Attached files
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EXCEL - IDEA: XBRL DOCUMENT - WireCo WorldGroup Inc. | Financial_Report.xls |
EX-31.2 - CFO 302 CERTIFICATION - WireCo WorldGroup Inc. | exhibit312_q3x2014.htm |
EX-31.1 - CEO 302 CERTIFICATION - WireCo WorldGroup Inc. | exhibit311_q3x2014.htm |
EX-32.2 - CFO 906 CERTIFICATION - WireCo WorldGroup Inc. | exhibit322_q3x2014.htm |
EX-32.1 - CEO 906 CERTIFICATION - WireCo WorldGroup Inc. | exhibit321_q3x2014.htm |
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 September 30, 2014
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
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, Missouri | 64163 | |||
(Address of registrant's executive offices) | (Zip Code) | |||
(816) 270-4700 | ||||
(Registrant's telephone number, including area code) |
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 ¨ NO x
NOTE: While the Registrant is a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months.
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 November 1, 2014 the Registrant had 100 shares of common stock outstanding.
WireCo WorldGroup Inc.
Quarterly Report
For the period ended September 30, 2014
TABLE OF CONTENTS
1
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements (unaudited)
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
Assets | September 30, 2014 | December 31, 2013 | ||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 41,718 | $ | 34,987 | ||||
Restricted cash | 1,873 | 2,887 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,106 and $3,458, at September 30, 2014 and December 31, 2013, respectively | 141,982 | 148,564 | ||||||
Inventories, net | 227,590 | 228,245 | ||||||
Current deferred income tax assets | 5,289 | 5,468 | ||||||
Prepaid expenses and other current assets | 24,154 | 12,657 | ||||||
Total current assets | $ | 442,606 | $ | 432,808 | ||||
Property, plant and equipment, less accumulated depreciation of $180,162 and $163,250, at September 30, 2014 and December 31, 2013, respectively | 330,407 | 366,338 | ||||||
Intangible assets, net | 132,748 | 150,287 | ||||||
Goodwill | 191,901 | 198,329 | ||||||
Deferred financing fees, net | 17,189 | 22,702 | ||||||
Non-current deferred income tax assets | 15,750 | 8,078 | ||||||
Other non-current assets | 15,575 | 20,673 | ||||||
Total assets | $ | 1,146,176 | $ | 1,199,215 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 11,177 | $ | 14,933 | ||||
Interest payable | 17,609 | 6,731 | ||||||
Accounts payable | 80,026 | 76,181 | ||||||
Accrued compensation and benefits | 22,473 | 17,873 | ||||||
Current deferred income tax liabilities | 707 | 742 | ||||||
Other current liabilities | 23,987 | 16,260 | ||||||
Total current liabilities | $ | 155,979 | $ | 132,720 | ||||
Long-term debt, excluding current maturities | 845,851 | 862,492 | ||||||
Non-current deferred income tax liabilities | 74,797 | 75,763 | ||||||
Other non-current liabilities | 22,378 | 32,007 | ||||||
Total liabilities | $ | 1,099,005 | $ | 1,102,982 | ||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.01 par value. 3,000,000 shares authorized; 2,054,374 and 2,053,174 shares issued, respectively, 2,005,205 and 2,004,005 shares outstanding, respectively | $ | 21 | $ | 21 | ||||
Additional paid-in capital | 230,606 | 225,106 | ||||||
Accumulated other comprehensive loss | (34,789 | ) | (18,527 | ) | ||||
Accumulated deficit | (132,669 | ) | (94,809 | ) | ||||
Treasury stock, at cost. 49,169 shares at September 30, 2014 and December 31, 2013 | (14,465 | ) | (14,465 | ) | ||||
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc. | $ | 48,704 | $ | 97,326 | ||||
Non-controlling interests | (1,533 | ) | (1,093 | ) | ||||
Total stockholders’ equity | $ | 47,171 | $ | 96,233 | ||||
Total liabilities and stockholders’ equity | $ | 1,146,176 | $ | 1,199,215 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
2
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands)
(unaudited)
Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net sales | $ | 217,076 | $ | 203,777 | $ | 654,086 | $ | 616,173 | |||||||
Cost of sales | (170,293 | ) | (155,396 | ) | (493,839 | ) | (469,303 | ) | |||||||
Gross profit | 46,783 | 48,381 | 160,247 | 146,870 | |||||||||||
Other operating expenses: | |||||||||||||||
Selling expenses | (10,787 | ) | (10,339 | ) | (33,328 | ) | (32,141 | ) | |||||||
Administrative expenses | (21,499 | ) | (21,562 | ) | (62,971 | ) | (63,125 | ) | |||||||
Amortization expense | (2,318 | ) | (4,637 | ) | (8,056 | ) | (13,232 | ) | |||||||
Total other operating expenses | (34,604 | ) | (36,538 | ) | (104,355 | ) | (108,498 | ) | |||||||
Operating income | 12,179 | 11,843 | 55,892 | 38,372 | |||||||||||
Other income (expense): | |||||||||||||||
Interest expense, net | (19,603 | ) | (20,107 | ) | (59,357 | ) | (60,783 | ) | |||||||
Foreign currency exchange gains (losses), net | (31,816 | ) | 14,417 | (35,131 | ) | 4,400 | |||||||||
Loss on extinguishment of debt | (617 | ) | — | (617 | ) | — | |||||||||
Other income (expense), net | 125 | (1,165 | ) | 703 | (451 | ) | |||||||||
Total other expense, net | (51,911 | ) | (6,855 | ) | (94,402 | ) | (56,834 | ) | |||||||
Income (loss) before income taxes | (39,732 | ) | 4,988 | (38,510 | ) | (18,462 | ) | ||||||||
Income tax benefit (expense) | 4,540 | (5,632 | ) | 1,177 | (6,985 | ) | |||||||||
Net loss | (35,192 | ) | (644 | ) | (37,333 | ) | (25,447 | ) | |||||||
Less: Net income (loss) attributable to non-controlling interests | 113 | (110 | ) | 527 | (465 | ) | |||||||||
Net loss attributable to WireCo WorldGroup (Cayman) Inc. | $ | (35,305 | ) | $ | (534 | ) | $ | (37,860 | ) | $ | (24,982 | ) |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
3
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss | $ | (35,192 | ) | $ | (644 | ) | $ | (37,333 | ) | $ | (25,447 | ) | |||
Other comprehensive income (loss): | |||||||||||||||
Foreign currency translation gain (loss) | (12,923 | ) | 1,622 | (17,229 | ) | 1,454 | |||||||||
Comprehensive income (loss) | (48,115 | ) | 978 | (54,562 | ) | (23,993 | ) | ||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests | 150 | (248 | ) | (440 | ) | (690 | ) | ||||||||
Comprehensive income (loss) attributable to WireCo WorldGroup (Cayman) Inc. | $ | (48,265 | ) | $ | 1,226 | $ | (54,122 | ) | $ | (23,303 | ) |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
4
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended | ||||||||
September 30, | ||||||||
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (37,333 | ) | $ | (25,447 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 38,140 | 42,753 | ||||||
Amortization of debt issuance costs, discounts and premium | 6,268 | 6,619 | ||||||
Loss on extinguishment of debt | 617 | — | ||||||
Share-based compensation | 5,539 | 3,719 | ||||||
Unrealized gain on derivative instruments | (1,882 | ) | — | |||||
Unrealized foreign currency exchange losses (gains), net | 35,722 | (5,164 | ) | |||||
Provision for deferred income taxes | (3,710 | ) | (4,423 | ) | ||||
Other adjustments | 2,476 | 2,072 | ||||||
Changes in assets and liabilities, net of business acquired: | ||||||||
Accounts receivable | 5 | (5,697 | ) | |||||
Inventories | (12,103 | ) | 15,060 | |||||
Prepaid expenses and other assets | (9,722 | ) | 54 | |||||
Interest payable | 9,603 | 12,774 | ||||||
Accounts payable | 8,673 | (10,644 | ) | |||||
Other accrued liabilities | 6,133 | 7,330 | ||||||
Net cash provided by operating activities | $ | 48,426 | $ | 39,006 | ||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (16,213 | ) | (22,479 | ) | ||||
Acquisition of business | (4,573 | ) | — | |||||
Other investing activities | 1,951 | (35 | ) | |||||
Net cash used in investing activities | $ | (18,835 | ) | $ | (22,514 | ) | ||
Cash flows from financing activities: | ||||||||
Principal payments on long-term debt | (5,621 | ) | (11,043 | ) | ||||
Debt issuance costs paid | — | (1,880 | ) | |||||
Retirement of long-term debt | (26,946 | ) | — | |||||
Borrowings under revolving credit agreement | 152,350 | 108,630 | ||||||
Repayments under revolving credit agreement | (140,300 | ) | (121,530 | ) | ||||
Repayments of short-term borrowings | — | (1,586 | ) | |||||
Other financing activities | (437 | ) | — | |||||
Net cash used in financing activities | $ | (20,954 | ) | $ | (27,409 | ) | ||
Effect of exchange rates on cash and cash equivalents | (1,906 | ) | 239 | |||||
Increase (decrease) in cash and cash equivalents | $ | 6,731 | $ | (10,678 | ) | |||
Cash and cash equivalents, beginning of period | 34,987 | 49,244 | ||||||
Cash and cash equivalents, end of period | $ | 41,718 | $ | 38,566 | ||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash paid for interest, net of interest capitalized | $ | 41,462 | $ | 41,901 | ||||
Cash paid for income taxes, net of refunds | 6,632 | 6,139 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
5
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
(unaudited)
(1) Interim Financial Statement Presentation
The financial information included in this quarterly report on Form 10-Q are those of WireCo WorldGroup (Cayman) Inc., its wholly-owned subsidiaries, including WireCo WorldGroup Inc., and subsidiaries in which it has a controlling interest (collectively, the “Company”). The consolidated financial statements include the activity of Lankhorst Euronete - Indústria e Comércio Ltda and WireCo WorldGroup US Holdings, Inc., both indirect subsidiaries of the Company that are not wholly-owned, but over which the Company has control. The Company reports the non-controlling interests in these consolidated subsidiaries as a component of equity separate from the Company's equity. The Company's ownership interest in certain other entities are accounted for under the equity method and are not consolidated. All intercompany transactions and balances have been eliminated in consolidation.
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 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, 2013.
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. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenue and expenses. Actual results could differ from those estimates. Certain reclassifications, not affecting net income, have been made to prior year amounts on the Consolidated Statements of Operations to conform to the current year presentation.
Out-of-period Error
During the first quarter of 2014, the Company identified certain prior period accounting entries, which were not recorded in the proper functional currency. The Company corrected this error in the first quarter of 2014 resulting in an increase to Other Comprehensive Loss of $3,351 on the Consolidated Statement of Comprehensive Income (Loss). This error was not material to the first quarter or to the first nine months of 2014 and any previously reported periods.
Accounting Pronouncement Adopted During 2014
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires the netting of unrecognized tax benefits against all same-jurisdiction deferred tax assets for a loss or other carryforward that would apply in settlement of the uncertain tax positions. The Company adopted ASU 2013-11 prospectively on January 1, 2014, which only affected presentation on the Consolidated Balance Sheet. There was no impact on the Company's operating results.
Accounting Pronouncements Issued During 2014
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP. The new standard is effective on January 1, 2017 and early adoption is not permitted. ASU 2014-09 allows the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect of ASU 2014-09 and has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern, which requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 is effective on December 31, 2016, with early adoption permitted. The Company does not anticipate that this guidance will materially impact its consolidated financial statements.
6
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
(2) Inventories, net
The major classes of inventories were as follows as of the dates indicated:
September 30, 2014 | December 31, 2013 | |||||||
Raw materials, net | $ | 84,179 | $ | 74,486 | ||||
Work in process, net | 23,017 | 18,612 | ||||||
Finished goods, net | 120,394 | 135,147 | ||||||
Inventories, net | $ | 227,590 | $ | 228,245 |
During the third quarter of 2014, the Company increased the breadth and depth of its Inventory Optimization Program, which was implemented during the third quarter of 2013, including initiating a plan to sell higher volumes of its slower moving inventory, which had historically sold at or above cost. This initiative resulted in sales below cost during the third quarter of 2014. As a result, the Company adjusted certain inventory to its net realizable value and recognized a charge of $9,244 and $2,970, which is included in Cost of sales in the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013, respectively. The Inventory Optimization Program is designed to generate cash in the short-term instead of holding certain inventory for longer periods of time and to create efficiencies from a physical material movement perspective at the Company's manufacturing and distribution facilities.
(3) Intangible Assets and Goodwill
The components of finite-lived intangible assets were as follows as of the dates indicated:
September 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||||
Finite-lived assets | ||||||||||||||||||||||||
Customer relationships | $ | 127,698 | $ | (87,143 | ) | $ | 40,555 | $ | 132,397 | $ | (82,569 | ) | $ | 49,828 | ||||||||||
Patented and unpatented technology | 23,169 | (10,358 | ) | 12,811 | 24,320 | (9,508 | ) | 14,812 | ||||||||||||||||
Other | 6,615 | (6,615 | ) | — | 7,193 | (6,966 | ) | 227 | ||||||||||||||||
Total finite-lived intangible assets | $ | 157,482 | $ | (104,116 | ) | $ | 53,366 | $ | 163,910 | $ | (99,043 | ) | $ | 64,867 |
Using the exchange rates in effect at period end, estimated amortization of finite-lived intangible assets as of September 30, 2014 was as follows:
Remainder of 2014 | $ | 2,440 | ||
2015 | 9,734 | |||
2016 | 9,434 | |||
2017 | 8,309 | |||
2018 | 3,835 | |||
Thereafter | 19,614 | |||
Total | $ | 53,366 |
Intangible assets with indefinite lives are not amortized. The carrying values of trade names as of September 30, 2014 and December 31, 2013 were $79,382 and $85,420, respectively.
7
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
The change in the carrying value of goodwill was as follows as of the dates indicated:
December 31, 2013 | $ | 198,329 | ||
Foreign currency translation | (6,428 | ) | ||
September 30, 2014 | $ | 191,901 |
(4) Borrowings
Long-term debt consisted of the following as of the dates indicated:
September 30, 2014 | December 31, 2013 | |||||||
Borrowings under Revolving Loan Facility | $ | 44,050 | $ | 32,000 | ||||
Polish Debt due 2014 | 8,029 | 8,860 | ||||||
Term Loan due 2017 | 325,192 | 330,813 | ||||||
9.00% Senior Notes due 2017 | 56,000 | 82,500 | ||||||
9.50% Senior Notes due 2017 | 425,000 | 425,000 | ||||||
Other indebtedness | 188 | 688 | ||||||
Total debt at face value | 858,459 | 879,861 | ||||||
Less: Unamortized discount, net | (1,431 | ) | (2,436 | ) | ||||
Less: Current maturities of long-term debt | (11,177 | ) | (14,933 | ) | ||||
Total long-term debt | $ | 845,851 | $ | 862,492 |
As of September 30, 2014, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. For a detailed discussion of the Company's borrowings, see Note 8—“Borrowings” to the Company's audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of the annual report on Form 10-K for the year ended December 31, 2013.
Senior Secured Credit Facilities - Revolving Loan Facility and Term Loan due 2017
The Company's maximum borrowing capacity under the Revolving Loan Facility is $145,000. As of September 30, 2014, availability under the Revolving Loan Facility was $99,970. Availability is based upon the maximum borrowing capacity, less outstanding borrowings and letters of credit, and if applicable, further restricted by certain covenants in the Company's credit agreements. Outstanding letters of credit were $980 at September 30, 2014. The interest rate on the Revolving Loan Facility and Term Loan due 2017 at September 30, 2014 was 5.10% and 6.00%, respectively.
9.00% Senior Notes due 2017 (formerly the 11.75% Senior Notes)
On July 16, 2014, WireCo WorldGroup Inc. entered into an amendment to the Note Purchase Agreement that reduced the interest rate from 11.75% to 9.00% and provided a waiver for the notice of redemption. On July 17, 2014, the Company redeemed $26,500 of the $82,500 aggregate principal amount of the 9.00% Senior Notes, using cash drawn under the Revolving Loan Facility. As a result of redeeming earlier than the stated maturity of May 15, 2017, the Company paid a call premium of approximately $400 and wrote-off $217 of unamortized debt issuance costs associated with the pro rata portion that was redeemed. These costs were recorded in Loss on extinguishment of debt in the consolidated statements of operations for the three and nine months ended September 30, 2014.
8
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Interest expense, net
Net interest expense consists of:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Interest on long-term debt | $ | 17,413 | $ | 18,539 | $ | 53,527 | $ | 55,634 | ||||||||
Amortization of debt issuance costs, discounts and premium | 2,091 | 2,391 | 6,268 | 6,619 | ||||||||||||
Capitalized interest | (265 | ) | (255 | ) | (635 | ) | (1,068 | ) | ||||||||
Other | 364 | (568 | ) | 197 | (402 | ) | ||||||||||
Interest expense, net | $ | 19,603 | $ | 20,107 | $ | 59,357 | $ | 60,783 |
(5) Derivative Financial Instruments
In late September 2014, the Company entered into cross-currency swaps with three counterparties to economically hedge exposures to foreign currency exchange risk. The cross-currency swaps notional value is $300,000, at a weighted average foreign currency exchange rate of $1.00 to €0.7820, and matures in February 2017. In accordance with the cross-currency swap agreements, on a semi-annual basis, the Company pays interest at a weighted average fixed rate of 8.79% and receives interest based on a fixed rate of 9.50%.
These derivative financial instruments have not been designated for hedge accounting treatment and accordingly, are adjusted to fair value through the consolidated statements of operations. The notional value is marked-to-market each reporting period based on the current spot rate, and gains and losses are classified in Foreign currency exchange gains (losses). Refer to Note 6—“Fair Value Measurements” for additional information regarding the fair value of the Company’s derivative arrangements.
(6) Fair Value Measurements
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, accounts payable and the Polish Debt due 2014. The carrying amounts reported on the consolidated balance sheets for these items approximate fair market value due to their relative short-term nature.
The table below sets forth by level, within the fair value hierarchy, the Company's financial instruments that are measured at fair value on a recurring basis:
September 30, 2014 | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Other non-current assets | ||||||||||||
Derivative instruments: | ||||||||||||
Cross-currency swap fair value | $ | — | $ | 1,882 | $ | — |
The Company's derivative financial instruments are valued using discounted cash flow techniques. Market interest rate and foreign currency exchange rate inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk.
The carrying amounts and estimated fair values of the Company’s long-term debt at September 30, 2014 were as follows:
Carrying amount | Estimated fair value | |||||||
Revolving Loan Facility | $ | 44,050 | $ | 44,050 | ||||
Term Loan due 2017 | 323,471 | 325,870 | ||||||
9.00% Senior Notes due 2017 | 56,000 | 56,840 | ||||||
9.50% Senior Notes due 2017 | 425,474 | 437,750 |
9
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
As the Revolving Loan Facility is a revolving credit agreement, the carrying amount approximates fair value. The estimated fair value of the Term Loan due 2017 is based on rates currently available for obligations with similar terms and maturities (Level 2 inputs). The estimated fair value of the privately placed 9.00% Senior Notes is based on a model that incorporates assumptions a market participant would use in pricing the liability (Level 3 inputs), and the estimated fair value of the 9.50% Senior Notes is based on current market rates in inactive markets (Level 2 inputs).
(7) Share-based Compensation
Changes in the Company's outstanding service-based stock option awards since December 31, 2013 were as follows:
Options | Number of options | Weighted average exercise price | Weighted average remaining contractual term (years) | ||||||
Outstanding at December 31, 2013 | 481,970 | $ | 163.19 | ||||||
Granted | 40,000 | 288.68 | |||||||
Exercised | (1,200 | ) | 190.00 | ||||||
Expired | (346 | ) | 294.18 | ||||||
Other | (3,933 | ) | 100.00 | ||||||
Outstanding at September 30, 2014 | 516,491 | $ | 173.24 | 5.25 | |||||
Vested and expected to vest as of September 30, 2014 | 516,491 | 173.24 | 5.25 | ||||||
Exercisable at September 30, 2014 | 359,441 | 133.02 | 3.66 |
The fair value of the service-based stock option awards granted during 2014 were estimated on the date of grant using the Black-Scholes option-pricing model. Since there were multiple grant dates, the range of assumptions used in the model are noted in the following table.
2014 | ||
Expected volatility (1) | 44.56% - 45.36% | |
Risk-free interest rate (2) | 1.99% - 2.24% | |
Expected term of the option (years) (3) | 6.50 | |
Expected dividend yield | —% | |
Grant-date fair value | $129.37 - $138.42 |
(1) | Based on the average historical volatility of similar entities with publicly traded shares since the Company's shares are privately held. |
(2) | Based on the U.S. Treasury interest rate whose term is consistent with the expected term of the stock options. |
(3) | Based on the expected term considering vesting and contractual terms. |
At September 30, 2014, total unrecognized compensation cost related to the unvested portion of the Company's service-based stock option awards that remains to be expensed was $17,828, with the weighted average remaining years to vest of approximately 1.81 years. There were 26,779 awards available for future grants under the 2008 Long Term Incentive Plan at September 30, 2014.
(8) Restructuring
During 2013, the Company formalized a restructuring plan, which included changes in certain executive management positions and headcount reductions at certain manufacturing facilities due to lower than expected sales volumes. As a result of these actions, the Company recorded restructuring charges related to employee termination and related benefits in Administrative expenses in the consolidated statement of operations during the year ended December 31, 2013. The accrual balances are included in Other current liabilities on the consolidated balance sheets.
10
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
A rollforward of these restructuring activities is set forth below:
Balance at December 31, 2013 | $ | 2,812 | |
Payments made in 2014 | (2,442 | ) | |
Balance at September 30, 2014 | $ | 370 |
(9) Income Taxes
The Company determines the interim tax provision by applying an estimate of the annual effective tax rate to the year-to-date pretax book income (loss) and adjusts for discrete items during the reporting period, if any. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded.
The effective income tax rate for the three months ended September 30, 2014 and 2013 was 11.4% and 112.9%, respectively. The effective income tax rate for the nine months ended September 30, 2014 and 2013 was 3.1% and (37.8)%, respectively. The Company's effective tax rates differ from the applicable statutory tax rate primarily due to a full valuation allowance on U.S. deferred tax assets, the mix of earnings (losses) by jurisdiction, and the effects of foreign tax rate differential.
During the third quarter of 2014, the Company's U.S. subsidiary filed an amendment of a prior year's tax return. This resulted in a reduction of uncertain tax positions of $13,165 and a decrease in deferred tax assets of $6,605, which were fully offset by a corresponding adjustment in the valuation allowance.
(10) Contingencies
The Company is involved in various claims and legal actions arising in the ordinary course of business, which are incidental to its operations. Insurance coverage is maintained for certain risks, such as product liability and workers’ compensation. The Company is not currently a party to any legal proceedings that it believes would have a material adverse effect on its financial position, results of operations, or cash flows.
(11) Segment Reporting
The Company reports the manufacturing, marketing, selling and distribution of wire and synthetic ropes, specialty wire and engineered products as one operating and one reportable segment. The Company's chief operating decision maker is its Chief Executive Officer, who reviews financial information on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Company's net sales by product line for the periods presented was as follows:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||
Product line net sales | ($) | (%) | ($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||
Rope | $ | 155,675 | 72 | % | $ | 147,221 | 72 | % | $ | 477,219 | 73 | % | $ | 453,261 | 73 | % | |||||||
Specialty wire | 37,631 | 17 | % | 32,454 | 16 | % | 106,198 | 16 | % | 95,710 | 16 | % | |||||||||||
Engineered products | 23,770 | 11 | % | 24,102 | 12 | % | 70,669 | 11 | % | 67,202 | 11 | % | |||||||||||
Total net sales | $ | 217,076 | 100 | % | $ | 203,777 | 100 | % | $ | 654,086 | 100 | % | $ | 616,173 | 100 | % |
11
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
(12) Condensed Consolidating Financial Statements
Guarantees of the 9.50% Senior Notes
WireCo WorldGroup Inc. has registered 9.50% Senior Notes, which are unsecured obligations. These obligations are jointly and severally and fully and unconditionally guaranteed by WireCo WorldGroup (Cayman) Inc. Certain entities controlled by WireCo WorldGroup (Cayman) Inc. (collectively referred to as the “Guarantor Subsidiaries”) 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 “Guarantor Subsidiaries” column are 100% owned directly or indirectly by the Company. Certain subsidiaries with locations primarily in the Netherlands, Brazil and France do not guarantee the debt (collectively referred to as the “Non-Guarantor Subsidiaries”). The following condensed consolidating financial statements are prepared with each entity’s investment in subsidiaries accounted for under the equity method. The adjustments eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions. 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.
During the third quarter of 2014, the Company determined that it had previously reported Royal Lankhorst Euronete Group B.V. ("RLEG"), an indirect wholly owned subsidiary of the Company, as a "Guarantor Subsidiary" in error in its 2013 10-K and first and second quarter 10-Qs. RLEG is principally a holding company with substantially all of its activities being intercompany in nature. The Company has correctly presented RLEG as a "Non-Guarantor Subsidiary" in the current period condensed consolidating financial statements. This error was not material in the current period and any previously reported periods.
12
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Condensed Consolidating Balance Sheets
September 30, 2014 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Assets | |||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 25 | $ | 6,216 | $ | 17,394 | $ | 18,083 | $ | — | $ | 41,718 | |||||||||||
Restricted cash | — | — | 860 | 1,013 | — | 1,873 | |||||||||||||||||
Accounts receivable, net | — | 42,392 | 73,265 | 26,325 | — | 141,982 | |||||||||||||||||
Intercompany accounts receivable | 25,717 | 32,113 | 37,952 | 23,758 | (119,540 | ) | — | ||||||||||||||||
Inventories, net | — | 70,075 | 128,815 | 28,700 | — | 227,590 | |||||||||||||||||
Current deferred income tax assets | — | 3,139 | 2,019 | 131 | — | 5,289 | |||||||||||||||||
Prepaid expenses and other current assets | — | 4,629 | 16,557 | 2,968 | — | 24,154 | |||||||||||||||||
Total current assets | $ | 25,742 | $ | 158,564 | $ | 276,862 | $ | 100,978 | $ | (119,540 | ) | $ | 442,606 | ||||||||||
Long-term intercompany notes receivable | — | 453,785 | 23,279 | 114,151 | (591,215 | ) | — | ||||||||||||||||
Property, plant and equipment, net | — | 54,820 | 231,381 | 44,206 | — | 330,407 | |||||||||||||||||
Intangible assets, net | — | 35,109 | 74,562 | 23,077 | — | 132,748 | |||||||||||||||||
Goodwill | — | 117,124 | 52,631 | 22,146 | — | 191,901 | |||||||||||||||||
Investments in subsidiaries | 29,597 | — | 124,964 | 7,687 | (162,248 | ) | — | ||||||||||||||||
Deferred financing fees, net | — | 17,189 | — | — | — | 17,189 | |||||||||||||||||
Non-current deferred income tax assets | — | (645 | ) | 12,666 | 3,729 | — | 15,750 | ||||||||||||||||
Other non-current assets | — | 2,090 | 13,476 | 9 | — | 15,575 | |||||||||||||||||
Total assets | $ | 55,339 | $ | 838,036 | $ | 809,821 | $ | 315,983 | $ | (873,003 | ) | $ | 1,146,176 | ||||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Current maturities of long-term debt | $ | — | $ | 3,318 | $ | 7,846 | $ | 13 | $ | — | $ | 11,177 | |||||||||||
Interest payable | — | 17,584 | 25 | — | — | 17,609 | |||||||||||||||||
Accounts payable | — | 17,152 | 49,766 | 13,108 | — | 80,026 | |||||||||||||||||
Accrued compensation and benefits | — | 5,315 | 13,538 | 3,620 | — | 22,473 | |||||||||||||||||
Intercompany accounts payable | 1,468 | 56,595 | 49,643 | 11,828 | (119,534 | ) | — | ||||||||||||||||
Current deferred income tax liabilities | — | 351 | (1,239 | ) | 1,595 | — | 707 | ||||||||||||||||
Other current liabilities | — | 2,961 | 15,618 | 5,408 | — | 23,987 | |||||||||||||||||
Total current liabilities | $ | 1,468 | $ | 103,276 | $ | 135,197 | $ | 35,572 | $ | (119,534 | ) | $ | 155,979 | ||||||||||
Long-term debt, excluding current maturities | — | 845,676 | 175 | — | — | 845,851 |
13
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Long-term intercompany notes payable | 6,700 | — | 558,602 | 25,892 | (591,194 | ) | — | ||||||||||||||||
Non-current deferred income tax liabilities | — | 13,277 | 53,098 | 8,422 | — | 74,797 | |||||||||||||||||
Other non-current liabilities | — | 457 | 20,126 | 1,795 | — | 22,378 | |||||||||||||||||
Total liabilities | $ | 8,168 | $ | 962,686 | $ | 767,198 | $ | 71,681 | $ | (710,728 | ) | $ | 1,099,005 | ||||||||||
Stockholders’ equity: | |||||||||||||||||||||||
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc. | 47,171 | (124,650 | ) | 47,430 | 241,028 | (162,275 | ) | 48,704 | |||||||||||||||
Non-controlling interests | — | — | (4,807 | ) | 3,274 | — | (1,533 | ) | |||||||||||||||
Total stockholders’ equity | $ | 47,171 | $ | (124,650 | ) | $ | 42,623 | $ | 244,302 | $ | (162,275 | ) | $ | 47,171 | |||||||||
Total liabilities and stockholders’ equity | $ | 55,339 | $ | 838,036 | $ | 809,821 | $ | 315,983 | $ | (873,003 | ) | $ | 1,146,176 |
14
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
December 31, 2013 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Assets | |||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 53 | $ | 2,564 | $ | 11,798 | $ | 20,572 | $ | — | $ | 34,987 | |||||||||||
Restricted cash | — | — | 2,887 | — | — | 2,887 | |||||||||||||||||
Accounts receivable, net | — | 38,891 | 87,234 | 22,439 | 148,564 | ||||||||||||||||||
Intercompany accounts receivable | 20,871 | 53,444 | 131,716 | (55 | ) | (205,976 | ) | — | |||||||||||||||
Inventories, net | — | 79,017 | 121,913 | 27,315 | — | 228,245 | |||||||||||||||||
Current deferred income tax assets | — | 3,139 | 2,185 | 144 | — | 5,468 | |||||||||||||||||
Prepaid expenses and other current assets | — | 2,218 | 4,016 | 389 | 6,034 | 12,657 | |||||||||||||||||
Total current assets | $ | 20,924 | $ | 179,273 | $ | 361,749 | $ | 70,804 | $ | (199,942 | ) | $ | 432,808 | ||||||||||
Long-term intercompany notes receivable | — | 477,637 | 4,827 | — | (482,464 | ) | — | ||||||||||||||||
Property, plant and equipment, net | — | 59,065 | 258,580 | 48,693 | — | 366,338 | |||||||||||||||||
Intangible assets, net | — | 37,090 | 86,555 | 26,642 | — | 150,287 | |||||||||||||||||
Goodwill | — | 117,124 | 55,749 | 25,456 | — | 198,329 | |||||||||||||||||
Investment in subsidiaries | 83,430 | — | 125,767 | — | (209,197 | ) | — | ||||||||||||||||
Deferred financing fees, net | — | 22,702 | — | — | — | 22,702 | |||||||||||||||||
Non-current deferred income tax assets | — | — | 7,175 | 903 | — | 8,078 | |||||||||||||||||
Other non-current assets | — | 201 | 17,273 | 3,199 | — | 20,673 | |||||||||||||||||
Total assets | $ | 104,354 | $ | 893,092 | $ | 917,675 | $ | 175,697 | $ | (891,603 | ) | $ | 1,199,215 | ||||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Current maturities of long-term debt | $ | — | $ | 6,710 | $ | 8,223 | $ | — | $ | — | $ | 14,933 | |||||||||||
Interest payable | — | 6,604 | 124 | 3 | — | 6,731 | |||||||||||||||||
Accounts payable | — | 14,552 | 45,695 | 15,934 | — | 76,181 | |||||||||||||||||
Accrued compensation and benefits | — | 7,907 | 9,622 | 344 | — | 17,873 | |||||||||||||||||
Intercompany accounts payable | 1,412 | 84,495 | 49,713 | 4,418 | (140,038 | ) | — | ||||||||||||||||
Current deferred income tax liabilities | — | — | (33 | ) | 424 | 351 | 742 | ||||||||||||||||
Other current liabilities | 9 | 1,886 | 351 | 74,085 | (60,071 | ) | 16,260 | ||||||||||||||||
Total current liabilities | $ | 1,421 | $ | 122,154 | $ | 113,695 | $ | 95,208 | $ | (199,758 | ) | $ | 132,720 | ||||||||||
Long-term debt, excluding current maturities | — | 861,948 | 544 | — | — | 862,492 | |||||||||||||||||
Long-term intercompany notes payable | 6,700 | — | 472,165 | 2,613 | (481,478 | ) | — |
15
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Non-current deferred income tax liabilities | — | 6,717 | 56,670 | 12,376 | — | 75,763 | |||||||||||||||||
Other non-current liabilities | — | 7,477 | 22,618 | 2,878 | (966 | ) | 32,007 | ||||||||||||||||
Total liabilities | $ | 8,121 | $ | 998,296 | $ | 665,692 | $ | 113,075 | $ | (682,202 | ) | $ | 1,102,982 | ||||||||||
Stockholders’ equity: | |||||||||||||||||||||||
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc. | 97,326 | (105,204 | ) | 253,076 | 60,215 | (208,087 | ) | 97,326 | |||||||||||||||
Non-controlling interests | (1,093 | ) | — | (1,093 | ) | 2,407 | (1,314 | ) | (1,093 | ) | |||||||||||||
Total stockholders’ equity | $ | 96,233 | $ | (105,204 | ) | $ | 251,983 | $ | 62,622 | $ | (209,401 | ) | $ | 96,233 | |||||||||
Total liabilities and stockholders’ equity | $ | 104,354 | $ | 893,092 | $ | 917,675 | $ | 175,697 | $ | (891,603 | ) | $ | 1,199,215 |
16
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three months ended September 30, 2014 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 74,566 | $ | 130,647 | $ | 47,522 | $ | (35,659 | ) | $ | 217,076 | ||||||||||
Cost of sales | — | (64,889 | ) | (103,742 | ) | (37,403 | ) | 35,741 | (170,293 | ) | |||||||||||||
Gross profit | — | 9,677 | 26,905 | 10,119 | 82 | 46,783 | |||||||||||||||||
Other operating expenses: | |||||||||||||||||||||||
Selling expenses | — | (3,040 | ) | (4,859 | ) | (2,888 | ) | — | (10,787 | ) | |||||||||||||
Administrative expenses | (199 | ) | (14,248 | ) | (6,813 | ) | (824 | ) | 585 | (21,499 | ) | ||||||||||||
Amortization expense | — | (757 | ) | (1,179 | ) | (382 | ) | — | (2,318 | ) | |||||||||||||
Total other operating expenses | (199 | ) | (18,045 | ) | (12,851 | ) | (4,094 | ) | 585 | (34,604 | ) | ||||||||||||
Operating income (loss) | (199 | ) | (8,368 | ) | 14,054 | 6,025 | 667 | 12,179 | |||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest income (expense), net | (103 | ) | (10,660 | ) | (10,301 | ) | 1,461 | — | (19,603 | ) | |||||||||||||
Equity income (losses) from subsidiaries | (35,003 | ) | — | (5,812 | ) | 983 | 39,832 | — | |||||||||||||||
Foreign currency exchange gains (losses), net | — | 1,734 | (39,856 | ) | 6,306 | — | (31,816 | ) | |||||||||||||||
Loss on extinguishment of debt | — | (617 | ) | — | — | — | (617 | ) | |||||||||||||||
Other income (expense), net | — | (198 | ) | 301 | 22 | — | 125 | ||||||||||||||||
Total other income (expense), net | (35,106 | ) | (9,741 | ) | (55,668 | ) | 8,772 | 39,832 | (51,911 | ) | |||||||||||||
Income (loss) before income taxes | (35,305 | ) | (18,109 | ) | (41,614 | ) | 14,797 | 40,499 | (39,732 | ) | |||||||||||||
Income tax benefit (expense) | — | (1,117 | ) | (1,559 | ) | 7,216 | — | 4,540 | |||||||||||||||
Net income (loss) | (35,305 | ) | (19,226 | ) | (43,173 | ) | 22,013 | 40,499 | (35,192 | ) | |||||||||||||
Less: Net income (loss) attributable to non-controlling interests | — | — | (618 | ) | 731 | — | 113 | ||||||||||||||||
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc. | (35,305 | ) | (19,226 | ) | (42,555 | ) | 21,282 | 40,499 | (35,305 | ) | |||||||||||||
Comprehensive income (loss) | $ | (48,115 | ) | $ | (19,226 | ) | $ | (56,096 | ) | $ | 16,973 | $ | 58,349 | $ | (48,115 | ) |
17
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Three months ended September 30, 2013 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 72,428 | $ | 116,446 | $ | 42,361 | $ | (27,458 | ) | $ | 203,777 | ||||||||||
Cost of sales | — | (53,799 | ) | (93,928 | ) | (32,484 | ) | 24,815 | (155,396 | ) | |||||||||||||
Gross profit | — | 18,629 | 22,518 | 9,877 | (2,643 | ) | 48,381 | ||||||||||||||||
Other operating expenses: | |||||||||||||||||||||||
Selling expenses | — | (3,233 | ) | (5,065 | ) | (2,041 | ) | — | (10,339 | ) | |||||||||||||
Administrative expenses | (57 | ) | (10,973 | ) | (7,583 | ) | (2,399 | ) | (550 | ) | (21,562 | ) | |||||||||||
Amortization expense | — | (1,432 | ) | (2,637 | ) | (568 | ) | — | (4,637 | ) | |||||||||||||
Total other operating expenses | (57 | ) | (15,638 | ) | (15,285 | ) | (5,008 | ) | (550 | ) | (36,538 | ) | |||||||||||
Operating income (loss) | (57 | ) | 2,991 | 7,233 | 4,869 | (3,193 | ) | 11,843 | |||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest income (expense), net | (103 | ) | (11,449 | ) | (9,662 | ) | 1,107 | — | (20,107 | ) | |||||||||||||
Equity losses from subsidiaries | (374 | ) | — | (8,129 | ) | — | 8,503 | — | |||||||||||||||
Foreign currency exchange gains (losses), net | — | (347 | ) | 17,114 | (2,350 | ) | — | 14,417 | |||||||||||||||
Other expense, net | — | (829 | ) | (332 | ) | (4 | ) | — | (1,165 | ) | |||||||||||||
Total other expense, net | (477 | ) | (12,625 | ) | (1,009 | ) | (1,247 | ) | 8,503 | (6,855 | ) | ||||||||||||
Income (loss) before income taxes | (534 | ) | (9,634 | ) | 6,224 | 3,622 | 5,310 | 4,988 | |||||||||||||||
Income tax expense | — | (494 | ) | (4,470 | ) | (668 | ) | — | (5,632 | ) | |||||||||||||
Net income (loss) | (534 | ) | (10,128 | ) | 1,754 | 2,954 | 5,310 | (644 | ) | ||||||||||||||
Less: Net income (loss) attributable to non-controlling interests | — | — | (343 | ) | 233 | — | (110 | ) | |||||||||||||||
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc. | (534 | ) | (10,128 | ) | 2,097 | 2,721 | 5,310 | (534 | ) | ||||||||||||||
Comprehensive income (loss) | $ | 978 | $ | (10,128 | ) | $ | 3,376 | $ | 9,819 | $ | (3,067 | ) | $ | 978 |
18
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Nine months ended September 30, 2014 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 221,559 | $ | 389,617 | $ | 141,939 | $ | (99,029 | ) | $ | 654,086 | ||||||||||
Cost of sales | — | (178,369 | ) | (306,605 | ) | (108,561 | ) | 99,696 | (493,839 | ) | |||||||||||||
Gross profit | — | 43,190 | 83,012 | 33,378 | 667 | 160,247 | |||||||||||||||||
Other operating expenses: | |||||||||||||||||||||||
Selling expenses | — | (8,954 | ) | (15,210 | ) | (9,164 | ) | — | (33,328 | ) | |||||||||||||
Administrative expenses | (495 | ) | (39,253 | ) | (20,034 | ) | (3,531 | ) | 342 | (62,971 | ) | ||||||||||||
Amortization expense | — | (1,981 | ) | (5,121 | ) | (954 | ) | — | (8,056 | ) | |||||||||||||
Total other operating expenses | (495 | ) | (50,188 | ) | (40,365 | ) | (13,649 | ) | 342 | (104,355 | ) | ||||||||||||
Operating income (loss) | (495 | ) | (6,998 | ) | 42,647 | 19,729 | 1,009 | 55,892 | |||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest income (expense), net | (307 | ) | (32,808 | ) | (30,636 | ) | 4,394 | — | (59,357 | ) | |||||||||||||
Equity income (losses) from subsidiaries | (37,058 | ) | — | (10,620 | ) | 2,264 | 45,414 | — | |||||||||||||||
Foreign currency exchange gains (losses), net | — | 1,836 | (44,281 | ) | 7,314 | — | (35,131 | ) | |||||||||||||||
Loss on extinguishment of debt | — | (617 | ) | — | — | — | (617 | ) | |||||||||||||||
Other income (expense), net | — | (570 | ) | 1,223 | 50 | — | 703 | ||||||||||||||||
Total other income (expense), net | (37,365 | ) | (32,159 | ) | (84,314 | ) | 14,022 | 45,414 | (94,402 | ) | |||||||||||||
Income (loss) before income taxes | (37,860 | ) | (39,157 | ) | (41,667 | ) | 33,751 | 46,423 | (38,510 | ) | |||||||||||||
Income tax benefit (expense) | — | (1,144 | ) | (1,637 | ) | 3,958 | — | 1,177 | |||||||||||||||
Net income (loss) | (37,860 | ) | (40,301 | ) | (43,304 | ) | 37,709 | 46,423 | (37,333 | ) | |||||||||||||
Less: Net income (loss) attributable to non-controlling interests | — | — | (1,324 | ) | 1,851 | — | 527 | ||||||||||||||||
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc. | (37,860 | ) | (40,301 | ) | (41,980 | ) | 35,858 | 46,423 | (37,860 | ) | |||||||||||||
Comprehensive income (loss) | $ | (54,562 | ) | $ | (40,301 | ) | $ | (60,533 | ) | $ | 30,990 | $ | 69,844 | $ | (54,562 | ) |
19
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Nine months ended September 30, 2013 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 224,943 | $ | 365,943 | $ | 110,510 | $ | (85,223 | ) | $ | 616,173 | ||||||||||
Cost of sales | — | (171,817 | ) | (291,636 | ) | (88,827 | ) | 82,977 | (469,303 | ) | |||||||||||||
Gross profit | — | 53,126 | 74,307 | 21,683 | (2,246 | ) | 146,870 | ||||||||||||||||
Other operating expenses: | |||||||||||||||||||||||
Selling expenses | — | (10,455 | ) | (15,599 | ) | (6,087 | ) | — | (32,141 | ) | |||||||||||||
Administrative expenses | (805 | ) | (30,060 | ) | (24,722 | ) | (6,988 | ) | (550 | ) | (63,125 | ) | |||||||||||
Amortization expense | — | (4,296 | ) | (7,292 | ) | (1,644 | ) | — | (13,232 | ) | |||||||||||||
Total other operating expenses | (805 | ) | (44,811 | ) | (47,613 | ) | (14,719 | ) | (550 | ) | (108,498 | ) | |||||||||||
Operating income (loss) | (805 | ) | 8,315 | 26,694 | 6,964 | (2,796 | ) | 38,372 | |||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest income (expense), net | (307 | ) | (33,741 | ) | (29,935 | ) | 3,200 | — | (60,783 | ) | |||||||||||||
Equity losses from subsidiaries | (23,870 | ) | — | (20,748 | ) | — | 44,618 | — | |||||||||||||||
Foreign currency exchange gains (losses), net | — | (519 | ) | 7,292 | (2,373 | ) | — | 4,400 | |||||||||||||||
Other income (expense), net | — | (1,079 | ) | 628 | — | — | (451 | ) | |||||||||||||||
Total other income (expense), net | (24,177 | ) | (35,339 | ) | (42,763 | ) | 827 | 44,618 | (56,834 | ) | |||||||||||||
Income (loss) before income taxes | (24,982 | ) | (27,024 | ) | (16,069 | ) | 7,791 | 41,822 | (18,462 | ) | |||||||||||||
Income tax expense | — | (485 | ) | (5,834 | ) | (666 | ) | — | (6,985 | ) | |||||||||||||
Net income (loss) | (24,982 | ) | (27,509 | ) | (21,903 | ) | 7,125 | 41,822 | (25,447 | ) | |||||||||||||
Less: Net income (loss) attributable to non-controlling interests | — | — | (931 | ) | 466 | — | (465 | ) | |||||||||||||||
Net income (loss) attributable to WireCo WorldGroup (Cayman), Inc. | (24,982 | ) | (27,509 | ) | (20,972 | ) | 6,659 | 41,822 | (24,982 | ) | |||||||||||||
Comprehensive income (loss) | $ | (23,993 | ) | $ | (27,509 | ) | $ | (20,449 | ) | $ | 28,919 | $ | 19,039 | $ | (23,993 | ) |
20
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2014 | |||||||||||||||||||||||
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 | $ | (256 | ) | $ | (15,394 | ) | $ | 51,038 | $ | 13,038 | $ | — | $ | 48,426 | |||||||||
Cash flows from investing activities: | |||||||||||||||||||||||
Capital expenditures | — | (4,198 | ) | (8,635 | ) | (3,380 | ) | — | (16,213 | ) | |||||||||||||
Acquisition of business | — | — | — | (4,573 | ) | — | (4,573 | ) | |||||||||||||||
Other investing activities | — | — | 1,951 | — | — | 1,951 | |||||||||||||||||
Repayments from intercompany loans | — | 43,713 | 7,997 | 819 | (52,529 | ) | — | ||||||||||||||||
Investment in subsidiaries | — | — | — | (4,573 | ) | 4,573 | — | ||||||||||||||||
Net cash provided by (used in) investing activities | $ | — | $ | 39,515 | $ | 1,313 | $ | (11,707 | ) | $ | (47,956 | ) | $ | (18,835 | ) | ||||||||
Cash flows from financing activities: | |||||||||||||||||||||||
Principal payments on long-term debt | — | (5,621 | ) | — | — | — | (5,621 | ) | |||||||||||||||
Retirement of long-term debt | — | (26,500 | ) | (446 | ) | — | — | (26,946 | ) | ||||||||||||||
Borrowings under revolving credit agreement | — | 152,350 | — | — | — | 152,350 | |||||||||||||||||
Repayments under revolving credit agreement | — | (140,300 | ) | — | — | — | (140,300 | ) | |||||||||||||||
Capital contributions received | — | — | — | 4,573 | (4,573 | ) | — | ||||||||||||||||
Repayments of intercompany loans | — | — | (44,532 | ) | (7,997 | ) | 52,529 | — | |||||||||||||||
Other financing activities | 228 | (398 | ) | (267 | ) | — | — | (437 | ) | ||||||||||||||
Net cash provided by (used in) financing activities | $ | 228 | $ | (20,469 | ) | $ | (45,245 | ) | $ | (3,424 | ) | $ | 47,956 | $ | (20,954 | ) | |||||||
Effect of exchange rates on cash and cash equivalents | — | — | (1,510 | ) | (396 | ) | — | (1,906 | ) | ||||||||||||||
Increase (decrease) in cash and cash equivalents | $ | (28 | ) | $ | 3,652 | $ | 5,596 | $ | (2,489 | ) | $ | — | $ | 6,731 | |||||||||
Cash and cash equivalents, beginning of period | 53 | 2,564 | 11,798 | 20,572 | — | 34,987 | |||||||||||||||||
Cash and cash equivalents, end of period | $ | 25 | $ | 6,216 | $ | 17,394 | $ | 18,083 | $ | — | $ | 41,718 |
21
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Nine months ended September 30, 2013 | |||||||||||||||||||||||
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 | $ | (8 | ) | $ | 11,474 | $ | 12,763 | $ | 14,777 | $ | — | $ | 39,006 | ||||||||||
Cash flows from investing activities: | |||||||||||||||||||||||
Capital expenditures | — | (3,711 | ) | (14,571 | ) | (4,197 | ) | — | (22,479 | ) | |||||||||||||
Other investing activities | — | (35 | ) | — | — | — | (35 | ) | |||||||||||||||
Intercompany dividends received | 5,800 | — | 4,008 | — | (9,808 | ) | — | ||||||||||||||||
Investment in subsidiaries | (5,800 | ) | — | — | — | 5,800 | — | ||||||||||||||||
Net cash used in investing activities | $ | — | $ | (3,746 | ) | $ | (10,563 | ) | $ | (4,197 | ) | $ | (4,008 | ) | $ | (22,514 | ) | ||||||
Cash flows from financing activities: | |||||||||||||||||||||||
Principal payments on long-term debt | — | (2,513 | ) | (8,530 | ) | — | — | (11,043 | ) | ||||||||||||||
Debt issuance costs paid | — | (1,880 | ) | — | — | — | (1,880 | ) | |||||||||||||||
Borrowings under revolving credit agreement | — | 108,630 | — | — | — | 108,630 | |||||||||||||||||
Repayments under revolving credit agreement | — | (121,530 | ) | — | — | — | (121,530 | ) | |||||||||||||||
Repayments of short-term borrowings | — | — | — | (1,586 | ) | — | (1,586 | ) | |||||||||||||||
Intercompany loans, net | — | 9,308 | (2,670 | ) | (6,638 | ) | — | — | |||||||||||||||
Capital contributions received | — | — | 5,800 | — | (5,800 | ) | — | ||||||||||||||||
Intercompany dividends paid | — | — | (5,800 | ) | (4,008 | ) | 9,808 | — | |||||||||||||||
Net cash used in financing activities | $ | — | $ | (7,985 | ) | $ | (11,200 | ) | $ | (12,232 | ) | $ | 4,008 | $ | (27,409 | ) | |||||||
Effect of exchange rates on cash and cash equivalents | — | — | (296 | ) | 535 | — | 239 | ||||||||||||||||
Decrease in cash and cash equivalents | $ | (8 | ) | $ | (257 | ) | $ | (9,296 | ) | $ | (1,117 | ) | $ | — | $ | (10,678 | ) | ||||||
Cash and cash equivalents, beginning of period | 34 | 2,867 | 24,993 | 21,350 | — | 49,244 | |||||||||||||||||
Cash and cash equivalents, end of period | $ | 26 | $ | 2,610 | $ | 15,697 | $ | 20,233 | $ | — | $ | 38,566 |
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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., its wholly-owned subsidiaries and subsidiaries in which it has a controlling interest, including WireCo WorldGroup Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“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, 2013.
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. Forward-looking statements include those containing such words as “anticipates,” “believes,” “continues,” “estimates,” “expects,” “forecasts,” “outlook,” “plans,” “projects,” “should,” “targets,” “will,” or the negative of those words 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, 2013. Such factors include, among others:
• | the general economic conditions in markets and countries where we have operations; |
• | risks associated with our non-U.S. operations; |
• | our ability to implement and maintain sufficient internal controls; |
• | foreign currency exchange rate fluctuations; |
• | the competitive environment in which we operate; |
• | changes in the availability or cost of raw materials and energy; |
• | risks associated with our manufacturing activities; |
• | our ability to meet quality standards; |
• | our ability to protect our trade names; |
• | violations of laws and regulations; |
• | the impact of environmental issues and changes in environmental laws and regulations; |
• | our ability to successfully execute and integrate acquisitions; |
• | comparability of our specified scaled disclosure requirements applicable to emerging growth companies; |
• | labor disturbances, including any resulting from suspension or termination of our collective bargaining agreements; |
• | our significant indebtedness; |
• | covenant restrictions; |
• | the interests of our principal equity holder may not be aligned with the holders of our 9.50% Senior Notes; and |
• | credit-rating downgrades. |
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.
23
Non-GAAP Financial Measures
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). This MD&A includes various financial measures that have not been calculated in accordance with GAAP, commonly referred to as “Non-GAAP Financial Measures”. These Non-GAAP Financial Measures include:
• | Adjusted EBITDA |
• | Adjusted Working Capital |
• | Net Debt |
• | Free Cash Flow |
We provide Adjusted EBITDA as a means to enhance communication with security holders by providing additional information regarding our operating results. We use this Non-GAAP Financial Measure internally to evaluate our performance, allocate resources, calculate debt covenant ratios and for incentive compensation purposes. We believe that our presentation of this measure provides investors with greater transparency with respect to our results of operations, is required for debt covenant calculation purposes and is useful for peer and period-to-period comparisons of results considering our history of acquisitions.
We provide Adjusted Working Capital, Net Debt and Free Cash Flow as additional information regarding our liquidity. We believe that Adjusted Working Capital provides a meaningful measure of our efforts to manage inventory, our customer collections and vendor payments. We believe Net Debt is meaningful to investors because management assesses our leverage position after factoring in available cash and restricted cash that eventually could be used to repay outstanding debt. We believe that the Free Cash Flow measure is meaningful to investors because it represents the cash flow we have available to pay down debt and/or invest for future growth. It is important to note that Free Cash Flow does not represent the residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements, are not deducted from the measure.
These measures are not in accordance with, or an alternative to GAAP, and may be different from Non-GAAP Financial Measures used by other companies. These measures have important limitations as analytical tools and should not be considered in isolation, nor as a substitute for, or superior to, analysis of our results as reported under GAAP. We recommend that investors view these measures in conjunction with the GAAP measures included in this MD&A and have provided reconciliations of reported GAAP amounts to the Non-GAAP amounts.
Third Quarter and Year-to-Date 2014 Highlights
Overall, operating results continued to improve with growth in sales, Adjusted EBITDA and cash generation. Net sales improved 6.5% and 6.2% during the three and nine months ended September 30, 2014, respectively, compared to the same periods from the prior year primarily due to increased activity in certain key rope end markets. The increase for the quarter and year-to-date was principally driven by higher sales of our rope products in the oil and gas and fishing end markets and improvement in sales of our specialty steel wire. During 2013, our sales were negatively impacted by economic conditions in the United States and Europe. Foreign currency translation had minimal impact on the quarter when comparing the average exchange rates for the three months ended September 30, 2014 to the average exchange rates for the three months ended September 30, 2013, but accounted for $9.0 million of the increase in sales for the nine months ended September 30, 2014.
As we continued to monitor inventory levels in conjunction with the Inventory Optimization Program implemented in 2013, we increased the breadth and depth of the program. We identified further opportunities in the third quarter of 2014 to maximize the return on inventory, especially with our focus on improving working capital management and gaining efficiencies in our operations. As a result of these opportunities, we recognized a charge of $9.2 million to adjust certain inventory to its net realizable value. The Inventory Optimization Program is designed to generate cash in the short-term instead of holding certain inventory for longer periods of time and to create efficiencies from a physical material movement perspective at our manufacturing and distribution facilities.
Adjusted EBITDA as a percentage of sales was 17.9% and 17.8% for the three and nine months ended September 30, 2014 compared to 17.5% and 16.9% for the three and nine months ended September 30, 2013. The Adjusted EBITDA growth can primarily be attributed to sales growth and efficiencies gained in our plant operations. Adjusted EBITDA in relation to net loss, the most directly comparable GAAP measure, is included in the table below. For the definition of Adjusted EBITDA and the formal reconciliation to net loss, see the section titled “Adjusted EBITDA”.
24
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Adjusted EBITDA (Non-GAAP) | $ | 38,952 | $ | 35,679 | $ | 116,745 | $ | 104,223 | ||||||||
Net loss (GAAP) | (35,192 | ) | (644 | ) | (37,333 | ) | (25,447 | ) |
The increase in net loss of $34.5 million quarter-over-quarter was primarily due to $31.8 million of foreign currency exchange losses this quarter, related mostly to the depreciation of the euro, compared to $14.4 million of foreign currency exchange gains in the third quarter of 2013. The majority of the foreign currency exchange gain/loss activity is unrealized and relates to the revaluation of intercompany loans based on the end of period foreign currency exchange rates. This change in foreign currency exchange gains/losses was partially offset by an income tax benefit. Through the nine months ended September 30, 2014, net loss increased $11.9 million year-over-year primarily due to significant foreign currency exchange losses, partially offset by margin growth, reduced operating expenses and lower income taxes.
We generated cash flow from operations of $48.4 million for the nine months ended September 30, 2014 compared to $39.0 million for the nine months ended September 30, 2013. The cash flow improvement is a result of sales growth and focused efforts to reduce working capital.
Consolidated Results of Operations
This section focuses on significant items that impacted our operating results for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013. Our results of operations have been converted to U.S. dollars from multiple currencies, which primarily include the euro, the Mexican peso and the Polish złoty. Our revenues and certain expenses are affected by fluctuations in the value of the U.S. dollar against these local currencies. The results of operations for any quarter or year-to-date period are not necessarily indicative of the results to be expected for other periods or the full fiscal year.
Three months ended September 30, 2014 compared to three months ended September 30, 2013
The following table presents selected consolidated financial data for the three months ended September 30, 2014 and 2013:
Three months ended September 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(in thousands) | |||||||||||||||
Net sales | $ | 217,076 | $ | 203,777 | $ | 13,299 | 6.5 | % | |||||||
Gross profit | 46,783 | 48,381 | (1,598 | ) | (3.3 | )% | |||||||||
Other operating expenses | (34,604 | ) | (36,538 | ) | 1,934 | (5.3 | )% | ||||||||
Other expense, net | (51,911 | ) | (6,855 | ) | (45,056 | ) | 657.3 | % | |||||||
Income tax benefit (expense) | 4,540 | (5,632 | ) | 10,172 | NM | ||||||||||
Net loss | $ | (35,192 | ) | $ | (644 | ) | $ | (34,548 | ) | NM | |||||
Gross profit as % of net sales | 21.6 | % | 23.7 | % | |||||||||||
Other operating expenses as % of net sales | 15.9 | % | 17.9 | % |
NM = Not Meaningful
Net sales
Our consolidated net sales increased $13.3 million, or 6.5%, during the quarter ended September 30, 2014 as compared to the same period in 2013. Foreign currency exchange rate fluctuations had no material impact on the net sales change when comparing the average exchange rates for the three months ended September 30, 2014 to the average exchange rates for the three months ended September 30, 2013.
Rope sales for the quarter increased $8.3 million primarily due to increased sales in our oil and gas, industrial and infrastructure and fishing end markets. Sales of our offshore oil and gas products were up $2.5 million primarily due to new contracts. Onshore oil and gas sales increased $2.6 million driven by an increase in drilling activity evidenced by the improving rig count. According to Baker Hughes, the average North American onshore rig count for the third quarter of 2014 was 2,225 compared to
25
2,055 in the third quarter of 2013, an 8.3% increase. Sales to our industrial and infrastructure market increased $2.1 million primarily due to strong infrastructure sales in the U.S. and maintenance of our market position in Europe and Asia despite soft market conditions. Fishing sales increased $1.4 million primarily due to product innovation in our netting offering and improving global market conditions. Sales to the maritime, mining and structures end markets did not significantly change. Rope sales represented 72% of our total consolidated net sales for both the three months ended September 30, 2014 and 2013.
Specialty wire sales increased $5.2 million for the three months ended September 30, 2014 compared to the same period last year due to improvement in market conditions in Mexico, as well as continued growth in Europe. We are seeing the Mexican economy pickup, especially in the construction and automotive sectors, and performance of our spring wire is exceeding expectations in Europe. Wire sales represented 17% of our total consolidated net sales for the three months ended September 30, 2014 compared to 16% for the same period in 2013.
Sales of engineered products did not significantly change for the three months ended September 30, 2014. Engineered Product sales represented 11% of our total consolidated net sales for the three months ended September 30, 2014 compared to 12% for the same period in 2013.
Gross profit
Gross profit decreased $1.6 million for the three months ended September 30, 2014 compared to the same period in 2013, and gross profit as a percentage of sales (“gross margin”) decreased from 23.7% for the three months ended September 30, 2013 to 21.6% for the three months ended September 30, 2014. Despite improved margin performance, we recorded costs related to our Inventory Optimization Program, which negatively impacted gross profit and gross margin. The effect of our Inventory Optimization Program on Cost of sales was $9.2 million in 2014 and $3.0 million in 2013. Excluding these adjustments, our gross margin would have been 25.8% for the third quarter of 2014 and 25.2% for the third quarter of 2013. This margin growth is primarily due to favorable product mix towards higher margin products, cost management and efficiencies in our production facilities.
Other operating expenses
Three months ended September 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(in thousands) | |||||||||||||||
Selling expenses | $ | (10,787 | ) | $ | (10,339 | ) | $ | (448 | ) | 4.3 | % | ||||
Administrative expenses | (21,499 | ) | (21,562 | ) | 63 | (0.3 | )% | ||||||||
Amortization expense | (2,318 | ) | (4,637 | ) | 2,319 | (50.0 | )% | ||||||||
Other operating expenses | $ | (34,604 | ) | $ | (36,538 | ) | $ | 1,934 | (5.3 | )% |
Other operating expenses decreased $1.9 million, or 5.3%, for the three months ended September 30, 2014 compared to the same period in 2013. Overall, total other operating expenses as a percentage of net sales declined from 17.9% for the third quarter of 2013 to 15.9% for the third quarter of 2014.
Selling expenses increased $0.4 million, or 4.3%, in the third quarter of 2014 as compared to the same period in 2013 primarily due to commissions directly related to the increase in sales. Foreign currency exchange rate fluctuations had no material impact on the selling expenses change when comparing the average exchange rates for the three months ended September 30, 2014 to the average exchange rates for the three months ended September 30, 2013.
Administrative expenses did not significantly change compared to the same period in 2013. Lower reorganization and restructuring charges of $1.2 million and consulting fees of $1.0 million were partially offset by higher incentive bonus compensation, advisory fees and a $0.2 million impairment charge related to in-process research and development intangibles established in purchase accounting that were ultimately abandoned. During the third quarter of 2013, we incurred more reorganization and restructuring charges associated with severance costs related to organizational changes and business performance. Consulting fees were lower for the three months ended September 30, 2014 compared to the same period in 2013 primarily due to cost management initiatives, which included the management of more projects with internal resources and fewer matters requiring external professional services. Incentive compensation, based on Adjusted EBITDA, was $1.2 million higher in the third quarter of 2014 compared to the third quarter of 2013 as Adjusted EBITDA increased. Also, advisory fees were $0.8 million more in this period compared to the same period in prior year due to external fees incurred on Paine & Partners' behalf related to business process improvements. Foreign currency exchange rate fluctuations had no material impact on the administrative expenses change when comparing the average exchange rates for the three months ended September 30, 2014 to the average exchange rates for the three months ended September 30, 2013.
26
Amortization expense decreased $2.3 million, or 50.0%, primarily due to certain finite-lived intangible assets becoming fully amortized effective in the first quarter of 2014 and $0.4 million more of amortization expense in prior year due to the acceleration of amortization associated with a finite-lived trade name that is no longer used.
Other expense, net
Three months ended September 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(in thousands) | |||||||||||||||
Interest expense, net | $ | (19,603 | ) | $ | (20,107 | ) | $ | 504 | (2.5 | )% | |||||
Foreign currency exchange gains (losses), net | (31,816 | ) | 14,417 | (46,233 | ) | (320.7 | )% | ||||||||
Loss on extinguishment of debt | (617 | ) | — | (617 | ) | 100.0 | % | ||||||||
Other income (expense), net | 125 | (1,165 | ) | 1,290 | (110.7 | )% | |||||||||
Total other expense, net | $ | (51,911 | ) | $ | (6,855 | ) | $ | (45,056 | ) | 657.3 | % |
Other expense increased by $45.1 million, or 657.3%, for the three months ended September 30, 2014 compared to the same period in 2013. This increase was primarily due to foreign currency exchange fluctuations. For the three months ended September 30, 2014, foreign currency exchange losses were $31.8 million compared to foreign currency exchange gains of $14.4 million for the same period in 2013. At September 30, 2014 and 2013, we had intercompany loans that required remeasurement in the aggregate amounts of $432.8 million and $478.4 million, respectively. Foreign currency exchange losses for the third quarter of 2014 primarily related to the depreciation of the euro and the Polish złoty. The U.S. dollar to euro exchange rate at June 30, 2014 was $1.00 to €0.7322 compared to $1.00 to €0.7947 at September 30, 2014. The U.S. dollar to the Polish złoty exchange rate at June 30, 2014 was $1.00 to zł3.0435 compared to $1.00 to zł3.3200 at September 30, 2014. These losses were partially offset by a $1.9 million unrealized gain on the fair value marked-to-market adjustment on the cross-currency swaps entered into during the third quarter of 2014. In the third quarter of 2013, foreign currency exchange gains related to the appreciation of the euro and the Polish zloty.
Loss on extinguishment of debt increased $0.6 million for the three months ended September 30, 2014 compared to
the same period in 2013 due to the call premium and write-off of unamortized debt issuance costs in conjunction with the
redemption of a portion of the 9.00% Senior Notes (formerly the 11.75% Senior Notes).
Other expense decreased $1.3 million for the three months ended September 30, 2014 compared to the same period in 2013, primarily due to a loss of $1.4 million on the disposal of assets recorded in 2013.
Income tax expense/benefit
For the three months ended September 30, 2014, we recorded an income tax benefit of $4.5 million compared to income tax expense of $5.6 million for the three months ended September 30, 2013. The resulting effective tax rate for the third quarter of 2014 and 2013 was 11.4% and 112.9%, respectively. The Company's effective tax rate differs from the applicable statutory tax rate primarily due to a full valuation allowance on U.S. deferred tax assets, the mix of earnings (losses) by jurisdiction, and the effects of foreign tax rate differential.
27
Nine months ended September 30, 2014 compared to nine months ended September 30, 2013
The following table presents selected consolidated financial data for the nine months ended September 30, 2014 and 2013:
Nine months ended September 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(in thousands) | |||||||||||||||
Net sales | $ | 654,086 | $ | 616,173 | $ | 37,913 | 6.2 | % | |||||||
Gross profit | 160,247 | 146,870 | 13,377 | 9.1 | % | ||||||||||
Other operating expenses | (104,355 | ) | (108,498 | ) | 4,143 | (3.8 | )% | ||||||||
Other expense, net | (94,402 | ) | (56,834 | ) | (37,568 | ) | 66.1 | % | |||||||
Income tax benefit (expense) | 1,177 | (6,985 | ) | 8,162 | NM | ||||||||||
Net loss | $ | (37,333 | ) | $ | (25,447 | ) | $ | (11,886 | ) | NM | |||||
Gross profit as % of net sales | 24.5 | % | 23.8 | % | |||||||||||
Other operating expenses as % of net sales | 16.0 | % | 17.6 | % |
NM = Not Meaningful
Net sales
Our consolidated net sales increased $37.9 million, or 6.2%, during the nine months ended September 30, 2014 as compared to the same period in 2013. Foreign currency exchange rate fluctuations contributed to an increase in sales of $9.0 million.
Excluding the impacts of foreign currency exchange rates, rope sales for the nine months ended September 30, 2014 increased $16.8 million over the same period in 2013. Oil and gas sales increased $15.5 million primarily due to more offshore projects and improving North American onshore rig counts. According to Baker Hughes, the average North American onshore rig count during the first nine months of 2014 was 2,155 compared to 2,050 during the same period in 2013, a 5.1% increase. Fishing sales increased $7.9 million primarily due to product innovation in our netting offering, new customer activity across several markets globally, and lower gas prices for fishing vessels, which lowers operating costs, increases spending on fishing gear and results in improved fish prices. During the first half of 2013, sales to Mauritania, one of the world's richest fishing areas, were blocked. Maritime sales increased $2.9 million in the nine months ended September 30, 2014 compared to the same period in 2013 due to growth in new vessel build orders and new customers from the April 2014 Endenburg B.V acquisition, which had maritime, offshore and heavy lifting business activities. Increased sales in these end markets were partially offset by declines in structures, mining and industrial and infrastructure end markets.
Sales to the structures end market declined $2.8 million in the nine months ended September 30, 2014 compared to the same period in 2013 due to fewer large bridge projects as compared to 2013. Sales to the mining end market declined $3.0 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to the continued pressure on commodity prices and overall lower level of spending from mining operators. We saw improvement in rope sales to the industrial and infrastructure end markets in the second and third quarters of 2014, but sales were still down $4.0 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, primarily due to strong infrastructure sales in the U.S. and maintenance of our market position in Europe and Asia despite soft market conditions. Also, certain assets acquired from Endenburg were reorganized into a new distribution facility allowing us to provide quicker response times and higher service levels to our European and international customer base. The new distribution center, called WireCo Crane Center, in Gouda, Netherlands is expected to make a contribution to industrial and infrastructure sales in 2015. Rope sales represented 73% of our total consolidated net sales for both the nine months ended September 30, 2014 and 2013.
Excluding the impacts of foreign currency exchange rates, specialty wire sales increased $10.3 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to growth in Mexican private sector infrastructure spending, as well as continued growth in Europe related to demand for our spring wire. Wire sales represented 16% of our total consolidated net sales for both the nine months ended September 30, 2014 and 2013.
Excluding the impacts of foreign currency exchange rates, sales of engineered products increased $1.7 million for the nine months ended September 30, 2014 compared to the same period in 2013 primarily due to more offshore projects and a steady production volume of storage systems for the steel industry. Engineered Product sales represented 11% of our total consolidated net sales for both the nine months ended September 30, 2014 and 2013.
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Gross profit
Gross profit increased $13.4 million and gross profit as a percentage of sales (“gross margin”) increased from 23.8% for the nine months ended September 30, 2013 to 24.5% for the nine months ended September 30, 2014. Improved margin performance was partially offset by costs related to our Inventory Optimization Program. The effect of our Inventory Optimization Program on Cost of sales was $9.2 million in 2014 and $3.0 million in 2013. Excluding these adjustments, our gross margin would have been 25.9% for the nine months ended September 30, 2014 and 24.3% for the nine months ended September 30, 2013. We have seen continued improvement in our margins due to favorable product mix towards higher margin products, such as oil and gas end market products, cost management and efficiencies in our production facilities. We continue to streamline operations to improve processes and reduce costs.
Other operating expenses
Nine months ended September 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(in thousands) | |||||||||||||||
Selling expenses | $ | (33,328 | ) | $ | (32,141 | ) | $ | (1,187 | ) | 3.7 | % | ||||
Administrative expenses | (62,971 | ) | (63,125 | ) | 154 | (0.2 | )% | ||||||||
Amortization expense | (8,056 | ) | (13,232 | ) | 5,176 | (39.1 | )% | ||||||||
Other operating expenses | $ | (104,355 | ) | $ | (108,498 | ) | $ | 4,143 | (3.8 | )% |
Other operating expenses decreased $4.1 million, or 3.8%, for the nine months ended September 30, 2014 compared to the same period in 2013. Overall, total other operating expenses as a percentage of net sales declined from 17.6% for the nine months ended September 30, 2013 to 16.0% for the nine months ended September 30, 2014.
Selling expenses increased $1.2 million primarily due to the increase in commissions directly related to sales volume. Foreign currency exchange rate fluctuations accounted for $0.6 million of the change.
Administrative expenses did not significantly change compared to the same period in 2013. Lower reorganization and restructuring charges of $5.6 million, consulting fees of $1.0 million and bank fees of $0.9 million were nearly offset by higher compensation, impairment charges, $0.4 million of bad debt expense, $0.3 million more of advisory fees, and the impact of foreign currency exchange rates. In 2013, we incurred more reorganization and restructuring charges associated with severance costs related to changes in personnel, including executive management positions. Consulting fees were lower for the nine months ended September 30, 2014 compared to the same period in 2013 primarily due to cost management initiatives, which included the management of more projects with internal resources and fewer matters requiring external professional services. Also, we incurred non-capitalizable bank fees in the second quarter of 2013 associated with the Second Amendment of the Credit Agreement. Incentive compensation, based on Adjusted EBITDA, was $3.9 million higher for the nine months ended September 30, 2014 compared to the same period in 2013 as Adjusted EBITDA increased and no bonus was earned in the second quarter of 2013. Share-based compensation was $1.8 million more in the nine months ended September 30, 2014 compared to the same period in 2013 due to grants of options and restricted stock awards in July of 2013. Non-cash impairment charges of $0.8 million were recorded in the nine months ended September 30, 2014 related to an office building that will be abandoned instead of sold and in-process research and development intangibles established in purchase accounting that were ultimately abandoned. Foreign currency exchange rate fluctuations accounted for $0.7 million of the increase.
Amortization expense decreased $5.2 million, primarily due to certain finite-lived intangible assets becoming fully amortized effective the first quarter of 2014 and $0.4 million more of amortization expense in prior year due to the acceleration of amortization associated with a finite-lived trade name that is no longer used.
29
Other expense, net
Nine months ended September 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(in thousands) | |||||||||||||||
Interest expense, net | $ | (59,357 | ) | $ | (60,783 | ) | $ | 1,426 | (2.3 | )% | |||||
Foreign currency exchange gains (losses), net | (35,131 | ) | 4,400 | (39,531 | ) | (898.4 | )% | ||||||||
Loss on extinguishment of debt | (617 | ) | — | (617 | ) | 100.0 | % | ||||||||
Other income (expense), net | 703 | (451 | ) | 1,154 | (255.9 | )% | |||||||||
Total other expense, net | $ | (94,402 | ) | $ | (56,834 | ) | $ | (37,568 | ) | 66.1 | % |
Other expense increased $37.6 million, or 66.1%, for the nine months ended September 30, 2014 compared to the same period in 2013. This increase was primarily due to foreign currency exchange fluctuations.
Interest expense decreased $1.4 million for the nine months ended September 30, 2014 compared to 2013 primarily due to a decrease in outstanding debt and refinancing of debt carried at the Company's highest interest rate. These decreases were slightly offset by lower capitalized interest and lower interest income.
Foreign currency exchange losses were $35.1 million for the nine months ended September 30, 2014 compared to foreign currency exchange gains of $4.4 million for the same period in 2013. At September 30, 2014 and 2013, we had intercompany loans that required remeasurement in the aggregate amounts of $432.8 million and $478.4 million, respectively. Foreign currency exchange losses for the nine months ended September 30, 2014 primarily related to the depreciation of the euro and the Polish złoty. The U.S. dollar to euro exchange rate at December 31, 2013 was $1.00 to €0.7251 compared to $1.00 to €0.7947 at September 30, 2014. The U.S. dollar to the Polish złoty exchange rate at December 31, 2013 was $1.00 to zł3.0123 compared to $1.00 to zł3.3200 at September 30, 2014. These losses were partially offset by a $1.9 million unrealized gain on the fair value marked-to-market adjustment on the cross-currency swaps entered into during the third quarter of 2014. Foreign currency exchange gains for the nine months ended September 30, 2013 were primarily due to the appreciation of the euro. The U.S. dollar to euro exchange rate at December 31, 2012 was $1.00 to €0.7579 compared to $1.00 to €0.7405 at September 30, 2013.
Loss on extinguishment of debt increased $0.6 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to the call premium and write-off of unamortized debt issuance costs in conjunction with the redemption of a portion of the 9.00% Senior Notes (formerly the 11.75% Senior Notes).
Other income increased $1.2 million primarily due to only $0.2 million of losses recognized on the sale of property, plant and equipment for the nine months ended September 30, 2014 compared to $1.4 million for the same period in 2013.
Income tax expense/benefit
For the nine months ended September 30, 2014, we recorded an income tax benefit of $1.2 million compared to income tax expense of $7.0 million for the same period in 2013. The resulting effective tax rate for the nine months ended September 30, 2014 and the same period in 2013 was 3.1% and (37.8)%, respectively. The Company's effective tax rate differs from the applicable statutory tax rate primarily due to a full valuation allowance on U.S. deferred tax assets, the mix of earnings (losses) by jurisdiction, and the effects of foreign tax rate differential.
30
Adjusted EBITDA
Adjusted EBITDA is a Non-GAAP Financial Measure defined as net income (loss) plus, without duplication: interest expense, income tax expense (benefit), depreciation and amortization, as further adjusted by (i) all fees and costs incurred in connection with any merger, consolidation, acquisition or offering of debt or equity securities, (ii) realized and unrealized gains (losses) resulting from foreign currency transactions, (iii) payments of advisory fees pursuant to the Management Fee Letter with Paine & Partners, LLC, (iv) 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, (v) business optimization expenses and other reorganization or restructuring charges, reserves or expenses (which, for the avoidance of doubt, will include, without limitation, the effect of inventory optimization programs, plant closures, facility consolidations, retention, system establishment costs (including costs of instituting systems and controls to comply with the Sarbanes-Oxley Act of 2002), contract termination costs, future lease commitments and excess pension charges), (vi) other expenses, such as share-based compensation expense and income or loss on our investments in joint ventures, and (vii) non-cash items increasing such consolidated net income, other than the accrual of revenue in the ordinary course of business. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP measures.
The following is a reconciliation of net loss to Adjusted EBITDA:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in thousands) | ||||||||||||||||
Net loss (GAAP) | $ | (35,192 | ) | $ | (644 | ) | $ | (37,333 | ) | $ | (25,447 | ) | ||||
Plus: | ||||||||||||||||
Interest expense, net | 19,603 | 20,107 | 59,357 | 60,783 | ||||||||||||
Income tax expense (benefit) | (4,540 | ) | 5,632 | (1,177 | ) | 6,985 | ||||||||||
Depreciation and amortization | 12,192 | 14,436 | 38,140 | 42,753 | ||||||||||||
Foreign currency exchange losses (gains), net | 31,816 | (14,417 | ) | 35,131 | (4,400 | ) | ||||||||||
Share-based compensation | 1,969 | 1,993 | 5,539 | 3,719 | ||||||||||||
Other expense (income), net | (125 | ) | 1,165 | (703 | ) | 451 | ||||||||||
Loss on extinguishment of debt | 617 | — | 617 | — | ||||||||||||
Acquisition costs | — | — | 347 | 369 | ||||||||||||
Purchase accounting (inventory step-up and other) | — | 393 | — | 2,155 | ||||||||||||
Advisory fees | 2,001 | 1,220 | 3,899 | 3,554 | ||||||||||||
Reorganization and restructuring charges | 832 | 2,005 | 1,968 | 7,556 | ||||||||||||
Non-cash impairment of assets | 246 | — | 844 | — | ||||||||||||
Effect of Inventory Optimization Program | 9,244 | 2,970 | 9,244 | 2,970 | ||||||||||||
Other adjustments | 289 | 819 | 872 | 2,775 | ||||||||||||
Adjusted EBITDA (Non-GAAP) | $ | 38,952 | $ | 35,679 | $ | 116,745 | $ | 104,223 |
31
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our liquidity initiatives continue to be: generate cash and pay down debt. For the nine months ended September 30, 2014, we generated net cash from operating activities of $48.4 million compared to $39.0 million for the nine months ended September 30, 2013. This is evidence of strong business performance, improved collection efforts and our focus on operational efficiencies. During the third quarter, we amended the Note Purchase Agreement to reduce the interest rate on our 9.00% Senior Notes (formerly the 11.75% Senior Notes) from 11.75% to 9.00% and we redeemed $26.5 million of the 9.00% Senior Notes with available cash and funds under the Revolving Loan Facility, which had an interest rate of 5.10% at September 30, 2014. The 9.00% Senior Notes carried the highest interest rate of all the Company's debt prior to the amendment.
Our principal sources of liquidity consist of cash from operations and borrowings under our Revolving Loan Facility. 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 cash collections from our customers and fluctuations in the cost of our raw materials.
Total available liquidity, defined as availability under our Revolving Loan Facility plus cash and cash equivalents, was $141.7 million at September 30, 2014 compared to $146.9 million at December 31, 2013. Availability under the Revolving Loan Facility is based upon the maximum borrowing capacity of $145.0 million, less outstanding borrowings, letters of credit and if applicable, further restricted by certain covenants in our credit agreements. Our available liquidity declined from December 31, 2013 primarily due to additional debt outstanding under our Revolving Loan Facility, partially offset by a higher cash and cash equivalents balance. We had borrowed $44.1 million under the Revolving Loan Facility at September 30, 2014 compared to $32.0 million at December 31, 2013. As discussed above, our borrowings under the Revolving Loan Facility increased due to funding a portion of the redemption of the 9.00% Senior Notes.
We reinvest the earnings of substantially all of our 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 primarily issued by the U.S. operating subsidiary and there are intercompany loans within the Company's 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 $41.7 million at September 30, 2014, cash and cash equivalents held in foreign countries were $35.8 million, of which $2.8 million was in U.S. dollars. 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.
Based on our current assessment of our operating plan, we believe that cash flow from operations, cash and cash equivalents and availability under our Revolving Loan Facility will be adequate to fund anticipated operating, capital and debt service requirements and other commitments over the next twelve months.
Adjusted Working Capital
Within our asset base, working capital management is our largest opportunity for cash generation. Adjusted Working Capital, a Non-GAAP Financial Measure defined as accounts receivable plus inventories less accounts payable, decreased from $300.6 million as of December 31, 2013 to $289.5 million as of September 30, 2014. The decrease in Adjusted Working Capital is primarily due to strong collection efforts, the effects of the Inventory Optimization Program, and continued focus on operational efficiencies. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures.
The following is a reconciliation of Adjusted Working Capital to working capital:
September 30, 2014 | December 31, 2013 | |||||||
(in thousands) | ||||||||
Accounts receivable, net | $ | 141,982 | $ | 148,564 | ||||
Inventories, net | 227,590 | 228,245 | ||||||
Accounts payable | (80,026 | ) | (76,181 | ) | ||||
Adjusted Working Capital (Non-GAAP) | 289,546 | 300,628 | ||||||
Plus: All other current assets | 73,034 | 55,999 | ||||||
Less: All other current liabilities | (75,953 | ) | (56,539 | ) | ||||
Working capital (GAAP) | $ | 286,627 | $ | 300,088 |
32
Long-term Debt
For a detailed discussion of our borrowings, see Note 8—“Borrowings” to our audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of our annual report on Form 10-K for the year ended December 31, 2013. On July 16, 2014, WireCo WorldGroup Inc. entered into an amendment to the Note Purchase Agreement governing the 9.00% Senior Notes (formerly the 11.75% Senior Notes) that reduced the interest rate from 11.75% to 9.00% and provided a waiver for the notice of redemption. On July 17, 2014, we redeemed $26.5 million of the $82.5 million aggregate principal amount of the 9.00% Senior Notes, using cash drawn under the Revolving Loan Facility.
Net Debt was $817.3 million and $845.3 million at September 30, 2014 and December 31, 2013, respectively. Our Net Leverage ratio was 5.40x at September 30, 2014, compared to 6.07x at December 31, 2013. Net Debt is a Non-GAAP Financial Measure defined as consolidated total debt at face value plus capital lease obligations less cash and cash equivalents and restricted cash. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. The following is a reconciliation of total debt to Net Debt.
September 30, 2014 | December 31, 2013 | |||||||
(in thousands) | ||||||||
Borrowings under Revolving Loan Facility | $ | 44,050 | $ | 32,000 | ||||
Polish Debt due 2014 | 8,029 | 8,860 | ||||||
Term Loan due 2017 | 325,192 | 330,813 | ||||||
9.00% Senior Notes due 2017 | 56,000 | 82,500 | ||||||
9.50% Senior Notes due 2017 | 425,000 | 425,000 | ||||||
Other indebtedness | 188 | 688 | ||||||
Capital lease obligations | 2,455 | 3,333 | ||||||
Total debt at face value plus capital lease obligations (GAAP) | 860,914 | 883,194 | ||||||
Less: Cash and cash equivalents | (41,718 | ) | (34,987 | ) | ||||
Less: Restricted cash | (1,873 | ) | (2,887 | ) | ||||
Net Debt (Non-GAAP) | $ | 817,323 | $ | 845,320 |
Free Cash Flow
Free Cash Flow, a Non-GAAP Financial Measure, is defined as cash flows from operating activities less capital expenditures, acquisitions and other investing activities and further adjusted by effect of exchange rates on cash and cash equivalents and other items. Free Cash Flow is also equivalent to the change in Net Debt. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. We generated Free Cash Flow of $28.0 million and $16.6 million for the nine months ended September 30, 2014 and 2013, respectively. This increase was primarily due to an increase in cash flows from operating activities.
Nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Net cash provided by operating activities (GAAP) | $ | 48,426 | $ | 39,006 | ||||
Less: capital expenditures | (16,213 | ) | (22,479 | ) | ||||
Less: acquisition of business and other investing activities | (2,622 | ) | (35 | ) | ||||
Effect of exchange rates on cash and cash equivalents | (1,906 | ) | 239 | |||||
Other items | 312 | (176 | ) | |||||
Free Cash Flow (Non-GAAP) | $ | 27,997 | $ | 16,555 |
33
Debt Covenant Compliance
As of September 30, 2014, we were in compliance with all restrictive and financial covenants associated with our borrowings. As defined in our respective credit agreements, the Senior Secured Net Leverage to Adjusted EBITDA ratio was 2.23x. The maximum Senior Secured Net Leverage Ratio was set at 3.50x of Adjusted EBITDA, with more restricted step-downs thereafter to 3.25x effective December 31, 2014 and 3.00x effective June 30, 2016.
Cash Flow Information
The following tables summarize our cash flows from operating, investing and financing activities for the nine months ended September 30, 2014 and 2013, respectively.
Nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Cash flows provided by (used in) | ||||||||
Operating activities | $ | 48,426 | $ | 39,006 | ||||
Investing activities | (18,835 | ) | (22,514 | ) | ||||
Financing activities | (20,954 | ) | (27,409 | ) | ||||
Effect of exchange rates on cash and cash equivalents | (1,906 | ) | 239 | |||||
Increase (decrease) in cash and cash equivalents | 6,731 | (10,678 | ) | |||||
Cash and cash equivalents, beginning of period | 34,987 | 49,244 | ||||||
Cash and cash equivalents, end of period | $ | 41,718 | $ | 38,566 |
Cash from Operating Activities
Nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Net loss | $ | (37,333 | ) | $ | (25,447 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities | 83,170 | 45,576 | ||||||
Changes in assets and liabilities | 2,589 | 18,877 | ||||||
Net cash provided by operating activities | $ | 48,426 | $ | 39,006 |
Cash flows from operating activities increased in the nine months ended September 30, 2014 over the prior period primarily due to higher cash earnings, partially offset by investments in working capital. Cash earnings is our net loss adjusted for non-cash items, such as depreciation and amortization among other reconciling items. The significant outflow of cash associated with building-up inventory was partially offset by an improvement in managing our collection terms with customers and payment terms with vendors. Days sales outstanding improved from 71 days for the third quarter of 2013 to 60 days for the third quarter of 2014.
Cash from Investing Activities
Nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Capital expenditures | $ | (16,213 | ) | $ | (22,479 | ) | ||
Acquisition of business | (4,573 | ) | — | |||||
Other investing activities | 1,951 | (35 | ) | |||||
Net cash used in investing activities | $ | (18,835 | ) | $ | (22,514 | ) |
34
Our investment in capital expenditures is lower in the nine months ended September 30, 2014 than the nine months ended September 30, 2013 primarily due to getting a late start on key projects. As a result, we currently expect to invest approximately $25 million in capital expenditures, primarily in emerging markets, for the full year. During the second quarter of 2014, we purchased certain assets from Endenburg B.V. for approximately $4.6 million. We expect to continue seeking strategic business acquisitions that are complementary to our business. The other investing cash inflow is related to proceeds from the sale of a building no longer used.
Cash from Financing Activities
Nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Principal payments on long-term debt | $ | (5,621 | ) | $ | (11,043 | ) | ||
Debt issuance costs paid | — | (1,880 | ) | |||||
Retirement of long-term debt | (26,946 | ) | — | |||||
Net borrowings (repayments) under revolving credit agreement | 12,050 | (12,900 | ) | |||||
Repayments of short-term borrowings | — | (1,586 | ) | |||||
Other financing activities | (437 | ) | — | |||||
Net cash used in financing activities | $ | (20,954 | ) | $ | (27,409 | ) |
During the nine months ended September 30, 2014, we paid $20.5 million on our long-term debt, including a partial redemption of our 9.00% Senior Notes and a $3.1 million annual excess cash flow payment on our Term Loan, and we expect to continue to pay down our long-term debt balances, including the payoff of the Polish Debt in the fourth quarter.
Contractual Obligations and Commitments
As of September 30, 2014, there have been no material changes in our contractual obligations and commitments from those reported in 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, 2013.
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, which have not materially changed from the disclosure in our annual report on Form 10-K for the year ended December 31, 2013. We also periodically maintain standby letters of credit for purchase of inventory, contract performance on certain sales contracts and other guarantees of our performance.
Critical Accounting Policies
A discussion of our critical accounting policies can be found in 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, 2013. There have been no significant changes in our critical accounting policies since year-end.
Recently Issued Accounting Standards
Refer to Note 1—“Interim Financial Statement Presentation” to our unaudited interim consolidated financial statements in Item 1 of this quarterly report for recently issued accounting standards.
35
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Other than as described below, there was no material change from the information included in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our annual report on Form 10-K for the year ended December 31, 2013.
Foreign Currency Exchange Rate Risk. Fluctuations in foreign currency exchange rates result in increases or decreases in our foreign currency exchange gains (losses). At times, we have partially hedged this volatility through the use of derivative instruments. In late September 2014, we entered into cross-currency swaps with three counterparties to hedge exposures to foreign currency exchange risk. The notional amount and unrealized gain on our outstanding cross-currency swap contracts are shown in the table below. In addition, this table shows the change in fair value of these swaps assuming a hypothetical adverse foreign currency exchange rate movement of 10% as of September 30, 2014.
Nine months ended September 30, | ||||
2014 | ||||
(in thousands) | ||||
Cross-currency swaps: | ||||
Notional amount | $ | 300,000 | ||
Unrealized gain | 1,882 | |||
Change in fair value due to 10% foreign currency exchange rate movement | 35,837 |
Refer to Note 5—“Derivative Financial Instruments” to our unaudited interim consolidated financial statements in Item 1 of this quarterly report for further information. Notwithstanding our efforts to mitigate some foreign currency exchange rate risk, we do not hedge all of our foreign currency exposures, and there can be no assurance that our mitigating activities related to the exposures that we hedge will adequately protect us against risks associated with foreign currency fluctuations.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
The Company's management, under the supervision and with the participation of our CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Exchange Act). Based on this evaluation, the Company's CEO and CFO concluded that, due to an unremediated material weakness in internal control over financial reporting in the areas of accounting for income taxes described below, the Company's disclosure controls and procedures were not effective.
The Company had a material weakness in internal control over financial reporting in the areas of accounting for income taxes for the years ended December 31, 2013 and 2012. Specifically, the Company did not maintain sufficient, effective controls over the preparation and review of income taxes related to the complete and accurate recording of the Company's tax provision, deferred tax balances (net of required valuation allowance) and uncertain tax positions.
The Company is continuing to implement remedial actions regarding the material weakness. The Company hired a Vice President of Global Tax and Treasury in March, an International Tax Director in June, and a Domestic Tax Manager and Tax Analyst during the third quarter. We have also further investigated the root cause of the material weakness, designed standardized tax packages to gather tax provision information, scheduled regular tax discussions with significant locations, and strengthened tax provision documentation. Management anticipates the actions described above and the resulting improvements in controls will strengthen the Company's internal control over financial reporting and will, over time, address the related material weakness identified. However, the above material weakness will not be considered remediated until these improvements have been fully implemented and are operating effectively for an adequate period of time.
Notwithstanding the unremediated material weakness, management, including our CEO and CFO, believes the consolidated financial statements included in this quarterly report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
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Changes in Internal Control over Financial Reporting
Other than the actions described above, there was no change in the Company's internal control over financial reporting that occurred during the Company's third quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1.Legal Proceedings
We are not a party to any material legal proceedings. From time to time, we are involved in routine litigation arising in the ordinary course of business, which is incidental to our operations. For further information required by this item, refer to Note 10—“Contingencies” to our unaudited interim consolidated financial statements in Item 1 of this quarterly report.
Item 1A.Risk Factors
There have been no material changes in our Risk Factors from those disclosed in Item 1A, Risk Factors, in our annual report on Form 10-K for the year ended December 31, 2013.
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
None.
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.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit No. | Description of Exhibits Incorporated by Reference | ||
10.1 | Amendment No. 5 to Note Purchase Agreement, dated as of July 16, 2014, between WireCo WorldGroup Inc. and the Purchasers (incorporated by reference to Exhibit 10.1 to the Registrant's quarterly report on Form 10-Q (File No. 333-174896), filed on August 7, 2014). | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WireCo WorldGroup Inc. | |||||||
(Registrant) | |||||||
Dated: | November 13, 2014 | By: | /s/ Brian G. Block | ||||
Brian G. Block | |||||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||
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