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EX-32.1 - CEO 906 CERTIFICATION - WireCo WorldGroup Inc.exhibit321_q3x2014.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 333-174896

 
WireCo WorldGroup Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
27-0061302
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
12200 NW Ambassador Drive
Kansas City, Missouri
 
64163
 
 
(Address of registrant's executive offices)
 
(Zip Code)
 
 
(816) 270-4700
 
 
(Registrant's telephone number, including area code)
 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ¨   NO  x 
NOTE: While the Registrant is a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
 
Non-accelerated filer
 
x
  
Smaller reporting company
 
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    YES  ¨   NO  x
There is no market for the Registrant’s equity, all of which is held by affiliates of WireCo WorldGroup (Cayman) Inc. (the “Company”). As of November 1, 2014 the Registrant had 100 shares of common stock outstanding.




WireCo WorldGroup Inc.
Quarterly Report
For the period ended September 30, 2014
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



1


PART I – FINANCIAL INFORMATION
Item 1.Financial Statements (unaudited)

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
Assets
 
September 30, 2014
 
December 31, 2013
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
41,718

 
$
34,987

Restricted cash
 
1,873

 
2,887

Accounts receivable, less allowance for doubtful accounts of $2,106 and $3,458, at September 30, 2014 and December 31, 2013, respectively
 
141,982

 
148,564

Inventories, net
 
227,590

 
228,245

Current deferred income tax assets
 
5,289

 
5,468

Prepaid expenses and other current assets
 
24,154

 
12,657

Total current assets
 
$
442,606

 
$
432,808

Property, plant and equipment, less accumulated depreciation of $180,162 and $163,250, at September 30, 2014 and December 31, 2013, respectively
 
330,407

 
366,338

Intangible assets, net
 
132,748

 
150,287

Goodwill
 
191,901

 
198,329

Deferred financing fees, net
 
17,189

 
22,702

Non-current deferred income tax assets
 
15,750

 
8,078

Other non-current assets
 
15,575

 
20,673

Total assets
 
$
1,146,176

 
$
1,199,215

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
11,177

 
$
14,933

Interest payable
 
17,609

 
6,731

Accounts payable
 
80,026

 
76,181

Accrued compensation and benefits
 
22,473

 
17,873

Current deferred income tax liabilities
 
707

 
742

Other current liabilities
 
23,987

 
16,260

Total current liabilities
 
$
155,979

 
$
132,720

Long-term debt, excluding current maturities
 
845,851

 
862,492

Non-current deferred income tax liabilities
 
74,797

 
75,763

Other non-current liabilities
 
22,378

 
32,007

Total liabilities
 
$
1,099,005

 
$
1,102,982

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value. 3,000,000 shares authorized; 2,054,374 and 2,053,174 shares issued, respectively, 2,005,205 and 2,004,005 shares outstanding, respectively
 
$
21

 
$
21

Additional paid-in capital
 
230,606

 
225,106

Accumulated other comprehensive loss
 
(34,789
)
 
(18,527
)
Accumulated deficit
 
(132,669
)
 
(94,809
)
Treasury stock, at cost. 49,169 shares at September 30, 2014 and December 31, 2013
 
(14,465
)
 
(14,465
)
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
 
$
48,704

 
$
97,326

Non-controlling interests
 
(1,533
)
 
(1,093
)
Total stockholders’ equity
 
$
47,171

 
$
96,233

Total liabilities and stockholders’ equity
 
$
1,146,176

 
$
1,199,215

The accompanying notes are an integral part of the unaudited consolidated financial statements.

2

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands)
(unaudited)


 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
217,076

 
$
203,777

 
$
654,086

 
$
616,173

Cost of sales
(170,293
)
 
(155,396
)
 
(493,839
)
 
(469,303
)
Gross profit
46,783

 
48,381

 
160,247

 
146,870

Other operating expenses:

 

 

 

Selling expenses
(10,787
)
 
(10,339
)
 
(33,328
)
 
(32,141
)
Administrative expenses
(21,499
)
 
(21,562
)
 
(62,971
)
 
(63,125
)
Amortization expense
(2,318
)
 
(4,637
)
 
(8,056
)
 
(13,232
)
Total other operating expenses
(34,604
)
 
(36,538
)
 
(104,355
)
 
(108,498
)
Operating income
12,179

 
11,843

 
55,892

 
38,372

Other income (expense):

 

 

 

Interest expense, net
(19,603
)
 
(20,107
)
 
(59,357
)
 
(60,783
)
Foreign currency exchange gains (losses), net
(31,816
)
 
14,417

 
(35,131
)
 
4,400

Loss on extinguishment of debt
(617
)
 

 
(617
)
 

Other income (expense), net
125

 
(1,165
)
 
703

 
(451
)
Total other expense, net
(51,911
)
 
(6,855
)
 
(94,402
)
 
(56,834
)
Income (loss) before income taxes
(39,732
)
 
4,988

 
(38,510
)
 
(18,462
)
Income tax benefit (expense)
4,540

 
(5,632
)
 
1,177

 
(6,985
)
Net loss
(35,192
)
 
(644
)
 
(37,333
)
 
(25,447
)
Less: Net income (loss) attributable to non-controlling interests
113

 
(110
)
 
527

 
(465
)
Net loss attributable to WireCo WorldGroup (Cayman) Inc.
$
(35,305
)
 
$
(534
)
 
$
(37,860
)
 
$
(24,982
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.




3

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)


 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(35,192
)
 
$
(644
)
 
$
(37,333
)
 
$
(25,447
)
Other comprehensive income (loss):
 
 
 
 
 
 

Foreign currency translation gain (loss)
(12,923
)
 
1,622

 
(17,229
)
 
1,454

Comprehensive income (loss)
(48,115
)
 
978

 
(54,562
)
 
(23,993
)
Less: Comprehensive income (loss) attributable to non-controlling interests
150

 
(248
)
 
(440
)
 
(690
)
Comprehensive income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
$
(48,265
)
 
$
1,226

 
$
(54,122
)
 
$
(23,303
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.



4

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


 
 
Nine months ended
 
 
September 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(37,333
)
 
$
(25,447
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 

Depreciation and amortization
 
38,140

 
42,753

Amortization of debt issuance costs, discounts and premium
 
6,268

 
6,619

Loss on extinguishment of debt
 
617

 

Share-based compensation
 
5,539

 
3,719

Unrealized gain on derivative instruments
 
(1,882
)
 

Unrealized foreign currency exchange losses (gains), net
 
35,722

 
(5,164
)
Provision for deferred income taxes
 
(3,710
)
 
(4,423
)
Other adjustments
 
2,476

 
2,072

Changes in assets and liabilities, net of business acquired:
 

 

Accounts receivable
 
5

 
(5,697
)
Inventories
 
(12,103
)
 
15,060

Prepaid expenses and other assets
 
(9,722
)
 
54

Interest payable
 
9,603

 
12,774

Accounts payable
 
8,673

 
(10,644
)
Other accrued liabilities
 
6,133

 
7,330

Net cash provided by operating activities
 
$
48,426

 
$
39,006

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(16,213
)
 
(22,479
)
Acquisition of business
 
(4,573
)
 

Other investing activities
 
1,951

 
(35
)
Net cash used in investing activities
 
$
(18,835
)
 
$
(22,514
)
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(5,621
)
 
(11,043
)
Debt issuance costs paid
 

 
(1,880
)
Retirement of long-term debt
 
(26,946
)
 

Borrowings under revolving credit agreement
 
152,350

 
108,630

Repayments under revolving credit agreement
 
(140,300
)
 
(121,530
)
Repayments of short-term borrowings
 

 
(1,586
)
Other financing activities
 
(437
)
 

Net cash used in financing activities
 
$
(20,954
)
 
$
(27,409
)
Effect of exchange rates on cash and cash equivalents
 
(1,906
)
 
239

Increase (decrease) in cash and cash equivalents
 
$
6,731

 
$
(10,678
)
Cash and cash equivalents, beginning of period
 
34,987

 
49,244

Cash and cash equivalents, end of period
 
$
41,718

 
$
38,566

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid for interest, net of interest capitalized
 
$
41,462

 
$
41,901

Cash paid for income taxes, net of refunds
 
6,632

 
6,139

The accompanying notes are an integral part of the unaudited consolidated financial statements.


5

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
(unaudited)


(1) Interim Financial Statement Presentation
The financial information included in this quarterly report on Form 10-Q are those of WireCo WorldGroup (Cayman) Inc., its wholly-owned subsidiaries, including WireCo WorldGroup Inc., and subsidiaries in which it has a controlling interest (collectively, the “Company”). The consolidated financial statements include the activity of Lankhorst Euronete - Indústria e Comércio Ltda and WireCo WorldGroup US Holdings, Inc., both indirect subsidiaries of the Company that are not wholly-owned, but over which the Company has control. The Company reports the non-controlling interests in these consolidated subsidiaries as a component of equity separate from the Company's equity. The Company's ownership interest in certain other entities are accounted for under the equity method and are not consolidated. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements included herein have been prepared in United States ("U.S.") dollars and in accordance with U.S. generally accepted accounting principles (“GAAP”) by the Company without audit in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for quarterly reports on Form 10-Q and, accordingly, do not include all of the annual disclosures required by GAAP. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.
In the opinion of management, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented using management’s best estimates and assumptions where appropriate. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenue and expenses. Actual results could differ from those estimates. Certain reclassifications, not affecting net income, have been made to prior year amounts on the Consolidated Statements of Operations to conform to the current year presentation.
Out-of-period Error
During the first quarter of 2014, the Company identified certain prior period accounting entries, which were not recorded in the proper functional currency. The Company corrected this error in the first quarter of 2014 resulting in an increase to Other Comprehensive Loss of $3,351 on the Consolidated Statement of Comprehensive Income (Loss). This error was not material to the first quarter or to the first nine months of 2014 and any previously reported periods.
Accounting Pronouncement Adopted During 2014
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires the netting of unrecognized tax benefits against all same-jurisdiction deferred tax assets for a loss or other carryforward that would apply in settlement of the uncertain tax positions. The Company adopted ASU 2013-11 prospectively on January 1, 2014, which only affected presentation on the Consolidated Balance Sheet. There was no impact on the Company's operating results.
Accounting Pronouncements Issued During 2014
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP. The new standard is effective on January 1, 2017 and early adoption is not permitted. ASU 2014-09 allows the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect of ASU 2014-09 and has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern, which requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 is effective on December 31, 2016, with early adoption permitted. The Company does not anticipate that this guidance will materially impact its consolidated financial statements.



6

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

(2) Inventories, net
The major classes of inventories were as follows as of the dates indicated:
 
 
September 30, 2014
 
December 31, 2013
Raw materials, net
 
$
84,179

 
$
74,486

Work in process, net
 
23,017

 
18,612

Finished goods, net
 
120,394

 
135,147

Inventories, net
 
$
227,590

 
$
228,245


During the third quarter of 2014, the Company increased the breadth and depth of its Inventory Optimization Program, which was implemented during the third quarter of 2013, including initiating a plan to sell higher volumes of its slower moving inventory, which had historically sold at or above cost.  This initiative resulted in sales below cost during the third quarter of 2014. As a result, the Company adjusted certain inventory to its net realizable value and recognized a charge of $9,244 and $2,970, which is included in Cost of sales in the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013, respectively.  The Inventory Optimization Program is designed to generate cash in the short-term instead of holding certain inventory for longer periods of time and to create efficiencies from a physical material movement perspective at the Company's manufacturing and distribution facilities.

(3) Intangible Assets and Goodwill
The components of finite-lived intangible assets were as follows as of the dates indicated:
 
 
September 30, 2014
 
December 31, 2013
 
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Finite-lived assets
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
127,698

 
$
(87,143
)
 
$
40,555

 
$
132,397

 
$
(82,569
)
 
$
49,828

Patented and unpatented technology
 
23,169

 
(10,358
)
 
12,811

 
24,320

 
(9,508
)
 
14,812

Other
 
6,615

 
(6,615
)
 

 
7,193

 
(6,966
)
 
227

Total finite-lived intangible assets
 
$
157,482

 
$
(104,116
)
 
$
53,366

 
$
163,910

 
$
(99,043
)
 
$
64,867


Using the exchange rates in effect at period end, estimated amortization of finite-lived intangible assets as of September 30, 2014 was as follows:
Remainder of 2014
 
$
2,440

2015
 
9,734

2016
 
9,434

2017
 
8,309

2018
 
3,835

Thereafter
 
19,614

Total
$
53,366


Intangible assets with indefinite lives are not amortized. The carrying values of trade names as of September 30, 2014 and December 31, 2013 were $79,382 and $85,420, respectively.



7

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

The change in the carrying value of goodwill was as follows as of the dates indicated:
December 31, 2013
 
$
198,329

Foreign currency translation
 
(6,428
)
September 30, 2014
 
$
191,901


(4) Borrowings
Long-term debt consisted of the following as of the dates indicated:
 
 
September 30, 2014
 
December 31, 2013
Borrowings under Revolving Loan Facility
 
$
44,050

 
$
32,000

Polish Debt due 2014
 
8,029

 
8,860

Term Loan due 2017
 
325,192

 
330,813

9.00% Senior Notes due 2017
 
56,000

 
82,500

9.50% Senior Notes due 2017
 
425,000

 
425,000

Other indebtedness
 
188

 
688

Total debt at face value
 
858,459

 
879,861

Less: Unamortized discount, net
 
(1,431
)
 
(2,436
)
Less: Current maturities of long-term debt
 
(11,177
)
 
(14,933
)
Total long-term debt
 
$
845,851

 
$
862,492

As of September 30, 2014, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. For a detailed discussion of the Company's borrowings, see Note 8—“Borrowings” to the Company's audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of the annual report on Form 10-K for the year ended December 31, 2013.

Senior Secured Credit Facilities - Revolving Loan Facility and Term Loan due 2017
The Company's maximum borrowing capacity under the Revolving Loan Facility is $145,000. As of September 30, 2014, availability under the Revolving Loan Facility was $99,970. Availability is based upon the maximum borrowing capacity, less outstanding borrowings and letters of credit, and if applicable, further restricted by certain covenants in the Company's credit agreements. Outstanding letters of credit were $980 at September 30, 2014. The interest rate on the Revolving Loan Facility and Term Loan due 2017 at September 30, 2014 was 5.10% and 6.00%, respectively.

9.00% Senior Notes due 2017 (formerly the 11.75% Senior Notes)
On July 16, 2014, WireCo WorldGroup Inc. entered into an amendment to the Note Purchase Agreement that reduced the interest rate from 11.75% to 9.00% and provided a waiver for the notice of redemption. On July 17, 2014, the Company redeemed $26,500 of the $82,500 aggregate principal amount of the 9.00% Senior Notes, using cash drawn under the Revolving Loan Facility. As a result of redeeming earlier than the stated maturity of May 15, 2017, the Company paid a call premium of approximately $400 and wrote-off $217 of unamortized debt issuance costs associated with the pro rata portion that was redeemed. These costs were recorded in Loss on extinguishment of debt in the consolidated statements of operations for the three and nine months ended September 30, 2014.


8

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

Interest expense, net
Net interest expense consists of:
 
 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Interest on long-term debt
 
$
17,413

 
$
18,539

 
$
53,527

 
$
55,634

Amortization of debt issuance costs, discounts and premium
 
2,091

 
2,391

 
6,268

 
6,619

Capitalized interest
 
(265
)
 
(255
)
 
(635
)
 
(1,068
)
Other
 
364

 
(568
)
 
197

 
(402
)
Interest expense, net
 
$
19,603

 
$
20,107

 
$
59,357

 
$
60,783


(5) Derivative Financial Instruments
In late September 2014, the Company entered into cross-currency swaps with three counterparties to economically hedge exposures to foreign currency exchange risk. The cross-currency swaps notional value is $300,000, at a weighted average foreign currency exchange rate of $1.00 to €0.7820, and matures in February 2017. In accordance with the cross-currency swap agreements, on a semi-annual basis, the Company pays interest at a weighted average fixed rate of 8.79% and receives interest based on a fixed rate of 9.50%.
These derivative financial instruments have not been designated for hedge accounting treatment and accordingly, are adjusted to fair value through the consolidated statements of operations. The notional value is marked-to-market each reporting period based on the current spot rate, and gains and losses are classified in Foreign currency exchange gains (losses). Refer to Note 6—“Fair Value Measurements” for additional information regarding the fair value of the Company’s derivative arrangements.

(6) Fair Value Measurements
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, accounts payable and the Polish Debt due 2014. The carrying amounts reported on the consolidated balance sheets for these items approximate fair market value due to their relative short-term nature.
The table below sets forth by level, within the fair value hierarchy, the Company's financial instruments that are measured at fair value on a recurring basis:
 
 
September 30, 2014
 
 
Level 1
 
Level 2
 
Level 3
Other non-current assets
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
     Cross-currency swap fair value
 
$

 
$
1,882

 
$


The Company's derivative financial instruments are valued using discounted cash flow techniques. Market interest rate and foreign currency exchange rate inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk.
The carrying amounts and estimated fair values of the Company’s long-term debt at September 30, 2014 were as follows:
 
 
Carrying
amount
 
Estimated
fair value
Revolving Loan Facility
 
$
44,050

 
$
44,050

Term Loan due 2017
 
323,471

 
325,870

9.00% Senior Notes due 2017
 
56,000

 
56,840

9.50% Senior Notes due 2017
 
425,474

 
437,750


9

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

As the Revolving Loan Facility is a revolving credit agreement, the carrying amount approximates fair value. The estimated fair value of the Term Loan due 2017 is based on rates currently available for obligations with similar terms and maturities (Level 2 inputs). The estimated fair value of the privately placed 9.00% Senior Notes is based on a model that incorporates assumptions a market participant would use in pricing the liability (Level 3 inputs), and the estimated fair value of the 9.50% Senior Notes is based on current market rates in inactive markets (Level 2 inputs).

(7) Share-based Compensation
Changes in the Company's outstanding service-based stock option awards since December 31, 2013 were as follows:
Options
 
Number of
options
 
Weighted
average
exercise price
 
Weighted
average
remaining
contractual term
(years)
Outstanding at December 31, 2013
 
481,970

 
$
163.19

 
 
Granted
 
40,000

 
288.68

 
 
Exercised
 
(1,200
)
 
190.00

 
 
Expired
 
(346
)
 
294.18

 
 
Other
 
(3,933
)
 
100.00

 
 
Outstanding at September 30, 2014
 
516,491

 
$
173.24

 
5.25
Vested and expected to vest as of September 30, 2014
 
516,491

 
173.24

 
5.25
Exercisable at September 30, 2014
 
359,441

 
133.02

 
3.66
The fair value of the service-based stock option awards granted during 2014 were estimated on the date of grant using the Black-Scholes option-pricing model. Since there were multiple grant dates, the range of assumptions used in the model are noted in the following table.
 
2014
Expected volatility (1)
44.56% - 45.36%
Risk-free interest rate (2)
1.99% - 2.24%
Expected term of the option (years) (3)
6.50
Expected dividend yield
—%
Grant-date fair value
$129.37 - $138.42
(1) 
Based on the average historical volatility of similar entities with publicly traded shares since the Company's shares are privately held.
(2) 
Based on the U.S. Treasury interest rate whose term is consistent with the expected term of the stock options.
(3) 
Based on the expected term considering vesting and contractual terms.
At September 30, 2014, total unrecognized compensation cost related to the unvested portion of the Company's service-based stock option awards that remains to be expensed was $17,828, with the weighted average remaining years to vest of approximately 1.81 years. There were 26,779 awards available for future grants under the 2008 Long Term Incentive Plan at September 30, 2014.

(8) Restructuring
During 2013, the Company formalized a restructuring plan, which included changes in certain executive management positions and headcount reductions at certain manufacturing facilities due to lower than expected sales volumes. As a result of these actions, the Company recorded restructuring charges related to employee termination and related benefits in Administrative expenses in the consolidated statement of operations during the year ended December 31, 2013. The accrual balances are included in Other current liabilities on the consolidated balance sheets.


10

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

A rollforward of these restructuring activities is set forth below:
Balance at December 31, 2013
$
2,812

Payments made in 2014
(2,442
)
Balance at September 30, 2014
$
370


(9) Income Taxes
The Company determines the interim tax provision by applying an estimate of the annual effective tax rate to the year-to-date pretax book income (loss) and adjusts for discrete items during the reporting period, if any. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded.
The effective income tax rate for the three months ended September 30, 2014 and 2013 was 11.4% and 112.9%, respectively. The effective income tax rate for the nine months ended September 30, 2014 and 2013 was 3.1% and (37.8)%, respectively. The Company's effective tax rates differ from the applicable statutory tax rate primarily due to a full valuation allowance on U.S. deferred tax assets, the mix of earnings (losses) by jurisdiction, and the effects of foreign tax rate differential.
During the third quarter of 2014, the Company's U.S. subsidiary filed an amendment of a prior year's tax return. This resulted in a reduction of uncertain tax positions of $13,165 and a decrease in deferred tax assets of $6,605, which were fully offset by a corresponding adjustment in the valuation allowance.

(10) Contingencies
The Company is involved in various claims and legal actions arising in the ordinary course of business, which are incidental to its operations. Insurance coverage is maintained for certain risks, such as product liability and workers’ compensation. The Company is not currently a party to any legal proceedings that it believes would have a material adverse effect on its financial position, results of operations, or cash flows.

(11) Segment Reporting
The Company reports the manufacturing, marketing, selling and distribution of wire and synthetic ropes, specialty wire and engineered products as one operating and one reportable segment. The Company's chief operating decision maker is its Chief Executive Officer, who reviews financial information on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Company's net sales by product line for the periods presented was as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Product line net sales
($)
(%)
 
($)
(%)
 
($)
(%)
 
($)
(%)
Rope
$
155,675

72
%
 
$
147,221

72
%
 
$
477,219

73
%
 
$
453,261

73
%
Specialty wire
37,631

17
%
 
32,454

16
%
 
106,198

16
%
 
95,710

16
%
Engineered products
23,770

11
%
 
24,102

12
%
 
70,669

11
%
 
67,202

11
%
Total net sales
$
217,076

100
%
 
$
203,777

100
%
 
$
654,086

100
%
 
$
616,173

100
%
 
 
 
 
 
 
 

11

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

(12) Condensed Consolidating Financial Statements
Guarantees of the 9.50% Senior Notes
WireCo WorldGroup Inc. has registered 9.50% Senior Notes, which are unsecured obligations. These obligations are jointly and severally and fully and unconditionally guaranteed by WireCo WorldGroup (Cayman) Inc. Certain entities controlled by WireCo WorldGroup (Cayman) Inc. (collectively referred to as the “Guarantor Subsidiaries”) also jointly and severally and fully and unconditionally guarantee these obligations, subject to customary release provisions. All voting shares for the entities presented in the “Guarantor Subsidiaries” column are 100% owned directly or indirectly by the Company. Certain subsidiaries with locations primarily in the Netherlands, Brazil and France do not guarantee the debt (collectively referred to as the “Non-Guarantor Subsidiaries”). The following condensed consolidating financial statements are prepared with each entity’s investment in subsidiaries accounted for under the equity method. The adjustments eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions. There are currently no significant restrictions on the ability of WireCo WorldGroup Inc. or any guarantor to obtain funds from its subsidiaries by dividend or loan.
During the third quarter of 2014, the Company determined that it had previously reported Royal Lankhorst Euronete Group B.V. ("RLEG"), an indirect wholly owned subsidiary of the Company, as a "Guarantor Subsidiary" in error in its 2013 10-K and first and second quarter 10-Qs. RLEG is principally a holding company with substantially all of its activities being intercompany in nature. The Company has correctly presented RLEG as a "Non-Guarantor Subsidiary" in the current period condensed consolidating financial statements. This error was not material in the current period and any previously reported periods.




12

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

Condensed Consolidating Balance Sheets
 
September 30, 2014
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
25

 
$
6,216

 
$
17,394

 
$
18,083

 
$

 
$
41,718

Restricted cash

 

 
860

 
1,013

 

 
1,873

Accounts receivable, net

 
42,392

 
73,265

 
26,325

 

 
141,982

Intercompany accounts receivable
25,717

 
32,113

 
37,952

 
23,758

 
(119,540
)
 

Inventories, net

 
70,075

 
128,815

 
28,700

 

 
227,590

Current deferred income tax assets

 
3,139

 
2,019

 
131

 

 
5,289

Prepaid expenses and other current assets

 
4,629

 
16,557

 
2,968

 

 
24,154

Total current assets
$
25,742

 
$
158,564

 
$
276,862

 
$
100,978

 
$
(119,540
)
 
$
442,606

Long-term intercompany notes receivable

 
453,785

 
23,279

 
114,151

 
(591,215
)
 

Property, plant and equipment, net

 
54,820

 
231,381

 
44,206

 

 
330,407

Intangible assets, net

 
35,109

 
74,562

 
23,077

 

 
132,748

Goodwill

 
117,124

 
52,631

 
22,146

 

 
191,901

Investments in subsidiaries
29,597

 

 
124,964

 
7,687

 
(162,248
)
 

Deferred financing fees, net

 
17,189

 

 

 

 
17,189

Non-current deferred income tax assets

 
(645
)
 
12,666

 
3,729

 

 
15,750

Other non-current assets

 
2,090

 
13,476

 
9

 

 
15,575

Total assets
$
55,339

 
$
838,036

 
$
809,821

 
$
315,983

 
$
(873,003
)
 
$
1,146,176

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$

 
$
3,318

 
$
7,846

 
$
13

 
$

 
$
11,177

Interest payable

 
17,584

 
25

 

 

 
17,609

Accounts payable

 
17,152

 
49,766

 
13,108

 

 
80,026

Accrued compensation and benefits

 
5,315

 
13,538

 
3,620

 

 
22,473

Intercompany accounts payable
1,468

 
56,595

 
49,643

 
11,828

 
(119,534
)
 

Current deferred income tax liabilities

 
351

 
(1,239
)
 
1,595

 

 
707

Other current liabilities

 
2,961

 
15,618

 
5,408

 

 
23,987

Total current liabilities
$
1,468

 
$
103,276

 
$
135,197

 
$
35,572

 
$
(119,534
)
 
$
155,979

Long-term debt, excluding current maturities

 
845,676

 
175

 

 

 
845,851


13

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

Long-term intercompany notes payable
6,700

 

 
558,602

 
25,892

 
(591,194
)
 

Non-current deferred income tax liabilities

 
13,277

 
53,098

 
8,422

 

 
74,797

Other non-current liabilities

 
457

 
20,126

 
1,795

 

 
22,378

Total liabilities
$
8,168

 
$
962,686

 
$
767,198

 
$
71,681

 
$
(710,728
)
 
$
1,099,005

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
47,171

 
(124,650
)
 
47,430

 
241,028

 
(162,275
)
 
48,704

Non-controlling interests

 

 
(4,807
)
 
3,274

 

 
(1,533
)
Total stockholders’ equity
$
47,171

 
$
(124,650
)
 
$
42,623

 
$
244,302

 
$
(162,275
)
 
$
47,171

Total liabilities and stockholders’ equity
$
55,339

 
$
838,036

 
$
809,821

 
$
315,983

 
$
(873,003
)
 
$
1,146,176



14

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

 
December 31, 2013
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
53

 
$
2,564

 
$
11,798

 
$
20,572

 
$

 
$
34,987

Restricted cash

 

 
2,887

 

 

 
2,887

Accounts receivable, net

 
38,891

 
87,234

 
22,439

 


 
148,564

Intercompany accounts receivable
20,871

 
53,444

 
131,716

 
(55
)
 
(205,976
)
 

Inventories, net

 
79,017

 
121,913

 
27,315

 

 
228,245

Current deferred income tax assets

 
3,139

 
2,185

 
144

 

 
5,468

Prepaid expenses and other current assets

 
2,218

 
4,016

 
389

 
6,034

 
12,657

Total current assets
$
20,924

 
$
179,273

 
$
361,749

 
$
70,804

 
$
(199,942
)
 
$
432,808

Long-term intercompany notes receivable

 
477,637

 
4,827

 

 
(482,464
)
 

Property, plant and equipment, net

 
59,065

 
258,580

 
48,693

 

 
366,338

Intangible assets, net

 
37,090

 
86,555

 
26,642

 

 
150,287

Goodwill

 
117,124

 
55,749

 
25,456

 

 
198,329

Investment in subsidiaries
83,430

 

 
125,767

 

 
(209,197
)
 

Deferred financing fees, net

 
22,702

 

 

 

 
22,702

Non-current deferred income tax assets

 

 
7,175

 
903

 

 
8,078

Other non-current assets

 
201

 
17,273

 
3,199

 

 
20,673

Total assets
$
104,354

 
$
893,092

 
$
917,675

 
$
175,697

 
$
(891,603
)
 
$
1,199,215

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$

 
$
6,710

 
$
8,223

 
$

 
$

 
$
14,933

Interest payable

 
6,604

 
124

 
3

 

 
6,731

Accounts payable

 
14,552

 
45,695

 
15,934

 

 
76,181

Accrued compensation and benefits

 
7,907

 
9,622

 
344

 

 
17,873

Intercompany accounts payable
1,412

 
84,495

 
49,713

 
4,418

 
(140,038
)
 

Current deferred income tax liabilities

 

 
(33
)
 
424

 
351

 
742

Other current liabilities
9

 
1,886

 
351

 
74,085

 
(60,071
)
 
16,260

Total current liabilities
$
1,421

 
$
122,154

 
$
113,695

 
$
95,208

 
$
(199,758
)
 
$
132,720

Long-term debt, excluding current maturities

 
861,948

 
544

 

 

 
862,492

Long-term intercompany notes payable
6,700

 

 
472,165

 
2,613

 
(481,478
)
 


15

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

Non-current deferred income tax liabilities

 
6,717

 
56,670

 
12,376

 

 
75,763

Other non-current liabilities

 
7,477

 
22,618

 
2,878

 
(966
)
 
32,007

Total liabilities
$
8,121

 
$
998,296

 
$
665,692

 
$
113,075

 
$
(682,202
)
 
$
1,102,982

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
97,326

 
(105,204
)
 
253,076

 
60,215

 
(208,087
)
 
97,326

Non-controlling interests
(1,093
)
 

 
(1,093
)
 
2,407

 
(1,314
)
 
(1,093
)
Total stockholders’ equity
$
96,233

 
$
(105,204
)
 
$
251,983

 
$
62,622

 
$
(209,401
)
 
$
96,233

Total liabilities and stockholders’ equity
$
104,354

 
$
893,092

 
$
917,675

 
$
175,697

 
$
(891,603
)
 
$
1,199,215




16

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
 
Three months ended September 30, 2014
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$

 
$
74,566

 
$
130,647

 
$
47,522

 
$
(35,659
)
 
$
217,076

Cost of sales

 
(64,889
)
 
(103,742
)
 
(37,403
)
 
35,741

 
(170,293
)
Gross profit

 
9,677

 
26,905

 
10,119

 
82

 
46,783

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling expenses

 
(3,040
)
 
(4,859
)
 
(2,888
)
 

 
(10,787
)
Administrative expenses
(199
)
 
(14,248
)
 
(6,813
)
 
(824
)
 
585

 
(21,499
)
Amortization expense

 
(757
)
 
(1,179
)
 
(382
)
 

 
(2,318
)
Total other operating expenses
(199
)
 
(18,045
)
 
(12,851
)
 
(4,094
)
 
585

 
(34,604
)
Operating income (loss)
(199
)
 
(8,368
)
 
14,054

 
6,025

 
667

 
12,179

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(103
)
 
(10,660
)
 
(10,301
)
 
1,461

 

 
(19,603
)
Equity income (losses) from subsidiaries
(35,003
)
 

 
(5,812
)
 
983

 
39,832

 

Foreign currency exchange gains (losses), net

 
1,734

 
(39,856
)
 
6,306

 

 
(31,816
)
Loss on extinguishment of debt

 
(617
)
 

 

 

 
(617
)
Other income (expense), net

 
(198
)
 
301

 
22

 

 
125

Total other income (expense), net
(35,106
)
 
(9,741
)
 
(55,668
)
 
8,772

 
39,832

 
(51,911
)
Income (loss) before income taxes
(35,305
)
 
(18,109
)
 
(41,614
)
 
14,797

 
40,499

 
(39,732
)
Income tax benefit (expense)

 
(1,117
)
 
(1,559
)
 
7,216

 

 
4,540

Net income (loss)
(35,305
)
 
(19,226
)
 
(43,173
)
 
22,013

 
40,499

 
(35,192
)
Less: Net income (loss) attributable to non-controlling interests

 

 
(618
)
 
731

 

 
113

Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
(35,305
)
 
(19,226
)
 
(42,555
)
 
21,282

 
40,499

 
(35,305
)
Comprehensive income (loss)
$
(48,115
)
 
$
(19,226
)
 
$
(56,096
)
 
$
16,973

 
$
58,349

 
$
(48,115
)
 

17

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

 
Three months ended September 30, 2013
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$

 
$
72,428

 
$
116,446

 
$
42,361

 
$
(27,458
)
 
$
203,777

Cost of sales

 
(53,799
)
 
(93,928
)
 
(32,484
)
 
24,815

 
(155,396
)
Gross profit

 
18,629

 
22,518

 
9,877

 
(2,643
)
 
48,381

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling expenses

 
(3,233
)
 
(5,065
)
 
(2,041
)
 

 
(10,339
)
Administrative expenses
(57
)
 
(10,973
)
 
(7,583
)
 
(2,399
)
 
(550
)
 
(21,562
)
Amortization expense

 
(1,432
)
 
(2,637
)
 
(568
)
 

 
(4,637
)
Total other operating expenses
(57
)
 
(15,638
)
 
(15,285
)
 
(5,008
)
 
(550
)
 
(36,538
)
Operating income (loss)
(57
)
 
2,991

 
7,233

 
4,869

 
(3,193
)
 
11,843

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(103
)
 
(11,449
)
 
(9,662
)
 
1,107

 

 
(20,107
)
Equity losses from subsidiaries
(374
)
 

 
(8,129
)
 

 
8,503

 

Foreign currency exchange gains (losses), net

 
(347
)
 
17,114

 
(2,350
)
 

 
14,417

Other expense, net

 
(829
)
 
(332
)
 
(4
)
 

 
(1,165
)
Total other expense, net
(477
)
 
(12,625
)
 
(1,009
)
 
(1,247
)
 
8,503

 
(6,855
)
Income (loss) before income taxes
(534
)
 
(9,634
)
 
6,224

 
3,622

 
5,310

 
4,988

Income tax expense

 
(494
)
 
(4,470
)
 
(668
)
 

 
(5,632
)
Net income (loss)
(534
)
 
(10,128
)
 
1,754

 
2,954

 
5,310

 
(644
)
Less: Net income (loss) attributable to non-controlling interests

 

 
(343
)
 
233

 

 
(110
)
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
(534
)
 
(10,128
)
 
2,097

 
2,721

 
5,310

 
(534
)
Comprehensive income (loss)
$
978

 
$
(10,128
)
 
$
3,376

 
$
9,819

 
$
(3,067
)
 
$
978


18

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

 
Nine months ended September 30, 2014
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$

 
$
221,559

 
$
389,617

 
$
141,939

 
$
(99,029
)
 
$
654,086

Cost of sales

 
(178,369
)
 
(306,605
)
 
(108,561
)
 
99,696

 
(493,839
)
Gross profit

 
43,190

 
83,012

 
33,378

 
667

 
160,247

Other operating expenses:


 


 


 


 


 


Selling expenses

 
(8,954
)
 
(15,210
)
 
(9,164
)
 

 
(33,328
)
Administrative expenses
(495
)
 
(39,253
)
 
(20,034
)
 
(3,531
)
 
342

 
(62,971
)
Amortization expense

 
(1,981
)
 
(5,121
)
 
(954
)
 

 
(8,056
)
Total other operating expenses
(495
)
 
(50,188
)
 
(40,365
)
 
(13,649
)
 
342

 
(104,355
)
Operating income (loss)
(495
)
 
(6,998
)
 
42,647

 
19,729

 
1,009

 
55,892

Other income (expense):


 


 


 


 


 


Interest income (expense), net
(307
)
 
(32,808
)
 
(30,636
)
 
4,394

 

 
(59,357
)
Equity income (losses) from subsidiaries
(37,058
)
 

 
(10,620
)
 
2,264

 
45,414

 

Foreign currency exchange gains (losses), net

 
1,836

 
(44,281
)
 
7,314

 

 
(35,131
)
Loss on extinguishment of debt

 
(617
)
 

 

 

 
(617
)
Other income (expense), net

 
(570
)
 
1,223

 
50

 

 
703

Total other income (expense), net
(37,365
)
 
(32,159
)
 
(84,314
)
 
14,022

 
45,414

 
(94,402
)
Income (loss) before income taxes
(37,860
)
 
(39,157
)
 
(41,667
)
 
33,751

 
46,423

 
(38,510
)
Income tax benefit (expense)

 
(1,144
)
 
(1,637
)
 
3,958

 

 
1,177

Net income (loss)
(37,860
)
 
(40,301
)
 
(43,304
)
 
37,709

 
46,423

 
(37,333
)
Less: Net income (loss) attributable to non-controlling interests

 

 
(1,324
)
 
1,851

 

 
527

Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
(37,860
)
 
(40,301
)
 
(41,980
)
 
35,858

 
46,423

 
(37,860
)
Comprehensive income (loss)
$
(54,562
)
 
$
(40,301
)
 
$
(60,533
)
 
$
30,990

 
$
69,844

 
$
(54,562
)

19

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

 
Nine months ended September 30, 2013
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$

 
$
224,943

 
$
365,943

 
$
110,510

 
$
(85,223
)
 
$
616,173

Cost of sales

 
(171,817
)
 
(291,636
)
 
(88,827
)
 
82,977

 
(469,303
)
Gross profit

 
53,126

 
74,307

 
21,683

 
(2,246
)
 
146,870

Other operating expenses:

 

 

 

 

 

Selling expenses

 
(10,455
)
 
(15,599
)
 
(6,087
)
 

 
(32,141
)
Administrative expenses
(805
)
 
(30,060
)
 
(24,722
)
 
(6,988
)
 
(550
)
 
(63,125
)
Amortization expense

 
(4,296
)
 
(7,292
)
 
(1,644
)
 

 
(13,232
)
Total other operating expenses
(805
)
 
(44,811
)
 
(47,613
)
 
(14,719
)
 
(550
)
 
(108,498
)
Operating income (loss)
(805
)
 
8,315

 
26,694

 
6,964

 
(2,796
)
 
38,372

Other income (expense):

 

 

 

 

 

Interest income (expense), net
(307
)
 
(33,741
)
 
(29,935
)
 
3,200

 

 
(60,783
)
Equity losses from subsidiaries
(23,870
)
 

 
(20,748
)
 

 
44,618

 

Foreign currency exchange gains (losses), net

 
(519
)
 
7,292

 
(2,373
)
 

 
4,400

Other income (expense), net

 
(1,079
)
 
628

 

 

 
(451
)
Total other income (expense), net
(24,177
)
 
(35,339
)
 
(42,763
)
 
827

 
44,618

 
(56,834
)
Income (loss) before income taxes
(24,982
)
 
(27,024
)
 
(16,069
)
 
7,791

 
41,822

 
(18,462
)
Income tax expense

 
(485
)
 
(5,834
)
 
(666
)
 

 
(6,985
)
Net income (loss)
(24,982
)
 
(27,509
)
 
(21,903
)
 
7,125

 
41,822

 
(25,447
)
Less: Net income (loss) attributable to non-controlling interests

 

 
(931
)
 
466

 

 
(465
)
Net income (loss) attributable to WireCo WorldGroup (Cayman), Inc.
(24,982
)
 
(27,509
)
 
(20,972
)
 
6,659

 
41,822

 
(24,982
)
Comprehensive income (loss)
$
(23,993
)
 
$
(27,509
)
 
$
(20,449
)
 
$
28,919

 
$
19,039

 
$
(23,993
)


20

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)

Condensed Consolidating Statements of Cash Flows
 
Nine months ended September 30, 2014
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net cash provided by (used in) operating activities
$
(256
)
 
$
(15,394
)
 
$
51,038

 
$
13,038

 
$

 
$
48,426

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(4,198
)
 
(8,635
)
 
(3,380
)
 

 
(16,213
)
Acquisition of business

 

 

 
(4,573
)
 

 
(4,573
)
Other investing activities

 

 
1,951

 

 

 
1,951

Repayments from intercompany loans

 
43,713

 
7,997

 
819

 
(52,529
)
 

Investment in subsidiaries

 

 

 
(4,573
)
 
4,573

 

Net cash provided by (used in) investing activities
$

 
$
39,515

 
$
1,313

 
$
(11,707
)
 
$
(47,956
)
 
$
(18,835
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt

 
(5,621
)
 

 

 

 
(5,621
)
Retirement of long-term debt

 
(26,500
)
 
(446
)
 

 

 
(26,946
)
Borrowings under revolving credit agreement

 
152,350

 

 

 

 
152,350

Repayments under revolving credit agreement

 
(140,300
)
 

 

 

 
(140,300
)
Capital contributions received

 

 

 
4,573

 
(4,573
)
 

Repayments of intercompany loans

 

 
(44,532
)
 
(7,997
)
 
52,529

 

Other financing activities
228

 
(398
)
 
(267
)
 

 

 
(437
)
Net cash provided by (used in) financing activities
$
228

 
$
(20,469
)
 
$
(45,245
)
 
$
(3,424
)
 
$
47,956

 
$
(20,954
)
Effect of exchange rates on cash and cash equivalents

 

 
(1,510
)
 
(396
)
 

 
(1,906
)
Increase (decrease) in cash and cash equivalents
$
(28
)
 
$
3,652

 
$
5,596

 
$
(2,489
)
 
$

 
$
6,731

Cash and cash equivalents, beginning of period
53

 
2,564

 
11,798

 
20,572

 

 
34,987

Cash and cash equivalents, end of period
$
25

 
$
6,216

 
$
17,394

 
$
18,083

 
$

 
$
41,718


21

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
(unaudited)


 
Nine months ended September 30, 2013
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net cash provided by (used in) operating activities
$
(8
)
 
$
11,474

 
$
12,763

 
$
14,777

 
$

 
$
39,006

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(3,711
)
 
(14,571
)
 
(4,197
)
 

 
(22,479
)
Other investing activities

 
(35
)
 

 

 

 
(35
)
Intercompany dividends received
5,800

 

 
4,008

 

 
(9,808
)
 

Investment in subsidiaries
(5,800
)
 

 

 

 
5,800

 

Net cash used in investing activities
$

 
$
(3,746
)
 
$
(10,563
)
 
$
(4,197
)
 
$
(4,008
)
 
$
(22,514
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt

 
(2,513
)
 
(8,530
)
 

 

 
(11,043
)
Debt issuance costs paid

 
(1,880
)
 

 

 

 
(1,880
)
Borrowings under revolving credit agreement

 
108,630

 

 

 

 
108,630

Repayments under revolving credit agreement

 
(121,530
)
 

 

 

 
(121,530
)
Repayments of short-term borrowings

 

 

 
(1,586
)
 

 
(1,586
)
Intercompany loans, net

 
9,308

 
(2,670
)
 
(6,638
)
 

 

Capital contributions received

 

 
5,800

 

 
(5,800
)
 

Intercompany dividends paid

 

 
(5,800
)
 
(4,008
)
 
9,808

 

Net cash used in financing activities
$

 
$
(7,985
)
 
$
(11,200
)
 
$
(12,232
)
 
$
4,008

 
$
(27,409
)
Effect of exchange rates on cash and cash equivalents

 

 
(296
)
 
535

 

 
239

Decrease in cash and cash equivalents
$
(8
)
 
$
(257
)
 
$
(9,296
)
 
$
(1,117
)
 
$

 
$
(10,678
)
Cash and cash equivalents, beginning of period
34

 
2,867

 
24,993

 
21,350

 

 
49,244

Cash and cash equivalents, end of period
$
26

 
$
2,610

 
$
15,697

 
$
20,233

 
$

 
$
38,566



22


Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, the use of the terms “WireCo,” the “Company,” “we,” “our” or “us” in the following refers to WireCo WorldGroup (Cayman) Inc., its wholly-owned subsidiaries and subsidiaries in which it has a controlling interest, including WireCo WorldGroup Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a reader of our financial statements with a narrative from the perspective of our management on our consolidated financial condition, results of operations, liquidity and capital resources on a historical basis and certain other factors that have affected recent earnings, as well as those factors that may affect future earnings. This MD&A is provided as a supplement to, and should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes included in this quarterly report. Additionally, our MD&A should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2013.

Forward-Looking Statements
This quarterly report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations. Forward-looking statements include those containing such words as “anticipates,” “believes,” “continues,” “estimates,” “expects,” “forecasts,” “outlook,” “plans,” “projects,” “should,” “targets,” “will,” or the negative of those words or other comparable terminology. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this quarterly report are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. You are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements as a result of various factors, including but not limited to those set forth under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2013. Such factors include, among others:

the general economic conditions in markets and countries where we have operations;
risks associated with our non-U.S. operations;
our ability to implement and maintain sufficient internal controls;
foreign currency exchange rate fluctuations;
the competitive environment in which we operate;
changes in the availability or cost of raw materials and energy;
risks associated with our manufacturing activities;
our ability to meet quality standards;
our ability to protect our trade names;
violations of laws and regulations;
the impact of environmental issues and changes in environmental laws and regulations;
our ability to successfully execute and integrate acquisitions;
comparability of our specified scaled disclosure requirements applicable to emerging growth companies;
labor disturbances, including any resulting from suspension or termination of our collective bargaining agreements;
our significant indebtedness;
covenant restrictions;
the interests of our principal equity holder may not be aligned with the holders of our 9.50% Senior Notes; and
credit-rating downgrades.

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

23



Non-GAAP Financial Measures
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). This MD&A includes various financial measures that have not been calculated in accordance with GAAP, commonly referred to as “Non-GAAP Financial Measures”. These Non-GAAP Financial Measures include:

Adjusted EBITDA
Adjusted Working Capital
Net Debt
Free Cash Flow

We provide Adjusted EBITDA as a means to enhance communication with security holders by providing additional information regarding our operating results. We use this Non-GAAP Financial Measure internally to evaluate our performance, allocate resources, calculate debt covenant ratios and for incentive compensation purposes. We believe that our presentation of this measure provides investors with greater transparency with respect to our results of operations, is required for debt covenant calculation purposes and is useful for peer and period-to-period comparisons of results considering our history of acquisitions.
We provide Adjusted Working Capital, Net Debt and Free Cash Flow as additional information regarding our liquidity. We believe that Adjusted Working Capital provides a meaningful measure of our efforts to manage inventory, our customer collections and vendor payments. We believe Net Debt is meaningful to investors because management assesses our leverage position after factoring in available cash and restricted cash that eventually could be used to repay outstanding debt. We believe that the Free Cash Flow measure is meaningful to investors because it represents the cash flow we have available to pay down debt and/or invest for future growth. It is important to note that Free Cash Flow does not represent the residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements, are not deducted from the measure.
These measures are not in accordance with, or an alternative to GAAP, and may be different from Non-GAAP Financial Measures used by other companies. These measures have important limitations as analytical tools and should not be considered in isolation, nor as a substitute for, or superior to, analysis of our results as reported under GAAP. We recommend that investors view these measures in conjunction with the GAAP measures included in this MD&A and have provided reconciliations of reported GAAP amounts to the Non-GAAP amounts.

Third Quarter and Year-to-Date 2014 Highlights
Overall, operating results continued to improve with growth in sales, Adjusted EBITDA and cash generation. Net sales improved 6.5% and 6.2% during the three and nine months ended September 30, 2014, respectively, compared to the same periods from the prior year primarily due to increased activity in certain key rope end markets. The increase for the quarter and year-to-date was principally driven by higher sales of our rope products in the oil and gas and fishing end markets and improvement in sales of our specialty steel wire. During 2013, our sales were negatively impacted by economic conditions in the United States and Europe. Foreign currency translation had minimal impact on the quarter when comparing the average exchange rates for the three months ended September 30, 2014 to the average exchange rates for the three months ended September 30, 2013, but accounted for $9.0 million of the increase in sales for the nine months ended September 30, 2014.
As we continued to monitor inventory levels in conjunction with the Inventory Optimization Program implemented in 2013, we increased the breadth and depth of the program. We identified further opportunities in the third quarter of 2014 to maximize the return on inventory, especially with our focus on improving working capital management and gaining efficiencies in our operations. As a result of these opportunities, we recognized a charge of $9.2 million to adjust certain inventory to its net realizable value. The Inventory Optimization Program is designed to generate cash in the short-term instead of holding certain inventory for longer periods of time and to create efficiencies from a physical material movement perspective at our manufacturing and distribution facilities.
Adjusted EBITDA as a percentage of sales was 17.9% and 17.8% for the three and nine months ended September 30, 2014 compared to 17.5% and 16.9% for the three and nine months ended September 30, 2013. The Adjusted EBITDA growth can primarily be attributed to sales growth and efficiencies gained in our plant operations. Adjusted EBITDA in relation to net loss, the most directly comparable GAAP measure, is included in the table below. For the definition of Adjusted EBITDA and the formal reconciliation to net loss, see the section titled “Adjusted EBITDA”.

24


 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Adjusted EBITDA (Non-GAAP)
 
$
38,952

 
$
35,679

 
$
116,745


$
104,223

Net loss (GAAP)
 
(35,192
)
 
(644
)
 
(37,333
)

(25,447
)
 
 
 
 
 
 
 
 
 
The increase in net loss of $34.5 million quarter-over-quarter was primarily due to $31.8 million of foreign currency exchange losses this quarter, related mostly to the depreciation of the euro, compared to $14.4 million of foreign currency exchange gains in the third quarter of 2013. The majority of the foreign currency exchange gain/loss activity is unrealized and relates to the revaluation of intercompany loans based on the end of period foreign currency exchange rates. This change in foreign currency exchange gains/losses was partially offset by an income tax benefit. Through the nine months ended September 30, 2014, net loss increased $11.9 million year-over-year primarily due to significant foreign currency exchange losses, partially offset by margin growth, reduced operating expenses and lower income taxes.
We generated cash flow from operations of $48.4 million for the nine months ended September 30, 2014 compared to $39.0 million for the nine months ended September 30, 2013. The cash flow improvement is a result of sales growth and focused efforts to reduce working capital.

Consolidated Results of Operations
This section focuses on significant items that impacted our operating results for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013. Our results of operations have been converted to U.S. dollars from multiple currencies, which primarily include the euro, the Mexican peso and the Polish złoty. Our revenues and certain expenses are affected by fluctuations in the value of the U.S. dollar against these local currencies. The results of operations for any quarter or year-to-date period are not necessarily indicative of the results to be expected for other periods or the full fiscal year.

Three months ended September 30, 2014 compared to three months ended September 30, 2013
The following table presents selected consolidated financial data for the three months ended September 30, 2014 and 2013:
 
 
Three months ended September 30,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
Net sales
 
$
217,076

 
$
203,777

 
$
13,299

 
6.5
 %
Gross profit
 
46,783

 
48,381

 
(1,598
)
 
(3.3
)%
Other operating expenses
 
(34,604
)
 
(36,538
)
 
1,934

 
(5.3
)%
Other expense, net
 
(51,911
)
 
(6,855
)
 
(45,056
)
 
657.3
 %
Income tax benefit (expense)
 
4,540

 
(5,632
)
 
10,172

 
NM

Net loss
 
$
(35,192
)
 
$
(644
)
 
$
(34,548
)
 
NM

Gross profit as % of net sales
 
21.6
%
 
23.7
%
 
 
 
 
Other operating expenses as % of net sales
 
15.9
%
 
17.9
%
 
 
 
 
NM = Not Meaningful

Net sales
Our consolidated net sales increased $13.3 million, or 6.5%, during the quarter ended September 30, 2014 as compared to the same period in 2013. Foreign currency exchange rate fluctuations had no material impact on the net sales change when comparing the average exchange rates for the three months ended September 30, 2014 to the average exchange rates for the three months ended September 30, 2013.
Rope sales for the quarter increased $8.3 million primarily due to increased sales in our oil and gas, industrial and infrastructure and fishing end markets. Sales of our offshore oil and gas products were up $2.5 million primarily due to new contracts. Onshore oil and gas sales increased $2.6 million driven by an increase in drilling activity evidenced by the improving rig count. According to Baker Hughes, the average North American onshore rig count for the third quarter of 2014 was 2,225 compared to

25


2,055 in the third quarter of 2013, an 8.3% increase. Sales to our industrial and infrastructure market increased $2.1 million primarily due to strong infrastructure sales in the U.S. and maintenance of our market position in Europe and Asia despite soft market conditions. Fishing sales increased $1.4 million primarily due to product innovation in our netting offering and improving global market conditions. Sales to the maritime, mining and structures end markets did not significantly change. Rope sales represented 72% of our total consolidated net sales for both the three months ended September 30, 2014 and 2013.
Specialty wire sales increased $5.2 million for the three months ended September 30, 2014 compared to the same period last year due to improvement in market conditions in Mexico, as well as continued growth in Europe. We are seeing the Mexican economy pickup, especially in the construction and automotive sectors, and performance of our spring wire is exceeding expectations in Europe. Wire sales represented 17% of our total consolidated net sales for the three months ended September 30, 2014 compared to 16% for the same period in 2013.
Sales of engineered products did not significantly change for the three months ended September 30, 2014. Engineered Product sales represented 11% of our total consolidated net sales for the three months ended September 30, 2014 compared to 12% for the same period in 2013.

Gross profit
Gross profit decreased $1.6 million for the three months ended September 30, 2014 compared to the same period in 2013, and gross profit as a percentage of sales (“gross margin”) decreased from 23.7% for the three months ended September 30, 2013 to 21.6% for the three months ended September 30, 2014. Despite improved margin performance, we recorded costs related to our Inventory Optimization Program, which negatively impacted gross profit and gross margin. The effect of our Inventory Optimization Program on Cost of sales was $9.2 million in 2014 and $3.0 million in 2013. Excluding these adjustments, our gross margin would have been 25.8% for the third quarter of 2014 and 25.2% for the third quarter of 2013. This margin growth is primarily due to favorable product mix towards higher margin products, cost management and efficiencies in our production facilities.

Other operating expenses
 
 
Three months ended September 30,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
Selling expenses
 
$
(10,787
)
 
$
(10,339
)
 
$
(448
)
 
4.3
 %
Administrative expenses
 
(21,499
)
 
(21,562
)
 
63

 
(0.3
)%
Amortization expense
 
(2,318
)
 
(4,637
)
 
2,319

 
(50.0
)%
Other operating expenses
 
$
(34,604
)
 
$
(36,538
)
 
$
1,934

 
(5.3
)%
Other operating expenses decreased $1.9 million, or 5.3%, for the three months ended September 30, 2014 compared to the same period in 2013. Overall, total other operating expenses as a percentage of net sales declined from 17.9% for the third quarter of 2013 to 15.9% for the third quarter of 2014.
Selling expenses increased $0.4 million, or 4.3%, in the third quarter of 2014 as compared to the same period in 2013 primarily due to commissions directly related to the increase in sales. Foreign currency exchange rate fluctuations had no material impact on the selling expenses change when comparing the average exchange rates for the three months ended September 30, 2014 to the average exchange rates for the three months ended September 30, 2013.
Administrative expenses did not significantly change compared to the same period in 2013. Lower reorganization and restructuring charges of $1.2 million and consulting fees of $1.0 million were partially offset by higher incentive bonus compensation, advisory fees and a $0.2 million impairment charge related to in-process research and development intangibles established in purchase accounting that were ultimately abandoned. During the third quarter of 2013, we incurred more reorganization and restructuring charges associated with severance costs related to organizational changes and business performance. Consulting fees were lower for the three months ended September 30, 2014 compared to the same period in 2013 primarily due to cost management initiatives, which included the management of more projects with internal resources and fewer matters requiring external professional services. Incentive compensation, based on Adjusted EBITDA, was $1.2 million higher in the third quarter of 2014 compared to the third quarter of 2013 as Adjusted EBITDA increased. Also, advisory fees were $0.8 million more in this period compared to the same period in prior year due to external fees incurred on Paine & Partners' behalf related to business process improvements. Foreign currency exchange rate fluctuations had no material impact on the administrative expenses change when comparing the average exchange rates for the three months ended September 30, 2014 to the average exchange rates for the three months ended September 30, 2013.

26


Amortization expense decreased $2.3 million, or 50.0%, primarily due to certain finite-lived intangible assets becoming fully amortized effective in the first quarter of 2014 and $0.4 million more of amortization expense in prior year due to the acceleration of amortization associated with a finite-lived trade name that is no longer used.

Other expense, net
 
 
Three months ended September 30,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
Interest expense, net
 
$
(19,603
)
 
$
(20,107
)
 
$
504

 
(2.5
)%
Foreign currency exchange gains (losses), net
 
(31,816
)
 
14,417

 
(46,233
)
 
(320.7
)%
Loss on extinguishment of debt
 
(617
)
 

 
(617
)
 
100.0
 %
Other income (expense), net
 
125

 
(1,165
)
 
1,290

 
(110.7
)%
Total other expense, net
 
$
(51,911
)
 
$
(6,855
)
 
$
(45,056
)
 
657.3
 %
Other expense increased by $45.1 million, or 657.3%, for the three months ended September 30, 2014 compared to the same period in 2013. This increase was primarily due to foreign currency exchange fluctuations. For the three months ended September 30, 2014, foreign currency exchange losses were $31.8 million compared to foreign currency exchange gains of $14.4 million for the same period in 2013. At September 30, 2014 and 2013, we had intercompany loans that required remeasurement in the aggregate amounts of $432.8 million and $478.4 million, respectively. Foreign currency exchange losses for the third quarter of 2014 primarily related to the depreciation of the euro and the Polish złoty. The U.S. dollar to euro exchange rate at June 30, 2014 was $1.00 to €0.7322 compared to $1.00 to €0.7947 at September 30, 2014. The U.S. dollar to the Polish złoty exchange rate at June 30, 2014 was $1.00 to zł3.0435 compared to $1.00 to zł3.3200 at September 30, 2014. These losses were partially offset by a $1.9 million unrealized gain on the fair value marked-to-market adjustment on the cross-currency swaps entered into during the third quarter of 2014. In the third quarter of 2013, foreign currency exchange gains related to the appreciation of the euro and the Polish zloty.
Loss on extinguishment of debt increased $0.6 million for the three months ended September 30, 2014 compared to
the same period in 2013 due to the call premium and write-off of unamortized debt issuance costs in conjunction with the
redemption of a portion of the 9.00% Senior Notes (formerly the 11.75% Senior Notes).
Other expense decreased $1.3 million for the three months ended September 30, 2014 compared to the same period in 2013, primarily due to a loss of $1.4 million on the disposal of assets recorded in 2013.

Income tax expense/benefit
For the three months ended September 30, 2014, we recorded an income tax benefit of $4.5 million compared to income tax expense of $5.6 million for the three months ended September 30, 2013. The resulting effective tax rate for the third quarter of 2014 and 2013 was 11.4% and 112.9%, respectively. The Company's effective tax rate differs from the applicable statutory tax rate primarily due to a full valuation allowance on U.S. deferred tax assets, the mix of earnings (losses) by jurisdiction, and the effects of foreign tax rate differential.

27



Nine months ended September 30, 2014 compared to nine months ended September 30, 2013
The following table presents selected consolidated financial data for the nine months ended September 30, 2014 and 2013:
 
 
Nine months ended September 30,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
Net sales
 
$
654,086

 
$
616,173

 
$
37,913

 
6.2
 %
Gross profit
 
160,247

 
146,870

 
13,377

 
9.1
 %
Other operating expenses
 
(104,355
)
 
(108,498
)
 
4,143

 
(3.8
)%
Other expense, net
 
(94,402
)
 
(56,834
)
 
(37,568
)
 
66.1
 %
Income tax benefit (expense)
 
1,177

 
(6,985
)
 
8,162

 
NM

Net loss
 
$
(37,333
)
 
$
(25,447
)
 
$
(11,886
)
 
NM

Gross profit as % of net sales
 
24.5
%
 
23.8
%
 
 
 
 
Other operating expenses as % of net sales
 
16.0
%
 
17.6
%
 
 
 
 
NM = Not Meaningful


Net sales
Our consolidated net sales increased $37.9 million, or 6.2%, during the nine months ended September 30, 2014 as compared to the same period in 2013. Foreign currency exchange rate fluctuations contributed to an increase in sales of $9.0 million.
Excluding the impacts of foreign currency exchange rates, rope sales for the nine months ended September 30, 2014 increased $16.8 million over the same period in 2013. Oil and gas sales increased $15.5 million primarily due to more offshore projects and improving North American onshore rig counts. According to Baker Hughes, the average North American onshore rig count during the first nine months of 2014 was 2,155 compared to 2,050 during the same period in 2013, a 5.1% increase. Fishing sales increased $7.9 million primarily due to product innovation in our netting offering, new customer activity across several markets globally, and lower gas prices for fishing vessels, which lowers operating costs, increases spending on fishing gear and results in improved fish prices. During the first half of 2013, sales to Mauritania, one of the world's richest fishing areas, were blocked. Maritime sales increased $2.9 million in the nine months ended September 30, 2014 compared to the same period in 2013 due to growth in new vessel build orders and new customers from the April 2014 Endenburg B.V acquisition, which had maritime, offshore and heavy lifting business activities. Increased sales in these end markets were partially offset by declines in structures, mining and industrial and infrastructure end markets.
Sales to the structures end market declined $2.8 million in the nine months ended September 30, 2014 compared to the same period in 2013 due to fewer large bridge projects as compared to 2013. Sales to the mining end market declined $3.0 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to the continued pressure on commodity prices and overall lower level of spending from mining operators. We saw improvement in rope sales to the industrial and infrastructure end markets in the second and third quarters of 2014, but sales were still down $4.0 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, primarily due to strong infrastructure sales in the U.S. and maintenance of our market position in Europe and Asia despite soft market conditions. Also, certain assets acquired from Endenburg were reorganized into a new distribution facility allowing us to provide quicker response times and higher service levels to our European and international customer base. The new distribution center, called WireCo Crane Center, in Gouda, Netherlands is expected to make a contribution to industrial and infrastructure sales in 2015. Rope sales represented 73% of our total consolidated net sales for both the nine months ended September 30, 2014 and 2013.
Excluding the impacts of foreign currency exchange rates, specialty wire sales increased $10.3 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to growth in Mexican private sector infrastructure spending, as well as continued growth in Europe related to demand for our spring wire. Wire sales represented 16% of our total consolidated net sales for both the nine months ended September 30, 2014 and 2013.
Excluding the impacts of foreign currency exchange rates, sales of engineered products increased $1.7 million for the nine months ended September 30, 2014 compared to the same period in 2013 primarily due to more offshore projects and a steady production volume of storage systems for the steel industry. Engineered Product sales represented 11% of our total consolidated net sales for both the nine months ended September 30, 2014 and 2013.


28



Gross profit
Gross profit increased $13.4 million and gross profit as a percentage of sales (“gross margin”) increased from 23.8% for the nine months ended September 30, 2013 to 24.5% for the nine months ended September 30, 2014. Improved margin performance was partially offset by costs related to our Inventory Optimization Program. The effect of our Inventory Optimization Program on Cost of sales was $9.2 million in 2014 and $3.0 million in 2013. Excluding these adjustments, our gross margin would have been 25.9% for the nine months ended September 30, 2014 and 24.3% for the nine months ended September 30, 2013. We have seen continued improvement in our margins due to favorable product mix towards higher margin products, such as oil and gas end market products, cost management and efficiencies in our production facilities. We continue to streamline operations to improve processes and reduce costs.

Other operating expenses
 
 
Nine months ended September 30,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
Selling expenses
 
$
(33,328
)

$
(32,141
)
 
$
(1,187
)
 
3.7
 %
Administrative expenses
 
(62,971
)

(63,125
)
 
154

 
(0.2
)%
Amortization expense
 
(8,056
)

(13,232
)
 
5,176

 
(39.1
)%
Other operating expenses
 
$
(104,355
)

$
(108,498
)
 
$
4,143

 
(3.8
)%
Other operating expenses decreased $4.1 million, or 3.8%, for the nine months ended September 30, 2014 compared to the same period in 2013. Overall, total other operating expenses as a percentage of net sales declined from 17.6% for the nine months ended September 30, 2013 to 16.0% for the nine months ended September 30, 2014.
Selling expenses increased $1.2 million primarily due to the increase in commissions directly related to sales volume. Foreign currency exchange rate fluctuations accounted for $0.6 million of the change.
Administrative expenses did not significantly change compared to the same period in 2013. Lower reorganization and restructuring charges of $5.6 million, consulting fees of $1.0 million and bank fees of $0.9 million were nearly offset by higher compensation, impairment charges, $0.4 million of bad debt expense, $0.3 million more of advisory fees, and the impact of foreign currency exchange rates. In 2013, we incurred more reorganization and restructuring charges associated with severance costs related to changes in personnel, including executive management positions. Consulting fees were lower for the nine months ended September 30, 2014 compared to the same period in 2013 primarily due to cost management initiatives, which included the management of more projects with internal resources and fewer matters requiring external professional services. Also, we incurred non-capitalizable bank fees in the second quarter of 2013 associated with the Second Amendment of the Credit Agreement. Incentive compensation, based on Adjusted EBITDA, was $3.9 million higher for the nine months ended September 30, 2014 compared to the same period in 2013 as Adjusted EBITDA increased and no bonus was earned in the second quarter of 2013. Share-based compensation was $1.8 million more in the nine months ended September 30, 2014 compared to the same period in 2013 due to grants of options and restricted stock awards in July of 2013. Non-cash impairment charges of $0.8 million were recorded in the nine months ended September 30, 2014 related to an office building that will be abandoned instead of sold and in-process research and development intangibles established in purchase accounting that were ultimately abandoned. Foreign currency exchange rate fluctuations accounted for $0.7 million of the increase.
Amortization expense decreased $5.2 million, primarily due to certain finite-lived intangible assets becoming fully amortized effective the first quarter of 2014 and $0.4 million more of amortization expense in prior year due to the acceleration of amortization associated with a finite-lived trade name that is no longer used.

29



Other expense, net
 
 
Nine months ended September 30,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
Interest expense, net
 
$
(59,357
)

$
(60,783
)
 
$
1,426

 
(2.3
)%
Foreign currency exchange gains (losses), net
 
(35,131
)

4,400

 
(39,531
)
 
(898.4
)%
Loss on extinguishment of debt
 
(617
)


 
(617
)
 
100.0
 %
Other income (expense), net
 
703


(451
)
 
1,154

 
(255.9
)%
Total other expense, net
 
$
(94,402
)

$
(56,834
)
 
$
(37,568
)
 
66.1
 %

Other expense increased $37.6 million, or 66.1%, for the nine months ended September 30, 2014 compared to the same period in 2013. This increase was primarily due to foreign currency exchange fluctuations.
Interest expense decreased $1.4 million for the nine months ended September 30, 2014 compared to 2013 primarily due to a decrease in outstanding debt and refinancing of debt carried at the Company's highest interest rate. These decreases were slightly offset by lower capitalized interest and lower interest income.
Foreign currency exchange losses were $35.1 million for the nine months ended September 30, 2014 compared to foreign currency exchange gains of $4.4 million for the same period in 2013. At September 30, 2014 and 2013, we had intercompany loans that required remeasurement in the aggregate amounts of $432.8 million and $478.4 million, respectively. Foreign currency exchange losses for the nine months ended September 30, 2014 primarily related to the depreciation of the euro and the Polish złoty. The U.S. dollar to euro exchange rate at December 31, 2013 was $1.00 to €0.7251 compared to $1.00 to €0.7947 at September 30, 2014. The U.S. dollar to the Polish złoty exchange rate at December 31, 2013 was $1.00 to zł3.0123 compared to $1.00 to zł3.3200 at September 30, 2014. These losses were partially offset by a $1.9 million unrealized gain on the fair value marked-to-market adjustment on the cross-currency swaps entered into during the third quarter of 2014. Foreign currency exchange gains for the nine months ended September 30, 2013 were primarily due to the appreciation of the euro. The U.S. dollar to euro exchange rate at December 31, 2012 was $1.00 to €0.7579 compared to $1.00 to €0.7405 at September 30, 2013.

Loss on extinguishment of debt increased $0.6 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to the call premium and write-off of unamortized debt issuance costs in conjunction with the redemption of a portion of the 9.00% Senior Notes (formerly the 11.75% Senior Notes).
Other income increased $1.2 million primarily due to only $0.2 million of losses recognized on the sale of property, plant and equipment for the nine months ended September 30, 2014 compared to $1.4 million for the same period in 2013.

Income tax expense/benefit
For the nine months ended September 30, 2014, we recorded an income tax benefit of $1.2 million compared to income tax expense of $7.0 million for the same period in 2013. The resulting effective tax rate for the nine months ended September 30, 2014 and the same period in 2013 was 3.1% and (37.8)%, respectively. The Company's effective tax rate differs from the applicable statutory tax rate primarily due to a full valuation allowance on U.S. deferred tax assets, the mix of earnings (losses) by jurisdiction, and the effects of foreign tax rate differential.

30


Adjusted EBITDA
Adjusted EBITDA is a Non-GAAP Financial Measure defined as net income (loss) plus, without duplication: interest expense, income tax expense (benefit), depreciation and amortization, as further adjusted by (i) all fees and costs incurred in connection with any merger, consolidation, acquisition or offering of debt or equity securities, (ii) realized and unrealized gains (losses) resulting from foreign currency transactions, (iii) payments of advisory fees pursuant to the Management Fee Letter with Paine & Partners, LLC, (iv) all amounts deducted in arriving at net income (loss) in respect of severance packages payable in connection with the termination of any officer, director or employee, (v) business optimization expenses and other reorganization or restructuring charges, reserves or expenses (which, for the avoidance of doubt, will include, without limitation, the effect of inventory optimization programs, plant closures, facility consolidations, retention, system establishment costs (including costs of instituting systems and controls to comply with the Sarbanes-Oxley Act of 2002), contract termination costs, future lease commitments and excess pension charges), (vi) other expenses, such as share-based compensation expense and income or loss on our investments in joint ventures, and (vii) non-cash items increasing such consolidated net income, other than the accrual of revenue in the ordinary course of business. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP measures.
The following is a reconciliation of net loss to Adjusted EBITDA:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Net loss (GAAP)
 
$
(35,192
)
 
$
(644
)
 
$
(37,333
)
 
$
(25,447
)
Plus:
 
 
 
 
 
 
 
 
Interest expense, net
 
19,603

 
20,107

 
59,357

 
60,783

Income tax expense (benefit)
 
(4,540
)
 
5,632

 
(1,177
)
 
6,985

Depreciation and amortization
 
12,192

 
14,436

 
38,140

 
42,753

Foreign currency exchange losses (gains), net
 
31,816

 
(14,417
)
 
35,131

 
(4,400
)
Share-based compensation
 
1,969


1,993

 
5,539


3,719

Other expense (income), net
 
(125
)
 
1,165

 
(703
)

451

Loss on extinguishment of debt
 
617

 

 
617

 

Acquisition costs
 

 

 
347

 
369

Purchase accounting (inventory step-up and other)
 

 
393

 

 
2,155

Advisory fees
 
2,001

 
1,220

 
3,899

 
3,554

Reorganization and restructuring charges
 
832

 
2,005

 
1,968

 
7,556

Non-cash impairment of assets
 
246

 

 
844

 

Effect of Inventory Optimization Program
 
9,244

 
2,970

 
9,244

 
2,970

Other adjustments
 
289

 
819

 
872

 
2,775

Adjusted EBITDA (Non-GAAP)
 
$
38,952

 
$
35,679

 
$
116,745

 
$
104,223



31


LIQUIDITY AND CAPITAL RESOURCES
Overview
Our liquidity initiatives continue to be: generate cash and pay down debt. For the nine months ended September 30, 2014, we generated net cash from operating activities of $48.4 million compared to $39.0 million for the nine months ended September 30, 2013. This is evidence of strong business performance, improved collection efforts and our focus on operational efficiencies. During the third quarter, we amended the Note Purchase Agreement to reduce the interest rate on our 9.00% Senior Notes (formerly the 11.75% Senior Notes) from 11.75% to 9.00% and we redeemed $26.5 million of the 9.00% Senior Notes with available cash and funds under the Revolving Loan Facility, which had an interest rate of 5.10% at September 30, 2014. The 9.00% Senior Notes carried the highest interest rate of all the Company's debt prior to the amendment.
Our principal sources of liquidity consist of cash from operations and borrowings under our Revolving Loan Facility. Our principal uses of cash are to support operations and service our debt. Our liquidity is influenced by many factors, including the amount and timing of cash collections from our customers and fluctuations in the cost of our raw materials.
Total available liquidity, defined as availability under our Revolving Loan Facility plus cash and cash equivalents, was $141.7 million at September 30, 2014 compared to $146.9 million at December 31, 2013. Availability under the Revolving Loan Facility is based upon the maximum borrowing capacity of $145.0 million, less outstanding borrowings, letters of credit and if applicable, further restricted by certain covenants in our credit agreements. Our available liquidity declined from December 31, 2013 primarily due to additional debt outstanding under our Revolving Loan Facility, partially offset by a higher cash and cash equivalents balance. We had borrowed $44.1 million under the Revolving Loan Facility at September 30, 2014 compared to $32.0 million at December 31, 2013. As discussed above, our borrowings under the Revolving Loan Facility increased due to funding a portion of the redemption of the 9.00% Senior Notes.
We reinvest the earnings of substantially all of our subsidiaries in those respective operations. The foreign operating subsidiaries use cash generated from earnings to fund working capital, invest in capital expenditures and service interest and principal payments on intercompany debt. Our outstanding debt is primarily issued by the U.S. operating subsidiary and there are intercompany loans within the Company's legal structure that are paid with earnings from the operating subsidiaries in foreign jurisdictions to provide liquidity in the U.S. for interest and principal payments on our outstanding debt. Of the consolidated cash and cash equivalents balance of $41.7 million at September 30, 2014, cash and cash equivalents held in foreign countries were $35.8 million, of which $2.8 million was in U.S. dollars. The cash balances in currencies other than the U.S. dollar are primarily in the euro, the Mexican peso and the Polish złoty, all of which can be readily converted to U.S. dollars.
Based on our current assessment of our operating plan, we believe that cash flow from operations, cash and cash equivalents and availability under our Revolving Loan Facility will be adequate to fund anticipated operating, capital and debt service requirements and other commitments over the next twelve months.

Adjusted Working Capital 
Within our asset base, working capital management is our largest opportunity for cash generation. Adjusted Working Capital, a Non-GAAP Financial Measure defined as accounts receivable plus inventories less accounts payable, decreased from $300.6 million as of December 31, 2013 to $289.5 million as of September 30, 2014. The decrease in Adjusted Working Capital is primarily due to strong collection efforts, the effects of the Inventory Optimization Program, and continued focus on operational efficiencies. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures.
The following is a reconciliation of Adjusted Working Capital to working capital:
 
 
September 30, 2014
 
December 31, 2013
 
 
(in thousands)
Accounts receivable, net
 
$
141,982

 
$
148,564

Inventories, net
 
227,590

 
228,245

Accounts payable
 
(80,026
)
 
(76,181
)
Adjusted Working Capital (Non-GAAP)
 
289,546

 
300,628

Plus: All other current assets
 
73,034

 
55,999

Less: All other current liabilities
 
(75,953
)
 
(56,539
)
Working capital (GAAP)
 
$
286,627

 
$
300,088



32


Long-term Debt
For a detailed discussion of our borrowings, see Note 8—“Borrowings” to our audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of our annual report on Form 10-K for the year ended December 31, 2013. On July 16, 2014, WireCo WorldGroup Inc. entered into an amendment to the Note Purchase Agreement governing the 9.00% Senior Notes (formerly the 11.75% Senior Notes) that reduced the interest rate from 11.75% to 9.00% and provided a waiver for the notice of redemption. On July 17, 2014, we redeemed $26.5 million of the $82.5 million aggregate principal amount of the 9.00% Senior Notes, using cash drawn under the Revolving Loan Facility.
Net Debt was $817.3 million and $845.3 million at September 30, 2014 and December 31, 2013, respectively. Our Net Leverage ratio was 5.40x at September 30, 2014, compared to 6.07x at December 31, 2013. Net Debt is a Non-GAAP Financial Measure defined as consolidated total debt at face value plus capital lease obligations less cash and cash equivalents and restricted cash. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. The following is a reconciliation of total debt to Net Debt.
 
 
September 30, 2014
 
December 31, 2013
 
 
(in thousands)
Borrowings under Revolving Loan Facility
 
$
44,050

 
$
32,000

Polish Debt due 2014
 
8,029

 
8,860

Term Loan due 2017
 
325,192

 
330,813

9.00% Senior Notes due 2017
 
56,000

 
82,500

9.50% Senior Notes due 2017
 
425,000

 
425,000

Other indebtedness
 
188

 
688

Capital lease obligations
 
2,455

 
3,333

Total debt at face value plus capital lease obligations (GAAP)
 
860,914

 
883,194

Less: Cash and cash equivalents
 
(41,718
)
 
(34,987
)
Less: Restricted cash
 
(1,873
)
 
(2,887
)
Net Debt (Non-GAAP)
 
$
817,323

 
$
845,320


Free Cash Flow
Free Cash Flow, a Non-GAAP Financial Measure, is defined as cash flows from operating activities less capital expenditures, acquisitions and other investing activities and further adjusted by effect of exchange rates on cash and cash equivalents and other items. Free Cash Flow is also equivalent to the change in Net Debt. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. We generated Free Cash Flow of $28.0 million and $16.6 million for the nine months ended September 30, 2014 and 2013, respectively. This increase was primarily due to an increase in cash flows from operating activities.
 
 
Nine months ended September 30,
 
 
2014
 
2013
 
 
(in thousands)
Net cash provided by operating activities (GAAP)
 
$
48,426

 
$
39,006

Less: capital expenditures
 
(16,213
)
 
(22,479
)
Less: acquisition of business and other investing activities
 
(2,622
)
 
(35
)
Effect of exchange rates on cash and cash equivalents
 
(1,906
)
 
239

Other items
 
312

 
(176
)
Free Cash Flow (Non-GAAP)
 
$
27,997

 
$
16,555







33




Debt Covenant Compliance
As of September 30, 2014, we were in compliance with all restrictive and financial covenants associated with our borrowings. As defined in our respective credit agreements, the Senior Secured Net Leverage to Adjusted EBITDA ratio was 2.23x. The maximum Senior Secured Net Leverage Ratio was set at 3.50x of Adjusted EBITDA, with more restricted step-downs thereafter to 3.25x effective December 31, 2014 and 3.00x effective June 30, 2016.

Cash Flow Information
The following tables summarize our cash flows from operating, investing and financing activities for the nine months ended September 30, 2014 and 2013, respectively.
 
 
Nine months ended September 30,
 
 
2014

2013
 
 
(in thousands)
Cash flows provided by (used in)
 
 
 
 
Operating activities
 
$
48,426

 
$
39,006

Investing activities
 
(18,835
)
 
(22,514
)
Financing activities
 
(20,954
)
 
(27,409
)
Effect of exchange rates on cash and cash equivalents
 
(1,906
)
 
239

Increase (decrease) in cash and cash equivalents
 
6,731

 
(10,678
)
Cash and cash equivalents, beginning of period
 
34,987

 
49,244

Cash and cash equivalents, end of period
 
$
41,718

 
$
38,566


Cash from Operating Activities
 
 
Nine months ended September 30,
 
 
2014
 
2013
 
 
(in thousands)
Net loss
 
$
(37,333
)
 
$
(25,447
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
83,170


45,576

Changes in assets and liabilities
 
2,589


18,877

Net cash provided by operating activities
 
$
48,426

 
$
39,006

Cash flows from operating activities increased in the nine months ended September 30, 2014 over the prior period primarily due to higher cash earnings, partially offset by investments in working capital. Cash earnings is our net loss adjusted for non-cash items, such as depreciation and amortization among other reconciling items. The significant outflow of cash associated with building-up inventory was partially offset by an improvement in managing our collection terms with customers and payment terms with vendors. Days sales outstanding improved from 71 days for the third quarter of 2013 to 60 days for the third quarter of 2014.

Cash from Investing Activities
 
 
Nine months ended September 30,
 
 
2014
 
2013
 
 
(in thousands)
Capital expenditures
 
$
(16,213
)
 
$
(22,479
)
Acquisition of business
 
(4,573
)
 

Other investing activities
 
1,951

 
(35
)
Net cash used in investing activities
 
$
(18,835
)
 
$
(22,514
)

34


Our investment in capital expenditures is lower in the nine months ended September 30, 2014 than the nine months ended September 30, 2013 primarily due to getting a late start on key projects. As a result, we currently expect to invest approximately $25 million in capital expenditures, primarily in emerging markets, for the full year. During the second quarter of 2014, we purchased certain assets from Endenburg B.V. for approximately $4.6 million. We expect to continue seeking strategic business acquisitions that are complementary to our business. The other investing cash inflow is related to proceeds from the sale of a building no longer used.

Cash from Financing Activities
 
 
Nine months ended September 30,
 
 
2014
 
2013
 
 
(in thousands)
Principal payments on long-term debt
 
$
(5,621
)
 
$
(11,043
)
Debt issuance costs paid
 

 
(1,880
)
Retirement of long-term debt
 
(26,946
)
 

Net borrowings (repayments) under revolving credit agreement
 
12,050

 
(12,900
)
Repayments of short-term borrowings
 

 
(1,586
)
Other financing activities
 
(437
)
 

Net cash used in financing activities
 
$
(20,954
)
 
$
(27,409
)
During the nine months ended September 30, 2014, we paid $20.5 million on our long-term debt, including a partial redemption of our 9.00% Senior Notes and a $3.1 million annual excess cash flow payment on our Term Loan, and we expect to continue to pay down our long-term debt balances, including the payoff of the Polish Debt in the fourth quarter.

Contractual Obligations and Commitments
As of September 30, 2014, there have been no material changes in our contractual obligations and commitments from those reported in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our annual report on Form 10-K for the year ended December 31, 2013.

Off-balance Sheet Arrangements
Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases, which have not materially changed from the disclosure in our annual report on Form 10-K for the year ended December 31, 2013. We also periodically maintain standby letters of credit for purchase of inventory, contract performance on certain sales contracts and other guarantees of our performance.

Critical Accounting Policies
A discussion of our critical accounting policies can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our annual report on Form 10-K for the year ended December 31, 2013. There have been no significant changes in our critical accounting policies since year-end.

Recently Issued Accounting Standards
Refer to Note 1—“Interim Financial Statement Presentation” to our unaudited interim consolidated financial statements in Item 1 of this quarterly report for recently issued accounting standards.


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Item 3.Quantitative and Qualitative Disclosures About Market Risk

Other than as described below, there was no material change from the information included in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our annual report on Form 10-K for the year ended December 31, 2013.

Foreign Currency Exchange Rate Risk. Fluctuations in foreign currency exchange rates result in increases or decreases in our foreign currency exchange gains (losses). At times, we have partially hedged this volatility through the use of derivative instruments. In late September 2014, we entered into cross-currency swaps with three counterparties to hedge exposures to foreign currency exchange risk. The notional amount and unrealized gain on our outstanding cross-currency swap contracts are shown in the table below. In addition, this table shows the change in fair value of these swaps assuming a hypothetical adverse foreign currency exchange rate movement of 10% as of September 30, 2014.
 
 
Nine months ended September 30,
 
 
2014
 
 
(in thousands)
Cross-currency swaps:
 
 
Notional amount
 
$
300,000

Unrealized gain
 
1,882

Change in fair value due to 10% foreign currency exchange rate movement
 
35,837

Refer to Note 5—“Derivative Financial Instruments” to our unaudited interim consolidated financial statements in Item 1 of this quarterly report for further information. Notwithstanding our efforts to mitigate some foreign currency exchange rate risk, we do not hedge all of our foreign currency exposures, and there can be no assurance that our mitigating activities related to the exposures that we hedge will adequately protect us against risks associated with foreign currency fluctuations.

Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
The Company's management, under the supervision and with the participation of our CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Exchange Act). Based on this evaluation, the Company's CEO and CFO concluded that, due to an unremediated material weakness in internal control over financial reporting in the areas of accounting for income taxes described below, the Company's disclosure controls and procedures were not effective.
The Company had a material weakness in internal control over financial reporting in the areas of accounting for income taxes for the years ended December 31, 2013 and 2012. Specifically, the Company did not maintain sufficient, effective controls over the preparation and review of income taxes related to the complete and accurate recording of the Company's tax provision, deferred tax balances (net of required valuation allowance) and uncertain tax positions.
The Company is continuing to implement remedial actions regarding the material weakness. The Company hired a Vice President of Global Tax and Treasury in March, an International Tax Director in June, and a Domestic Tax Manager and Tax Analyst during the third quarter. We have also further investigated the root cause of the material weakness, designed standardized tax packages to gather tax provision information, scheduled regular tax discussions with significant locations, and strengthened tax provision documentation. Management anticipates the actions described above and the resulting improvements in controls will strengthen the Company's internal control over financial reporting and will, over time, address the related material weakness identified. However, the above material weakness will not be considered remediated until these improvements have been fully implemented and are operating effectively for an adequate period of time.
Notwithstanding the unremediated material weakness, management, including our CEO and CFO, believes the consolidated financial statements included in this quarterly report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.


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Changes in Internal Control over Financial Reporting
Other than the actions described above, there was no change in the Company's internal control over financial reporting that occurred during the Company's third quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.Legal Proceedings
We are not a party to any material legal proceedings. From time to time, we are involved in routine litigation arising in the ordinary course of business, which is incidental to our operations. For further information required by this item, refer to Note 10—“Contingencies” to our unaudited interim consolidated financial statements in Item 1 of this quarterly report.

Item 1A.Risk Factors
There have been no material changes in our Risk Factors from those disclosed in Item 1A, Risk Factors, in our annual report on Form 10-K for the year ended December 31, 2013.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.     Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures
Not applicable.

Item 5.     Other Information
 
None.

Item 6. Exhibits
Exhibit
No.

 
Description of Exhibits Filed with this Report
 
 
31.1

 
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2

 
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1

 
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2

  
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS

  
XBRL Instance Document
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB

 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document

Exhibit
No.

 
Description of Exhibits Incorporated by Reference
 
 
10.1

 
Amendment No. 5 to Note Purchase Agreement, dated as of July 16, 2014, between WireCo WorldGroup Inc. and the Purchasers (incorporated by reference to Exhibit 10.1 to the Registrant's quarterly report on Form 10-Q (File No. 333-174896), filed on August 7, 2014).
 
 
 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WireCo WorldGroup Inc.
 
 
 
 
 
 
 
(Registrant)
 
 
 
 
 
Dated:
November 13, 2014
 
 
 
By:
 
/s/ Brian G. Block
 
 
 
 
 
 
 
Brian G. Block
 
 
 
 
 
 
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
 
 
 
 




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