Attached files
file | filename |
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EX-31.1 - CEO 302 CERTIFICATION - WireCo WorldGroup Inc. | exhibit311_q2x2014.htm |
EX-10.1 - AMENDMENT NO.5 TO NOTE PURCHASE AGREEMENT - WireCo WorldGroup Inc. | exhibit101-q2_2014.htm |
EXCEL - IDEA: XBRL DOCUMENT - WireCo WorldGroup Inc. | Financial_Report.xls |
EX-32.2 - CFO 906 CERTIFICATION - WireCo WorldGroup Inc. | exhibit322_q2x2014.htm |
EX-31.2 - CFO 302 CERTIFICATION - WireCo WorldGroup Inc. | exhibit312_q2x2014.htm |
EX-32.1 - CEO 906 CERTIFICATION - WireCo WorldGroup Inc. | exhibit321_q2x2014.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 June 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 August 1, 2014 the Registrant had 100 shares of common stock outstanding.
WireCo WorldGroup Inc.
Quarterly Report
For the period ended June 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 | June 30, 2014 | December 31, 2013 | ||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 37,003 | $ | 34,987 | ||||
Restricted cash | 2,429 | 2,887 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,414 and $3,458, at June 30, 2014 and December 31, 2013, respectively | 159,652 | 148,564 | ||||||
Inventories, net | 248,400 | 228,245 | ||||||
Current deferred income tax assets | 7,690 | 5,468 | ||||||
Prepaid expenses and other current assets | 15,776 | 12,657 | ||||||
Total current assets | $ | 470,950 | $ | 432,808 | ||||
Property, plant and equipment, less accumulated depreciation of $178,270 and $163,250, at June 30, 2014 and December 31, 2013, respectively | 355,436 | 366,338 | ||||||
Intangible assets, net | 143,640 | 150,287 | ||||||
Goodwill | 196,758 | 198,329 | ||||||
Deferred financing fees, net | 19,175 | 22,702 | ||||||
Non-current deferred income tax assets | 1,723 | 8,078 | ||||||
Other non-current assets | 16,300 | 20,673 | ||||||
Total assets | $ | 1,203,982 | $ | 1,199,215 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 11,801 | $ | 14,933 | ||||
Interest payable | 6,638 | 6,731 | ||||||
Accounts payable | 94,821 | 76,181 | ||||||
Accrued compensation and benefits | 24,974 | 17,873 | ||||||
Current deferred income tax liabilities | 2,047 | 742 | ||||||
Other current liabilities | 14,612 | 16,260 | ||||||
Total current liabilities | $ | 154,893 | $ | 132,720 | ||||
Long-term debt, excluding current maturities | 856,544 | 862,492 | ||||||
Non-current deferred income tax liabilities | 68,578 | 75,763 | ||||||
Other non-current liabilities | 30,651 | 32,007 | ||||||
Total liabilities | $ | 1,110,666 | $ | 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 | 228,637 | 225,106 | ||||||
Accumulated other comprehensive loss | (21,829 | ) | (18,527 | ) | ||||
Accumulated deficit | (97,365 | ) | (94,809 | ) | ||||
Treasury stock, at cost. 49,169 shares at June 30, 2014 and December 31, 2013 | (14,465 | ) | (14,465 | ) | ||||
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc. | $ | 94,999 | $ | 97,326 | ||||
Non-controlling interests | (1,683 | ) | (1,093 | ) | ||||
Total stockholders’ equity | $ | 93,316 | $ | 96,233 | ||||
Total liabilities and stockholders’ equity | $ | 1,203,982 | $ | 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 | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net sales | $ | 226,507 | $ | 189,753 | $ | 437,009 | $ | 412,397 | |||||||
Cost of sales | (166,350 | ) | (145,890 | ) | (323,546 | ) | (313,907 | ) | |||||||
Gross profit | 60,157 | 43,863 | 113,463 | 98,490 | |||||||||||
Other operating expenses: | |||||||||||||||
Selling expenses | (11,540 | ) | (10,273 | ) | (22,541 | ) | (21,802 | ) | |||||||
Administrative expenses | (21,082 | ) | (21,044 | ) | (41,472 | ) | (41,563 | ) | |||||||
Amortization expense | (2,591 | ) | (4,437 | ) | (5,739 | ) | (8,595 | ) | |||||||
Total other operating expenses | (35,213 | ) | (35,754 | ) | (69,752 | ) | (71,960 | ) | |||||||
Operating income | 24,944 | 8,109 | 43,711 | 26,530 | |||||||||||
Other income (expense): | |||||||||||||||
Interest expense, net | (20,116 | ) | (20,456 | ) | (39,974 | ) | (40,676 | ) | |||||||
Foreign currency exchange gains (losses), net | (4,045 | ) | 836 | (3,094 | ) | (10,017 | ) | ||||||||
Other income (expense), net | (176 | ) | 866 | 578 | 713 | ||||||||||
Total other expense, net | (24,337 | ) | (18,754 | ) | (42,490 | ) | (49,980 | ) | |||||||
Income (loss) before income taxes | 607 | (10,645 | ) | 1,221 | (23,450 | ) | |||||||||
Income tax expense | (2,704 | ) | (2,792 | ) | (3,363 | ) | (1,353 | ) | |||||||
Net loss | (2,097 | ) | (13,437 | ) | (2,142 | ) | (24,803 | ) | |||||||
Less: Net income (loss) attributable to non-controlling interests | (73 | ) | (589 | ) | 414 | (355 | ) | ||||||||
Net loss attributable to WireCo WorldGroup (Cayman) Inc. | $ | (2,024 | ) | $ | (12,848 | ) | $ | (2,556 | ) | $ | (24,448 | ) |
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 | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss | $ | (2,097 | ) | $ | (13,437 | ) | $ | (2,142 | ) | $ | (24,803 | ) | |||
Other comprehensive loss: | |||||||||||||||
Foreign currency translation gain (loss) | (1,212 | ) | 390 | (4,306 | ) | (168 | ) | ||||||||
Comprehensive loss | (3,309 | ) | (13,047 | ) | (6,448 | ) | (24,971 | ) | |||||||
Less: Comprehensive income (loss) attributable to non-controlling interests | (179 | ) | (635 | ) | (590 | ) | (442 | ) | |||||||
Comprehensive loss attributable to WireCo WorldGroup (Cayman) Inc. | $ | (3,130 | ) | $ | (12,412 | ) | $ | (5,858 | ) | $ | (24,529 | ) |
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)
Six months ended | ||||||||
June 30, | ||||||||
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (2,142 | ) | $ | (24,803 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 25,948 | 28,316 | ||||||
Amortization of debt issuance costs, discounts and premium | 4,177 | 4,322 | ||||||
Share-based compensation | 3,570 | 1,726 | ||||||
Other non-cash items | (314 | ) | 2,062 | |||||
Unrealized foreign currency exchange losses, net | 2,559 | 8,486 | ||||||
Provision for deferred income taxes | (1,364 | ) | (1,723 | ) | ||||
Changes in assets and liabilities, net of business acquired: | ||||||||
Accounts receivable | (9,814 | ) | (21,200 | ) | ||||
Inventories | (20,175 | ) | 1,600 | |||||
Prepaids and other assets | 241 | (313 | ) | |||||
Interest payable | (117 | ) | 254 | |||||
Accounts payable | 18,620 | 557 | ||||||
Other accrued liabilities | 4,533 | 2,364 | ||||||
Net cash provided by operating activities | $ | 25,722 | $ | 1,648 | ||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (9,624 | ) | (18,290 | ) | ||||
Acquisition of business | (4,573 | ) | — | |||||
Other investing activities | — | (34 | ) | |||||
Net cash used in investing activities | $ | (14,197 | ) | $ | (18,324 | ) | ||
Cash flows from financing activities: | ||||||||
Principal payments on long-term debt | (4,792 | ) | (10,205 | ) | ||||
Borrowings under revolving credit agreement | 87,000 | 86,930 | ||||||
Repayments under revolving credit agreement | (91,750 | ) | (73,380 | ) | ||||
Repayments of short-term borrowings | — | (1,586 | ) | |||||
Other financing activities | (39 | ) | — | |||||
Net cash provided by (used in) financing activities | $ | (9,581 | ) | $ | 1,759 | |||
Effect of exchange rates on cash and cash equivalents | 72 | (610 | ) | |||||
Increase (decrease) in cash and cash equivalents | $ | 2,016 | $ | (15,527 | ) | |||
Cash and cash equivalents, beginning of period | 34,987 | 49,244 | ||||||
Cash and cash equivalents, end of period | $ | 37,003 | $ | 33,717 | ||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash paid for interest, net of interest capitalized | $ | 35,541 | $ | 36,132 | ||||
Cash paid for income taxes, net of refunds | 5,616 | 4,027 | ||||||
Debt issuance costs and amendment fees | — | 2,427 |
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 Statement of Operations to conform to the current year presentation.
Out-of-period Errors
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 of 2014 and any previously reported periods.
The Company uses the percentage-of-completion method of accounting to recognize revenues and associated costs as work progresses for certain contracts. During the second quarter of 2013, the Company determined that certain projects, for which production occurred in the first quarter of 2013, did not meet the thresholds established to recognize revenue and costs using the percentage-of-completion method. As a result, the Company recorded an entry in the second quarter of 2013 that decreased Net sales and Cost of sales by $5,776 and $4,340, respectively, to correct the untimely recognition of revenue and costs. This error was not material to the second quarter of 2013 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 Pronouncement 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.
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:
June 30, 2014 | December 31, 2013 | |||||||
Raw materials, net | $ | 80,733 | $ | 74,486 | ||||
Work in process | 22,989 | 18,612 | ||||||
Finished goods, net | 144,678 | 135,147 | ||||||
Inventories, net | $ | 248,400 | $ | 228,245 |
(3) Intangible Assets and Goodwill
The components of intangible assets were as follows as of the dates indicated:
June 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 | $ | 132,240 | $ | (87,102 | ) | $ | 45,138 | $ | 132,397 | $ | (82,569 | ) | $ | 49,828 | ||||||||||
Patented and unpatented technology | 24,209 | (10,303 | ) | 13,906 | 24,320 | (9,508 | ) | 14,812 | ||||||||||||||||
Other | 7,110 | (6,849 | ) | 261 | 7,193 | (6,966 | ) | 227 | ||||||||||||||||
Total finite-lived intangible assets | $ | 163,559 | $ | (104,254 | ) | $ | 59,305 | $ | 163,910 | $ | (99,043 | ) | $ | 64,867 |
Using the exchange rates in effect at period end, estimated amortization of intangible assets as of June 30, 2014 was as follows:
Remainder of 2014 | $ | 5,172 | ||
2015 | 10,253 | |||
2016 | 9,976 | |||
2017 | 8,176 | |||
2018 | 4,165 | |||
Thereafter | 21,563 | |||
Total | $ | 59,305 |
Intangible assets with indefinite lives are not amortized. The carrying values of trade names as of June 30, 2014 and December 31, 2013 were $84,335 and $85,420, respectively.
The change in the carrying value of goodwill was as follows as of the dates indicated:
Total | ||||
December 31, 2013 | $ | 198,329 | ||
Foreign currency translation | (1,571 | ) | ||
June 30, 2014 | $ | 196,758 |
7
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
(4) Borrowings
Long-term debt consisted of the following as of the dates indicated:
June 30, 2014 | December 31, 2013 | |||||||
Borrowings under Revolving Loan Facility | $ | 27,250 | $ | 32,000 | ||||
Polish Debt due 2014 | 8,756 | 8,860 | ||||||
Term Loan due 2017 | 326,021 | 330,813 | ||||||
9.50% Senior Notes due 2017 | 425,000 | 425,000 | ||||||
11.75% Senior Notes due 2017 | 82,500 | 82,500 | ||||||
Other indebtedness | 594 | 688 | ||||||
Total debt at face value | 870,121 | 879,861 | ||||||
Less: Unamortized discount, net | (1,776 | ) | (2,436 | ) | ||||
Less: Current maturities of long-term debt | (11,801 | ) | (14,933 | ) | ||||
Total long-term debt | $ | 856,544 | $ | 862,492 |
As of June 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 June 30, 2014, availability under the Revolving Loan Facility was $117,163. 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 $587 at June 30, 2014. The interest rate on the Revolving Loan Facility and Term Loan due 2017 at June 30, 2014 was 5.48% and 6.00%, respectively.
Recent Developments - 11.75% Senior Notes due 2017
On July 16, 2014, WireCo WorldGroup Inc. entered into an Amendment to the Note Purchase Agreement governing 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, the Company redeemed $26,500 of the $82,500 aggregate principal amount of the 11.75% 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. Giving effect to this transaction, the Company's availability under the Revolving Loan Facility was $90,263.
Interest expense, net
Net interest expense consists of:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Interest on long-term debt | $ | 18,070 | $ | 18,749 | $ | 36,114 | $ | 37,095 | ||||||||
Amortization of debt issuance costs, discounts and premium | 2,099 | 2,163 | 4,177 | 4,322 | ||||||||||||
Capitalized interest | (123 | ) | (538 | ) | (370 | ) | (813 | ) | ||||||||
Other | 70 | 82 | 53 | 72 | ||||||||||||
Interest expense, net | $ | 20,116 | $ | 20,456 | $ | 39,974 | $ | 40,676 |
8
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
(5) 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 carrying amounts and estimated fair values of the Company’s long-term debt at June 30, 2014 were as follows:
Carrying amount | Estimated fair value | |||||||
Revolving Loan Facility | $ | 27,250 | $ | 27,250 | ||||
Term Loan due 2017 | 324,122 | 328,466 | ||||||
9.50% Senior Notes due 2017 | 425,518 | 435,625 | ||||||
11.75% Senior Notes due 2017 | 82,500 | 82,500 |
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 9.50% Senior Notes is based on current market rates in inactive markets (Level 2 inputs) and the estimated fair value of the privately placed 11.75% Senior Notes is based on a model that incorporates assumptions a market participant would use in pricing the liability (Level 3 inputs).
(6) 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 June 30, 2014 | 516,491 | $ | 173.24 | 5.51 | |||||
Vested and expected to vest as of June 30, 2014 | 516,491 | 173.24 | 5.51 | ||||||
Exercisable at June 30, 2014 | 348,591 | 128.93 | 3.75 |
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. |
9
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
At June 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 $19,576, with the weighted average remaining years to vest of approximately 2.13 years. There were 26,779 awards available for future grants under the 2008 Long Term Incentive Plan at June 30, 2014.
(7) 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.
A rollforward of these restructuring activities is set forth below:
Balance at December 31, 2013 | $ | 2,812 | |
Payments made in 2014 | (1,925 | ) | |
Balance at June 30, 2014 | $ | 887 |
(8) 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 June 30, 2014 and 2013 was 445.5% and (26.2)%, respectively. The effective income tax rate for the six months ended June 30, 2014 and 2013 was 275.4% and (5.8)%, 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 taxable income (loss) by jurisdiction, and the effects of foreign tax rate differential.
(9) 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.
10
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
(10) 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 June 30, | Six months ended June 30, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||
Product line net sales | ($) | (%) | ($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||
Rope | $ | 161,915 | 72 | % | $ | 145,397 | 76 | % | $ | 321,543 | 74 | % | $ | 306,041 | 74 | % | |||||||
Specialty Wire | 35,459 | 16 | % | 31,256 | 16 | % | 68,567 | 16 | % | 63,256 | 15 | % | |||||||||||
Engineered Products | 29,133 | 12 | % | 13,100 | 8 | % | 46,899 | 10 | % | 43,100 | 11 | % | |||||||||||
$ | 226,507 | 100 | % | $ | 189,753 | 100 | % | $ | 437,009 | 100 | % | $ | 412,397 | 100 | % |
(11) 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 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.
The following condensed consolidating financial statements are prepared with each entity’s investment in subsidiaries accounted for under the equity method. During the fourth quarter of 2013, Royal Lankhorst Euronete Group B.V., an indirect subsidiary of the Company, became a guarantor. This change in the guarantor pool has been retroactively reflected in all condensed consolidating financial statements presented.
11
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
June 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 | $ | 29 | $ | 5,071 | $ | 22,646 | $ | 9,257 | $ | — | $ | 37,003 | |||||||||||
Restricted cash | — | — | 2,429 | — | — | 2,429 | |||||||||||||||||
Accounts receivable, net | — | 44,086 | 81,022 | 34,544 | — | 159,652 | |||||||||||||||||
Intercompany accounts receivable | 23,945 | 31,837 | 118,416 | 9,036 | (183,234 | ) | — | ||||||||||||||||
Inventories, net | — | 77,614 | 139,575 | 31,211 | — | 248,400 | |||||||||||||||||
Current deferred income tax assets | — | 3,139 | 4,412 | 139 | — | 7,690 | |||||||||||||||||
Prepaid expenses and other current assets | — | 2,698 | 9,807 | 3,271 | — | 15,776 | |||||||||||||||||
Total current assets | $ | 23,974 | $ | 164,445 | $ | 378,307 | $ | 87,458 | $ | (183,234 | ) | $ | 470,950 | ||||||||||
Long-term intercompany notes receivable | — | 455,172 | 4,780 | 3,111 | (463,063 | ) | — | ||||||||||||||||
Property, plant and equipment, net | — | 56,158 | 251,173 | 48,105 | — | 355,436 | |||||||||||||||||
Intangible assets, net | — | 35,867 | 82,191 | 25,582 | — | 143,640 | |||||||||||||||||
Goodwill | — | 117,124 | 55,461 | 24,173 | — | 196,758 | |||||||||||||||||
Investments in subsidiaries | 77,407 | — | 40,154 | 6,704 | (124,265 | ) | — | ||||||||||||||||
Deferred financing fees, net | — | 19,175 | — | — | — | 19,175 | |||||||||||||||||
Non-current deferred income tax assets | — | (4,798 | ) | 5,598 | 923 | — | 1,723 | ||||||||||||||||
Other non-current assets | — | 153 | 16,137 | 10 | — | 16,300 | |||||||||||||||||
Total assets | $ | 101,381 | $ | 843,296 | $ | 833,801 | $ | 196,066 | $ | (770,562 | ) | $ | 1,203,982 | ||||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Current maturities of long-term debt | $ | — | $ | 3,318 | $ | 8,460 | $ | 23 | $ | — | $ | 11,801 | |||||||||||
Interest payable | — | 6,447 | 181 | 10 | — | 6,638 | |||||||||||||||||
Accounts payable | — | 16,781 | 55,177 | 22,863 | — | 94,821 | |||||||||||||||||
Accrued compensation and benefits | — | 5,984 | 14,723 | 4,267 | — | 24,974 | |||||||||||||||||
Intercompany accounts payable | 1,365 | 68,098 | 37,477 | 76,426 | (183,366 | ) | — | ||||||||||||||||
Current deferred income tax liabilities | — | — | (37 | ) | 1,733 | 351 | 2,047 | ||||||||||||||||
Other current liabilities | — | 3,163 | 7,606 | 3,843 | — | 14,612 | |||||||||||||||||
Total current liabilities | $ | 1,365 | $ | 103,791 | $ | 123,587 | $ | 109,165 | $ | (183,015 | ) | $ | 154,893 | ||||||||||
Long-term debt, excluding current maturities | — | 856,072 | 472 | — | — | 856,544 |
12
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 | — | 448,956 | 7,418 | (463,074 | ) | — | ||||||||||||||||
Non-current deferred income tax liabilities | — | 1,920 | 56,268 | 10,390 | — | 68,578 | |||||||||||||||||
Other non-current liabilities | — | 7,371 | 21,276 | 2,004 | — | 30,651 | |||||||||||||||||
Total liabilities | $ | 8,065 | $ | 969,154 | $ | 650,559 | $ | 128,977 | $ | (646,089 | ) | $ | 1,110,666 | ||||||||||
Stockholders’ equity: | |||||||||||||||||||||||
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc. | 94,999 | (121,669 | ) | 184,925 | 64,583 | (127,839 | ) | 94,999 | |||||||||||||||
Non-controlling interests | (1,683 | ) | (4,189 | ) | (1,683 | ) | 2,506 | 3,366 | (1,683 | ) | |||||||||||||
Total stockholders’ equity | $ | 93,316 | $ | (125,858 | ) | $ | 183,242 | $ | 67,089 | $ | (124,473 | ) | $ | 93,316 | |||||||||
Total liabilities and stockholders’ equity | $ | 101,381 | $ | 843,296 | $ | 833,801 | $ | 196,066 | $ | (770,562 | ) | $ | 1,203,982 |
13
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 | ) | — |
14
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 |
15
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 June 30, 2014 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 74,769 | $ | 130,732 | $ | 54,887 | $ | (33,881 | ) | $ | 226,507 | ||||||||||
Cost of sales | — | (57,626 | ) | (102,613 | ) | (40,525 | ) | 34,414 | (166,350 | ) | |||||||||||||
Gross profit | — | 17,143 | 28,119 | 14,362 | 533 | 60,157 | |||||||||||||||||
Other operating expenses: | |||||||||||||||||||||||
Selling expenses | — | (2,993 | ) | (5,361 | ) | (3,186 | ) | — | (11,540 | ) | |||||||||||||
Administrative expenses | (153 | ) | (12,571 | ) | (6,806 | ) | (1,102 | ) | (450 | ) | (21,082 | ) | |||||||||||
Amortization expense | — | (757 | ) | (1,564 | ) | (270 | ) | — | (2,591 | ) | |||||||||||||
Total other operating expenses | (153 | ) | (16,321 | ) | (13,731 | ) | (4,558 | ) | (450 | ) | (35,213 | ) | |||||||||||
Operating income (loss) | (153 | ) | 822 | 14,388 | 9,804 | 83 | 24,944 | ||||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest income (expense), net | (102 | ) | (11,172 | ) | (8,871 | ) | 29 | — | (20,116 | ) | |||||||||||||
Equity income (losses) from subsidiaries | (1,769 | ) | — | (2,506 | ) | 842 | 3,433 | — | |||||||||||||||
Foreign currency exchange gains (losses), net | — | 123 | (3,274 | ) | (894 | ) | — | (4,045 | ) | ||||||||||||||
Other income (expense), net | — | (363 | ) | 189 | (2 | ) | — | (176 | ) | ||||||||||||||
Total other expense, net | (1,871 | ) | (11,412 | ) | (14,462 | ) | (25 | ) | 3,433 | (24,337 | ) | ||||||||||||
Income (loss) before income taxes | (2,024 | ) | (10,590 | ) | (74 | ) | 9,779 | 3,516 | 607 | ||||||||||||||
Income tax expense | — | (4 | ) | (1,892 | ) | (808 | ) | — | (2,704 | ) | |||||||||||||
Net income (loss) | (2,024 | ) | (10,594 | ) | (1,966 | ) | 8,971 | 3,516 | (2,097 | ) | |||||||||||||
Less: Net income (loss) attributable to non-controlling interests | — | — | (355 | ) | 282 | — | (73 | ) | |||||||||||||||
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc. | (2,024 | ) | (10,594 | ) | (1,611 | ) | 8,689 | 3,516 | (2,024 | ) | |||||||||||||
Comprehensive income (loss) | $ | (3,309 | ) | $ | (10,594 | ) | $ | (754 | ) | $ | (945 | ) | $ | 12,293 | $ | (3,309 | ) |
16
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Three months ended June 30, 2013 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 72,972 | $ | 119,158 | $ | 25,929 | $ | (28,306 | ) | $ | 189,753 | ||||||||||
Cost of sales | — | (56,367 | ) | (96,452 | ) | (21,492 | ) | 28,421 | (145,890 | ) | |||||||||||||
Gross profit | — | 16,605 | 22,706 | 4,437 | 115 | 43,863 | |||||||||||||||||
Other operating expenses: | |||||||||||||||||||||||
Selling expenses | — | (3,422 | ) | (4,766 | ) | (2,085 | ) | — | (10,273 | ) | |||||||||||||
Administrative expenses | (671 | ) | (10,465 | ) | (7,839 | ) | (2,069 | ) | — | (21,044 | ) | ||||||||||||
Amortization expense | — | (1,432 | ) | (2,468 | ) | (537 | ) | — | (4,437 | ) | |||||||||||||
Total other operating expenses | (671 | ) | (15,319 | ) | (15,073 | ) | (4,691 | ) | — | (35,754 | ) | ||||||||||||
Operating income (loss) | (671 | ) | 1,286 | 7,633 | (254 | ) | 115 | 8,109 | |||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest expense, net | (102 | ) | (11,372 | ) | (8,910 | ) | (72 | ) | — | (20,456 | ) | ||||||||||||
Equity losses from subsidiaries | (12,075 | ) | — | (11,887 | ) | (441 | ) | 24,403 | — | ||||||||||||||
Foreign currency exchange gains (losses), net | — | (378 | ) | 2,095 | (881 | ) | — | 836 | |||||||||||||||
Other income (expense), net | — | (77 | ) | 942 | 1 | — | 866 | ||||||||||||||||
Total other expense, net | (12,177 | ) | (11,827 | ) | (17,760 | ) | (1,393 | ) | 24,403 | (18,754 | ) | ||||||||||||
Loss before income taxes | (12,848 | ) | (10,541 | ) | (10,127 | ) | (1,647 | ) | 24,518 | (10,645 | ) | ||||||||||||
Income tax benefit (expense) | — | 132 | (2,815 | ) | (109 | ) | — | (2,792 | ) | ||||||||||||||
Net loss | (12,848 | ) | (10,409 | ) | (12,942 | ) | (1,756 | ) | 24,518 | (13,437 | ) | ||||||||||||
Less: Net loss attributable to non-controlling interests | — | — | (323 | ) | (266 | ) | — | (589 | ) | ||||||||||||||
Net loss attributable to WireCo WorldGroup (Cayman) Inc. | (12,848 | ) | (10,409 | ) | (12,619 | ) | (1,490 | ) | 24,518 | (12,848 | ) | ||||||||||||
Comprehensive income (loss) | $ | (13,047 | ) | $ | (10,409 | ) | $ | (13,332 | ) | $ | 2,635 | $ | 21,106 | $ | (13,047 | ) |
17
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Six months ended June 30, 2014 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 146,993 | $ | 258,970 | $ | 94,415 | $ | (63,369 | ) | $ | 437,009 | ||||||||||
Cost of sales | — | (113,480 | ) | (202,863 | ) | (71,158 | ) | 63,955 | (323,546 | ) | |||||||||||||
Gross profit | — | 33,513 | 56,107 | 23,257 | 586 | 113,463 | |||||||||||||||||
Other operating expenses: | |||||||||||||||||||||||
Selling expenses | — | (5,914 | ) | (10,351 | ) | (6,276 | ) | — | (22,541 | ) | |||||||||||||
Administrative expenses | (297 | ) | (25,005 | ) | (13,638 | ) | (2,282 | ) | (250 | ) | (41,472 | ) | |||||||||||
Amortization expense | — | (1,224 | ) | (3,942 | ) | (573 | ) | — | (5,739 | ) | |||||||||||||
Total other operating expenses | (297 | ) | (32,143 | ) | (27,931 | ) | (9,131 | ) | (250 | ) | (69,752 | ) | |||||||||||
Operating income (loss) | (297 | ) | 1,370 | 28,176 | 14,126 | 336 | 43,711 | ||||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest income (expense), net | (204 | ) | (22,148 | ) | (17,787 | ) | 165 | — | (39,974 | ) | |||||||||||||
Equity income (losses) from subsidiaries | (2,055 | ) | — | (7,860 | ) | 1,280 | 8,635 | — | |||||||||||||||
Foreign currency exchange gains (losses), net | — | 102 | (3,502 | ) | 306 | — | (3,094 | ) | |||||||||||||||
Other income (expense), net | — | (372 | ) | 923 | 27 | — | 578 | ||||||||||||||||
Total other income (expense), net | (2,259 | ) | (22,418 | ) | (28,226 | ) | 1,778 | 8,635 | (42,490 | ) | |||||||||||||
Income (loss) before income taxes | (2,556 | ) | (21,048 | ) | (50 | ) | 15,904 | 8,971 | 1,221 | ||||||||||||||
Income tax expense | — | (27 | ) | (2,351 | ) | (985 | ) | — | (3,363 | ) | |||||||||||||
Net income (loss) | (2,556 | ) | (21,075 | ) | (2,401 | ) | 14,919 | 8,971 | (2,142 | ) | |||||||||||||
Less: Net income (loss) attributable to non-controlling interests | — | — | (706 | ) | 1,120 | — | 414 | ||||||||||||||||
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc. | (2,556 | ) | (21,075 | ) | (1,695 | ) | 13,799 | 8,971 | (2,556 | ) | |||||||||||||
Comprehensive income (loss) | $ | (6,448 | ) | $ | (21,075 | ) | $ | 1,905 | $ | (289 | ) | $ | 19,459 | $ | (6,448 | ) |
18
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Six months ended June 30, 2013 | |||||||||||||||||||||||
WireCo WorldGroup (Cayman) Inc. (Parent) | WireCo WorldGroup Inc. (Issuer) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Elimination Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 152,514 | $ | 249,497 | $ | 68,150 | $ | (57,764 | ) | $ | 412,397 | ||||||||||
Cost of sales | — | (118,018 | ) | (197,708 | ) | (56,343 | ) | 58,162 | (313,907 | ) | |||||||||||||
Gross profit | — | 34,496 | 51,789 | 11,807 | 398 | 98,490 | |||||||||||||||||
Other operating expenses: | |||||||||||||||||||||||
Selling expenses | — | (7,222 | ) | (10,533 | ) | (4,047 | ) | — | (21,802 | ) | |||||||||||||
Administrative expenses | (748 | ) | (20,024 | ) | (16,733 | ) | (4,058 | ) | — | (41,563 | ) | ||||||||||||
Amortization expense | — | (2,864 | ) | (4,662 | ) | (1,069 | ) | — | (8,595 | ) | |||||||||||||
Total other operating expenses | (748 | ) | (30,110 | ) | (31,928 | ) | (9,174 | ) | — | (71,960 | ) | ||||||||||||
Operating income (loss) | (748 | ) | 4,386 | 19,861 | 2,633 | 398 | 26,530 | ||||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest expense, net | (204 | ) | (22,292 | ) | (17,984 | ) | (196 | ) | — | (40,676 | ) | ||||||||||||
Equity income (losses) from subsidiaries | (23,496 | ) | — | (16,498 | ) | 71 | 39,923 | — | |||||||||||||||
Foreign currency exchange losses, net | — | (171 | ) | (9,201 | ) | (645 | ) | — | (10,017 | ) | |||||||||||||
Other income (expense), net | — | (250 | ) | 960 | 3 | — | 713 | ||||||||||||||||
Total other expense, net | (23,700 | ) | (22,713 | ) | (42,723 | ) | (767 | ) | 39,923 | (49,980 | ) | ||||||||||||
Income (loss) before income taxes | (24,448 | ) | (18,327 | ) | (22,862 | ) | 1,866 | 40,321 | (23,450 | ) | |||||||||||||
Income tax benefit (expense) | — | 9 | (1,364 | ) | 2 | — | (1,353 | ) | |||||||||||||||
Net income (loss) | (24,448 | ) | (18,318 | ) | (24,226 | ) | 1,868 | 40,321 | (24,803 | ) | |||||||||||||
Less: Net income (loss) attributable to non-controlling interests | — | — | (588 | ) | 233 | — | (355 | ) | |||||||||||||||
Net income (loss) attributable to WireCo WorldGroup (Cayman), Inc. | (24,448 | ) | (18,318 | ) | (23,638 | ) | 1,635 | 40,321 | (24,448 | ) | |||||||||||||
Comprehensive income (loss) | $ | (24,971 | ) | $ | (18,318 | ) | $ | (24,058 | ) | $ | 19,434 | $ | 22,942 | $ | (24,971 | ) |
19
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
Six months ended June 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 | $ | (252 | ) | $ | (8,120 | ) | $ | 44,049 | $ | (9,955 | ) | $ | — | $ | 25,722 | ||||||||
Cash flows from investing activities: | |||||||||||||||||||||||
Capital expenditures | — | (2,296 | ) | (5,300 | ) | (2,028 | ) | — | (9,624 | ) | |||||||||||||
Acquisition of business | — | — | — | (4,573 | ) | — | (4,573 | ) | |||||||||||||||
Repayments from intercompany loans | — | 26,035 | 3,570 | 819 | (30,424 | ) | — | ||||||||||||||||
Investment in subsidiaries | — | — | (4,573 | ) | — | 4,573 | — | ||||||||||||||||
Net cash provided by (used in) investing activities | $ | — | $ | 23,739 | $ | (6,303 | ) | $ | (5,782 | ) | $ | (25,851 | ) | $ | (14,197 | ) | |||||||
Cash flows from financing activities: | |||||||||||||||||||||||
Principal payments on long-term debt | — | (4,792 | ) | — | — | — | (4,792 | ) | |||||||||||||||
Borrowings under revolving credit agreement | — | 87,000 | — | — | — | 87,000 | |||||||||||||||||
Repayments under revolving credit agreement | — | (91,750 | ) | — | — | — | (91,750 | ) | |||||||||||||||
Capital contributions received | — | — | — | 4,573 | (4,573 | ) | — | ||||||||||||||||
Repayments of intercompany loans | — | (3,570 | ) | (26,854 | ) | — | 30,424 | — | |||||||||||||||
Other financing activities | 228 | — | (267 | ) | — | — | (39 | ) | |||||||||||||||
Net cash provided by (used in) financing activities | $ | 228 | $ | (13,112 | ) | $ | (27,121 | ) | $ | 4,573 | $ | 25,851 | $ | (9,581 | ) | ||||||||
Effect of exchange rates on cash and cash equivalents | — | — | 223 | (151 | ) | — | 72 | ||||||||||||||||
Increase (decrease) in cash and cash equivalents | $ | (24 | ) | $ | 2,507 | $ | 10,848 | $ | (11,315 | ) | $ | — | $ | 2,016 | |||||||||
Cash and cash equivalents, beginning of period | 53 | 2,564 | 11,798 | 20,572 | — | 34,987 | |||||||||||||||||
Cash and cash equivalents, end of period | $ | 29 | $ | 5,071 | $ | 22,646 | $ | 9,257 | $ | — | $ | 37,003 |
20
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)
Six months ended June 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 | $ | 65 | $ | (17,592 | ) | $ | 21,764 | $ | (2,589 | ) | $ | — | $ | 1,648 | |||||||||
Cash flows from investing activities: | |||||||||||||||||||||||
Capital expenditures | — | (2,560 | ) | (13,954 | ) | (1,776 | ) | — | (18,290 | ) | |||||||||||||
Other investing activities | — | (34 | ) | — | — | — | (34 | ) | |||||||||||||||
Disbursements of intercompany loans | — | (1,396 | ) | (10,602 | ) | (952 | ) | 12,950 | — | ||||||||||||||
Intercompany dividends received | 5,800 | — | 4,008 | — | (9,808 | ) | — | ||||||||||||||||
Investment in subsidiaries | (5,800 | ) | — | — | — | 5,800 | — | ||||||||||||||||
Net cash provided by (used in) investing activities | $ | — | $ | (3,990 | ) | $ | (20,548 | ) | $ | (2,728 | ) | $ | 8,942 | $ | (18,324 | ) | |||||||
Cash flows from financing activities: | |||||||||||||||||||||||
Principal payments on long-term debt | — | (1,675 | ) | (8,530 | ) | — | — | (10,205 | ) | ||||||||||||||
Borrowings under revolving credit agreement | — | 86,930 | — | — | — | 86,930 | |||||||||||||||||
Repayments under revolving credit agreement | — | (73,380 | ) | — | — | — | (73,380 | ) | |||||||||||||||
Repayments of short-term borrowings | — | — | — | (1,586 | ) | — | (1,586 | ) | |||||||||||||||
Proceeds from intercompany loans | — | 10,603 | 2,040 | 307 | (12,950 | ) | — | ||||||||||||||||
Capital contributions received | — | — | 5,800 | — | (5,800 | ) | — | ||||||||||||||||
Intercompany dividends paid | — | — | (5,800 | ) | (4,008 | ) | 9,808 | — | |||||||||||||||
Net cash provided by (used in) financing activities | $ | — | $ | 22,478 | $ | (6,490 | ) | $ | (5,287 | ) | $ | (8,942 | ) | $ | 1,759 | ||||||||
Effect of exchange rates on cash and cash equivalents | — | — | (441 | ) | (169 | ) | — | (610 | ) | ||||||||||||||
Increase (decrease) in cash and cash equivalents | $ | 65 | $ | 896 | $ | (5,715 | ) | $ | (10,773 | ) | $ | — | $ | (15,527 | ) | ||||||||
Cash and cash equivalents, beginning of period | 34 | 2,867 | 26,980 | 19,363 | — | 49,244 | |||||||||||||||||
Cash and cash equivalents, end of period | $ | 99 | $ | 3,763 | $ | 21,265 | $ | 8,590 | $ | — | $ | 33,717 |
21
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.
22
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 restricted cash and available cash that 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.
First Half of 2014 Highlights
Results continued to improve with meaningful growth in sales, Adjusted EBITDA and cash generation. Net sales improved 19.4% and 6.0% for the second quarter and first half of 2014, respectively, compared to the same periods from the prior year. Rope sales increased 11.4% and 5.1% in the second quarter and first half of 2014, respectively, as compared to the same periods in 2013. Strengths in certain rope end markets, such as oil and gas, fishing and maritime, contributed to the increase. Lower first quarter sales to the industrial and infrastructure and mining rope end markets impacted the level of sales for the first half of 2014 compared to 2013. Sales of engineered products increased 122.4% and 8.8% for the second quarter and first half of 2014, respectively, compared to the same periods in 2013, with most growth being due to the offshore end market. Specialty wire sales picked up in 2014 both on a quarter-over-quarter and year-over-year basis. For the first half of the year, specialty wire sales are 8.4% higher than 2013 driven both by improvement in the Mexican market and continued growth in Europe.
In April, we acquired certain assets from Endenburg B.V. to reorganize into a new distribution facility called WireCo Crane Center. Endenburg B.V. is headquartered in Gouda, Holland and supplied high quality hoisting and lifting gear, among other products. This crane center establishes a key central stocking location with good inland transportation routes near the Rotterdam Port, allowing us to provide quicker response times and higher service levels to our European and international customer base. The new crane center in Gouda is expected to make a contribution to rope sales in the latter half of 2014.
Adjusted EBITDA as a percentage of sales was 18.2% and 17.8% for the three and six months ended June 30, 2014 compared to 16.3% and 16.6% for the three and six months ended June 30, 2013. The Adjusted EBITDA growth can primarily be attributed to sales growth and efficiencies gained in our plant operations, including freight and distribution. 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 formal reconciliation to net loss, see the section titled “Adjusted EBITDA”.
23
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Adjusted EBITDA (Non-GAAP) | $ | 41,323 | $ | 30,982 | $ | 77,793 | $ | 68,543 | ||||||||
Net loss as reported (GAAP) | $ | (2,097 | ) | $ | (13,437 | ) | $ | (2,142 | ) | $ | (24,803 | ) |
The decrease in net loss of $11.3 million quarter-over-quarter was primarily due to sales growth and margin enhancement offset by foreign currency exchange losses. The decrease in net loss of $22.7 million year-over-year was primarily due to sales growth, margin enhancement and less foreign currency exchange losses. The majority of the foreign currency exchange gain/loss activity is unrealized and relates to the revaluation of intercompany loans.
We generated cash flow from operations of $25.7 million for the six months ended June 30, 2014, even with semi-annual interest payments of approximately $25.0 million. This is evidence of strong business performance, improved collection efforts and close management of payment terms.
Consolidated Results of Operations
This section focuses on significant items that impacted our operating results for the three and six months ended June 30, 2014 compared to the three and six months ended June 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 June 30, 2014 compared to three months ended June 30, 2013
The following table presents selected consolidated financial data for the three months ended June 30, 2014 and 2013:
Three months ended June 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(dollars in thousands) | |||||||||||||||
Net sales | $ | 226,507 | $ | 189,753 | $ | 36,754 | 19.4 | % | |||||||
Gross profit | 60,157 | 43,863 | 16,294 | 37.1 | % | ||||||||||
Other operating expenses | (35,213 | ) | (35,754 | ) | 541 | (1.5 | )% | ||||||||
Other expense, net | (24,337 | ) | (18,754 | ) | (5,583 | ) | 29.8 | % | |||||||
Income tax expense | (2,704 | ) | (2,792 | ) | 88 | NM | |||||||||
Net loss | $ | (2,097 | ) | $ | (13,437 | ) | $ | 11,340 | NM | ||||||
Gross profit as % of net sales | 26.6 | % | 23.1 | % | |||||||||||
Other operating expenses as % of net sales | 15.5 | % | 18.8 | % |
NM = Not Meaningful
Net sales
Our consolidated net sales increased $36.8 million, or 19.4%, during the quarter ended June 30, 2014 as compared to the same period in 2013. Foreign currency exchange rate fluctuations contributed $5.7 million of the increase.
Rope sales for the quarter increased $12.5 million primarily due to increased sales in our oil and gas and fishing end markets. Orders for our offshore oil and gas products were up $6.8 million primarily due to increased production at our Brazilian facility. Onshore oil and gas sales increased $2.9 million driven by the improving rig count and new customer growth. According to Baker Hughes, the average North American rig count for the second quarter of 2014 was 2,054 compared to 1,916 in the second quarter of 2013, a 7.2% increase. Fishing sales increased $2.5 million quarter-over-quarter primarily due to product innovation in our netting offering, growth in South America and improving global market conditions. Sales to industrial and infrastructure markets utilizing our crane ropes declined slightly compared to the same period in prior year.
24
Specialty wire sales increased $3.9 million for the three months ended June 30, 2014 compared to the same period last year due to slight improvement in market conditions in Mexico, as well as continued growth in Europe.
Sales of engineered products increased approximately $14.7 million. Of the increase, $5.8 million was related to lower than normal sales in the second quarter of 2013 due to a correction of an accounting error. The timing of projects and new offshore contracts resulted in the remaining increase in sales.
Gross profit
Gross profit increased $16.3 million for the three months ended June 30, 2014 compared to the same period last year. Gross profit as a percentage of sales (“gross margin”) increased from 23.1% for the three months ended June 30, 2013 to 26.6% for the three months ended June 30, 2014. Improved margin performance is primarily attributable to favorable product mix towards higher margin products, including innovative products, cost management and efficiencies in our production facilities.
Other operating expenses
Three months ended June 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(dollars in thousands) | |||||||||||||||
Selling expenses | $ | (11,540 | ) | $ | (10,273 | ) | $ | (1,267 | ) | 12.3 | % | ||||
Administrative expenses | (21,082 | ) | (21,044 | ) | (38 | ) | 0.2 | % | |||||||
Amortization expense | (2,591 | ) | (4,437 | ) | 1,846 | (41.6 | )% | ||||||||
Other operating expenses | $ | (35,213 | ) | $ | (35,754 | ) | $ | 541 | (1.5 | )% |
Other operating expenses decreased $0.5 million, or 1.5%, for the three months ended June 30, 2014 compared to the same period in 2013. Overall, total other operating expenses as a percentage of net sales declined from 18.8% for the second quarter of 2013 to 15.5% for the second quarter of 2014.
Selling expenses increased $1.3 million, or 12.3%, in the second quarter of 2014 as compared to the same period in 2013. Commissions increased $0.7 million directly related to the increase in sales. Foreign currency exchange rate fluctuations accounted for $0.3 million of the increase in selling expenses.
Administrative expenses increased less than $0.1 million, or 0.2%, in the second quarter of 2014 as compared to the same period in 2013. Higher compensation of $3.4 million and bad debt expense of $0.6 million was partially offset by lower reorganization and restructuring charges of $3.4 million, bank fees of $0.7 million and advisory fees of $0.4 million. Incentive compensation, based on Adjusted EBITDA, was $2.7 million higher in the second quarter of 2014 compared to the second quarter of 2013 as no bonus was earned in the second quarter of 2013. Also, share-based compensation increased $0.7 million for the three months ended June 30, 2014 compared to the same period in prior year due to grants of options and restricted stock awards issued. Bad debt expense was lower in the second quarter of 2013 due to collection of a reserved amount. Foreign currency exchange rate fluctuations accounted for $0.4 million of the increase. In 2013, we underwent an organizational restructuring, which included changes in executive management positions. Also, we incurred non-capitalizable bank fees in the second quarter of 2013 associated with the Second Amendment of the Credit Agreement.
Amortization expense decreased $1.8 million, or 41.6%, primarily due to certain finite-lived intangible assets becoming fully amortized effective in the first quarter of 2014.
25
Other expense, net
Three months ended June 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(dollars in thousands) | |||||||||||||||
Interest expense, net | $ | (20,116 | ) | $ | (20,456 | ) | $ | 340 | (1.7 | )% | |||||
Foreign currency exchange gains (losses), net | (4,045 | ) | 836 | (4,881 | ) | (583.9 | )% | ||||||||
Other income (expense), net | (176 | ) | 866 | (1,042 | ) | (120.3 | )% | ||||||||
Total other expense, net | $ | (24,337 | ) | $ | (18,754 | ) | $ | (5,583 | ) | 29.8 | % |
Other expense increased by $5.6 million, or 29.8%, for the three months ended June 30, 2014 compared to the same period in 2013. This increase was primarily due to foreign currency exchange fluctuations. For the three months ended June 30, 2014, foreign currency exchange losses were $4.0 million compared to foreign currency exchange gains of $0.8 million for the same period in 2013. At June 30, 2014 and 2013, we had intercompany loans that required remeasurement in the aggregate amounts of $452.2 million and $479.6 million, respectively. Foreign currency exchange losses for the second quarter of 2014 primarily related to the depreciation of the euro. The U.S. dollar to euro exchange rate at March 31, 2014 was $1.00 to €0.7253 compared to $1.00 to €0.7322 at June 30, 2014. In the second quarter of 2013, foreign currency exchange gains related to the appreciation of the euro were partially offset by foreign currency exchange losses related to the depreciation of the Mexican peso and the Polish zloty.
Income tax expense
For the three months ended June 30, 2014, we recorded income tax expense of $2.7 million compared to $2.8 million for the three months ended June 30, 2013. The resulting effective tax rate for the second quarter of 2014 and 2013 was 445.5% and (26.2)%, 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 taxable income (loss) by jurisdiction, and the effects of foreign tax rate differential.
Six months ended June 30, 2014 compared to six months ended June 30, 2013
The following table presents selected consolidated financial data for the six months ended June 30, 2014 and 2013:
Six months ended June 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(dollars in thousands) | |||||||||||||||
Net sales | $ | 437,009 | $ | 412,397 | $ | 24,612 | 6.0 | % | |||||||
Gross profit | 113,463 | 98,490 | 14,973 | 15.2 | % | ||||||||||
Other operating expenses | (69,752 | ) | (71,960 | ) | 2,208 | (3.1 | )% | ||||||||
Other expense, net | (42,490 | ) | (49,980 | ) | 7,490 | (15.0 | )% | ||||||||
Income tax expense | (3,363 | ) | (1,353 | ) | (2,010 | ) | NM | ||||||||
Net loss | $ | (2,142 | ) | $ | (24,803 | ) | $ | 22,661 | NM | ||||||
Gross profit as % of net sales | 26.0 | % | 23.9 | % | |||||||||||
Other operating expenses as % of net sales | 16.0 | % | 17.4 | % |
NM = Not Meaningful
Net sales
Our consolidated net sales increased $24.6 million, or 6.0%, during the six months ended June 30, 2014 as compared to the same period in 2013. Foreign currency exchange rate fluctuations contributed to an increase in sales of $9.1 million.
Rope sales for the first half of 2014 increased $8.5 million over the same period in 2013. Increased sales in our fishing, oil and gas and maritime end markets were offset by declines in industrial and infrastructure and mining end markets. Oil and gas sales increased $10.4 million primarily due to more offshore projects, new customers and improving rig counts, partially offset by fewer oilfield exploration orders. According to Baker Hughes, the average North American rig count for the first half of 2014
26
was 2,180 compared to 2,105 in the first half of 2013, a 3.6% increase. Fishing sales increased $6.5 million year-over-year primarily due to product innovation in our netting offering, growth in South America and improving market conditions. Maritime sales increased $3.4 million in the first half of 2014 compared to the first half of 2013 due to growth in new vessel build orders and new customers from the Endenburg acquisition.
Sales to industrial and infrastructure markets utilizing our crane ropes declined $6.1 million. We saw improvement in our crane rope sales in the second quarter of 2014, but our first quarter 2014 sales were below the first quarter of 2013 largely driven by lower sales into Europe. The new crane center in Gouda is expected to make a contribution to sales in the latter half of 2014. Due to the continued pressure on commodity prices and resulting overall level of spending from mining operators, sales to the mining end market declined $4.2 million for the six months ended June 30, 2014 compared to the same period in 2013. Sales to the structures end market declined $2.1 million year-over-year primarily due to large bridge projects being postponed to future years.
Specialty wire sales increased $5.1 million for the six months ended June 30, 2014 compared to the same period last year due to a slight improvement in market conditions in Mexico, as well as continued growth in Europe.
Sales of engineered products increased $1.9 million for the six months ended June 30, 2014 compared to the same period last year primarily due to more offshore projects and a steady production volume of storage systems for the steel industry.
Gross profit
Gross profit increased $15.0 million and gross profit as a percentage of sales (“gross margin”) increased from 23.9% for the six months ended June 30, 2013 to 26.0% for the six months ended June 30, 2014. Improved margin performance is primarily attributable to favorable product mix towards higher margin products and cost management. We continue to streamline operations to improve processes and reduce costs.
Other operating expenses
Six months ended June 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(dollars in thousands) | |||||||||||||||
Selling expenses | $ | (22,541 | ) | $ | (21,802 | ) | $ | (739 | ) | 3.4 | % | ||||
Administrative expenses | (41,472 | ) | (41,563 | ) | 91 | (0.2 | )% | ||||||||
Amortization expense | (5,739 | ) | (8,595 | ) | 2,856 | (33.2 | )% | ||||||||
Other operating expenses | $ | (69,752 | ) | $ | (71,960 | ) | $ | 2,208 | (3.1 | )% |
Other operating expenses decreased $2.2 million, or 3.1%, for the six months ended June 30, 2014 compared to the same period in 2013. Overall, total other operating expenses as a percentage of net sales declined from 17.4% for the first half of 2013 to 16.0% for the first half of 2014.
Foreign currency exchange rate fluctuations accounted for $0.6 million of the increase in selling expenses. The increase in commissions for the second quarter of 2014 compared to the second quarter of 2013 directly related to sales volume was offset by the decline in commissions for the first quarter of 2014 compared to the first quarter of 2013.
Administrative expenses did not significantly change compared to the same period in 2013. Lower reorganization and restructuring charges of $4.4 million, bank fees of $0.9 million and advisory fees of $0.4 million, were partially offset by higher compensation, an impairment charge, bad debt expense and the impact of foreign currency exchange rates. Incentive compensation, based on Adjusted EBITDA, was $2.7 million higher for the six months ended June 30, 2014 compared to the same period in 2013 as no bonus was earned in the second quarter of 2013. Share-based compensation was $1.8 million more in the first half of 2014 compared to the first half of 2013 due to grants of options and restricted stock awards. A non-cash impairment charge of $0.6 million was recorded in the first quarter of 2014 related to an office building that will be abandoned instead of sold. Bad debt expense was $0.6 million lower in the first half of 2013 due to collection of a reserved amount. Foreign currency exchange rate fluctuations accounted for $0.7 million of the increase. In 2013, we underwent an organizational restructuring, which included changes in executive management positions. Also, we incurred non-capitalizable bank fees in the second quarter of 2013 associated with the Second Amendment of the Credit Agreement.
Amortization expense decreased $2.9 million, or 33.2%, primarily due to certain finite-lived intangible assets becoming fully amortized effective the first quarter of 2014.
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Other expense, net
Six months ended June 30, | Change | ||||||||||||||
2014 | 2013 | Dollars | Percent | ||||||||||||
(dollars in thousands) | |||||||||||||||
Interest expense, net | $ | (39,974 | ) | $ | (40,676 | ) | $ | 702 | (1.7 | )% | |||||
Foreign currency exchange losses, net | (3,094 | ) | (10,017 | ) | 6,923 | (69.1 | )% | ||||||||
Other income, net | 578 | 713 | (135 | ) | (18.9 | )% | |||||||||
Total other expense, net | $ | (42,490 | ) | $ | (49,980 | ) | $ | 7,490 | (15.0 | )% |
Other expense decreased by $7.5 million, or 15.0%, for the six months ended June 30, 2014 compared to the same period in 2013. This decline was primarily due to foreign currency exchange fluctuations. For the six months ended June 30, 2014, foreign currency exchange losses were $3.1 million compared to foreign currency exchange losses of $10.0 million for the same period in 2013. At June 30, 2014 and 2013, we had intercompany loans that required remeasurement in the aggregate amounts of $452.2 million and $479.6 million, respectively. Foreign currency exchange losses for the first half of 2014 primarily related to the depreciation of the euro. The U.S. dollar to euro exchange rate at December 31, 2013 was $1.00 to €0.7251 compared to $1.00 to €0.7322 at June 30, 2014. Foreign currency exchange losses for the first half of 2013 were primarily due to the depreciation of the Polish zloty and the euro. The U.S. dollar to Polish exchange rate at December 31, 2012 was $1.00 to zł.3.0878 compared to $1.00 to zł.3.3162 at June 30, 2013. The U.S. dollar to euro exchange rate at December 31, 2012 was $1.00 to €0.7579 compared to $1.00 to €0.7645 at June 30, 2013.
Income tax expense
For the six months ended June 30, 2014, we recorded income tax expense of $3.4 million compared to $1.4 million for the same period in 2013. The resulting effective tax rate for the first half of 2014 and 2013 was 275.4% and (5.8)%, 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 taxable income (loss) by jurisdiction, and the effects of foreign tax rate differential.
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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 June 30, | Six months ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Net loss (GAAP) | $ | (2,097 | ) | $ | (13,437 | ) | $ | (2,142 | ) | $ | (24,803 | ) | ||||
Plus: | ||||||||||||||||
Interest expense, net | 20,116 | 20,456 | 39,974 | 40,676 | ||||||||||||
Income tax expense | 2,704 | 2,792 | 3,363 | 1,353 | ||||||||||||
Depreciation and amortization | 12,913 | 14,542 | 25,948 | 28,316 | ||||||||||||
Foreign currency exchange losses (gains), net | 4,045 | (836 | ) | 3,094 | 10,017 | |||||||||||
Share-based compensation | 1,808 | 1,091 | 3,570 | 1,726 | ||||||||||||
Other expense (income), net | 176 | (866 | ) | (578 | ) | (713 | ) | |||||||||
Acquisition costs | 334 | 337 | 347 | 369 | ||||||||||||
Purchase accounting (inventory step-up and other) | — | 838 | — | 1,761 | ||||||||||||
Advisory fees | 947 | 1,297 | 1,898 | 2,334 | ||||||||||||
Reorganization and restructuring charges | 147 | 3,589 | 1,135 | 5,551 | ||||||||||||
Non-cash impairment of fixed assets | — | — | 598 | — | ||||||||||||
Other adjustments | 230 | 1,179 | 586 | 1,956 | ||||||||||||
Adjusted EBITDA (Non-GAAP) | $ | 41,323 | $ | 30,982 | (a) | $ | 77,793 | $ | 68,543 |
(a) Adjusted EBITDA for the three months ended June 30, 2013 is exclusive of an out-of-period accounting error. If we would have properly recorded the transaction, Adjusted EBITDA would have been $32.4 million. We use the percentage-of-completion method of accounting to recognize revenues and associated costs as work progresses for certain contracts. During the second quarter of 2013, we determined that certain projects, for which production occurred in the first quarter of 2013, did not meet the thresholds established to recognize revenue and costs using the percentage-of-completion method. As a result, we recorded an entry in the second quarter of 2013 that decreased Net sales and Cost of sales by $5.8 million and $4.3 million, respectively, to correct the untimely recognition of revenue and costs. This error was not material to the second quarter of 2013 and any previously reported periods.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
For the six months ended June 30, 2014, we generated net cash from operating activities of $25.7 million compared to $1.6 million for the six months ended June 30, 2013 with significant interest payments of $35.5 million and $36.1 million during these periods, respectively. This is evidence of strong business performance, improved collection efforts and close management of payment terms. Our focus remains on initiatives to generate cash and pay down debt.
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 $154.2 million at June 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. We had borrowed $27.3 million under the Revolving Loan Facility at June 30, 2014, but subsequently borrowed $26.5 million to redeem a portion of the 11.75% Senior Notes on July 17, 2014 as described in "Recent Developments".
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 corporate legal structure that are paid with earnings from the operating subsidiaries in foreign jurisdictions to provide liquidity in the U.S. for interest and principal payments on our outstanding debt. Of the consolidated cash and cash equivalents balance of $37.0 million at June 30, 2014, cash and cash equivalents held in foreign countries were $31.4 million, of which $3.7 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. However, there can be no assurance of the cost or availability of future borrowings, if any, under our credit facilities or in the debt markets.
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, increased from $300.6 million as of December 31, 2013 to $313.2 million as of June 30, 2014. The increase in Adjusted Working Capital is primarily due to increased sales activity and a build in inventory in anticipation of future sales and planned European holidays, offset by management of our payment terms. 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:
June 30, 2014 | December 31, 2013 | |||||||
(dollars in thousands) | ||||||||
Accounts receivable, net | $ | 159,652 | $ | 148,564 | ||||
Inventories, net | 248,400 | 228,245 | ||||||
Accounts payable | (94,821 | ) | (76,181 | ) | ||||
Adjusted Working Capital (Non-GAAP) | 313,231 | 300,628 | ||||||
Plus: All other current assets | 62,898 | 55,999 | ||||||
Less: All other current liabilities | (60,072 | ) | (56,539 | ) | ||||
Working capital (GAAP) | $ | 316,057 | $ | 300,088 |
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.
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Net Debt was $833.6 million and $845.3 million at June 30, 2014 and December 31, 2013, respectively. Our Net Leverage ratio was 5.63x at June 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.
June 30, 2014 | December 31, 2013 | |||||||
(dollars in thousands) | ||||||||
Borrowings under Revolving Loan Facility | $ | 27,250 | $ | 32,000 | ||||
Polish Debt due 2014 | 8,756 | 8,860 | ||||||
Term Loan due 2017 | 326,021 | 330,813 | ||||||
9.50% Senior Notes due 2017 | 425,000 | 425,000 | ||||||
11.75% Senior Notes due 2017 | 82,500 | 82,500 | ||||||
Other indebtedness | 594 | 688 | ||||||
Capital lease obligations | 2,869 | 3,333 | ||||||
Total debt at face value plus capital lease obligations (GAAP) | 872,990 | 883,194 | ||||||
Less: Cash and cash equivalents | (37,003 | ) | (34,987 | ) | ||||
Less: Restricted cash | (2,429 | ) | (2,887 | ) | ||||
Net Debt (Non-GAAP) | $ | 833,558 | $ | 845,320 |
Free Cash Flow
Free Cash Flow, a Non-GAAP Financial Measure, is defined as the change in Net Debt exclusive of the impact of acquisitions. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. After significant interest payments, investments in capital expenditures and an acquisition of a business, we still generated Free Cash Flow of $11.8 million for the six months ended June 30, 2014.
Six months ended June 30, 2014 | ||||
(dollars in thousands) | ||||
Net cash provided by operating activities (GAAP) | $ | 25,722 | ||
Less: capital expenditures | (9,624 | ) | ||
Less: acquisition of business | (4,573 | ) | ||
Plus: effect of exchange rates on cash and cash equivalents | 72 | |||
Plus: other items | 165 | |||
Free Cash Flow (Non-GAAP) | $ | 11,762 |
Recent Developments
On July 16, 2014, WireCo WorldGroup Inc. entered into an Amendment to the Note Purchase Agreement governing our 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 11.75% Senior Notes, using cash drawn under the Revolving Loan Facility.
Debt Covenant Compliance
As of June 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 2.21x. 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.
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Cash Flow Information
The following tables summarize our cash flows from operating, investing and financing activities for the six months ended June 30, 2014 and 2013, respectively.
Six months ended June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Cash flows provided by (used in) | ||||||||
Operating activities | $ | 25,722 | $ | 1,648 | ||||
Investing activities | (14,197 | ) | (18,324 | ) | ||||
Financing activities | (9,581 | ) | 1,759 | |||||
Effect of exchange rates on cash and cash equivalents | 72 | (610 | ) | |||||
Increase (decrease) in cash and cash equivalents | 2,016 | (15,527 | ) | |||||
Cash and cash equivalents, beginning of period | 34,987 | 49,244 | ||||||
Cash and cash equivalents, end of period | $ | 37,003 | $ | 33,717 |
Cash from Operating Activities
Six months ended June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Net loss | $ | (2,142 | ) | $ | (24,803 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities | 34,576 | 43,189 | ||||||
Changes in assets and liabilities | (6,712 | ) | (16,738 | ) | ||||
Net cash provided by operating activities | $ | 25,722 | $ | 1,648 |
Cash flows from operating activities increased over the prior period primarily due to higher cash earnings. Cash earnings is our net loss adjusted for non-cash items, such as depreciation and amortization among other reconciling items. Also, our working capital cash flow needs improved with close monitoring of payables, partially offset by our investment in inventory.
Cash from Investing Activities
Six months ended June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Capital expenditures | $ | (9,624 | ) | $ | (18,290 | ) | ||
Acquisition of business | (4,573 | ) | — | |||||
Other investing activities | — | (34 | ) | |||||
Net cash used in investing activities | $ | (14,197 | ) | $ | (18,324 | ) |
Our investment in capital expenditures is lower than the first half of 2013 primarily due to getting a late start on key projects. We still expect to invest approximately $30.0 to $35.0 million in capital expenditures, primarily in emerging markets. 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.
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Cash from Financing Activities
Six months ended June 30, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Principal payments on long-term debt | $ | (4,792 | ) | $ | (10,205 | ) | ||
Net repayments under revolving credit agreement | (4,750 | ) | 13,550 | |||||
Repayments of short-term borrowings | — | (1,586 | ) | |||||
Other financing activities | (39 | ) | — | |||||
Net cash provided by (used in) financing activities | $ | (9,581 | ) | $ | 1,759 |
During the first half of 2014, we paid $9.5 million on our long-term debt, including a $3.1 million annual excess cash flow payment, and we expect to continue to pay down our long-term debt balances.
Contractual Obligations and Commitments
As of June 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.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk
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.
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 is in the process of recruiting other key tax personnel. 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.
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 second quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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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 9—“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
On August 5, 2014, Mitchell S. Presser resigned from his position as a member of the Board of Directors of WireCo WorldGroup Inc. The resignation was not the result of any disagreement on any matter relating to WireCo WorldGroup Inc.'s operations, policies or practices.
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Item 6. Exhibits
Exhibit No. | Description of Exhibits Filed with this Report | ||
10.1 | Amendment No. 5 to Note Purchase Agreement, dated as of July 16, 2014, between WireCo WorldGroup Inc. and the Purchasers. | ||
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 |
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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: | August 7, 2014 | By: | /s/ Brian G. Block | ||||
Brian G. Block | |||||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||
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