         15,003   

Capital lease obligations

     10,223         3,230         3,548         941         1,756         210         538   

Operating lease obligations

     17,091         3,328         3,820         3,413         2,773         1,780         1,977   

Pension & postemployment benefits

     4,473         292         376         409         406         432         2,558   

Acquisition installment payment (2)

     5,717         5,717         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 870,339       $ 86,049       $ 64,316       $ 186,427       $ 45,407       $ 42,894       $ 445,246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amounts include contractual interest payments using the interest rates as of March 31, 2012 applicable to our variable interest debt instruments and stated fixed rates for all other debt instruments.

(2) 

On July 18, 2011, we acquired Drumet for an aggregate purchase price equivalent to approximately $62.4 million using the exchange rates in effect at closing. The purchase price is to be paid in three installments. The remaining installment of €4.3 million is payable on July 31, 2012.

Income Taxes—Due to the uncertainty with respect to the timing of cash payments, the table above excludes unrecognized tax benefits. Unrecognized tax benefits of $22.1 million are classified on our consolidated balance sheets in Other noncurrent accrued liabilities and Noncurrent deferred income tax liabilities at March 31, 2012. We do not expect to make significant payments on these liabilities within the next year. For further information, see Note 8—”Income Taxes” to the unaudited interim consolidated financial statements contained in this quarterly report.

Critical Accounting Policies

A discussion of our critical accounting policies can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our annual report on Form 10-K for the year ended December 31, 2011. There have been no significant changes in our critical accounting policies since year-end.

Recently Adopted Accounting Standards

Note 1— “Interim Financial Statement Presentation” to the unaudited interim consolidated financial statements contained in this quarterly report includes a description of the recently adopted accounting standards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Other than as discussed below, there was no material change during the quarter from the information included in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in the annual report on Form 10-K for the year ended December 31, 2011.

Foreign Currency Exchange Rate Risk. The consolidated financial statements are prepared in U.S. dollars. The assets and liabilities of certain of our foreign subsidiaries are denominated in foreign currencies, which create exposure to changes in foreign currency exchange rates. Our primary exposure to foreign currency exchange fluctuations are the U.S. dollar/euro and U.S. dollar/złoty related to subsidiaries with intercompany loans denominated in currencies other than their local currency. At March 31, 2012, we had intercompany loans that required remeasurement in the aggregate amounts of $184.4 million. A hypothetical 10% increase in the U.S. dollar to the euro exchange rate would result in a greater foreign currency exchange gain of approximately $14.8 million compared to the actual gain recorded of $3.9 million. A hypothetical 10% decrease in the exchange rate would result in a foreign currency exchange loss of approximately $8.6 million. A hypothetical 10% increase in the U.S. dollar to the Polish złoty exchange rate would result in a greater foreign currency exchange gain of approximately $11.8 million compared to the actual gain recorded of approximately $5.5 million. A hypothetical 10% decrease in the exchange rate would result in a foreign currency exchange loss of approximately $0.8 million. We also have some exposure to foreign exchange fluctuations related to the Mexican peso/U.S. dollar on an intercompany loan, but the overall impact on the consolidated statements of operations is insignificant. We manage this risk by monitoring our foreign currency denominated cash inflows and outflows.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation prior to filing this report of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

For information related to the Company’s legal proceedings, refer to Note 10—”Commitments and Contingencies” under Part I, Item 1 of this quarterly report.

Item 1A. Risk Factors

There were no material changes during the quarter to the Risk Factors disclosed in Item 1A, Risk Factors, in our annual report on Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On May 2, 2012, the Company amended its policies and procedures governing related party transactions to, among other things, provide that related party transactions that are subject to such policy must be approved by the full board of directors (rather than the Audit Committee).

Item 6. Exhibits

 

Exhibit
No.

  

Description of Exhibits Filed with this Report

31.1    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following financial information from WireCo WorldGroup’s quarterly report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language) includes (i) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      WireCo WorldGroup Inc.
Dated: May 11, 2012     By:   /s/ J. Keith McKinnish
      J. Keith McKinnish
      Senior Vice President and Chief Financial Officer
      (Principal Financial Officer)
Dated: May 11, 2012     By:   /s/ Beth Armstrong
      Beth Armstrong
      Vice President and Chief Accounting Officer
      (Principal Accounting Officer)

 

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