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EX-21 - EXHIBIT 21 - WireCo WorldGroup Inc.exhibit21_2014.htm
EX-31.2 - EXHIBIT 31.2 - WireCo WorldGroup Inc.exhibit312_2014.htm
EX-32.1 - EXHIBIT 32.1 - WireCo WorldGroup Inc.exhibit321_2014.htm
EX-32.2 - EXHIBIT 32.2 - WireCo WorldGroup Inc.exhibit322_2014.htm
EX-10.15 - EXHIBIT 10.15 - WireCo WorldGroup Inc.exhibit1015_2014.htm
EXCEL - IDEA: XBRL DOCUMENT - WireCo WorldGroup Inc.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - WireCo WorldGroup Inc.exhibit311_2014.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
 
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).    YES  ¨    NO  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  x   NO  ¨
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 February 23, 2015, the Registrant had 100 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None



WireCo WorldGroup Inc.
Annual Report
For the year ended December 31, 2014
TABLE OF CONTENTS
 
PART I
 
PART II
 
 
 
 
 
PART III
 
 
 
 
 
PART IV
 




1


Our Organization
The diagram below illustrates our current corporate structure at December 31, 2014, including WireCo WorldGroup Inc. (the "Registrant"), the issuer of the 9.50% Senior Notes due 2017, the guarantors, and non-guarantors designated by the shaded boxes. WireCo WorldGroup (Cayman) Inc. ("WireCo" or the "Company") indirectly owns 100% of the voting common stock of the Registrant and all of the subsidiaries guaranteeing the 9.50% Senior Notes. For a list of our subsidiaries, refer to Exhibit 21. Percentages of sales or assets represent the respective portion of consolidated WireCo net sales for the year ended December 31, 2014, and assets at December 31, 2014.

 

(1) 
This entity is 84% beneficially owned by Paine & Partners Fund III, of which Paine & Partners, LLC ("Paine & Partners") is the manager.
(2) 
Certain current and former members of management beneficially own 3.3% of the non-voting common stock of U.S. Holdings, reflected as non-controlling interests.
(3) 
For subsidiaries in which the Company does not have a controlling interest, we account for our respective ownership interests as equity method investments.

2


Cautionary Information Regarding Forward-Looking Statements
The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report contains statements that relate to future events and expectations and, as such, constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. All statements that reflect WireCo's expectations, assumptions or projections about the future other than statements of historical fact are forward-looking statements, including, without limitation, forecasts concerning end-market growth or other trend projections, anticipated financial results or operating performance, and statements about WireCo's business plans and strategies.

Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors and are not guarantees of future performance. Actual results, performance or outcomes may differ materially from those expressed in or implied by those forward-looking statements. A number of factors or combination of factors including, but not limited to, the factors identified below and those discussed in Item 1A, Risk Factors, of this annual report may cause WireCo’s actual results to differ materially from those projected in any forward-looking statements.
Readers are strongly encouraged to consider these factors and the following factors when evaluating any forward-looking statements concerning the Company:
the general economic conditions in markets and countries where we have operations;
fluctuations in end market demand;
foreign currency exchange rate fluctuations;
risks associated with our non-U.S. operations;
our ability to meet quality standards;
our ability to protect our trade names;
the competitive environment in which we operate;
changes in the availability or cost of raw materials and energy;
risks associated with our manufacturing activities;
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 9.5% Senior Notes; and
credit-rating downgrades.

Any forward-looking statements that WireCo makes in this annual report speak only as of the date of such statement and we disclaim any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law.



3


PART I

Item 1.Business

INTRODUCTION
Unless otherwise indicated, the financial information included in this annual report on Form 10-K are those of WireCo WorldGroup (Cayman) Inc., its wholly-owned subsidiaries, including WireCo WorldGroup Inc., and subsidiaries in which it has a controlling interest. In this report, unless the context otherwise requires, “WireCo,” the “Company,” “we,” “our” or “us” means WireCo WorldGroup (Cayman) Inc. and all subsidiaries consolidated for the purposes of its financial statements. WireCo WorldGroup (Cayman) Inc. is an exempted company incorporated under the laws of the Cayman Islands in 2008. WireCo WorldGroup Inc. (the "Registrant") was originally founded in 1931 as Wire Rope Corporation of America, Inc.

COMPANY OVERVIEW
WireCo is a leading global manufacturer of both steel and synthetic rope, specialty wire and engineered products serving a diverse range of end markets, geographies and customers. We maintain a broad portfolio of critical products across the end markets we serve, including, but not limited to, industrial and infrastructure, oil and gas (both offshore and onshore), fishing, mining, maritime, structures, poultry, and storage systems. We market our products under well-known brands including: Union™, CASAR®, Lankhorst Ropes®, Camesa®, Euronete™, Oliveira™, Phillystran®, Drumet™, Lankhorst Engineered Products™ and Lankhorst Mouldings™.
Our highly engineered, specialized ropes are "mission-critical" equipment components used in applications, such as heavy lifting, pulling, mooring, supporting and suspension. Our products' performance, quality and safety are of the utmost importance to our customers to limit exposure to costly unplanned operational disruptions and downtime. The consumable nature of our products and rigid replacement cycles result in a recurring revenue base over time.
We operate 23 manufacturing facilities in 8 countries, which are supplemented by a global network of company-owned distribution facilities, consignment centers, distributor partnerships and sales offices. In addition, we have joint ventures with manufacturing activities in India, Greece and China. Our acquisitions have enhanced our leadership position by creating new growth opportunities, served to diversify and increase end market penetration, and reduced our dependence on external wire suppliers. The timeline below highlights a few of the more significant acquisitions we have made over the past decade.


4



OUR STRENGTHS
Mission-Critical Products with Recurring Revenue. Due to the mission-critical nature of our products, customers choose our products based on quality, service and engineering support. Rigorous operating conditions require frequent replacement, generating a steady stream of recurring revenue.
Highly Diversified Business Mix. Our revenue base has a balanced exposure across a diverse mix of end-user markets, geographies, products and brands. We believe our diversified portfolio insulates us from volatility in any single industry. In 2014, no single end market represented more than 40% of our total sales. In addition, we are geographically diversified with approximately 66% of sales outside of the United States during 2014.
Leading Market Share. We believe we hold a top market position in each of the end markets in which we choose to participate. We are actively pursuing the high margin global marketplace, where quality and service is key for buying decisions.
Track Record of Successful Acquisitions. We have been able to successfully execute several key acquisitions resulting in a market leading position and diversification among products, end markets and geographies.
Consistent Margins Despite Volatile Raw Material Prices. We have pass-through pricing mechanisms for all products at the time of sale to reflect current commodity prices, which allows for stabilized margins during volatile commodity markets.
Organic Innovation. We introduced 17 new products during 2014. Driving this organic innovation is a team of over 70 research, design and development engineers involved in product conception, research, design, development, testing and full technical customer support. We employ some of the end markets' most creditable subject matter experts, currently serving or having served on committees such as the Wire Rope Technical Board, American Society of Mechanical Engineers B30.30 Committee, and in Europe, The Drahtseil-Vereinigung for the wire rope industry.  

REPORTABLE SEGMENT
Our operations consist of one operating segment and one reportable segment. Refer to Note 15—“Segment and Geographic Area Information” to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this annual report for additional information.
PRODUCTS
The table below summarizes each product's contribution as a percentage of our consolidated net sales during 2014, 2013 and 2012. The Lankhorst acquisition in July 2012 affects the comparability of period-over-period results.

Product Sales as a Percentage of Total Consolidated Sales
 
2014
 
2013
 
2012
Rope
73
%
 
74
%
 
74
%
Specialty Wire
16
%
 
16
%
 
20
%
Engineered Products
11
%
 
10
%
 
6
%
    
100
%
 
100
%
 
100
%

ROPE
Product Portfolio
WireCo is a leading global producer with a broad product offering of steel rope, electromechanical cable ("EM Cable"), synthetic rope and synthetic yarns. These customized products are capable of withstanding extremely heavy loads and harsh operating environments with specific quality, durability, weight, functionality and performance capabilities. Given the intensity of rope usage in certain applications and their consumable nature, they are subject to strict inspection and removal criteria, necessitating frequent replacement. As a result, the aftermarket represents a significant portion of highly engineered rope sales. WireCo's products are mainly used for lifting equipment within the oil and gas, fishing, mining, maritime and industrial and infrastructure end markets.

5


We sell our products through a global sales force consisting of regional sales managers and application or end market specialists.  To enhance our overall level of service to our customers, we have: an extensive engineering and research and development organization that is actively involved in developing innovative products for our customers; leading technical training seminars surrounding our products; and fieldwork with our customers to maximize product performance. We service our customers through a global network of owned distribution centers, consignment centers and distributor partnerships in order to provide fast delivery, short lead-times, consistent product supply and high quality customer service.
The below table summarizes each product's contribution as a percentage to our consolidated rope sales during 2014, 2013 and 2012. The Lankhorst acquisition affects the comparability of period-over-period results.

Rope Product Portfolio Sales as a Percentage of Total Rope Sales
 
2014
 
2013
 
2012
Steel Rope
53
%
 
49
%
 
57
%
Steel EM Cable
5
%
 
5
%
 
6
%
     Total Steel
58
%
 
54
%
 
63
%
Synthetic Rope
12
%
 
16
%
 
10
%
Synthetic Yarns
3
%
 
4
%
 
1
%
     Total Synthetic
15
%
 
20
%
 
11
%
     Rope Total Sales
73
%
 
74
%
 
74
%

Steel Rope consists of a group of high-carbon steel wire strands helically and symmetrically twisted and “closed” together around a central core. Steel rope can range from small specialty rope of 1/16th of an inch to large mining ropes of up to five inches in diameter. We produce both highly engineered specialty products and steel rope suitable for a variety of uses, such as drill lines, mining ropes, cranes, mooring lines, bridges and logging. Major applications of these highly engineered products involve mineral mining, oil and gas exploration, fishing, maritime, construction and heavy industry (e.g., cranes).
EM Cable is a highly engineered, customized electrical power and electrical signal transmission cable that is armored with high-carbon steel wire or special metal alloys, providing protection for the electrical conductors inside and various mechanical performance properties. Our EM Cable product is used in the oil and gas exploration industry and provides a link to the surface from underground instrumentation. The cable not only transmits data, but also acts as a strength member for the insertion and removal of the geophysical tools used for data-logging and perforating oil and gas wells. Over the past several years, advancements in drilling technology have opened up large shale gas reserves, creating a significant shale drilling market for our EM Cable product.
Synthetic Ropes include high tenacity fiber ropes, strands, braids and strength members made from fibers such as Kevlar®, Dyneema®, Twaron®, Technora® (all registered trademarks are owned by their respective owners) and our own proprietary formulations. These products are unique in that they have the strength characteristics of steel rope but weigh significantly less. Synthetic ropes are primarily used in maritime, offshore oil and gas, fishing and other industries that require specific operating strength, buoyancy (when in high-modulus polyethylene), corrosion resistance or weight tolerance characteristics beyond wire rope. These include mooring lines, fishing ropes, fishing nets, life and winch lines, structural and support lines, boat rigging, power cables and broadcast tower guy cables. For certain applications, fiber ropes offer attractive physical characteristics compared to steel. Although fiber has comparative strength features, it is known to have greater flexibility and lighter weight, which allows submersion to approximately 10,000 meters, allowing far greater depth reach with virtually no increase in weight. Synthetic products have become crucial in the offshore oil and gas markets as greater drilling depths have made steel ropes impractical and obsolete due to the weight of the steel rope. We have pioneered the development of new products, which combine the use of steel wire ropes with high-strength synthetic components that improve the strength to weight ratio in the finished product.
Synthetic Yarns products, such as tapes, yarns and monofilaments, are used in a variety of end market applications including flexible intermediate bulk containers, horticulture, agriculture, cables, concrete reinforcement, synthetic grass, geotextiles, electrical fencing, antiballistics, luggage, sports products, industrial and infrastructure usage and synthetic ropes. The Company also manufactures synthetic yarns for use in the production of its own synthetic ropes.

6



End Markets
Our Rope products provide solutions in a variety of end markets with attractive growth opportunities, focusing on premium high-margin business. A breakdown of our net sales for the year ended December 31, 2014 by end market, as well as our Go-to-Market brands were as follows:
The following provides a detailed description regarding some uses of our products by end market:
Industrial and Infrastructure - This end market encompasses industrial and infrastructure applications that use steel rope in various industries, including construction, transportation, defense, automotive, agriculture and logging. Crane ropes sold within this end market consist of both Original Equipment Manufacturers ("OEMs") tied to new crane build annually and a much larger global market of end users of cranes in the aftermarket.  Crane ropes are a consumable working component of cranes that require replacement every one to four years depending on cycle counts, working conditions and operator experience. 
Oil and Gas - Steel and synthetic ropes are used throughout the oil and gas industry, providing solutions, from exploration all the way to production. We have a full suite of product offerings for onshore oil and gas (well servicing, tubing and sandlines, drill lines, and mast raising lines), offshore above platform (drill lines, buoy pendants, tensioner ropes, riser ropes, cranes and cable lays), and solutions for offshore mooring systems below platform (deep water mooring, anchor lines, mooring systems, modulines and synthetic tethers). Onshore and offshore above platform ropes are mission critical and typically need to be replaced every 6 to 12 months depending on the application and operating environment.
Fishing - The fishing industry encompasses applications that use steel and synthetic wire ropes and netting for fishing and other related equipment. We are a leading global supplier of these products to the fishing industry, with worldwide distribution of our recognized Oliveira and Euronete brands. We believe we are the only company with a complete fishing gear range and the unique ability to produce netting and wire and synthetic ropes. Our products are consumable working ropes and nets for fishing vessels and fish farms, which need to be replaced every three to four years based on level of activity in order to protect valuable fish catches or fish farm production.
Mining - Our steel rope products are primarily consumable working ropes for mining operations. We participate both in the underground and surface mining market for the extraction of coal, copper, iron ore and other minerals and ores. Due to the severe wear-and-tear that steel ropes endure in surface mining operations, they typically need to be replaced every two to four months depending on the application and operating environment.
Maritime - Steel and synthetic ropes are used for various maritime operating applications including mooring, tugging, lifting and anchoring. The maritime business is managed with ship owners directly or with affiliated companies, like ship yards and ship management companies with regular activity in vessels designed for bulk cargo, containers and tankers for shipping product globally, as well as working boats built for towing, dredging, drilling, offshore installations, holiday cruises and defense purposes. These types of ropes typically need to be replaced every 12 to 18 months depending on the application and operating environment.
Structures - Our steel and synthetic rope products are used in bridges, stadiums, towers and other cable supported structures. Our specialty wire products are also commonly used as concrete reinforcement for infrastructure projects.

7



SPECIALTY WIRE
Product Portfolio
Our specialty wire provides a competitive edge, fulfilling substantially all of our internal supply chain needs. The majority of our volume in wire is high-carbon steel wire for use in the production of our own steel ropes and EM Cable products. For our external customers, we offer a variety of selective products such as PC strand, PC wire, tire bead, spring and duct, guy strand and staple band, which are manufactured for a wide variety of uses in a broad range of industries. Of our specialty wire production for the year ended December 31, 2014, we produced 48% for internal use and the remaining for our external customers. Our Go-to-Market brands during 2014 were as follows:
End Markets
Besides serving our internal needs, we serve niche markets in the infrastructure and industrial industries. Our primary infrastructure product is PC strand, used in highways, dams, silos, long extension bridges and industrial structures. PC strand is a reinforcing component for concrete. For the industrial market, we serve a variety of applications including air conditioning, automotive, furniture and fencing applications. Guy strand is used in telecommunications and utilities and staple band is used to manufacture staples for various industries.

ENGINEERED PRODUCTS

Product Portfolio
Lankhorst Engineered Products are highly engineered, plastic injected molded products and sheets.  Our products have a very low maintenance cost, long useful life, high impact resistance, and perform in extreme temperature conditions.  In many cases, these products are used as a substitute for steel, concrete or wood alternatives due to their unique engineered design, performance characteristics and price. Most products are custom designed by our dedicated team of research and development engineers to meet specific customer requirements.  Since these applications are complementary with some of our wire and synthetic rope products, we can offer our customers a "complete solution."  An example is our oil-platform mooring systems where we offer high strength synthetic ropes and buoyancy modules produced by our Lankhorst Engineered Products facilities.  Sales and distribution are done primarily in Europe and, for the oil and gas market, by our own team in Houston, Texas. Together with our global network of dedicated distributors and agents, we are able to serve customers around the world.

End Markets
Engineered products are used in the following end markets:  oil and gas, poultry, industrial and infrastructure and storage systems.  Within oil and gas, we produce applications ranging from protection to buoyancy to anti-oscillation.  Our poultry end market includes poultry manufacturing conveyor belts for eggs and manure that are tailored for the end application.  The industrial and infrastructure end market produces manholes, poles, planks, decking sheet, furniture, bridges, and railroad cross ties.  Engineered products are used in pipe storage systems for worksite mobility and coil storage solutions, such as steel plants, service centers, automotive plants and transportation. A breakdown of our net sales for the year ended December 31, 2014 by end market, as well as our Go-to-Market brands were as follows:



8


RAW MATERIALS
The main raw materials that we use to manufacture our rope products are high-carbon steel wire, polymers, such as polypropylene and polyethylene, and synthetic fibers, such as polyester and polyamide (nylon) and high tenacity synthetic fibers, such as Ultra High Molecular Weight Polyethylene. The main raw material that we use to manufacture wire is high-carbon steel rod. Our steel rope and wire products are made from steel rod that is primarily made from recycled steel scrap and iron ore and our synthetic ropes are primarily composed of new raw materials. Engineered Products are made from new plastic materials (36%) and recycled plastic materials (64%). The recycled plastics are sourced from agricultural foils, bottle caps and industrial waste. All of our products have a variety of different coatings or ancillary materials required to complete finished products. Examples include zinc, grease, lubrication, master batch for coloring, polyurethane, fittings and hardware.
Due to the wide geographic dispersion of our production facilities, we use numerous suppliers for the raw materials needed in our operations. We are not significantly dependent on any one or a limited number of suppliers, especially considering we are vertically integrated and manufacture the majority of the wire, fibers and cores we use in our ropes. These raw materials are purchased at regular intervals, usually on a monthly or quarterly basis, depending on pricing and market conditions.

MANUFACTURING FOOTPRINT
We have a comprehensive global footprint, with both highly engineered value added manufacturing and low cost production serving diverse end markets. Our rope products are produced on a diverse set of manufacturing assets and our engineered products have unique production capabilities, such as low and high pressure injection molding, flat-die extrusion and high production flexibility. Refer to Item 2, Properties, of this annual report for more information on our manufacturing footprint.

CUSTOMERS
We serve a broad customer base, both in terms of industries and geographic regions. Our rope and specialty wire customers include distributors, OEMs and end users of our products in the various industries we serve. Engineered products' customers include: engineering firms, contractors, multinational oil and gas energy companies, offshore pipelayers, steel manufacturers and railroads. Due to our diversified customer base, our top 10 customers only accounted for approximately 10% of our net sales in 2014, and our largest customer accounted for less than 2% of net sales in 2014.

BACKLOG
Our policy is to include only firm unfilled orders shippable within twelve months in backlog. The backlog of orders for the principal products manufactured and marketed was $156.6 million at December 31, 2014, relating primarily to offshore oil and gas contracts. We anticipate that most of the 2014 backlog of orders will be filled during fiscal year 2015.



9


COMPETITIVE CONDITIONS
We are subject to competitive conditions in most end markets. Our competitors include other global well-capitalized wire rope manufacturers, as well as other local and specialized wire manufacturers and niche markets with a wide variety of specialized producers of plastic solutions, as well as large producers of steel, concrete and wood alternatives. In spite of this moderately competitive environment, we have established market leading positions in our various end markets under our distinguished brands and design capabilities. We generally compete on the basis of product performance, sales and technical service support, and price.

INTELLECTUAL PROPERTY
The Company believes that its patents, brands, trademarks and other intellectual property provide it with a significant competitive advantage. We own numerous patents and patent applications worldwide.  We regularly file patent applications and obtain issued patents resulting from our research and development activities. Although we use patented inventions throughout our product portfolio, our business is not substantially dependent on any single patent or group of patents. We have a significant number of trademarks registered around the world covering our company names and material brands. These trademarks include WireCo WorldGroup®, WireCo®, Union™, CASAR®, Lankhorst Ropes®, Camesa®, Euronete™, Oliveira™, WireCo® Structures, Phillystran®, Drumet™, Lankhorst Engineered Products™ and Lankhorst Mouldings™. In addition, we have trademarks registered in the U.S. and some foreign countries to protect our specific “marker strand” designs, which, consistent with market practice, designate our steel rope products as well as various brands. We have also trademarked our orange-colored plastic coating used to enhance the performance of our steel rope product lines.

RESEARCH AND DEVELOPMENT
We believe our focused agenda of research and development initiatives has enhanced our reputation as one of the leading product innovators in the industries that we serve. Demand for our products developed in previous years continues to increase as our customers recognize the added value to their respective business. In 2014, we introduced seventeen new products to the diverse global industries that we serve. These new products have been included in our already extensive and highly engineered product portfolio. Our strategy is to continue to build on our history of innovation and technological expertise while bringing new, highly engineered products to market. Our investment in research and development was $5.3 million, $4.0 million and $3.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

REGULATION - Environmental Matters
Our business operations and facilities are subject to a number of laws and regulations, which govern the discharge of pollutants and hazardous substances into the air and water; the handling, storage, use and disposal of such materials; and remediation of contaminated sites. Operations at our facilities include transforming steel rods and wire into steel rope or cable, which can produce wastewater, spent acid and petroleum waste; and transforming polymers and synthetic fibers into fiber strand and fiber rope, which may be recycled or may produce polymer or synthetic fiber waste; and transforming lumber into wooden reels, which may produce waste that may be recycled or incinerated. We also store certain petroleum products and hazardous substances that we use in our operations. Due to the nature of these activities, our facilities are subject to routine inspection by regulators. Our regulators have not identified any material findings or situations that could have a material impact on our operations. Although we continually incur expenses and make capital expenditures related to environmental protection, we do not anticipate that future expenditures should materially impact our financial condition, results of operations, or liquidity.

EMPLOYEES AND LABOR RELATIONS
At December 31, 2014, we employed approximately 4,100 employees worldwide, not including our joint ventures, of which approximately 800 were employed by the Registrant in the U.S. Approximately 37% of our employees were covered by collective bargaining agreements, of which none are subject to agreements that expire within one year of December 31, 2014. The Company believes it will be able to successfully negotiate all such contracts as they come due.

10



FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The Company conducts a significant amount of its business and has a number of operating facilities in countries outside the United States. Refer to Note 15—“Segment and Geographic Area Information” to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this annual report for financial information about WireCo’s domestic and foreign operations.

AVAILABLE INFORMATION
The Company makes available free of charge on its website, www.wirecoworldgroup.com, its current reports on Form 8-K, quarterly reports on Form 10-Q and annual reports on Form 10-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission ("SEC"). The SEC maintains an Internet website, www.sec.gov, that contains reports and other information issuers file electronically with the SEC. Interested parties may also read and copy any of our filings at the SEC’s Public Reference Room at 100 F Street N.E., Room 1580, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Item 1A.Risk Factors
Our business is subject to various risks, many of which are not exclusively within our control and may cause actual performance to differ materially from historical or projected future performance. The risks described below could materially and adversely affect our business, financial condition, results of operations or cash flows. These risks are not the only risks that we face and our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. See “Cautionary Information Regarding Forward-Looking Statements” on page 3 of this annual report for cautionary statements regarding forward-looking statements.

Risks Relating to our Business
Worldwide economic conditions could negatively impact our business.
The general worldwide economic conditions continue to affect many industries, including industries in which we or our customers operate. These conditions could negatively impact our business by adversely affecting, among other things, our: net sales; operating income; margins; cash flows; suppliers' and distributors' ability to perform and the availability and costs of materials; customers' orders; customers' ability to access credit; and customers' ability to pay amounts due to us. If economic conditions are not favorable, the negative impact on our business could increase or continue for longer than we expect.
Some of our end markets are cyclical, which may cause us to experience fluctuations in net sales or operating results.
We have experienced, and expect to continue to experience, fluctuations in net sales and operating results due to business cycles. We sell our products principally to oil and gas (both offshore and onshore), industrial and infrastructure, fishing, mining, maritime, structures, poultry, and storage systems markets. Although we serve a variety of markets to avoid a dependency on any one, a significant downturn in any one of these markets could cause a material reduction in our net sales that could be difficult to offset. In addition, decreased market demand typically results in excess manufacturing capacity among our competitors which, in turn, results in pricing pressure. As a consequence, a significant downturn in our markets can result in lower profit margins.
Our reported financial condition and results of operations are subject to exchange rate fluctuations, which will make it more difficult to predict our financial results.
Our reported financial condition and results of operations are reported in multiple currencies, which primarily include the euro, the Mexican peso, and the Polish złoty, and are then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. Appreciation of the U.S. dollar against the euro, the Mexican peso, and the Polish złoty will have a negative impact on our reported net sales and operating income while depreciation of the U.S. dollar against such currencies will have a positive effect on reported net sales and operating income. Additionally, foreign currency exchange rate fluctuations related to intercompany loans denominated in U.S. dollars with subsidiaries whose functional currency is the euro, the Mexico peso, and the Polish złoty impact the Foreign currency exchange gains (losses), net line item included in our consolidated statements of operations.


11


We may be subject to risks relating to our non-U.S. operations.
Many of our manufacturing operations and suppliers are located outside the United States. Our non-U.S. operations are subject to risks in addition to those facing our domestic operations, including: fluctuations in currency exchange rates; limitations on ownership and on repatriation of earnings; transportation delays and interruptions; political, social and economic instability and disruptions; government embargoes or trade restrictions; the imposition of duties and tariffs and other trade barriers; import and export controls; labor unrest and current and changing regulatory environments; the potential for nationalization of enterprises; difficulties in staffing and managing multi-national operations; limitations on our ability to enforce legal rights and remedies; potentially adverse tax consequences; and difficulties in implementing restructuring actions on a timely basis. If we are unable to successfully manage the risks associated with expanding our global business or adequately manage operational fluctuations internationally, the risks could have a material adverse effect on our business, results of operations or financial condition.
If we do not maintain the quality of our products, our sales would be harmed and product liability claims could increase our costs.
Our products are used in applications by our customers where quality and performance are critical. If we are unable to maintain the high standards, including various quality certifications, expected by our customers, or our competitors are able to produce higher quality products, our sales may be harmed by the loss of existing customers and our ability to attract new customers. Also, we have potential exposure to product liability claims in the event that the use of any of our products results in personal injury or property damage, or a failure of our products causes a work stoppage, including situations resulting from misuse of our products. Any such claims may be significant. Therefore, product liability claims against us could have a negative reputational impact, particularly if the failure of a product is highly publicized. Furthermore, manufacturing defects may not be discovered for some time after new products are introduced. In the event that any of our products prove to be defective, among other things, we may be responsible for any related damages, and we may be required to recall or redesign such products. Any insurance we maintain may not continue to be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred. Should this occur, we may also need to increase our investments in manufacturing processes, which could increase our expenses, reduce our margins and adversely affect our cash flows.
Our reputation and competitive position are dependent on our ability to protect our intellectual property rights.
We believe that our trade names are important to our success and competitive position. We cannot, however, guarantee that we will be able to secure protection for our intellectual property in the future or that such protection will be adequate for future operations. Furthermore, we face the risk of ineffective protection of intellectual property rights in jurisdictions where we source and distribute our products, some of which do not protect intellectual property rights to the same extent as the United States. If we are unsuccessful in challenging a party’s products on the basis of infringement of our intellectual property rights, continued sales of these products could adversely affect our sales, devalue our brands and result in a shift in consumer preference away from our products. We may face significant expenses and liability in connection with the protection of our intellectual property rights, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected.
We face competition and competitive pressures, which could adversely affect our results of operations and financial condition.
Our industry is moderately competitive. We face competition on multiple fronts, including from large global firms and local specialized rope manufacturers. Other global firms may have more capital at their disposal, and may be able to produce their products at a lower cost due to their size and economies of scale. Our competitors who are based in other jurisdictions may have lower production costs because of lower labor costs, fewer regulatory standards, local access to raw materials, lower shipping costs or other factors. Local specialized firms may have an advantage due to their knowledge of the markets in which they operate. In addition, our competitors may be able to offer substitute products that customers could use as a replacement to our products.
We face volatility in the prices for, and availability of, raw materials and energy used in our business, which could adversely impact our competitive position and results of operations.
We rely heavily on certain raw materials (principally rod, polymers and synthetic fibers), and energy sources (principally electricity, natural gas and propane) in our manufacturing processes. As a result, our earnings are affected by changes in the costs and availability of these raw materials and energy. Unanticipated increases in the prices of such commodities could increase our costs, negatively impacting our business, results of operations and financial condition if we are unable to fully offset the effects of higher raw material or energy costs through price increases, productivity improvements or cost-reduction programs.  In addition, the loss of some of our significant raw material suppliers could cause shortages, which could have a material adverse effect on operations. The imposition of tariffs pursuant to trade laws and regulations in the jurisdictions in which our operations and suppliers are located can have an adverse impact on our business by placing tariffs and tariff-rate quotas on the import of certain raw materials and raising the prices of raw materials we require for our production. In addition,

12


under certain tax laws, customs and taxing authorities may, from time to time, review the tariff classifications we use to import our raw materials and export our products.

We experience risks associated with manufacturing, which could adversely affect our business and results of operations.
A manufacturing disruption, such as equipment downtime, facility shutdown or casualty loss, could lead to production curtailment and could substantially impair our business. Interruptions in production capabilities would increase production costs and reduce our sales and earnings. In addition to lost revenue, long-term business interruption could result in the loss of some customers. To the extent these events are not covered by insurance, we are unable to recover insurance proceeds to reimburse for losses or business interruption, or if we are insured, but there are delays in the receipt of such reimbursements, our cash flows may be adversely impacted by events of this type.
We are subject to extensive governmental laws and regulations that can adversely affect the cost, manner or feasibility of doing business and could result in restrictions on our operations or civil or criminal liability.
We are required to comply with various governmental laws and regulations, including but not limited to environmental, occupational health and safety, tax trade, import and export, anti-dumping, anti-bribery, anti-trust and reporting obligations of the Exchange Act. Failure to comply could lead to manufacturing shutdowns, product shortages, delays in product manufacturing, operating restrictions, withdrawal of required licenses and prohibitions against exporting or importing of products. In addition, civil and criminal penalties could result from regulatory violations. Such laws and regulations may become more stringent and result in necessary modifications to our current practices and facilities that could force us to incur additional costs that could materially affect us.
We are subject to significant environmental compliance obligations and potential environmental liabilities, which could increase our costs or cause us to change our operations.
As activities in certain of our facilities involve the handling, storage, use and disposal of hazardous substances, we may be subject to material liabilities arising from conditions caused by the release of these substances. Such liability can include the costs of investigation and clean-up, fines and penalties sought by environmental authorities and damages arising out of personal injury and contaminated property and other toxic tort claims, as well as claims for lost or impaired natural resources. Certain environmental laws impose strict liability, and under certain circumstances, joint and several liability on current and prior owners and operators of sites without regard to comparative fault. In addition, environmental requirements change frequently, and have tended to become more stringent over time. We cannot predict what environmental laws or regulations will be enacted or amended in the future, how existing or future laws or regulations will be interpreted or enforced, or the amount of future expenditures that may be required to comply with such laws or regulations. Failure to maintain or comply with environmental permits, governmental approvals or other environmental requirements necessary to operate our business, exposure to any one of the possible environmental obligations and liabilities listed above, and the uncertainty that our indemnification rights will result in the recovery of any environmental losses that may arise, may subject us to significant obligations and liabilities that could have a material adverse effect on our business, financial condition and results of operations.
We may pursue and execute acquisitions, which could adversely affect our business.
We have made, and may in the future make, acquisitions of or significant investments in businesses with complementary products, services and/or technologies. We cannot provide assurance that we will be able to consummate any such transactions or that any future acquisitions will be consummated at acceptable prices and terms. Acquisitions involve numerous risks, including: unforeseen difficulties in integrating operations, technologies, services, accounting and personnel; the diversion of financial and management resources from existing operations; unforeseen difficulties related to entering geographic regions or target markets where we do not have prior experience; and the assumption of known and unknown liabilities and exposure to litigation. If we finance an acquisition with debt, it could result in higher leverage and interest costs. As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of these acquisitions, and we may incur costs in excess of what we anticipate.
We are an emerging growth company and our election to delay compliance with new or revised accounting standards and utilize scaled disclosure and governance requirements applicable to reporting companies may result in our financial statements not being comparable to those of other reporting companies.
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we are utilizing certain exemptions from various reporting requirements that are applicable to other reporting companies that are not emerging growth companies. An emerging growth company may also take advantage of some or all of the scaled disclosure provisions that are applicable to emerging growth companies, such as delayed compliance with new or revised accounting pronouncements applicable to reporting companies until such pronouncements are made applicable to private companies and reduced disclosure about executive compensation arrangements. We are electing to take advantage of the extended transition period for complying with new or revised accounting standards until we (i) no longer qualify as an emerging growth company

13


or (ii) affirmatively and irrevocably opt out of the extended transition period provided by the JOBS Act. As a result of this election, our financial statements may not be comparable to the financial statements of other reporting companies. Also, we are taking advantage of scaled disclosure provisions within Item 11, Executive Compensation, of this annual report provided by the JOBS Act to emerging growth companies. We cannot predict if investors will find our debt securities less attractive because we are relying on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and our trading price may be more volatile. We may utilize these reporting exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more or (ii) the date on which we have issued more than $1 billion in non-convertible debt securities during the previous three-year period.
Organized labor action could have a material adverse effect on our business.
Many of our operations are highly labor intensive. We have collective bargaining agreements with our employees at several plant locations and distribution centers. Approximately 37% of our work force is unionized. If our unionized employees were to engage in a strike, work stoppage or other slowdown at any of our plants, this could adversely affect our ability to produce our products. In addition, any significant increase in labor costs or the making of other significant concessions as a result of agreements with our unionized workforce could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to our Public Debt
Our substantial level of indebtedness could have a material adverse effect on our financial condition and prevent us from fulfilling our debt service obligations.
As of December 31, 2014, we had $874.3 million of total indebtedness at face value. Face value excludes adjustments for unamortized premium and discounts. In addition, subject to restrictions in the indenture governing the 9.50% Senior Notes (the “Indenture”) and restrictions in our current debt agreements, we may incur additional indebtedness. Our high level of indebtedness could have important consequences, including the following:
it may be more difficult for us to satisfy our obligations with respect to the 9.50% Senior Notes;
our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;
we must use a substantial portion of our cash flow from operations to pay interest and principal on the 9.50% Senior Notes and other indebtedness, which will reduce the funds available to us for other purposes such as capital expenditures;
we may be more vulnerable to economic downturns and adverse developments in our business; and
there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.
We expect to obtain the money to pay our expenses and to pay the principal and interest on all debt from our cash flow from operations. Our ability to satisfy our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. We cannot be certain that our cash flow will be sufficient to allow us to pay principal and interest on our indebtedness and meet our other obligations. If we lack sufficient liquidity, we may be required to refinance all or part of our existing debt, sell assets or borrow more money. We cannot guarantee that we will be able to do so on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.
Covenants in our debt instruments may limit our ability to operate our business and any failure by us to comply with such covenants may accelerate our obligation to repay the underlying debt.
Certain debt instruments contain covenant restrictions that limit our ability to operate our business, including covenant restrictions that may prevent us from:
incurring additional debt or issuing guarantees;
creating liens;
entering into certain transactions with our affiliates; and
consolidating, merging or transferring all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.

14


The Revolving Loan Facility and the Term Loan due 2017 requires us to maintain specific leverage ratios, and the Indenture governing the 9.50% Senior Notes requires us to meet a specific fixed charge coverage ratio prior to incurring certain additional debt. Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. Our failure to comply with these obligations could prevent us from borrowing additional money and could result in our default. If a default occurs under any of our senior indebtedness, the relevant lenders could elect to declare such indebtedness, together with accrued interest and other fees, to be immediately due and payable and to proceed against our assets that secure such senior indebtedness. Moreover, if the lenders under a facility or other agreement in default were to accelerate the indebtedness outstanding under that facility, it could result in a default under other indebtedness. If all or any part of our indebtedness were to be accelerated, we may not have or be able to obtain sufficient funds to repay it. In addition, we may incur other indebtedness in the future that may contain financial or other covenants that are more restrictive than those contained in the Indenture. As a result of these and certain other covenants, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us.
We are controlled by a principal equity holder who will be able to make important decisions about our business and capital structure.
A majority of our shares are held by Paine & Partners Fund III, an affiliate of Paine & Partners. As a result, Paine & Partners controls us and has the power to elect the members of our board of directors, appoint new management and approve any action requiring the approval of the holders of our stock, including approving acquisitions or sales of all or substantially all of our assets. Paine & Partners has the ability to control decisions affecting our capital structure, including the issuance of additional capital stock, the implementation of stock repurchase programs and the declaration of dividends. The interests of our principal equity holder may not be aligned with the holders of our 9.50% Senior Notes. Our principal equity holder may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to the holders of our 9.50% Senior Notes.
Any lower-than-expected rating of our bank debt and debt securities could adversely affect our business.
Two rating agencies, Moody's and Standard & Poor's, rate our debt securities. If the rating agencies were to reduce their current ratings, then our ability to access certain financial markets may become limited, the perception of us in the view of our customers, suppliers and security holders may worsen and as a result, our business and financial condition may be adversely affected.

Item 1B.Unresolved Staff Comments
None.

Item 2.Properties
Our principal properties include our manufacturing facilities and our distribution centers. A depiction of our global manufacturing footprint, excluding our joint ventures in China, Greece and India, is below:
 
North America
 
South America
 
Europe
 
 
 
 
   
 
 
 
United States (8)
 
Brazil (1)
 
France (1)
Germany (2)
Portugal (6)
 
 
 
 
 
   
 
 
 
Mexico (2)
 
 
 
The Netherlands (2)
Poland (1)
 
 
We have eight domestic manufacturing facilities in Missouri, Texas and Pennsylvania and fifteen international manufacturing facilities in Mexico, Germany, Portugal, Poland, the Netherlands, Brazil and France, excluding our three joint ventures. We have global capacity to annually produce approximately 307,000 metric tons of wire, 231,000 metric tons of rope, 35,000

15


metric tons of engineered products, and 5,000 metric tons of recycled raw materials. Utilization of manufacturing capacity varies by manufacturing plant based upon the type of products assigned and the level of demand for those products.
The Company adequately uses its total production capacity. Utilization of manufacturing capacity varies by manufacturing plant based upon the type of products assigned and the level of demand for those products.
We have twenty stand-alone distribution facilities in the U.S., Portugal, the Netherlands, France, United Kingdom, Australia, Denmark, Slovakia and Czech Republic. In addition to these distribution facilities, we have warehouse space available at substantially all of our manufacturing facilities.
We own all but six of our manufacturing facilities and lease eleven stand-alone distribution centers. Refer to Note 14—“Commitments and Contingencies” to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this annual report for further information on the Company's lease commitments.
Most of our properties and other assets are subject to liens securing our various borrowings. Refer to Note 7—“Borrowings” to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this annual report for further information on assets secured.
We believe our properties are in good condition, well maintained, adequately utilized and sufficient to support the anticipated operations of the business.

Item 3.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 14—“Commitments and Contingencies” to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this annual report.

Item 4.Mine Safety Disclosures
Not applicable.

PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Registrant's common equity consists of common stock that is privately held and there is no established public trading market. As of February 23, 2015, there was one stockholder of record. There are currently no significant restrictions on the ability of the Registrant to pay dividends to WireCo WorldGroup US Holdings Inc., its sole stockholder.

Item 6.Selected Financial Data
The selected financial data below should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this annual report. During the periods presented, we acquired businesses as set forth in the footnotes. The Company's consolidated financial statements include the results of operations of these acquired businesses from the date of acquisition and as such, period to period results of operations vary depending on these dates. Accordingly, this selected financial data is not necessarily comparable or indicative of our future financial results.

16


 
 
Years ended December 31,
 
 
2014
 
2013
 
2012 (1)
 
2011 (2)
 
2010 (3)
 
 
(in thousands)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
856,760

 
$
821,055

 
$
742,689

 
$
604,927

 
$
447,678

Gross profit
 
208,245

 
198,749

 
163,755

 
158,573

 
118,531

Operating income
 
70,954

 
51,418

 
45,195

 
57,009

 
41,354

Net loss
 
(28,773
)
 
(27,004
)
 
(18,174
)
 
(50,707
)
 
(6,565
)
 
 
As of December 31,
 
 
2014
 
2013
 
2012 (1)
 
2011 (2)
 
2010 (3)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
283,101

 
$
300,088

 
$
325,605

 
$
202,707

 
$
226,468

Total assets
 
1,124,851

 
1,199,215

 
1,250,260

 
885,703

 
822,406

Long-term debt, excluding current maturities
 
854,042

 
862,492

 
893,217

 
565,044

 
500,248

Total stockholders’ equity
 
44,263

 
96,233

 
112,012

 
129,536

 
195,069

 
 
Years ended December 31,
 
 
2014
 
2013
 
2012 (1)
 
2011 (2)
 
2010 (3)
Statement of Cash Flows Data:
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
59,418

 
$
55,151

 
$
13,554

 
$
10,653

 
$
(4,351
)
Investing activities
 
(27,494
)
 
(29,353
)
 
(210,232
)
 
(93,335
)
 
(102,326
)
Financing activities
 
(4,865
)
 
(40,980
)
 
214,599

 
56,956

 
140,984

(1) 
The 2012 financial information reflects the acquisition of Royal Lankhorst Euronete Group B.V. ("Lankhorst") on July 12, 2012.
(2) 
The 2011 financial information reflects the acquisition of Drumet Liny I Druty Sp Z O.O. ("Drumet") on July 18, 2011.
(3) 
The 2010 financial information reflects the acquisition of Luís Oliveira Sá, SGPS, S.A. ("Oliveira") on November 16, 2010.

Item 7.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, including WireCo WorldGroup Inc., and subsidiaries in which it has a controlling interest.
Management’s Discussion and Analysis (“MD&A”) provides a reader of our financial statements with a narrative from the perspective of our management on our consolidated results of operations, financial condition, 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. Please see “Cautionary Information Regarding Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions relating to these statements. This MD&A is provided as a supplement to, and should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8, Financial Statements and Supplementary Data, of this annual report.

Non-GAAP Financial Measures
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“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
Acquisition Adjusted EBITDA
Adjusted Working Capital
Net Debt

17


Free Cash Flow

We provide Adjusted EBITDA and Acquisition Adjusted EBITDA as a means to enhance communication with security holders by providing additional information regarding our operating results. We use these Non-GAAP Financial Measures internally to evaluate our performance, allocate resources, calculate debt covenant ratios and for incentive compensation purposes. We believe that our presentation of these measures provides investors with greater transparency with respect to our results of operations, are required for debt covenant calculation purposes and are 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.

BUSINESS OVERVIEW
We are a leading global manufacturer of both steel and synthetic rope, specialty wire and engineered products. Our products are used in a diverse range of industries including, but not limited to, industrial and infrastructure, oil and gas (both offshore and onshore), fishing, mining, maritime, structures, poultry, and storage systems. Our global manufacturing footprint includes 23 manufacturing facilities in 8 countries.

EXECUTIVE SUMMARY
During 2014, we saw a full year of benefit from initiatives commenced in the second half of 2013, as well as benefits from new initiatives implemented during 2014. Key initiatives implemented in 2013 and further capitalized on in 2014 include: executing clear sales strategies in each of our markets to best serve our customers, reducing plant costs to run a more efficient operation, actively managing inventory, accounts receivable and accounts payable to reduce working capital, and applying rigorous return on investment standards to our capital spending. In 2014, we continued our focus on operational improvements with new procurement initiatives focused on consolidating and improving global purchasing processes, as well as implementing standard procedures to support data driven decisions and rigorous productivity initiatives.
In April 2014, we acquired certain assets from Endenburg B.V. to reorganize into a new distribution facility called WireCo Crane Center. Endenburg B.V. is headquartered in Gouda, Holland and supplied high quality hoisting and lifting gear, among other products. The WireCo Crane Center establishes a key central stocking location with good inland transportation routes near the Rotterdam Port, allowing us to provide quicker response times and higher service levels to our European and international customer base. This facility is expected to make a contribution to rope sales in 2015.
In 2013, we initiated an inventory optimization program (the "Inventory Optimization Program") 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. In 2014, we continued to monitor inventory levels in conjunction with the Inventory Optimization Program, and we increased the breadth and depth of the program, including initiating a plan to sell higher volumes of our slower moving inventory, which had historically sold at or above cost. We identified further opportunities with this initiative in 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, which also resulted in sales below cost, we recognized a charge of $9.2 million in 2014 to adjust certain inventory to its net realizable value.
As a result of these initiatives, in fiscal year 2014, our net sales increased by $35.7 million, Adjusted EBITDA grew by $11.8 million, and we generated $59.4 million of cash from operating activities.

18


The increase in sales for the year ended December 31, 2014 compared to the same period in 2013 was primarily due to increased sales in our oil and gas and fishing markets, which were partially offset by weakness in the mining and industrial and infrastructure end markets.
We reported a net loss of $28.8 million and Adjusted EBITDA, a Non-GAAP Financial Measure, of $151.0 million for the year ended December 31, 2014, compared to a net loss of $27.0 million and Adjusted EBITDA of $139.2 million for the same period in 2013. Adjusted EBITDA as a percentage of sales was 17.6% during 2014 compared to 17.0% during 2013. The increase in net loss of $1.8 million year-over-year was primarily due to $36.3 million of foreign currency exchange losses during 2014, related mostly to the depreciation of the euro, compared to $13.6 million of foreign currency exchange gains in 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 increase in foreign currency exchange losses was partially offset by higher gross profit of $9.5 million attributable primarily to sales growth, reduced operating expenses of $10.0 million related to cost management initiatives and lower income taxes of $26.2 million. The increase in Adjusted EBITDA was driven primarily by sales growth and efficiencies gained in our plant operations.
Below is a comparison of Adjusted EBITDA to Net loss, the most comparable GAAP measure. For the definition of Adjusted EBITDA and reconciliation to net loss, see the section titled “Adjusted EBITDA and Acquisition Adjusted EBITDA”. Also, see the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures.
 
 
Years ended December 31,
 
 
2014
 
2013
 
 
(in thousands)
Adjusted EBITDA (Non-GAAP)
 
$
151,009

 
$
139,193

Net loss as reported (GAAP)
 
$
(28,773
)
 
$
(27,004
)

CONSOLIDATED RESULTS OF OPERATIONS
This section focuses on significant items that impacted our operating results during the years ended December 31, 2014, 2013 and 2012. Most notably, our acquisition of Royal Lankhorst Euronete Group B.V. (“Lankhorst”) on July 12, 2012 affects the comparability of 2012 results. Operating results of Lankhorst are included in our consolidated statements of operations since the date of acquisition.
Our reported financial condition and 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. When we refer to changes in foreign currency exchange rates, we are referring to the differences between the foreign currency exchange rates we use to convert our international operations’ results from local currencies into U.S. dollars for reporting purposes. The impacts of foreign currency exchange rate fluctuations are calculated as the difference between current period activity translated using the current period’s currency exchange rates and the comparable prior year period’s currency exchange rates. We use this method for all countries where the functional currency is not the U.S. dollar.

Year ended December 31, 2014 compared to the year ended December 31, 2013
The following table presents selected consolidated financial data for the years ended December 31, 2014 and 2013:
 
 
Years ended December 31,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
 
 
Net sales
 
$
856,760

 
$
821,055

 
$
35,705

 
4
 %
Gross profit
 
208,245

 
198,749

 
9,496

 
5
 %
Other operating expenses
 
(137,291
)
 
(147,331
)
 
10,040

 
(7
)%
Other expense, net
 
(115,368
)
 
(67,881
)
 
(47,487
)
 
70
 %
Income tax benefit (expense)
 
15,641

 
(10,541
)
 
26,182

 
NM

Net loss
 
$
(28,773
)
 
$
(27,004
)
 
$
(1,769
)
 
NM

Gross profit as % of net sales
 
24
%
 
24
%
 
 
 
 
Other operating expenses as % of net sales
 
16
%
 
18
%
 
 
 
 

19


NM = Not Meaningful

Net sales
Our consolidated net sales increased $35.7 million, or 4%, during the year ended December 31, 2014 compared to the same period in 2013. Offsetting the increase was a $2.3 million decline due to foreign currency exchange rate fluctuations when comparing the average exchange rates for the twelve months ended December 31, 2014 to the average exchange rates for the twelve months ended December 31, 2013.
Excluding the impacts of foreign currency exchange rates, rope sales increased by $20.8 million which was driven primarily by increased sales in our oil and gas and fishing end markets. Sales of our offshore oil and gas products were up $10.7 million primarily due to new contracts in South America and Europe. Onshore oil and gas sales increased $6.9 million driven by an increase in drilling activity evidenced by a higher average rig count throughout the year relative to the average throughout 2013, despite ending the 2014 fiscal year at a lower rig count, a decline that is anticipated to continue into fiscal year 2015. According to Baker Hughes, the average North American onshore rig count during the full fiscal year 2014 was 2,182 compared to 2,056 in 2013, while finishing the year at 2,035 on December 31, 2014. Fishing sales increased $11.7 million primarily due to product innovation in our netting offerings, 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. Maritime sales increased $2.8 million 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. These increases were offset by declines of $2.2 million in the mining end market driven by low mineral prices, mine closures and cost reductions at the major mining companies, $6.6 million in the industrial and infrastructure end market as a result of continued macroeconomic weakness in Europe and Asia and $1.8 million in the structures end market due to fewer large bridge projects. Rope sales represented 73% of our total consolidated net sales for the year ended December 31, 2014 compared to 74% for the same period in 2013.
Excluding the impacts of foreign currency exchange rates, specialty wire sales increased $12.7 million for the year ended December 31, 2014 compared to the year ended December 31, 2013 primarily due to increased sales in Mexico. Specialty wire sales represented 16% of our total consolidated net sales for the years ended December 31, 2014 and 2013.
Excluding the impacts of foreign currency exchange rates, engineered products sales increased $4.5 million for the year ended December 31, 2014 compared to the year ended December 31, 2013 driven by an increase in offshore contracts and further product innovation. Engineered product sales represented 11% of our total consolidated net sales for the year ended December 31, 2014 compared to 10% for the same period in 2013.
 
Gross profit
Gross profit increased $9.5 million for the year ended December 31, 2014 compared to 2013, but gross profit as a percentage of sales (“gross margin”) stayed constant at 24%. 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 the effect of the Inventory Optimization Program, our gross margin would have been 25% in 2014 and 2013. We have seen continued improvement in our margins due to cost reduction initiatives that were partially offset by the margin generated by our product mix. We saw volume growth in select specialty wire and engineered products categories, which generate lower margin than the products in the rope portfolio.

Other operating expenses
 
 
Years ended December 31,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
Selling expenses
 
$
(44,417
)
 
$
(41,661
)
 
$
(2,756
)
 
7
 %
Administrative expenses
 
(82,361
)
 
(88,598
)
 
6,237

 
(7
)%
Amortization expense
 
(10,513
)
 
(17,072
)
 
6,559

 
(38
)%
Other operating expenses
 
$
(137,291
)
 
$
(147,331
)
 
$
10,040

 
(7
)%
Other operating expenses decreased $10.0 million, or 7%, for the year ended December 31, 2014 compared to the same period in 2013. Total other operating expenses decreased as a percentage of net sales from 18% for the year ended December 31, 2013

20


to 16% for the year ended December 31, 2014 as a result of generating higher sales while maintaining a steady level of operating expenses.
Selling expenses increased $2.8 million, or 7%, over the same period in 2013 primarily due to the increase in commissions of $1.1 million directly related to sales volume and $1.8 million in payroll costs associated with reallocation of certain personnel between administrative expenses and selling expenses primarily related to product development and purchasing. Foreign currency exchange rate fluctuations had no material impact on the change in selling expenses for the year ended December 31, 2014.
Administrative expenses decreased $6.2 million, or 7%, over the same period in 2013. Lower reorganization and restructuring charges of $7.3 million, consulting fees of $1.3 million, bank fees of $1.0 million, and foreign currency exchange rate fluctuations of $1.2 million were offset by higher compensation, impairment charges and $0.8 million more of advisory fees. Contributing to the decrease was $4.5 million in payroll costs associated with reallocation of certain personnel between administrative expenses, selling expenses and cost of sales primarily related to product development and purchasing. 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 in 2014 compared to 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 $5.0 million higher in 2014 compared to the same period in 2013 as Adjusted EBITDA increased. Share-based compensation was $1.8 million more in 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 $1.1 million were recorded in 2014 related to an office building that was abandoned and the write-off of certain intangible assets.
Amortization expense decreased $6.6 million, or 38% over the same period in 2013 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.

Other expense, net
Other expense increased by $47.5 million, or 70%, for the year ended December 31, 2014, compared to the same period in 2013. Significant components of this change were as follows:
 
 
Years ended December 31,
 
Change
 
 
2014
 
2013
 
Dollars
 
Percent
 
 
(in thousands)
Interest expense, net
 
$
(78,477
)
 
$
(80,830
)
 
$
2,353

 
(3
)%
Foreign currency exchange gains (losses), net
 
(36,298
)
 
13,584

 
(49,882
)
 
367
 %
Loss on extinguishment of debt
 
(617
)
 

 
(617
)
 
100
 %
Other income (expense), net
 
24

 
(635
)
 
659

 
104
 %
Total other expense, net
 
$
(115,368
)
 
$
(67,881
)
 
$
(47,487
)
 
70
 %
Interest expense decreased $2.4 million for the year ended December 31, 2014 primarily due to a decrease in outstanding debt due to principal and excess cash payments, amending the Note Purchase Agreement to reduce the interest rate from 11.75% to 9.00% on the privately placed senior notes, and partial refinancing of debt carried at the highest interest rate of all the Company's debt prior to the amendment.
For the year ended December 31, 2014, foreign currency exchange losses were $36.3 million compared to foreign currency exchange gains of $13.6 million for the same period in 2013. These foreign currency exchange losses were primarily related to the remeasurement of intercompany loans denominated in U.S. dollars for subsidiaries who have a different functional currency. At December 31, 2014 and 2013, we had intercompany loans that required remeasurement in the aggregate amounts of $408.3 million and $473.1 million, respectively. The depreciation of the euro and the Polish złoty on our intercompany loans contributed to most of these unrealized foreign currency exchange losses. The revaluation of intercompany loans denominated in U.S. dollars for subsidiaries whose functional currency is the euro and the Polish zloty resulted in $38.1 million and $11.2, respectively, of the losses recognized. The U.S. dollar to euro exchange rate at December 31, 2013 was $1.00 to €0.7251 compared to $1.00 to €0.8237 at December 31, 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 zł3.5196 at December 31, 2014. These losses were partially offset by a $16.3 million unrealized gain on the fair value marked-to-market adjustment on the cross-currency swaps entered into during 2014. During 2013, the revaluation of intercompany loans denominated in U.S. dollars for subsidiaries whose functional

21


currency is the euro resulted in $12.6 million of the gains recognized. The U.S. dollar to euro exchange rate at December 31, 2012 was $1.00 to €0.7579 compared to $1.00 to €0.7251 at December 31, 2013.
Loss on extinguishment of debt increased by $0.6 million for the year ended December 31, 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).

Income tax benefit (expense)
For the year ended December 31, 2014, income tax benefit was $15.6 million, a decrease in expense of $26.2 million, as compared to income tax expense of $10.5 million for the year ended December 31, 2013. The resulting effective tax rate was a benefit of 35% and an expense of 64% for the year ended December 31, 2014 and 2013, respectively. The 2014 effective tax rate was primarily driven by a mix of earnings in various jurisdictions, releases of uncertain tax benefits as well as valuation allowances related to our U.S. deferred tax assets and certain foreign net operating losses.

Year ended December 31, 2013 compared to the year ended December 31, 2012
The following table presents selected consolidated financial data for the years ended December 31, 2013 and 2012:
 
 
Years ended
December 31,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(in thousands)
 
 
Net sales
 
$
821,055

 
$
742,689

 
$
78,366

 
11
%
Gross profit
 
198,749

 
163,755

 
34,994

 
21
%
Other operating expenses
 
(147,331
)
 
(118,560
)
 
(28,771
)
 
24
%
Other expense, net
 
(67,881
)
 
(49,492
)
 
(18,389
)
 
37
%
Income tax expense
 
(10,541
)
 
(13,877
)
 
3,336

 
NM

Net loss
 
$
(27,004
)
 
$
(18,174
)
 
$
(8,830
)
 
NM

Gross profit as % of net sales
 
24
%
 
22
%
 
 
 
 
Other operating expenses as % of net sales
 
18
%
 
16
%
 
 
 
 
NM = Not Meaningful

Net sales
Our net sales increased $78.4 million, or 11%, for the year ended December 31, 2013 as compared to the same period in 2012. Of the increase, $119.9 million was attributable to a full year of Lankhorst sales and $14.7 million was a result of foreign currency exchange rate fluctuations. Due to the market softness in certain end markets, our organic sales declined $56.5 million over prior year.
Excluding the impacts of foreign currency exchange rates, rope sales declined $30.7 million primarily driven by a reduction in demand in onshore oil and gas activities and weakness in the industrial/infrastructure end markets of Europe and Asia. Sales of rope in the oil and gas end market were down $14.0 million due to continued weakness in the U.S. and Canada onshore markets. According to Baker Hughes, the average North American rig count during 2013 was 2,116 as compared to 2,283 during the same period in 2012, a 7% decrease. At February 7, 2014, there were 2,392 rigs actively drilling in North America, compared to 2,020 rigs at December 31, 2013; an increase of 18.4% from year end 2013 levels. The price of oil increased to $99.98 per barrel and gas increased to $4.78 per mmbtu at February 7, 2014, representing a 2% increase in oil prices and a 12% increase in gas prices from the end of 2013. The sales of rope in the industrial/infrastructure end market declined $17.0 million, primarily in Europe and Asia. According to Eurostat, construction sector production declined 6.3% in 2013 compared to 2012. Rope sales represented 74% of our total consolidated net sales for the year ended December 31, 2013 compared to 74% for the same period in 2012.
Excluding the impacts of foreign currency exchange rates, specialty wire sales declined $25.8 million primarily due to lower demand of prestressed concrete strand related to delays of Mexican governmental infrastructure projects and our decision to reduce production of certain low margin wire products primarily in Mexico. We expect the Mexican infrastructure plan to be executed in 2014. Specialty wire sales represented 16% of our total consolidated net sales for the year ended December 31, 2013 compared to 20% for the same period in 2012.

22


The Lankhorst acquisition contributed engineered products to our product mix, and as a result we do not have comparable results period over period. Sales of engineered products were $85.9 million for the year ended December 31, 2013, or 10% of our total consolidated net sales. With an increase in offshore oil and gas contracts, the demand for certain engineered products that serve that end market is growing.

Gross profit
Gross profit increased $35.0 million but gross profit as a percentage of sales (“gross margin”) decreased to 24% in 2013 from 22% in 2012. Improved margin performance is attributable to growth in higher margin end markets, reduced sales of low margin wire products and cost reduction initiatives. These improvements were partially offset by a $3.0 million write-down of inventory related to our inventory optimization program. In 2012, gross margin was negatively impacted 1% due to the amortization of a $6.8 million purchase accounting inventory step-up adjustment.

Other operating expenses
 
 
Years ended
December 31,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(in thousands)
 
 
Selling expenses
 
$
(41,661
)
 
$
(32,527
)
 
$
(9,134
)
 
28
%
Administrative expenses
 
(88,598
)
 
(71,267
)
 
(17,331
)
 
24
%
Amortization expense
 
(17,072
)
 
(14,766
)
 
(2,306
)
 
16
%
Other operating expenses
 
$
(147,331
)
 
$
(118,560
)
 
$
(28,771
)
 
24
%
Other operating expenses increased $28.8 million, or 24%, for the year ended December 31, 2013 compared to the same period in 2012. Our acquisition of Lankhorst accounted for $20.5 million of the increase. Total other operating expenses increased as a percentage of net sales from 16% for the year ended December 31, 2012 to 18% for the year ended December 31, 2013.
Selling expenses increased $9.1 million, or 28%, in 2012 over the same period in 2012. Of the increase, approximately $7.1 million related to a full year of Lankhorst selling expenses. The remaining increase was primarily due to additional payroll costs associated with our investment in our international sales force. Foreign currency exchange rate fluctuations had no material impact on the change.
Administrative expenses increased $17.3 million, or 24%, in 2012 over the same period in 2012. Of the increase, approximately $12.0 million related to a full year of Lankhorst administrative expenses. During 2013, we recognized $2.1 million more in reorganization and restructuring charges primarily related to changes in our executive team, among other positions. Share-based compensation was $4.5 million higher due to the incremental cost associated with stock option modifications and new awards granted during 2013, partially offset by the reversal of previously recognized expense associated with forfeitures. Compensation costs have increased approximately $6.8 million due to higher incentive bonuses earned, new positions and salary increases during the year ended December 31, 2013. Advisory fees were $1.1 million more than the same period in 2012 due to a higher projected Adjusted EBITDA for 2013. These increases in administrative expenses were partially offset by lower acquisition costs of $10.9 million during 2013 as compared to 2012. Administrative expenses increased $0.9 million for the year ended December 31, 2013 due to foreign currency exchange rate fluctuations.
Amortization expense increased $2.3 million, or 16% over the same period in 2012 primarily due to the amortization of Lankhorst's intangibles.
 

23


Other expense, net
Other expense decreased by $18.4 million, or 37%, for the year ended December 31, 2013, compared to the same period in 2012. Significant components of this change were as follows:
 
 
Years ended
December 31,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(in thousands)
 
 
Interest expense, net
 
$
(80,830
)
 
$
(64,842
)
 
$
(15,988
)
 
25
 %
Foreign currency exchange gains (losses)
 
13,584

 
20,170

 
(6,586
)
 
(33
)%
Loss on extinguishment of debt
 

 
(2,358
)
 
2,358

 
(100
)%
Other expense, net
 
(635
)
 
(2,462
)
 
1,827

 
(74
)%
Other expense, net
 
$
(67,881
)
 
$
(49,492
)
 
$
(18,389
)
 
37
 %
Interest expense increased $16.0 million for the year ended December 31, 2013 primarily due to additional debt outstanding to fund the Lankhorst acquisition and refinance existing debt. On July 12, 2012, we issued $82.5 million aggregate principal amount of 9.00% Senior Notes resulting in approximately $5.5 million of increased interest expense. Also on July 12, 2012, we retired the Term Loan due 2014 with a portion of the proceeds from the $335.0 million Term Loan due 2017, resulting in $7.9 million of net additional interest expense. The amortization of debt issuance costs and the discount related to these new issuances resulted in an additional $1.1 million in interest expense for the year ended December 31, 2013. Additionally, we capitalized $2.3 million more in interest in 2012 compared to 2013, resulting in more interest expense this year. Prior to 2012, we did not capitalize interest on construction in progress for property, plant and equipment at our Mexican subsidiaries. During the first quarter of 2012, we corrected this error and capitalized $1.9 million of interest.
For the year ended December 31, 2013, foreign currency exchange gains were $13.6 million compared to foreign currency exchange gains of $20.2 million for the same period in 2012. At December 31, 2013 and 2012, we had intercompany loans that required remeasurement in the aggregate amounts of $473.1 million and $488.8 million, respectively. The revaluation of intercompany loans denominated in U.S. dollars for subsidiaries whose functional currency is the euro resulted in $12.6 million of the gains recognized. The U.S. dollar to euro exchange rate at December 31, 2012 was $1.00 to €0.7579 compared to $1.00 to €0.7251 at December 31, 2013. During 2012, the revaluation of $212.3 million new intercompany loans denominated in U.S. dollars at our Lankhorst subsidiaries contributed to $16.6 million of the gains recognized. The revaluation of other intercompany loans denominated in U.S. dollars for subsidiaries whose functional currency is the euro and Polish zloty contributed to $4.9 million and $6.2 million, respectively, of foreign currency exchange gains. These gains were offset by a $7.3 million foreign currency exchange loss related to the settlement of two foreign currency forward contracts on July 12, 2012 associated with the purchase of Lankhorst and refinancing transactions.
Loss on extinguishment of debt decreased by $2.4 million for the year ended December 31, 2013 compared to the same period in 2012. In July 2012, we wrote-off $2.4 million of unamortized debt issuance costs associated with the retirement of the Term Loan due 2014, the Revolving Credit Agreement, the CASAR Revolving Credit Agreement and the Euro Facility.

Income tax expense
For the year ended December 31, 2013, our income tax expense was $10.5 million, an increase of $3.3 million, as compared to income tax expense of $13.9 million for the year ended December 31, 2012. The resulting effective tax rate was an expense of 64% and an expense of 323% for the year ended December 31, 2013 and 2012, respectively. The 2013 effective tax rate was primarily driven by an increase in the U.S. valuation allowance.

Adjusted EBITDA and Acquisition 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 (“Paine & Partners”), (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, systems 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

24


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. We define Acquisition Adjusted EBITDA, another Non-GAAP Financial Measure, as Adjusted EBITDA plus pre-acquisition EBITDA of acquired companies. Management uses Adjusted EBITDA and Acquisition Adjusted EBITDA to compare our financial measures to those of our peers and for debt covenant calculations. 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 and Acquisition Adjusted EBITDA:
 
 
Years ended December 31,
 
 
2014
 
2013
 
2012
 
 
(in thousands)
Net loss (GAAP)
 
$
(28,773
)
 
$
(27,004
)
 
$
(18,174
)
Plus:
 
 
 
 
 
 
Interest expense, net
 
78,477

 
80,830

 
64,842

Income tax expense (benefit)
 
(15,641
)
 
10,541

 
13,877

Depreciation and amortization
 
50,558

 
58,534

 
47,493

Foreign currency exchange losses (gains), net
 
36,298

 
(13,584
)
 
(20,170
)
Share-based compensation
 
7,816

 
5,969

 
1,466

Other expense (income), net
 
(24
)
 
635

 
2,462

Loss on extinguishment of debt
 
617

 

 
2,358

Acquisition costs (a)
 
1,453

 
369

 
11,304

Purchase accounting (inventory step-up and other) (b)
 

 
2,191

 
8,471

Advisory fees (c)
 
5,397

 
4,551

 
3,438

Reorganization and restructuring charges (d)
 
2,234

 
9,548

 
6,181

Non- cash impairment of assets
 
1,144

 

 

Effect of inventory optimization program (e)
 
9,244

 
2,970

 

Other adjustments
 
2,209

 
3,643

 
4,487

Adjusted EBITDA (Non-GAAP)
 
$
151,009

 
$
139,193

 
$
128,035

Lankhorst pre-acquisition EBITDA (f)
 

 

 
15,908

Acquisition Adjusted EBITDA (Non-GAAP)
 
$
151,009

 
$
139,193

 
$
143,943


(a)
Acquisition costs, including costs directly attributable to acquisitions and certain start-up activities, are recorded in Administrative expenses in the consolidated statements of operations.
(b)
The amortization of purchase accounting inventory step-up adjustments, as well as certain other purchase accounting adjustments, are recorded in Cost of sales in the consolidated statements of operations.
(c)
Advisory fees consist of the management fee paid to Paine & Partners for administrative and other support services, reimbursement of travel and other out-of-pocket costs incurred on our behalf and external fees incurred on Paine & Partners' behalf related to business process improvements. Also, payments to certain members of the board of directors are included. Advisory fees are recorded in Administrative expenses in the consolidated statements of operations.
(d)
Reorganization and restructuring charges consist of severance costs related to headcount reductions, reorganizations and consultation fees for legal entity restructurings and synergies from acquisitions and fees associated with any replacement of key executives. Reorganization and restructuring charges are recorded in Administrative expenses in the consolidated statements of operations.
(e)
As a result of the Inventory Optimization Program, we recorded a charge in Cost of Sales to adjust the inventory value to its net realizable value.
(f)
The Lankhorst acquisition closed on July 12, 2012 and its results have been included in our consolidated statements of operations since the date of acquisition. Pro forma adjustments are included for the 193 days ended July 11, 2012 as if the acquisition had been consummated on the first day of 2012 for comparative purposes. These amounts represent the net income of Lankhorst before deductions for interest, taxes, depreciation and amortization. Also, we adjusted for the purchase of the remaining 40% of our Australian subsidiary and disposal of the yachting division and certain other

25


transactions related to percentage of completion accounting and start-up costs. The amount for the 193-day period ended July 11, 2012 were converted from euros to U.S. dollars using $1.00 to €0.7724, the average income statement exchange rate for the period.

LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of liquidity consist of cash from operations and borrowings under our Revolving Loan Facility. Our principal uses of cash are to fund working capital and capital expenditures, 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.
For the year ended December 31, 2014, we generated cash flow from operating activities of $59.4 million driven primarily by a continued decrease in Adjusted Working Capital due to management of accounts receivable, inventory and accounts payable. Adjusted Working Capital, a Non-GAAP Financial Measure defined as accounts receivable plus inventories less accounts payable, decreased $31.4 million due to execution upon our initiative to generate cash through improved collection efforts and focus on operational efficiencies. However, we believe there continues to be more opportunity in working capital and will further implement our initiatives in 2015.
Deleveraging remains another key initiative and we will continue to apply excess cash towards our outstanding debt balances. We reduced our Net Debt $28.5 million during the year ended December 31, 2014. For the definition and reconciliation of total debt to Net Debt, see within this section (MD&A). 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. The 9.00% Senior Notes carried the highest interest rate of all of our debt prior to the amendment. Also, we paid off the Polish Debt in December 2014. Total available liquidity, defined as availability under our Revolving Loan Facility plus cash and cash equivalents, was $133.5 million at December 31, 2014. Availability under the Revolving Loan Facility is based upon the maximum borrowing capacity of $145.0 million, less outstanding borrowings, letters of credit and further restricted by certain covenants in our financing agreements. Although our outstanding revolver balance was $68.8 million as of December 31, 2014, our available cash balance to apply against our borrowings was $58.2 million.
We reinvest the earnings of substantially all of our non-U.S. subsidiaries in those respective operations. The foreign operating subsidiaries use cash generated from earnings to fund working capital, invest in capital expenditures and service interest and principal payments on intercompany debt. Our outstanding debt is issued by the U.S. operating subsidiary and there are intercompany loans within the corporate legal structure that are paid with earnings from the operating subsidiaries in foreign jurisdictions to provide liquidity in the U.S. for interest and principal payments on our outstanding debt. Of the consolidated cash and cash equivalents balance of $58.2 million at December 31, 2014, cash and cash equivalents held in foreign countries were $52.9 million, of which $9.5 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 available borrowing under our Revolving Loan Facility will be adequate to fund anticipated operating, capital and debt service requirements and other commitments over the next 12 months.

Working Capital Management
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 $31.4 million from $300.6 million as of December 31, 2013 to $269.2 million as of December 31, 2014 due to execution upon our initiatives. Due to strong collection efforts, days sales outstanding were 61 at December 31, 2014 compared to 65 at December 31, 2013. The Company continued its initiatives in procurement to promote cost savings and negotiate extended terms with key suppliers. Days payables outstanding were 56 at December 31, 2014 compared to 45 at December 31, 2013. We made significant progress in reducing inventory levels during 2014, especially with our Inventory Optimization Program. Our Inventory Optimization Program was designed to generate cash from the sale of inventory in the near term instead of holding the inventory for longer periods of time.  This program has led to selling certain inventory at lower than normal prices or even below cost in some instances.

26


See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. The following is a reconciliation of working capital to Adjusted Working Capital:
 
 
December 31, 2014
 
December 31, 2013
 
 
(in thousands)
Accounts receivable
 
$
143,068

 
$
148,564

Inventories
 
225,075

 
228,245

Accounts payable
 
(98,914
)
 
(76,181
)
Adjusted Working Capital (Non-GAAP)
 
$
269,229

 
$
300,628

Plus: All other current assets
 
78,908

 
55,999

Less: All other current liabilities
 
(65,036
)
 
(56,539
)
Working capital (GAAP)
 
$
283,101

 
$
300,088


Cash Flow Information
The following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31, 2014, 2013 and 2012, respectively.
 
 
Years ended December 31,
 
 
2014
 
2013
 
2012
 
 
(in thousands)
Cash flows provided by (used in)
 
 
 
 
 
 
Operating activities
 
$
59,418

 
$
55,151

 
$
13,554

Investing activities
 
(27,494
)
 
(29,353
)
 
(210,232
)
Financing activities
 
(4,865
)
 
(40,980
)
 
214,599

Effect of exchange rates on cash and cash equivalents
 
(3,851
)
 
925

 
3,660

Net increase (decrease) in cash and cash equivalents
 
$
23,208

 
$
(14,257
)
 
$
21,581

Cash and cash equivalents, beginning of year
 
34,987

 
49,244

 
27,663

Cash and cash equivalents, end of year
 
$
58,195

 
$
34,987

 
$
49,244


Cash from Operating Activities
 
 
Years ended December 31,
 
 
2014
 
2013
 
2012
 
 
(in thousands)
Net loss
 
$
(28,773
)
 
$
(27,004
)

$
(18,174
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
88,126


61,698

 
39,335

Changes in assets and liabilities
 
65


20,457

 
(7,607
)
Net cash provided by operating activities
 
$
59,418

 
$
55,151

 
$
13,554


The slight increase in cash flows from operating activities during 2014, as compared to 2013, was due primarily to management of working capital and an increase in cash earnings. Cash earnings is our net loss adjusted for non-cash items, such as depreciation and amortization among other reconciling items.







27


Cash from Investing Activities
 
 
Years ended December 31,
 
 
2014
 
2013
 
2012
 
 
(in thousands)
Capital expenditures
 
$
(24,872
)
 
$
(29,318
)
 
$
(41,422
)
Acquisition of business, net of cash acquired
 
(4,573
)
 

 
(169,243
)
Other investing activities
 
1,951

 
(35
)
 
433

Net cash used in investing activities
 
$
(27,494
)
 
$
(29,353
)
 
$
(210,232
)
Cash flows from investing activities consist primarily of capital expenditures that are funded with cash from operations and draws on our Revolving Loan Facility when necessary. We will continue reinvesting in our business in 2015 to capitalize on our long-term growth opportunities with increased capital expenditures. As of December 31, 2014, the Company had $4.8 million of committed capital expenditures for 2015. In the past three years, we have completed two acquisitions. We expect to continue seeking and completing strategic business acquisitions that are complementary to our business.

Cash from Financing Activities
 
 
Years ended December 31,
 
 
2014

2013
 
2012
 
 
(in thousands)
Proceeds from issuance of long-term debt
 
$

 
$

 
$
414,150

Debt issuance costs paid
 

 
(1,880
)
 
(16,819
)
Repayment of long-term debt
 
(41,178
)
 
(20,824
)
 
(164,439
)
Net borrowings (repayments) under revolving credit agreements
 
36,750

 
(18,276
)
 
5,580

Acquisition installment payments
 

 

 
(9,418
)
Repurchase of common stock
 

 

 
(14,465
)
Other, net
 
(437
)
 

 
10

Net cash provided by (used in) financing activities
 
$
(4,865
)
 
$
(40,980
)
 
$
214,599

Cash flows from financing activities result primarily from borrowings under our revolving credit agreements and payments on long-term debt. During 2014, we paid off the Polish Debt, redeemed $26.5 million of the privately placed senior notes using cash drawn under the Revolving Loan Facility and paid down $6.5 million of the Term Loan due 2017 outstanding balance. We plan to pay $19.1 million on our debt in 2015 related to principal payments and other required payments. Also, if economic conditions, business opportunities or other factors present themselves, we may refinance some of our debt. During 2012, we issued debt to finance the Lankhorst acquisition and refinance existing debt. Excluding the repurchase of common stock in 2012, certain debt covenants restrict repurchase activity to $2.5 million each year.

Long-term Debt
We have historically funded our growth, capital spending and acquisitions through a combination of operating cash flows and debt financing. Our debt financing at December 31, 2014 consisted primarily of long-term debt. For a detailed discussion of our borrowings, see Note 7—“Borrowings” to our consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this annual report.

Revolving Loan Facility and Term Loan due 2017 – On July 12, 2012, we entered into a credit agreement (“Credit Agreement”) with Goldman Sachs Bank USA and Deutsche Bank Securities Inc., as joint lead arrangers, and Fifth Third Bank, as the administrative and collateral agent, that provides for a $335.0 million senior secured term loan (“Term Loan due 2017”) and a $145.0 million senior secured revolving credit facility (“Revolving Loan Facility” and together with the Term Loan due 2017, the “Credit Facilities”), with sub-limits for letters of credit and swingline loans. The Term Loan due 2017 was issued at an original issue discount of 1.00% or $3.4 million. The Credit Facilities mature on February 15, 2017. The Term Loan due 2017 requires quarterly principal payments of approximately $0.8 million, which can be adjusted downward as a result of the annual excess cash flow payment, if applicable, as defined in the Credit Agreement. As of December 31, 2014 and 2013, the Company calculated an annual excess cash flow payment of $13.9 million and $3.1 million, respectively, which is classified in Current maturities on long-term debt in the consolidated balance sheets. A 2013 amendment to the Credit Agreement required proceeds from the Inventory Optimization Program be used to pay down the Term Loan due 2017 balance. We calculated a payment of

28


$1.8 million from these proceeds at December 31, 2014, which is classified in Current maturities on long-term debt in the consolidated balance sheet.

Borrowings under the Credit Facilities incur interest at a variable rate based upon the nature of the loan under the facility. Loans are designated as either (i) Alternate Base Rate (“ABR”) or (ii) Eurodollar loans. ABR loans incur interest at the higher of (x) the prime rate of Fifth Third Bank or (y) the federal funds rate plus 1/2 of 1.00% (the higher of (x) or (y) equals the “Base Rate”), plus a margin of 3.75%. Eurodollar loans incur interest at the applicable LIBOR, plus a margin of 4.75%.  A Eurodollar loan is distinguished from an ABR loan in that a Eurodollar loan bears interest in reference to the applicable LIBOR. The Base Rate applicable to the Term Loan is subject to a 2.25% floor, and the LIBOR applicable to the Term Loan is subject to a 1.25% floor.  In addition to paying interest on the outstanding principal balance under the Credit Agreement, we must pay a commitment fee to the lenders under the Revolving Loan Facility for unutilized commitments at a rate ranging from approximately 0.38% to 0.50%, based on our consolidated leverage. We must also pay customary arrangement fees, upfront fees, administration fees and letter of credit fees. Interest on ABR loans is payable on the last business day of each March, June, September and December, and interest on Eurodollar loans is payable on the last day of the applicable interest period for loans of three months or less and, for loans of more than three months, at the end of each three month period starting on the first day of the applicable interest period. The interest rate on the Term Loan due 2017 was 6%, 6% and 6% at December 31, 2014, 2013, and 2012, respectively. The weighted average interest rate on the Revolving Loan Facility was 5.38%, 4.95% and 7.00% at December 31, 2014, 2013, and 2012, respectively.

The Credit Agreement contains covenants that restrict the ability of the Company and guarantors to take certain actions,
including, among other things and subject to certain significant exceptions: incurring indebtedness, incurring liens, paying
dividends and making other distributions, limiting capital expenditures, engaging in mergers and acquisitions, selling property,
engaging in transactions with affiliates or amending organizational documents. The Credit Agreement requires us to comply
with certain financial ratio maintenance covenants, including a maximum consolidated net leverage ratio and a minimum
consolidated interest coverage ratio. The Credit Agreement also contains customary affirmative covenants and events of
default.

9.00% Senior Notes (formerly the 11.75% Senior Notes) – On July 12, 2012, we issued $82.5 million aggregate principal amount of unsecured 11.75% Senior Notes due May 15, 2017 in a private placement pursuant to a note purchase agreement (the “Note Purchase Agreement”). On July 16, 2014, we entered into an amendment to the Note Purchase Agreement that reduced the interest rate from 11.75% to 9.00% on these senior notes ("9.00% Senior Notes") 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 available cash and cash drawn under the Revolving Loan Facility.

9.50% Senior Notes – On May 19, 2010, we issued $275.0 million aggregate principal amount of unsecured 9.50% Senior Notes due May 15, 2017 ("9.50% Senior Notes") at an original issue discount of $6.8 million, or 97.53%, of their aggregate principal amount under the indenture governing the 9.50% Senior Notes (the “Indenture”). On June 10, 2011, we issued an additional $150.0 million aggregate principal amount of unsecured 9.50% Senior Notes at a premium of $6.2 million, or 104.75%, of their aggregate principal amount under the Indenture. Interest on the 9.50% Senior Notes is due semi-annually on May 15th and November 15th of each year. The effective interest rate on the aggregate principal amount of 9.50% Senior Notes, including debt issuance costs, is 10.39%. The 9.50% Senior Notes are redeemable at our option, in whole or in part, during the twelve-month period beginning on May 15, 2014 at 102.38% and 2015 and thereafter at 100.00%. In the event of a change in control, we may repurchase the 9.50% Senior Notes at a price equal to 101.00% of the principal amount, plus accrued and unpaid interest.

Net Debt
Net Debt decreased from $845.3 million at December 31, 2013 to $816.8 million at December 31, 2014 and our Net Leverage ratio was 5.42x at December 31, 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.

29


The following is a reconciliation of total debt to Net Debt:
 
 
December 31, 2014
 
December 31, 2013
 
 
(in thousands)
Borrowings under Revolving Loan Facility
 
$
68,750

 
$
32,000

Polish Debt due 2014
 

 
8,860

Term Loan due 2017
 
324,362

 
330,813

9.00% Senior Notes due 2017
 
56,000

 
82,500

9.50% Senior Notes due 2017
 
425,000

 
425,000

Other indebtedness
 
157

 
688

Capital lease obligations
 
2,328

 
3,333

Total debt at face value plus capital lease obligations (GAAP)
 
$
876,597

 
$
883,194

Less: Cash and cash equivalents
 
(58,195
)
 
(34,987
)
Less: Restricted cash
 
(1,565
)
 
(2,887
)
Net Debt (Non-GAAP)
 
$
816,837

 
$
845,320


As of December 31, 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 at December 31, 2014 compared to the maximum ratio of 3.25x. The maximum Senior Secured Net Leverage Ratio will step-down to 3.00x effective June 30, 2016. As defined in our respective credit agreements, the interest coverage ratio was 2.14x at December 31, 2014 compared to a required ratio of no less than 1.75x.

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. We generated Free Cash Flow of $28.5 million and $27.2 million for the years ended December 31, 2014 and 2013, respectively, evidencing our intent to deleverage. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures.
 
 
Years ended December 31,
 
 
2014
 
2013
 
 
(in thousands)
Net cash provided by operating activities (GAAP)
 
$
59,418

 
$
55,151

Less: capital expenditures
 
(24,872
)
 
(29,318
)
Less: acquisition of business and other investing activities
 
(2,622
)
 
(35
)
Effect of exchange rates on cash and cash equivalents
 
(3,851
)
 
925

Other items
 
410

 
494

Free Cash Flow (Non-GAAP)
 
$
28,483

 
$
27,217


Contractual Obligations and Commitments
The following table provides information regarding our contractual obligations and commitments as of December 31, 2014. Amounts payable in a currency other than the U.S. dollar have been translated using the foreign currency exchange rates in effect as of year end.
We believe we will be able to fund these obligations through cash generated from our operations, availability under our Revolving Loan Facility, and refinancing or changes to our capital structure. Our ability to refinance or change our capital structure is dependent upon certain factors that are outside of management's control. There can be no assurance that we will be successful at any such efforts, if it were necessary to do so in order to meet these obligations. Our contractual obligations will

30


have an impact on our future liquidity.
 
Payments due by period
 
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Obligations:
(in thousands)
Long-term debt (1)
 
$
19,113

 
$
3,318

 
$
851,838

 
$

 
$

 
$

 
$
874,269

Interest on long-term debt (2)
 
67,441

 
67,292

 
25,601

 

 

 

 
160,334

Capital leases
 
1,728

 
323

 
138

 
122

 
299

 
1

 
2,611

Operating leases
 
4,890

 
3,722

 
2,311

 
1,193

 
833

 
1,953

 
14,902

Pension benefits
 
213

 
277

 
315

 
292

 
343

 
1,883

 
3,323

Total contractual obligations
 
$
93,385

 
$
74,932

 
$
880,203

 
$
1,607

 
$
1,475

 
$
3,837

 
$
1,055,439

(1) 
The Revolving Loan Facility is classified as long-term and amounts drawn are denoted as due based on the contractual maturity date.
(2) 
Amounts include contractual interest payments using the interest rates as of December 31, 2014 applicable to our variable interest debt instruments and stated fixed rates for all other debt instruments.
Income Taxes - Due to the uncertainty with respect to the timing of cash payments, the table above excludes unrecognized tax benefits. At December 31, 2014, unrecognized tax benefits of $7.3 million, including interest and penalties, were classified on our consolidated balance sheet in Other non-current liabilities and Non-current deferred income tax liabilities. We do not expect to make significant payments on these liabilities within the next year. For further information, refer to Note 12—“Income Taxes” to our consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this annual report.

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. 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
The judgments, assumptions and estimates used by management to prepare our U.S. GAAP consolidated financial statements are based on our historical experiences, current trends and understanding of current facts and circumstances. However, actual results could differ from our judgments, assumptions and estimates, and such differences could be material. Some of our accounting estimates are considered critical as they are both important to the portrayal of our financial condition and results, and require management to make significant, subjective and complex judgments. We believe the following accounting estimates are most critical to aid in fully understanding and evaluating our results. Note 2—“Summary of Significant Accounting Policies” to our consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this annual report expands upon the discussion of our Company's accounting policies.

Inventories Reserve—We write down our inventory for excess, slow moving and obsolescence to the net realizable value based upon assumptions about future demand and market conditions, such as potential uses, likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If actual market conditions are less favorable than those we project, additional write-downs may be required. As of December 31, 2014, the estimated reserve for excess, slow moving and obsolete inventory was $7.4 million or 3.3% of the gross inventory balance. During 2014, we recorded a charge of $9.2 million to adjust certain inventory to its net realizable value in connection with our Inventory Optimization Program.

Impairment of property, plant and equipment and finite-lived intangible assets—On a quarterly basis, we review our long-lived asset groups for indicators, such as, a significant decrease in the market price of an asset group, a significant adverse change in the manner in which we are using an asset group, or its physical condition. For purposes of this test, we group long-lived assets at the lowest level of identifiable cash flows, which we have determined to be our key manufacturing locations or combinations thereof. The recoverability of the carrying amount is tested by estimating the undiscounted future cash flows anticipated to be generated by the particular asset(s) being tested for impairment. The key assumptions in the discounted cash flow analysis are the discount rate and the projected cash flows. If our assumptions on discount rates and future cash flows change as a result of

31


events or circumstances, and we believe these assets may have declined in value, we may record impairment charges, resulting in lower profits.

Impairment of goodwill and indefinite-lived intangible assets—For our annual testing period of October 1st, we performed either step 0 or step 1 of the two-step goodwill test for our reporting units as existed on October 1st. We used a discounted cash flow analysis utilizing Level 3 inputs, a guideline public company market approach, and a comparable transaction market approach to determine the fair value of the reporting units.  Quantitative factors considered included, but were not limited to, assumptions about future revenue and cost growth rates, discount rates, and the amount of future capital expenditures. As a result of the 2013 assessment, we concluded that the fair values of each of our reporting units exceeded their carrying amounts by a significant margin.

During 2014, we performed a step 1 goodwill test for our one reporting unit as of October 1st. Inputs considered for the 2014 goodwill impairment assessment included, but were not limited to: assumptions about future revenue and cost growth rates, discount rates, and companies which we identified as peers. As a result of the 2014 assessment, we concluded that the fair value of our reporting unit exceeded the carrying amount by a significant margin.

During 2014, we performed a quantitative impairment assessment relative to our trade names.  We used the relief from royalty method to determine the fair value of the brands. Quantitative factors considered for the 2014 brand name impairment assessment included, but were not limited to: revenue projections, growth rates, royalty rates, discount rates, and tax rates.  As a result of this assessment, it was determined that the fair value of these assets exceeded their carrying amounts. The results of the indefinite-lived intangible assets impairment test showed an excess of fair value to book value.

Valuation of intangibles associated with business combinations—We are required to estimate the fair value and useful lives of assets acquired and liabilities assumed, including intangible assets, in a business combination. Under the income approach valuation technique, we primarily use variations of the discounted cash flow method, such as the relief from royalty method and excess earnings method to value intangibles. Judgment used in the valuation of intangible assets can include the cash flows that an asset is expected to generate per management’s projections, royalty rates, growth rates, customer attrition rates, obsolescence curve rates, present value factors, tax shield benefit factors, the weighted average cost of capital and discount rates. We believe that the assumptions made are comparable to those that market participants would use in making estimates of fair value. Additionally, determining the expected life of an intangible asset requires management’s judgment and is based on the evaluation of various factors, including the competitive environment and customer history. We have determined our trade names to have indefinite lives because we plan to use these names into perpetuity. If actual results are not consistent with our estimates, we may be exposed to impairment charges.

Income taxes—We are required to estimate our income taxes in each of the jurisdictions in which we operate. Significant judgment is required in determining our provision for income taxes, our deferred taxes including valuation allowances required against the net deferred tax assets, and evaluating our tax positions. Our income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we recorded unrecognized tax benefits for the positions that we believe may be challenged by these taxing authorities based on technical merits. The total amount of unrecognized tax benefits as of December 31, 2014 was $7.3 million, including accrued interest and penalties. If the unrecognized tax benefits were recognized in our consolidated financial statements, $7.3 million would affect income tax expense and our related effective tax rate.

The accounting estimate for valuation allowances against deferred tax assets is a critical accounting estimate because judgment is required in assessing the likely future utilization of our deferred tax assets. The Company considers all positive and negative evidences in making this assessment, including: (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carryforwards, (iii) taxable income in prior carryback years and (iv) tax planning strategies that would, if necessary, be implemented. In 2014, we concluded it was necessary to maintain a valuation allowance of $49.8 million on $79.5 million of deferred tax assets as we do not expect to realize the tax benefits arising from losses in the U.S. and interest deductions in the U.S. and Portugal. The gross deferred tax assets primarily related to limitations on interest deductions in the U.S. and Portugal, and losses recognized in the U.S. The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular issue may require the use of cash and could result in increased income tax expense. Favorable resolution could result in reduced income tax expense.




32


RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 2—“Summary of Significant Accounting Policies” to our consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this annual report for a discussion of recently issued accounting standards.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential economic loss arising from adverse changes in market factors. Our exposure to financial market risks results primarily from fluctuations in commodity prices, interest rates and foreign currency exchange rates. We normally
do not use derivative financial instruments to hedge these exposures (except as described below), nor do we use derivatives for trading purposes.

Commodity Price Risk. In our manufacturing operations, we rely heavily on certain raw materials (principally rod, polymers and synthetic fibers) and energy sources (principally electricity, natural gas and propane). We are exposed to changes in the prices of these raw materials and energy sources due to, among other things, fluctuations in foreign and domestic production capacity, availability, consumption and foreign currency exchange rates. Our raw material and energy costs are unpredictable and subject to a variety of factors outside our control. We monitor the cost of our raw materials and pass along price increases and decreases accordingly. We have not entered into any commodity contracts to manage the exposure on forecasted purchases of raw materials.

Interest Rate Risk. Our variable rate debt may be sensitive to fluctuations in interest rates. Variable-rate indebtedness totaled $393.1 million at December 31, 2014. Our Term Loan due 2017 and Revolving Loan Facility contain variable rate debt, which accrues interest based on target interest indexes (LIBOR and prime) subject to certain floors, plus an applicable spread as set forth in the Credit Agreement. In our present condition, a hypothetical 10% increase in LIBOR would not result in any additional interest expense on our Term Loan due 2017 balance as the current variable rate would still be below the 1.25% LIBOR floor. Also, a hypothetical 10% increase in the weighted average interest rate on our borrowings under the Revolving Loan Facility would not have a material impact on interest expense considering the outstanding amount at December 31, 2014. Actual changes in interest rates may differ from hypothetical changes.

Foreign Currency Exchange Rate Risk.  Fluctuations in foreign currency exchange rates result in increases or decreases in our foreign currency exchange gains (losses). Our consolidated financial statements are prepared in U.S. dollars, but the assets and liabilities of certain of our foreign subsidiaries are denominated in foreign currencies, which create exposure to changes in foreign currency exchange rates. The activity in the Foreign currency exchange gains (losses), net line item included in our consolidated statements of operations, primarily results from foreign currency exchange rate fluctuations related to intercompany loans denominated in U.S. dollars with subsidiaries whose functional currency is the euro, Polish złoty and Mexican peso. At December 31, 2014, we had intercompany loans that required remeasurement in the aggregate amount of $408.3 million. For the year ended December 31, 2014, we recognized unrealized foreign currency exchange losses of $51.4 million on these intercompany loans. The foreign currency exchange gains and losses recognized as a result of the remeasurement are unrealized until such time that the loans are paid. The unrealized foreign currency exchange gains (losses) due to a hypothetical 10% change in the U.S. dollar to the euro exchange rate, the Polish złoty exchange rate and the Mexican peso exchange rate are shown in the following table:

 
Year ended December 31,
 
2014
 
(in thousands)
 
+10%
-10%
Unrealized foreign currency exchange gains (losses) due to 10% rate movement:

 
 
U.S. dollar to euro
$
(82,375
)
$
6,153

U.S. dollar to Polish złoty
(20,716
)
(1,598
)
U.S. dollar to Mexican peso
(2,620
)
(1,340
)
From time to time, as market conditions indicate, we will enter into foreign currency contracts to manage the risks associated with anticipated future transactions and current balance sheet positions that are in currencies other than the functional

33


currencies of our operations. 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.
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 foreign currency exchange rate movement of 10% as of December 31, 2014.
 
 
Year ended December 31,
 
 
2014
 
 
(in thousands)
Cross-currency swaps:
 
 
Notional amount
 
$
300,000

Unrealized gain
 
16,133

Change in fair value due to 10% foreign currency exchange rate movement
 
34,124

Refer to Note 8—“Derivative Financial Instruments” to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this annual report.


34


Item 8.Financial Statements and Supplementary Data


 

35








Report of Independent Registered Public Accounting Firm
The Board of Directors
WireCo WorldGroup (Cayman) Inc.:
We have audited the accompanying consolidated balance sheets of WireCo WorldGroup (Cayman) Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WireCo WorldGroup (Cayman) Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Kansas City, Missouri
March 3, 2015




36

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)


 
December 31, 2014
 
December 31, 2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
58,195

 
$
34,987

Restricted cash
1,565

 
2,887

Accounts receivable, net
143,068

 
148,564

Other receivables
2,305

 
7,196

Inventories, net
225,075

 
228,245

Current deferred income tax assets
3,867

 
5,468

Prepaid expenses and other current assets
12,976

 
5,461

Total current assets
$
447,051

 
$
432,808

Property, plant and equipment, net
319,198

 
366,338

Intangible assets, net
125,578

 
150,287

Goodwill
188,925

 
198,329

Deferred financing fees, net
15,425

 
22,702

Non-current deferred income tax assets
1,123

 
8,078

Other non-current assets
27,551

 
20,673

Total assets
$
1,124,851

 
$
1,199,215

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
19,113

 
$
14,933

Interest payable
6,322

 
6,731

Accounts payable
98,914

 
76,181

Accrued compensation and benefits
19,117

 
17,873

Current deferred income tax liabilities
311

 
742

Other current liabilities
20,173

 
16,260

Total current liabilities
$
163,950

 
$
132,720

Long-term debt, excluding current maturities
854,042

 
862,492

Non-current deferred income tax liabilities
46,735

 
75,763

Other non-current liabilities
15,861

 
32,007

Total liabilities
$
1,080,588

 
$
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
232,883

 
225,106

Accumulated other comprehensive loss
(48,579
)
 
(18,527
)
Accumulated deficit
(125,626
)
 
(94,809
)
Treasury stock, at cost; 49,169 shares at December 31, 2014 and 2013
(14,465
)
 
(14,465
)
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
$
44,234

 
$
97,326

Non-controlling interests
29

 
(1,093
)
Total stockholders’ equity
$
44,263

 
$
96,233

Total liabilities and stockholders’ equity
$
1,124,851

 
$
1,199,215

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


37

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


 
 
Years ended December 31,
 
 
2014
 
2013
 
2012
Net sales
 
$
856,760

 
$
821,055

 
$
742,689

Cost of sales
 
(648,515
)
 
(622,306
)
 
(578,934
)
Gross profit
 
208,245

 
198,749

 
163,755

Other operating expenses:
 

 

 

Selling expenses
 
(44,417
)
 
(41,661
)
 
(32,527
)
Administrative expenses
 
(82,361
)
 
(88,598
)
 
(71,267
)
Amortization expense
 
(10,513
)
 
(17,072
)
 
(14,766
)
Total other operating expenses
 
(137,291
)
 
(147,331
)
 
(118,560
)
Operating income
 
70,954

 
51,418

 
45,195

Other income (expense):
 

 

 

Interest expense, net
 
(78,477
)
 
(80,830
)
 
(64,842
)
Foreign currency exchange gains (losses), net
 
(36,298
)
 
13,584

 
20,170

Loss on extinguishment of debt
 
(617
)
 

 
(2,358
)
Other income (expense), net
 
24

 
(635
)
 
(2,462
)
Total other expense, net
 
(115,368
)
 
(67,881
)
 
(49,492
)
Loss before income taxes
 
(44,414
)
 
(16,463
)
 
(4,297
)
Income tax benefit (expense)
 
15,641

 
(10,541
)
 
(13,877
)
Net loss
 
(28,773
)
 
(27,004
)
 
(18,174
)
Less: Net income (loss) attributable to non-controlling interests
 
2,044

 
(545
)
 
(2,710
)
Net loss attributable to WireCo WorldGroup (Cayman) Inc.
 
$
(30,817
)
 
$
(26,459
)
 
$
(15,464
)
The accompanying notes are an integral part of the consolidated financial statements.



38

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


 
 
Years ended December 31,
 
 
2014
 
2013
 
2012
Net loss
 
$
(28,773
)
 
$
(27,004
)
 
$
(18,174
)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation gain (loss)
 
(31,038
)
 
5,838

 
10,963

Pension benefits
 
64

 
(582
)
 
136

Total other comprehensive income (loss)
 
$
(30,974
)
 
$
5,256

 
$
11,099

Comprehensive loss
 
(59,747
)
 
(21,748
)
 
(7,075
)
Less: Comprehensive income (loss) attributable to non-controlling interests
 
1,122

 
(790
)
 
(2,521
)
Comprehensive loss attributable to WireCo WorldGroup (Cayman) Inc.
 
$
(60,869
)
 
$
(20,958
)
 
$
(4,554
)
The accompanying notes are an integral part of the consolidated financial statements.



39

WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Treasury stock
 
WireCo WorldGroup (Cayman) Inc. stockholders' equity
 
Non-controlling interests
 
Total stockholders' equity
Balance, December 31, 2011
$
20

 
$
216,924

 
$
(34,392
)
 
$
(52,886
)
 
$

 
$
129,666

 
$
(130
)
 
$
129,536

Increase in non-controlling interests from business acquisition

 

 

 

 

 

 
2,385

 
2,385

Purchase of non-controlling interest

 

 

 

 

 

 
(535
)
 
(535
)
Common stock issued related to exchange rights (1)
1

 
47

 
(546
)
 

 

 
(498
)
 
498

 

Repurchase of common stock

 

 

 

 
(14,465
)
 
(14,465
)
 

 
(14,465
)
Exercise of stock options

 
700

 

 

 

 
700

 

 
700

Share-based compensation

 
1,466

 

 

 

 
1,466

 

 
1,466

Other comprehensive income

 

 
10,910

 

 

 
10,910

 
189

 
11,099

Net loss

 

 

 
(15,464
)
 

 
(15,464
)
 
(2,710
)
 
(18,174
)
Balance, December 31, 2012
$
21

 
$
219,137

 
$
(24,028
)
 
$
(68,350