WireCo WorldGroup Inc. - FORM 10-Q - November 10, 2015

Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - WireCo WorldGroup Inc.exhibit312_q3x2015.htm
EX-32.2 - EXHIBIT 32.2 - WireCo WorldGroup Inc.exhibit322_q3x2015.htm
EX-31.1 - EXHIBIT 31.1 - WireCo WorldGroup Inc.exhibit311_q3x2015.htm
EX-32.1 - EXHIBIT 32.1 - WireCo WorldGroup Inc.exhibit321_q3x2015.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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.)
 
 
 
 
 
 
 
2400 West 75th Street
Prairie Village, Kansas
 
66208
 
 
(Address of registrant's executive offices)
 
(Zip Code)
 
 
(816) 270-4700
 
 
(Registrant's telephone number, including area code)
 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ¨   NO  x 
NOTE: While the Registrant is a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
 
Non-accelerated filer
 
x
  
Smaller reporting company
 
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    YES  ¨   NO  x
There is no market for the Registrant’s equity, all of which is held by affiliates of WireCo WorldGroup (Cayman) Inc. (the “Company”). As of November 1, 2015 the Registrant had 100 shares of common stock outstanding.



WireCo WorldGroup Inc.
Quarterly Report
For the period ended September 30, 2015
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



1

PART I – FINANCIAL INFORMATION
Item 1.Financial Statements (unaudited)
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
 
September 30, 2015
 
December 31, 2014
Current assets:
 
(unaudited)
 
 
Cash and cash equivalents
 
$
34,607

 
$
58,195

Restricted cash
 
1,584

 
1,565

Accounts receivable, less allowance for doubtful accounts of $2,103 and $2,223, at September 30, 2015 and December 31, 2014, respectively
 
134,297

 
143,068

Other receivables
 
4,200

 
2,305

Inventories, net
 
192,211

 
225,075

Current deferred income tax assets
 
3,197

 
3,867

Prepaid expenses and other current assets
 
9,461

 
12,976

Total current assets
 
$
379,557

 
$
447,051

Property, plant and equipment, less accumulated depreciation of $192,959 and $181,728, at September 30, 2015 and December 31, 2014, respectively
 
291,170

 
319,198

Intangible assets, net
 
110,234

 
125,578

Goodwill
 
182,978

 
188,925

Deferred financing fees, net
 
10,924

 
15,425

Non-current deferred income tax assets
 
969

 
1,123

Derivative assets
 
42,931

 
16,133

Other non-current assets
 
9,951

 
11,418

Total assets
 
$
1,028,714

 
$
1,124,851

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
3,318

 
$
19,113

Interest payable
 
17,960

 
6,322

Accounts payable
 
66,738

 
98,914

Accrued compensation and benefits
 
18,932

 
19,117

Current deferred income tax liabilities
 
938

 
311

Other current liabilities
 
28,147

 
20,173

Total current liabilities
 
$
136,033

 
$
163,950

Long-term debt, excluding current maturities
 
838,645

 
854,042

Non-current deferred income tax liabilities
 
42,393

 
46,735

Other non-current liabilities
 
16,446

 
15,861

Total liabilities
 
$
1,033,517

 
$
1,080,588

Commitments and contingencies
 


 


Stockholders’ deficit:
 
 
 
 
Common stock, $0.01 par value. 3,000,000 shares authorized; 2,054,374 and 2,005,205 shares issued and outstanding, respectively at September 30, 2015 and December 31, 2014
 
$
21

 
$
21

Additional paid-in capital
 
238,662

 
232,883

Accumulated other comprehensive loss
 
(78,571
)
 
(48,579
)
Accumulated deficit
 
(151,758
)
 
(125,626
)
Treasury stock, at cost. 49,169 shares at September 30, 2015 and December 31, 2014
 
(14,465
)
 
(14,465
)
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
 
$
(6,111
)
 
$
44,234

Non-controlling interests
 
1,308

 
29

Total stockholders’ equity
 
$
(4,803
)
 
$
44,263

Total liabilities and stockholders’ equity
 
$
1,028,714

 
$
1,124,851

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

2
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands)
(unaudited)


 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
171,356

 
$
217,076

 
$
525,526

 
$
654,086

Cost of sales
(130,686
)
 
(170,293
)
 
(402,072
)
 
(493,839
)
Gross profit
40,670

 
46,783

 
123,454

 
160,247

Other operating expenses:

 

 

 

Selling expenses
(8,904
)
 
(10,787
)
 
(28,592
)
 
(33,328
)
Administrative expenses
(19,117
)
 
(21,499
)
 
(54,875
)
 
(62,971
)
Amortization expense
(2,255
)
 
(2,318
)
 
(6,738
)
 
(8,056
)
Total other operating expenses
(30,276
)
 
(34,604
)
 
(90,205
)
 
(104,355
)
Operating income
10,394

 
12,179

 
33,249

 
55,892

Other income (expense):

 

 

 

Interest expense, net
(19,597
)
 
(19,603
)
 
(55,221
)
 
(59,357
)
Foreign currency exchange gains (losses), net
5,626

 
(31,816
)
 
(1,341
)
 
(35,131
)
Loss on extinguishment of debt
—

 
(617
)
 
—

 
(617
)
Other income (expense), net
(169
)
 
125

 
(397
)
 
703

Total other expense, net
(14,140
)
 
(51,911
)
 
(56,959
)
 
(94,402
)
Loss before income taxes
(3,746
)
 
(39,732
)
 
(23,710
)
 
(38,510
)
Income tax benefit (expense)
(1,446
)
 
4,540

 
(595
)
 
1,177

Net loss
(5,192
)
 
(35,192
)
 
(24,305
)
 
(37,333
)
Less: Net income attributable to non-controlling interests
2,073

 
113

 
1,827

 
527

Net loss attributable to WireCo WorldGroup (Cayman) Inc.
$
(7,265
)
 
$
(35,305
)
 
$
(26,132
)
 
$
(37,860
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.




3
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)


 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(5,192
)
 
$
(35,192
)
 
$
(24,305
)
 
$
(37,333
)
Other comprehensive income (loss):
 
 
 
 
 
 

Foreign currency translation gain (loss)
(11,249
)
 
(12,923
)
 
(30,540
)
 
(17,229
)
Comprehensive loss
(16,441
)
 
(48,115
)
 
(54,845
)
 
(54,562
)
Less: Comprehensive income (loss) attributable to non-controlling interests
2,367

 
150

 
1,279

 
(440
)
Comprehensive loss attributable to WireCo WorldGroup (Cayman) Inc.
$
(18,808
)
 
$
(48,265
)
 
$
(56,124
)
 
$
(54,122
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.



4
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


 
 
Nine months ended
 
 
September 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(24,305
)
 
$
(37,333
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 

Depreciation and amortization
 
33,746

 
38,140

Amortization of debt issuance costs, discounts and premium
 
5,830

 
6,268

Loss on extinguishment of debt
 
—

 
617

Share-based compensation
 
5,779

 
5,539

Unrealized gain on derivative instruments, net
 
(23,428
)
 
(1,882
)
Unrealized foreign currency exchange losses, net
 
22,137

 
35,722

Provision for deferred income taxes
 
(28
)
 
(3,710
)
Other adjustments
 
(378
)
 
2,476

Changes in assets and liabilities:
 

 

Accounts receivable
 
10,038

 
5

Inventories
 
19,439

 
(12,103
)
Prepaid expenses and other assets
 
(1,704
)
 
(9,722
)
Interest payable
 
11,656

 
9,603

Accounts payable
 
(31,761
)
 
8,673

Other accrued liabilities
 
8,982

 
6,133

Net cash provided by operating activities
 
$
36,003

 
$
48,426

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(22,829
)
 
(16,213
)
Acquisition of business
 
—

 
(4,573
)
Other investing activities
 
—

 
1,951

Net cash used in investing activities
 
$
(22,829
)
 
$
(18,835
)
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(17,116
)
 
(5,621
)
Debt issuance costs paid
 
(1,067
)
 
—

Retirement of long-term debt
 
—

 
(26,946
)
Borrowings under revolving credit agreement
 
55,400

 
152,350

Repayments under revolving credit agreement
 
(69,580
)
 
(140,300
)
Other financing activities
 
—

 
(437
)
Net cash used in financing activities
 
$
(32,363
)
 
$
(20,954
)
Effect of exchange rates on cash and cash equivalents
 
(4,399
)
 
(1,906
)
Increase (decrease) in cash and cash equivalents
 
$
(23,588
)
 
$
6,731

Cash and cash equivalents, beginning of period
 
58,195

 
34,987

Cash and cash equivalents, end of period
 
$
34,607

 
$
41,718

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid for interest, net of interest capitalized
 
$
39,594

 
$
41,462

Cash paid for income taxes, net of refunds
 
4,087

 
6,632

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

5
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands)
(unaudited)


(1) Interim Financial Statement Presentation
The financial information included in this quarterly report on Form 10-Q are those of WireCo WorldGroup (Cayman) Inc., its wholly-owned subsidiaries, including WireCo WorldGroup Inc., and subsidiaries in which it has a controlling interest (collectively, the “Company”). The accompanying unaudited interim consolidated financial statements included herein have been prepared in United States ("U.S.") dollars and in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of management, all material adjustments, which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented, have been reflected.
Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2014.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP. As a result of a deferral of the effective date enacted in July 2015, the new standard would be effective for public entities on January 1, 2018. ASU 2014-09 allows the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect of ASU 2014-09 and has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest, to reduce complexity in accounting standards and make the presentation of debt issuance costs consistent with the presentation of debt discounts. This ASU requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, rather than as an asset. ASU 2015-03 is limited to simplifying the presentation of debt issuance costs and there will be no effect on the income statement. This ASU requires retrospective adoption and is effective for the Company during the first quarter of 2016, with early adoption permitted. Upon adoption, the Company will present its remaining unamortized debt issuance costs as a direct deduction from the carrying amount of the related debt liability.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. This ASU requires prospective adoption and is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements.
Out-of-period Error
During the third quarter of 2015, the Company identified an error related to Foreign currency exchange gains within the consolidated statements of operations in the amount of $3,051. These foreign currency exchange gains should have been recorded in the three and six month periods ending June 30, 2015. This amount was determined to be immaterial to the consolidated financial statements for both the three and six month periods ended June 30, 2015.  The gains have been excluded from the consolidated financial statements for the three month period ended September 30, 2015 but are properly reflected in the results for the nine month period ended September 30, 2015.  The adjustment will be included in the consolidated financial statements for the three and six month periods ended June 30, 2015 when subsequently issued.

6
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

(2) Inventories, net
The major classes of inventories were as follows as of the dates indicated:
 
 
September 30, 2015
 
December 31, 2014
Raw materials, net
 
$
69,628

 
$
86,669

Work in process, net
 
8,754

 
10,487

Finished goods, net
 
113,829

 
127,919

Inventories, net
 
$
192,211

 
$
225,075


(3) Intangible Assets and Goodwill
The components of finite-lived intangible assets were as follows as of the dates indicated:
 
 
September 30, 2015
 
December 31, 2014
 
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Finite-lived assets
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
118,618

 
$
(89,493
)
 
$
29,125

 
$
124,856

 
$
(87,406
)
 
$
37,450

Patented and unpatented technology
 
21,534

 
(11,179
)
 
10,355

 
22,216

 
(10,539
)
 
11,677

Other
 
6,283

 
(6,283
)
 
—

 
6,505

 
(6,505
)
 
—

Total finite-lived intangible assets
 
$
146,435

 
$
(106,955
)
 
$
39,480

 
$
153,577

 
$
(104,450
)
 
$
49,127


Using the exchange rates in effect at period end, estimated amortization of finite-lived intangible assets as of September 30, 2015 was as follows:
Remainder of 2015
 
$
2,178

2016
 
8,633

2017
 
7,085

2018
 
3,509

2019
 
3,270

Thereafter
 
14,805

Total
$
39,480


Intangible assets with indefinite lives are not amortized. The carrying values of trade names as of September 30, 2015 and December 31, 2014 were $70,754 and $76,451, respectively.

The change in the carrying value of goodwill was as follows as of the dates indicated:
December 31, 2014
 
$
188,925

Foreign currency translation
 
(5,947
)
September 30, 2015
 
$
182,978


7
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

(4) Borrowings
Long-term debt consisted of the following as of the dates indicated:
 
 
September 30, 2015
 
December 31, 2014
Borrowings under Revolving Loan Facility
 
$
54,570

 
$
68,750

Term Loan due 2017
 
307,246

 
324,362

9.00% Senior Notes due 2017
 
56,000

 
56,000

9.50% Senior Notes due 2017
 
425,000

 
425,000

Other indebtedness
 
—

 
157

Total debt at face value
 
842,816

 
874,269

Less: Unamortized discount, net
 
(853
)
 
(1,114
)
Less: Current maturities of long-term debt
 
(3,318
)
 
(19,113
)
Total long-term debt
 
$
838,645

 
$
854,042


For a detailed discussion of the Company's borrowings, see Note 7—“Borrowings” to the Company's audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of the annual report on Form 10-K for the year ended December 31, 2014.

Senior Secured Credit Facilities - Revolving Loan Facility and Term Loan due 2017
The Company's maximum borrowing capacity under the Revolving Loan Facility is $145,000. As of September 30, 2015, availability under the Revolving Loan Facility was $88,767. Availability is based upon the maximum borrowing capacity, less outstanding borrowings and letters of credit, and if applicable, further restricted by certain covenants in the Company's credit agreements. Outstanding letters of credit were $1,663 at September 30, 2015. The variable interest rate on the Revolving Loan Facility and Term Loan due 2017 at September 30, 2015 was 5.06% and 6.00%, respectively.
On June 24, 2015, the Company entered into a third amendment (the “Amendment”) to the credit agreement dated as of July 12, 2012 (the "Credit Agreement"). The Amendment, among other things, amended the Credit Agreement to (i) update the Interest Coverage Ratio financial covenant for fiscal quarters ending June 30, 2015 and thereafter from a range of 1.75x to 2.00x to a fixed ratio covenant of 1.50x and (ii) reduce incremental capacity to the greater of (a) $75,000 and (b) 2.25:1.00 Senior Secured Leverage from the greater of (a) $125,000 and (b) 2.75:1.00 Senior Secured Leverage. During 2015, the Company paid $1,067 in debt issuance costs in connection with this Amendment that are being amortized to interest expense over the term of the debt instrument.

Interest expense, net
Net interest expense consists of:
 
 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest on long-term debt
 
$
17,498

 
$
17,413

 
$
49,182

 
$
53,527

Amortization of debt issuance costs, discounts and premium
 
1,994

 
2,091

 
5,830

 
6,268

Capitalized interest
 
(58
)
 
(265
)
 
(181
)
 
(635
)
Other
 
163

 
364

 
390

 
197

Interest expense, net
 
$
19,597

 
$
19,603

 
$
55,221

 
$
59,357


(5) Derivative Financial Instruments
During September 2014, the Company entered into cross-currency swaps with three counterparties to economically hedge exposures to foreign currency exchange risk related to its global operations. The cross-currency swaps notional value is $300,000, at a weighted average foreign currency exchange rate of $1.00 to €0.7820, and matures in February 2017. In accordance with the cross-currency swap agreements, on a semi-annual basis, the Company pays interest on €234,597 at a

8
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

weighted average fixed rate of 8.79% and receives interest on $300,000 based on a fixed rate of 9.50%, which is included in Interest expense, net within the consolidated statements of operations.
During June 2015, the Company entered into a cross-currency swap with a counterparty to economically hedge exposures to foreign currency exchange risk related to its global operations. The cross-currency swap notional value is $125,000, at a foreign currency exchange rate of $1.00 to €0.9125, and matures in February 2017. In accordance with the cross-currency swap agreement, on a quarterly basis, the Company pays interest on €114,062 at a fixed rate of 8.94% and receives interest on $125,000 based on a fixed rate of 9.50%, which is included in Interest expense, net within the consolidated statements of operations.
The Company incurred settlements with each of its counterparties during 2015, which resulted in a net reduction in Interest expense, net of $2,773 for the nine months ended September 30, 2015.
In March 2015, the Company entered into a foreign currency forward contract to mitigate the exchange rate risk associated with fluctuations of the U.S. dollar to euro on internal cash movements associated with its global operations. Pursuant to the contract, the Company received a notional value of $3,093 at a foreign currency exchange rate of $1.00 to €0.9700 on the settlement date of May 13, 2015. Upon cash settlement, the Company realized a $253 foreign currency exchange loss, which is included in Foreign currency exchange gains (losses) within the consolidated statements of operations.
The Company's derivative financial instruments do not qualify for hedge accounting treatment and accordingly, changes in fair value are recorded in Foreign currency exchange gains (losses) within the consolidated statements of operations. The Company recognized an unrealized loss of $221 during the three months ended September 30, 2015 and an unrealized gain of $23,428 during the nine months ended September 30, 2015 that were recorded in Foreign currency exchange gains (losses) in the consolidated statements of operations.
Refer to Note 6—“Fair Value Measurements” for additional information regarding the fair value of the Company’s derivative arrangements included in the consolidated balance sheets.

(6) Fair Value Measurements
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying amounts reported on the consolidated balance sheets for these items approximate fair market value due to their relative short-term nature.
The table below sets forth by level, within the fair value hierarchy, the fair value of the Company's derivative financial instruments that are measured on a recurring basis. The Company estimates the fair value of its derivative instruments using present value measurements based on the spot rate, forward option spreads and other relevant market conditions.
 
 
 
September 30, 2015
 
 
 
Level 1
 
Level 2
 
Level 3
Derivatives Designated
Balance Sheet Classification
 
 
 
 
 
 
Cross-currency swaps
Derivative assets
 
$
—

 
$
42,931

 
$
—

Cross-currency swap
Other non-current liabilities
 
$
—

 
$
3,370

 
$
—

 
 
 
December 31, 2014
 
 
 
Level 1
 
Level 2
 
Level 3
Derivatives Designated
Balance Sheet Classification
 
 
 
 
 
 
Cross-currency swaps
Derivative assets
 
$
—

 
$
16,133

 
$
—

Cross-currency swap
Other non-current liabilities
 
$
—

 
$
—

 
$
—



9
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

The carrying amounts and estimated fair values of the Company’s long-term debt at September 30, 2015 were as follows:
 
 
Carrying
amount
 
Estimated
fair value
Revolving Loan Facility
 
$
54,570

 
$
54,570

Term Loan due 2017
 
306,050

 
307,246

9.00% Senior Notes due 2017
 
56,000

 
49,350

9.50% Senior Notes due 2017
 
425,343

 
374,000

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

(7) Share-based Compensation
Changes in the Company's outstanding service-based stock option awards since December 31, 2014 were as follows:
Options
 
Number of
options
 
Weighted
average
exercise price
 
Weighted
average
remaining
contractual term
(years)
Outstanding at December 31, 2014
 
513,491

 
$
172.76

 
 
Granted
 
10,000

 
194.69

 
 
Exercised
 
—

 
—

 
 
Expired
 
—

 
—

 
 
Other
 
—

 
—

 
 
Outstanding at September 30, 2015
 
523,491

 
$
173.18

 
4.30
Vested and expected to vest as of September 30, 2015
 
523,491

 
173.18

 
4.30
Exercisable at September 30, 2015
 
417,458

 
150.61

 
3.33
The fair value of the service-based stock option awards granted during 2015 were estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the following table.
 
2015
Expected volatility (1)
35.51%
Risk-free interest rate (2)
1.80%
Expected term of the option (years) (3)
6.50
Expected dividend yield
—%
Grant-date fair value
$75.43
(1) 
Based on the average historical volatility of similar entities with publicly traded shares since the Company's shares are privately held.
(2) 
Based on the U.S. Treasury interest rate whose term is consistent with the expected term of the stock options.
(3) 
Based on the expected term considering vesting and contractual terms.
At September 30, 2015, total unrecognized compensation cost related to the unvested portion of the Company's service-based stock option awards that remains to be expensed was $11,232, with the weighted average remaining years to vest of approximately 2.47 years. There were 19,779 awards available for future grants under the 2008 Long Term Incentive Plan at September 30, 2015.


10
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

(8) Restructuring Charges

As part of the Company's initiatives to manage costs in response to the challenges in certain end markets, the Company reduced its production and administrative workforce during 2015. Restructuring charges related to employee termination and related benefits were recorded in Administrative expenses in the consolidated statement of operations. The accrual balance is included in Other current liabilities on the consolidated balance sheet.
A rollforward of this restructuring activity is set forth below:
Balance at December 31, 2014
$
—

Restructuring charges incurred in 2015
1,576

Payments made in 2015
(964
)
Balance at September 30, 2015
$
612


(9) Income Taxes
The Company determines the interim tax provision by applying an estimate of the annual effective tax rate to the year-to-date pretax book income (loss) and adjusts for discrete items during the reporting period, if any. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded. Additionally, for certain tax jurisdictions where a reliable estimate of year-to-date income tax expense or benefit cannot be made, the Company applied the actual effective tax rate to year-to-date income.
The effective income tax rate for the three months ended September 30, 2015 and 2014 was (38.6)% and 11.4%, respectively. The effective income tax rate for the nine months ended September 30, 2015 and 2014 was (2.5)% and 3.1%, respectively. The Company's effective income tax rates differ from the applicable statutory tax rate primarily due to valuation allowances on deferred tax assets in various jurisdictions, mix of earnings (losses) by jurisdictions and the effects of foreign tax rate differences.

(10) Related Party Transactions
Paine & Partners, LLC (“Paine & Partners”), which manages the funds that control the Company, has entered into a management agreement with the Company to provide administrative and other support services. During the first quarters of 2015 and 2014, the Company paid an annual management fee of $3,112 and $3,042, respectively. This annual management fee is deferred as a prepaid and recognized ratably over the year as the services are provided. The Company recognized management fee expense of $778 and $761 during the three months ended September 30, 2015 and 2014, respectively, and $2,334 and $2,282 during the nine months ended September 30, 2015 and 2014, respectively, that was recorded in Administrative expenses in the consolidated statements of operations.
During the three months ended September 30, 2015 and 2014, the Company had product sales of $378 and $139, respectively, and during the nine months ended September 30, 2015 and 2014, the Company had product sales of $824 and $585, respectively, to its Spanish joint venture, Lankhorst Euronete Espana SA. The Company purchased $449 and $1,293 of product for the three months ended September 30, 2015 and 2014, respectively, and purchased $1,773 and $3,816 of product for the nine months ended September 30, 2015 and 2014, respectively, from its Greek joint venture, Eurorope Performance Rope Producers SA.

(11) Commitments and Contingencies
The Company relocated its corporate headquarters during the third quarter of 2015. The Company entered into a noncancelable, renewable operating lease agreement for the term of 10 years and 5 months, with a total aggregate commitment of approximately $6,700. The Company accrued $2,406 related to the early termination of its previous corporate headquarters lease, which is included in Administrative expenses within the consolidated statements of operations. As an incentive to relocate, the Kansas Department of Commerce offered the Company grants, which allow businesses adding jobs in Kansas to retain a significant amount of eligible employees' state payroll withholding taxes for a period of 10 years. The Company will recognize a reduction of expense related to these grants as actual payroll withholding taxes are incurred for the respective period.

11
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

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

(12) Segment Reporting
The Company reports the manufacturing, marketing, selling and distribution of wire and synthetic ropes, specialty wire and engineered products as one operating and one reportable segment. The Company's net sales by product line for the periods presented was as follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Product line net sales
($)
(%)
 
($)
(%)
 
($)
(%)
 
($)
(%)
Rope
$
123,946

72
%
 
$
155,675

72
%
 
$
380,410

72
%
 
$
477,219

73
%
Specialty wire
29,623

17
%
 
37,631

17
%
 
93,470

18
%
 
106,198

16
%
Engineered products
17,787

11
%
 
23,770

11
%
 
51,646

10
%
 
70,669

11
%
Total net sales
$
171,356

100
%
 
$
217,076

100
%
 
$
525,526

100
%
 
$
654,086

100
%
 
 
 
 
 
 
 
(13) Condensed Consolidating Financial Statements
Guarantees of the 9.50% Senior Notes
WireCo WorldGroup Inc. has registered 9.50% Senior Notes, which are unsecured obligations. These obligations are jointly and severally and fully and unconditionally guaranteed by WireCo WorldGroup (Cayman) Inc. Certain entities controlled by WireCo WorldGroup (Cayman) Inc. (collectively referred to as the “Guarantor Subsidiaries”) also jointly and severally and fully and unconditionally guarantee these obligations, subject to customary release provisions. All voting shares for the entities presented in the “Guarantor Subsidiaries” column are 100% owned directly or indirectly by the Company. Certain subsidiaries with locations primarily in the Netherlands, Brazil and France do not guarantee the debt (collectively referred to as the “Non-Guarantor Subsidiaries”). The following condensed consolidating financial statements are prepared with each entity’s investment in subsidiaries accounted for under the equity method. The adjustments eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions. There are currently no significant restrictions on the ability of WireCo WorldGroup Inc. or any guarantor to obtain funds from its subsidiaries by dividend or loan.


12
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

Condensed Consolidating Balance Sheets
 
September 30, 2015
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
23

 
$
3,972

 
$
17,898

 
$
12,714

 
$
—

 
$
34,607

Restricted cash
—

 
—

 
317

 
1,267

 
—

 
1,584

Accounts receivable, net
—

 
29,858

 
72,749

 
31,690

 
—

 
134,297

Intercompany accounts receivable
(311
)
 
67,379

 
39,662

 
25,833

 
(132,563
)
 
—

Other receivables
—

 
686

 
2,522

 
992

 
—

 
4,200

Inventories, net
—

 
66,477

 
95,085

 
30,649

 
—

 
192,211

Current deferred income tax assets
—

 
1,384

 
1,696

 
117

 
—

 
3,197

Prepaid expenses and other current assets
—

 
3,674

 
3,963

 
1,824

 
—

 
9,461

Total current assets
$
(288
)
 
$
173,430

 
$
233,892

 
$
105,086

 
$
(132,563
)
 
$
379,557

Long-term intercompany notes receivable
—

 
432,956

 
18,597

 
109,439

 
(560,992
)
 
—

Property, plant and equipment, net
—

 
52,355

 
196,958

 
41,857

 
—

 
291,170

Intangible assets, net
—

 
31,781

 
60,219

 
18,234

 
—

 
110,234

Goodwill
—

 
116,842

 
47,672

 
18,464

 
—

 
182,978

Investments in subsidiaries
(44,189
)
 
—

 
118,233

 
8,392

 
(82,436
)
 
—

Deferred financing fees, net
—

 
10,924

 
—

 
—

 
—

 
10,924

Non-current deferred income tax assets
—

 
—

 
969

 
—

 
—

 
969

Derivative assets
42,931

 
—

 
—

 
—

 
—

 
42,931

Other non-current assets
—

 
251

 
9,692

 
8

 
—

 
9,951

Total assets
$
(1,546
)
 
$
818,539

 
$
686,232

 
$
301,480

 
$
(775,991
)
 
$
1,028,714

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

 
$
3,318

 
$
—

 
$
—

 
$
—

 
$
3,318

Interest payable
—

 
17,826

 
36

 
98

 
—

 
17,960

Accounts payable
—

 
11,994

 
40,553

 
14,191

 
—

 
66,738

Accrued compensation and benefits
—

 
5,304

 
10,806

 
2,822

 
—

 
18,932

Intercompany accounts payable
905

 
43,203

 
77,675

 
10,922

 
(132,705
)
 
—

Current deferred income tax liabilities
—

 
—

 
311

 
627

 
—

 
938

Other current liabilities
230

 
5,807

 
15,946

 
6,164

 
—

 
28,147

Total current liabilities
$
1,135

 
$
87,452

 
$
145,327

 
$
34,824

 
$
(132,705
)
 
$
136,033


13
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

Long-term debt, excluding current maturities
—

 
838,645

 
—

 
—

 
—

 
838,645

Long-term intercompany notes payable
—

 
—

 
532,521

 
28,445

 
(560,966
)
 
—

Non-current deferred income tax liabilities
—

 
11,949

 
22,945

 
7,499

 
—

 
42,393

Other non-current liabilities
3,430

 
481

 
11,194

 
1,341

 
—

 
16,446

Total liabilities
$
4,565

 
$
938,527

 
$
711,987

 
$
72,109

 
$
(693,671
)
 
$
1,033,517

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
(6,111
)
 
(119,988
)
 
(21,682
)
 
223,990

 
(82,320
)
 
(6,111
)
Non-controlling interests
—

 
—

 
(4,073
)
 
5,381

 
—

 
1,308

Total stockholders’ equity
$
(6,111
)
 
$
(119,988
)
 
$
(25,755
)
 
$
229,371

 
$
(82,320
)
 
$
(4,803
)
Total liabilities and stockholders’ equity
$
(1,546
)
 
$
818,539

 
$
686,232

 
$
301,480

 
$
(775,991
)
 
$
1,028,714



14
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

 
December 31, 2014
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
24

 
$
4,178

 
$
35,792

 
$
18,201

 
$
—

 
$
58,195

Restricted cash
—

 
—

 
656

 
909

 
—

 
1,565

Accounts receivable, net
—

 
45,159

 
69,645

 
28,264

 
—

 
143,068

Intercompany accounts receivable
27,454

 
64,043

 
55,654

 
18,493

 
(165,644
)
 
—

Other receivables
—

 
—

 
1,914

 
391

 
—

 
2,305

Inventories, net
—

 
71,924

 
122,025

 
31,126

 
—

 
225,075

Current deferred income tax assets
—

 
1,384

 
1,902

 
581

 
—

 
3,867

Prepaid expenses and other current assets
—

 
2,935

 
6,378

 
3,663

 
—

 
12,976

Total current assets
$
27,478

 
$
189,623

 
$
293,966

 
$
101,628

 
$
(165,644
)
 
$
447,051

Long-term intercompany notes receivable
—

 
467,127

 
22,461

 
112,482

 
(602,070
)
 
—

Property, plant and equipment, net
—

 
54,302

 
220,675

 
44,221

 
—

 
319,198

Intangible assets, net
—

 
34,052

 
70,186

 
21,340

 
—

 
125,578

Goodwill
—

 
116,842

 
50,906

 
21,177

 
—

 
188,925

Investment in subsidiaries
25,057

 
—

 
129,522

 
7,659

 
(162,238
)
 
—

Deferred financing fees, net
—

 
15,425

 
—

 
—

 
—

 
15,425

Non-current deferred income tax assets
—

 
—

 
1,123

 
—

 
—

 
1,123

Derivative assets
—

 
16,133

 
—

 
—

 
—

 
16,133

Other non-current assets
—

 
207

 
11,202

 
9

 
—

 
11,418

Total assets
$
52,535

 
$
893,711

 
$
800,041

 
$
308,516

 
$
(929,952
)
 
$
1,124,851

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

 
$
19,098

 
$
6

 
$
9

 
$
—

 
$
19,113

Interest payable
—

 
6,038

 
131

 
153

 
—

 
6,322

Accounts payable
—

 
23,830

 
62,158

 
12,926

 
—

 
98,914

Accrued compensation and benefits
—

 
5,009

 
10,558

 
3,550

 
—

 
19,117

Intercompany accounts payable
1,572

 
75,197

 
74,251

 
14,538

 
(165,558
)
 
—

Current deferred income tax liabilities
—

 
—

 
311

 
—

 
—

 
311

Other current liabilities
—

 
2,927

 
12,940

 
4,306

 
—

 
20,173

Total current liabilities
$
1,572

 
$
132,099

 
$
160,355

 
$
35,482

 
$
(165,558
)
 
$
163,950

Long-term debt, excluding current maturities
—

 
853,899

 
143

 
—

 
—

 
854,042


15
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

Long-term intercompany notes payable
6,700

 
—

 
564,740

 
30,610

 
(602,050
)
 
—

Non-current deferred income tax liabilities
—

 
11,949

 
25,084

 
9,702

 
—

 
46,735

Other non-current liabilities
—

 
414

 
13,825

 
1,622

 
—

 
15,861

Total liabilities
$
8,272

 
$
998,361

 
$
764,147

 
$
77,416

 
$
(767,608
)
 
$
1,080,588

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
44,234

 
(104,650
)
 
39,399

 
227,591

 
(162,340
)
 
44,234

Non-controlling interests
29

 
—

 
(3,505
)
 
3,509

 
(4
)
 
29

Total stockholders’ equity
$
44,263

 
$
(104,650
)
 
$
35,894

 
$
231,100

 
$
(162,344
)
 
$
44,263

Total liabilities and stockholders’ equity
$
52,535

 
$
893,711

 
$
800,041

 
$
308,516

 
$
(929,952
)
 
$
1,124,851




16
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
 
Three months ended September 30, 2015
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$
—

 
$
49,367

 
$
102,777

 
$
41,685

 
$
(22,473
)
 
$
171,356

Cost of sales
—

 
(40,268
)
 
(79,840
)
 
(33,559
)
 
22,981

 
(130,686
)
Gross profit
—

 
9,099

 
22,937

 
8,126

 
508

 
40,670

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
—

 
(2,600
)
 
(3,564
)
 
(2,740
)
 
—

 
(8,904
)
Administrative expenses
(229
)
 
(8,861
)
 
(7,974
)
 
(2,053
)
 
—

 
(19,117
)
Amortization expense
—

 
(757
)
 
(1,210
)
 
(288
)
 
—

 
(2,255
)
Total other operating expenses
(229
)
 
(12,218
)
 
(12,748
)
 
(5,081
)
 
—

 
(30,276
)
Operating income (loss)
(229
)
 
(3,119
)
 
10,189

 
3,045

 
508

 
10,394

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
6

 
(11,181
)
 
(9,528
)
 
1,106

 
—

 
(19,597
)
Equity income (loss) from subsidiaries
(21,174
)
 
—

 
(21,985
)
 
67

 
43,092

 
—

Foreign currency exchange gains (losses), net
(118
)
 
(731
)
 
(524
)
 
6,999

 
—

 
5,626

Other income (expense), net
14,250

 
(16
)
 
(164
)
 
11

 
(14,250
)
 
(169
)
Total other income (expense), net
(7,036
)
 
(11,928
)
 
(32,201
)
 
8,183

 
28,842

 
(14,140
)
Income (loss) before income taxes
(7,265
)
 
(15,047
)
 
(22,012
)
 
11,228

 
29,350

 
(3,746
)
Income tax expense
—

 
(399
)
 
(981
)
 
(66
)
 
—

 
(1,446
)
Net income (loss)
(7,265
)
 
(15,446
)
 
(22,993
)
 
11,162

 
29,350

 
(5,192
)
Less: Net income (loss) attributable to non-controlling interests
—

 
—

 
(488
)
 
2,561

 
—

 
2,073

Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
(7,265
)
 
(15,446
)
 
(22,505
)
 
8,601

 
29,350

 
(7,265
)
Comprehensive income (loss)
$
(16,441
)
 
$
(15,446
)
 
$
(34,242
)
 
$
20,338

 
$
29,350

 
$
(16,441
)
 

17
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

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

 
$
74,566

 
$
130,647

 
$
47,522

 
$
(35,659
)
 
$
217,076

Cost of sales
—

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

 
(170,293
)
Gross profit
—

 
9,677

 
26,905

 
10,119

 
82

 
46,783

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
—

 
(3,040
)
 
(4,859
)
 
(2,888
)
 
—

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

 
(21,499
)
Amortization expense
—

 
(757
)
 
(1,179
)
 
(382
)
 
—

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

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

 
6,025

 
667

 
12,179

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

 
—

 
(19,603
)
Equity income (loss) from subsidiaries
(35,003
)
 
—

 
(5,812
)
 
983

 
39,832

 
—

Foreign currency exchange gains (losses), net
—

 
1,734

 
(39,856
)
 
6,306

 
—

 
(31,816
)
Loss on extinguishment of debt
—

 
(617
)
 
—

 
—

 
—

 
(617
)
Other income (expense), net
—

 
(198
)
 
301

 
22

 
—

 
125

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

 
39,832

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

 
40,499

 
(39,732
)
Income tax benefit (expense)
—

 
(1,117
)
 
(1,559
)
 
7,216

 
—

 
4,540

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

 
40,499

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

 
—

 
(618
)
 
731

 
—

 
113

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

 
40,499

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

 
$
58,349

 
$
(48,115
)

18
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

 
Nine months ended September 30, 2015
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$
—

 
$
156,029

 
$
328,564

 
$
113,746

 
$
(72,813
)
 
$
525,526

Cost of sales
—

 
(125,631
)
 
(258,832
)
 
(90,848
)
 
73,239

 
(402,072
)
Gross profit
—

 
30,398

 
69,732

 
22,898

 
426

 
123,454

Other operating expenses:


 


 


 


 


 


Selling expenses
—

 
(8,523
)
 
(11,716
)
 
(8,353
)
 
—

 
(28,592
)
Administrative expenses
(842
)
 
(28,678
)
 
(20,703
)
 
(4,652
)
 
—

 
(54,875
)
Amortization expense
—

 
(2,272
)
 
(3,590
)
 
(876
)
 
—

 
(6,738
)
Total other operating expenses
(842
)
 
(39,473
)
 
(36,009
)
 
(13,881
)
 
—

 
(90,205
)
Operating income (loss)
(842
)
 
(9,075
)
 
33,723

 
9,017

 
426

 
33,249

Other income (expense):


 


 


 


 


 


Interest income (expense), net
(198
)
 
(29,916
)
 
(29,108
)
 
4,001

 
—

 
(55,221
)
Equity income (loss) from subsidiaries
(39,223
)
 
—

 
(11,289
)
 
733

 
49,779

 
—

Foreign currency exchange gains (losses), net
(119
)
 
23,218

 
(37,206
)
 
12,766

 
—

 
(1,341
)
Other income (expense), net
14,250

 
(143
)
 
(273
)
 
19

 
(14,250
)
 
(397
)
Total other income (expense), net
(25,290
)
 
(6,841
)
 
(77,876
)
 
17,519

 
35,529

 
(56,959
)
Income (loss) before income taxes
(26,132
)
 
(15,916
)
 
(44,153
)
 
26,536

 
35,955

 
(23,710
)
Income tax benefit (expense)
—

 
(531
)
 
(2,036
)
 
1,972

 
—

 
(595
)
Net income (loss)
(26,132
)
 
(16,447
)
 
(46,189
)
 
28,508

 
35,955

 
(24,305
)
Less: Net income (loss) attributable to non-controlling interests
—

 
—

 
(537
)
 
2,364

 
—

 
1,827

Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
(26,132
)
 
(16,447
)
 
(45,652
)
 
26,144

 
35,955

 
(26,132
)
Comprehensive income (loss)
$
(54,845
)
 
$
(16,447
)
 
$
(76,729
)
 
$
57,221

 
$
35,955

 
$
(54,845
)

19
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

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

 
$
221,559

 
$
389,617

 
$
141,939

 
$
(99,029
)
 
$
654,086

Cost of sales
—

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

 
(493,839
)
Gross profit
—

 
43,190

 
83,012

 
33,378

 
667

 
160,247

Other operating expenses:

 

 

 

 

 

Selling expenses
—

 
(8,954
)
 
(15,210
)
 
(9,164
)
 
—

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

 
(62,971
)
Amortization expense
—

 
(1,981
)
 
(5,121
)
 
(954
)
 
—

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

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

 
19,729

 
1,009

 
55,892

Other income (expense):

 

 

 

 

 

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

 
—

 
(59,357
)
Equity income (loss) from subsidiaries
(37,058
)
 
—

 
(10,620
)
 
2,264

 
45,414

 
—

Foreign currency exchange gains (losses), net
—

 
1,836

 
(44,281
)
 
7,314

 
—

 
(35,131
)
Loss on extinguishment of debt
—

 
(617
)
 
—

 
—

 
—

 
(617
)
Other income (expense), net
—

 
(570
)
 
1,223

 
50

 
—

 
703

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

 
45,414

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

 
46,423

 
(38,510
)
Income tax benefit (expense)
—

 
(1,144
)
 
(1,637
)
 
3,958

 
—

 
1,177

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

 
46,423

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

 
—

 
(1,324
)
 
1,851

 
—

 
527

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

 
46,423

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

 
$
69,844

 
$
(54,562
)


20
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

Condensed Consolidating Statements of Cash Flows
 
Nine months ended September 30, 2015
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net cash provided by (used in) operating activities
$
(14,251
)
 
$
9,422

 
$
38,996

 
$
1,836

 
$
—

 
$
36,003

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(5,409
)
 
(12,288
)
 
(5,132
)
 
—

 
(22,829
)
Repayments from intercompany loans
—

 
28,144

 
2,044

 
—

 
(30,188
)
 
—

Intercompany dividends received
14,250

 
—

 
—

 
—

 
(14,250
)
 
—

Net cash provided by (used in) investing activities
$
14,250

 
$
22,735

 
$
(10,244
)
 
$
(5,132
)
 
$
(44,438
)
 
$
(22,829
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
—

 
(17,116
)
 
—

 
—

 
—

 
(17,116
)
Debt issuance costs paid
—

 
(1,067
)
 
—

 
—

 
—

 
(1,067
)
Decreases in intercompany notes
—

 
—

 
(29,204
)
 
(984
)
 
30,188

 
—

Borrowings under revolving credit agreement
—

 
55,400

 
—

 
—

 
—

 
55,400

Repayments under revolving credit agreement
—

 
(69,580
)
 
—

 
—

 
—

 
(69,580
)
Intercompany dividends paid
—

 
—

 
(14,250
)
 
—

 
14,250

 
—

Net cash used in financing activities
$
—

 
$
(32,363
)
 
$
(43,454
)
 
$
(984
)
 
$
44,438

 
$
(32,363
)
Effect of exchange rates on cash and cash equivalents
—

 
—

 
(3,192
)
 
(1,207
)
 
—

 
(4,399
)
Decrease in cash and cash equivalents
$
(1
)
 
$
(206
)
 
$
(17,894
)
 
$
(5,487
)
 
$
—

 
$
(23,588
)
Cash and cash equivalents, beginning of period
24

 
4,178

 
35,792

 
18,201

 
—

 
58,195

Cash and cash equivalents, end of period
$
23

 
$
3,972

 
$
17,898

 
$
12,714

 
$
—

 
$
34,607


21
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)


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

 
$
13,038

 
$
—

 
$
48,426

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(4,198
)
 
(8,635
)
 
(3,380
)
 
—

 
(16,213
)
Acquisition of business
—

 
—

 
—

 
(4,573
)
 
—

 
(4,573
)
Other investing activities
—

 
—

 
1,951

 
—

 
—

 
1,951

Repayments from intercompany loans
—

 
43,713

 
7,997

 
819

 
(52,529
)
 
—

Investment in subsidiaries
—

 
—

 
—

 
(4,573
)
 
4,573

 
—

Net cash provided by (used in) investing activities
$
—

 
$
39,515

 
$
1,313

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

 
(5,621
)
 
—

 
—

 
—

 
(5,621
)
Retirement of long-term debt
—

 
(26,500
)
 
(446
)
 
—

 
—

 
(26,946
)
Borrowings under revolving credit agreement
—

 
152,350

 
—

 
—

 
—

 
152,350

Repayments under revolving credit agreement
—

 
(140,300
)
 
—

 
—

 
—

 
(140,300
)
Capital contributions received
—

 
—

 
—

 
4,573

 
(4,573
)
 
—

Repayments of intercompany loans
—

 
—

 
(44,532
)
 
(7,997
)
 
52,529

 
—

Other financing activities
228

 
(398
)
 
(267
)
 
—

 
—

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

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

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

 
—

 
(1,510
)
 
(396
)
 
—

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

 
$
5,596

 
$
(2,489
)
 
$
—

 
$
6,731

Cash and cash equivalents, beginning of period
53

 
2,564

 
11,798

 
20,572

 
—

 
34,987

Cash and cash equivalents, end of period
$
25

 
$
6,216

 
$
17,394

 
$
18,083

 
$
—

 
$
41,718


22

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, the use of the terms “WireCo,” the “Company,” “we,” “our” or “us” in the following refers to WireCo WorldGroup (Cayman) Inc., its wholly-owned subsidiaries, including WireCo WorldGroup Inc., and subsidiaries in which it has a controlling interest.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a reader of our financial statements with a narrative from the perspective of our management on our consolidated financial condition, results of operations, liquidity and capital resources on a historical basis and certain other factors that have affected recent earnings, as well as those factors that may affect future earnings. This MD&A is provided as a supplement to, and should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes included in this quarterly report. Additionally, our MD&A should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2014.

Forward-Looking Statements
This quarterly report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations. Forward-looking statements include those containing such words as “anticipates,” “believes,” “continues,” “estimates,” “expects,” “forecasts,” “outlook,” “plans,” “projects,” “should,” “targets,” “will,” or the negative of those words or other comparable terminology. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this quarterly report are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. You are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements as a result of various factors, including but not limited to those set forth under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2014. Such factors include, among others:

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

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

23

These Non-GAAP Financial Measures include:

•
Adjusted EBITDA
•
Adjusted Working Capital
•
Net Debt
•
Free Cash Flow

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. Also, in the respective sections of MD&A, we explain the ways in which management uses these Non-GAAP Financial Measures to evaluate our business and the reasons why management believes that these Non-GAAP Financial Measures provide useful information to investors.

Third Quarter 2015 Executive Summary
We provide steel and synthetic rope, specialty wire and engineered products across multiple customers and geographies which results in a diversified revenue stream. The long-term sales growth and profitability of our product portfolio is dependent not only on increased demand in the end markets which we serve and the overall economic environment, but also on our ability to increase our existing market share and expand our presence geographically, continuously improve operational excellence, identify, consummate and integrate strategic acquisitions and develop and market innovative new products. 
For the three months ended September 30, 2015, we reported sales of $171.4 million, a net loss of $5.2 million and Adjusted EBITDA of $27.5 million compared to sales of $217.1 million, a net loss of $35.2 million and Adjusted EBITDA of $39.0 million for the same period in 2014. For the nine months ended September 30, 2015, we reported sales of $525.5 million, a net loss of $24.3 million and Adjusted EBITDA of $81.9 million compared to sales of $654.1 million, a net loss of $37.3 million and Adjusted EBITDA of $116.7 million for the same period in 2014. Given our global operations, the strengthening of the U.S. dollar had a significant negative impact on our 2015 results.  For the three and nine months ended September 30, 2015, approximately 59% and 61% of our sales, respectively, were generated in currencies other than the U.S. dollar. The euro, Polish złoty and Mexican peso all devalued between 18-22% compared to the nine months ended September 30, 2014.  Given the translation of our international results into U.S. dollars, this devaluation unfavorably impacted our sales by $22.3 million and $70.5 million and our Adjusted EBITDA by $4.0 million and $12.7 million for the three months and nine months ended September 30, 2015, respectively. The foreign currency exchange impact on cash for the nine months ended September 30, 2015 is a decrease of $4.4 million. Conversely, while the appreciation of the U.S. dollar has an immediate negative impact on our earnings, there is potential for leveraging a weakening currency as a competitive sales advantage. Given our scale and ability to serve a global market, when our non-U.S. manufactured products are imported by customers in countries that have not experienced a currency devaluation, the prices of these produced goods have decreased.
As a result of the weakening oil and gas end market during 2015, we reduced our factory work force in the United States, Mexico and Poland and implemented workforce reductions in several administrative departments.  In addition, we took other cost containment measures, such as certain procurement initiatives and other selling and administrative savings. The disciplined management of capital expenditures during 2015 has also contributed to our cost savings initiatives. During the third quarter of 2015, management achieved $6.5 million of savings resulting from operational initiatives.
During the nine months ended September 30, 2015, we have been reducing our inventory in order to better match current demand. As a result, we have reduced our inventory levels in terms of dollars. In addition, we are strategically supporting certain customers in the short-term with longer payment terms which has resulted in an increase in days sales outstanding. Also, days payable outstanding decreased due to a large number of our rod suppliers having third quarter year-ends. Despite short-term challenges in some of our end markets, we continue to believe that our targeted strategies, including acquisitions, geographic expansion, market share gains and new product development, will provide attractive long-term opportunities for sustainable growth. We remain focused on maintaining our financial strength by adjusting our cost structure to reflect changes in demand levels and by proactively managing working capital and cash flow generation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

24

Consolidated Results of Operations
This section focuses on significant items that impacted our operating results for the three and nine months ended September 30, 2015 compared to the three and nine months ended September 30, 2014. Our results of operations have been converted to U.S. dollars from multiple currencies, which primarily include the euro, Polish złoty and Mexican peso. Our revenues and certain expenses are affected by fluctuations in the value of the U.S. dollar against these local currencies.

Three months ended September 30, 2015 compared to three months ended September 30, 2014
 
Three months ended
 
 
 
 
 
September 30,
 
Change
 
2015
 
2014
 
Dollars
 
Percent
 
(in thousands)
Net sales
$
171,356

 
$
217,076

 
$
(45,720
)
 
(21.1
)%
Gross profit
40,670

 
46,783

 
(6,113
)
 
(13.1
)%
Other operating expenses
(30,276
)
 
(34,604
)
 
4,328

 
(12.5
)%
Other expense, net
(14,140
)
 
(51,911
)
 
37,771

 
(72.8
)%
Income tax benefit (expense)
(1,446
)
 
4,540

 
(5,986
)
 
NM

Net loss
$
(5,192
)
 
$
(35,192
)
 
$
30,000

 
NM

Gross profit as % of net sales
23.7
%
 
21.6
%
 

 
 
Other operating expenses as % of net sales
17.7
%
 
15.9
%
 
 
 
 
NM = Not Meaningful

Net sales
Our consolidated net sales decreased $45.7 million, or 21.1%, for the three months ended September 30, 2015 as compared to the same period in 2014. Foreign currency exchange rate fluctuations contributed to $22.3 million of the decrease due to the depreciation of the euro, Polish złoty and Mexican peso when comparing the average exchange rates for the three months ended September 30, 2015 to the average exchange rates for the three months ended September 30, 2014.
Excluding the impact of foreign currency exchange rate fluctuations, rope sales for the quarter decreased $18.7 million primarily due to decreased sales in the onshore oil and gas, mining and industrial and infrastructure end markets. Sales to our onshore oil and gas end market decreased $19.2 million primarily driven by a slowdown in domestic drilling activity evidenced by the decline in rig count. According to Baker Hughes, the average North American onshore rig count for the third quarter of 2015 was 1,020 compared to 2,225 in the third quarter of 2014, a 54.2% decline, and the rig count at September 30, 2015 was 980 compared to 2,297 at September 30, 2014. Sales to our mining end market decreased $2.4 million primarily driven by a decrease in tons mined in the United States. According to the National Mining Association, tons mined in the United States decreased by 8.5% for the year-to-date period ended September 27, 2015 compared to the same period last year. Sales to our industrial and infrastructure end market decreased $4.5 million primarily due to weakness with global OEM cranes and continuing softening economic conditions in China. However, offshore oil and gas project sales increased $3.1 million for the three months ended September 30, 2015 compared to the same period last year. Rope sales represented 72% of our total consolidated net sales for both the three months ended September 30, 2015 and 2014.
Excluding the impact of foreign currency exchange rate fluctuations, specialty wire sales decreased $2.5 million for the three months ended September 30, 2015 compared to the same period last year primarily due to a slowdown in the fencing wire business in Poland. Specialty wire sales represented 17% of our total consolidated net sales for both the three months ended September 30, 2015 and 2014.
Excluding the impact of foreign currency exchange rate fluctuations, engineered products sales decreased $2.2 million for the three months ended September 30, 2015 compared to the same period last year primarily driven by lower sales within the mature oil and gas portfolio, offset by buoyancy sales. We produce buoyancy elements for the offshore industry to ensure that dynamic risers, cables and umbilicals are held in the correct wave configuration when submerged. Engineered product sales represented 11% of our total consolidated net sales for both the three months ended September 30, 2015 and 2014.

Gross profit
Gross profit decreased $6.1 million for the three months ended September 30, 2015 compared to the same period in 2014, and gross profit as a percentage of sales (“gross margin”) increased from 21.6% for the three months ended September 30, 2014 to

25

23.7% for the three months ended September 30, 2015. The decline in gross profit was directly related to the decline in sales. The higher gross margin was due to cost savings initiatives, partially offset by unfavorable product mix.

Other operating expenses
 
 
Three months ended September 30,
 
Change
 
 
2015
 
2014
 
Dollars
 
Percent
 
 
(in thousands)
Selling expenses
 
$
(8,904
)
 
$
(10,787
)
 
$
1,883

 
(17.5
)%
Administrative expenses
 
(19,117
)
 
(21,499
)
 
2,382

 
(11.1
)%
Amortization expense
 
(2,255
)
 
(2,318
)
 
63

 
(2.7
)%
Other operating expenses
 
$
(30,276
)
 
$
(34,604
)
 
$
4,328

 
(12.5
)%

Other operating expenses decreased $4.3 million, or 12.5%, for the three months ended September 30, 2015 compared to the same period in 2014. Total other operating expenses as a percentage of net sales increased from 15.9% for the third quarter of 2014 to 17.7% for the third quarter of 2015.
Selling expenses decreased $1.9 million, or 17.5%, for the three months ended September 30, 2015 compared to the same period in 2014 primarily due to foreign currency exchange rate fluctuations, which accounted for $1.0 million of the change. We incurred $0.4 million less external distributor commissions during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 due to the decline in net sales during the period. We also incurred $0.4 million less labor and related expenses during the three months ended September 30, 2015 compared to the three months ended September 30, 2014.
Administrative expenses decreased $2.4 million, or 11.1%, for the three months ended September 30, 2015 compared to the same period in 2014. Foreign currency exchange rate fluctuations accounted for $1.2 million of the decrease. As an offset, we incurred $2.1 million more reorganization and restructuring charges than the same period in prior year, considering the current period production and the corporate headquarters relocation. Due to the decline in Adjusted EBITDA, incentive compensation was $0.5 million lower in the third quarter of 2015 compared to the third quarter of 2014. We incurred $1.0 million less advisory fees in the third quarter of 2015 compared to the third quarter of 2014 due to external fees incurred on Paine & Partners' behalf related to business process improvements in 2014. We incurred $0.3 million less lease expenses during the three months ended September 30, 2015 compared to the same period in 2014 due to the corporate headquarters relocation. As a result of our workforce reductions during 2015, we incurred $0.3 million less personnel expenses during the three months ended September 30, 2015 compared to the three months ended September 30, 2014. As a result of impairment recorded on certain intangibles during 2014 as part of our annual impairment analysis, we incurred $0.2 million less impairment charges during the three months ended September 30, 2015 compared to the same period in 2014.

Other expense, net
 
 
Three months ended September 30,
 
Change
 
 
2015
 
2014
 
Dollars
 
Percent
 
 
(in thousands)
Interest expense, net
 
$
(19,597
)
 
$
(19,603
)
 
$
6

 
—
 %
Foreign currency exchange gains (losses), net
 
5,626

 
(31,816
)
 
37,442

 
(117.7
)%
Loss on extinguishment of debt
 
—

 
(617
)
 
617

 
100.0
 %
Other income (expense), net
 
(169
)
 
125

 
(294
)
 
(235.2
)%
Total other expense, net
 
$
(14,140
)
 
$
(51,911
)
 
$
37,771

 
(72.8
)%

Total other expense decreased by $37.8 million, or 72.8%, for the three months ended September 30, 2015 compared to the same period in 2014. For the three months ended September 30, 2015, foreign currency exchange gains were $5.6 million compared to foreign currency exchange losses of $31.8 million for the same period in 2014. At September 30, 2015 and 2014, we had intercompany loans that required remeasurement in the aggregate amounts of $383.7 million and $432.8 million, respectively. The U.S. dollar to euro exchange rate at September 30, 2014 was $1.00 to €0.7947 compared to $1.00 to €0.8926 at September 30, 2015. The U.S. dollar to the Polish złoty exchange rate at September 30, 2014 was $1.00 to zł3.3200 compared to $1.00 to zł3.7890 at September 30, 2015. The U.S. dollar to the Mexican peso exchange rate at September 30, 2014 was $1.00 to $13.4891 compared to $1.00 to $17.0771 at September 30, 2015.

26

Loss on extinguishment of debt decreased $0.6 million for the three months ended September 30, 2015 compared to the same period in 2014 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 in 2014.

Income tax expense/benefit
For the three months ended September 30, 2015, we recorded an income tax expense of $1.4 million compared to an income tax benefit of $4.5 million for the three months ended September 30, 2014. The resulting effective tax rate for the third quarter of 2015 and 2014 was (38.6)% and 11.4%, respectively. The Company's effective tax rate differs from the applicable statutory tax rate primarily due to valuation allowances on deferred tax assets in various jurisdictions, mix of earnings (losses) by jurisdictions and the effects of foreign tax rate differences.

Nine months ended September 30, 2015 compared to nine months ended September 30, 2014
The following table presents selected consolidated financial data for the nine months ended September 30, 2015 and 2014:
 
 
Nine months ended September 30,
 
Change
 
 
2015
 
2014
 
Dollars
 
Percent
 
 
(in thousands)
Net sales
 
$
525,526

 
$
654,086

 
$
(128,560
)
 
(19.7
)%
Gross profit
 
123,454

 
160,247

 
(36,793
)
 
(23.0
)%
Other operating expenses
 
(90,205
)
 
(104,355
)
 
14,150

 
(13.6
)%
Other expense, net
 
(56,959
)
 
(94,402
)
 
37,443

 
(39.7
)%
Income tax benefit (expense)
 
(595
)
 
1,177

 
(1,772
)
 
NM

Net loss
 
$
(24,305
)
 
$
(37,333
)
 
$
13,028

 
NM

Gross profit as % of net sales
 
23.5
%
 
24.5
%
 

 
 
Other operating expenses as % of net sales
 
17.2
%
 
16.0
%
 
 
 
 

Net sales
Our consolidated net sales decreased $128.6 million, or 19.7%, during the nine months ended September 30, 2015 as compared to the same period in 2014. Foreign currency exchange rate fluctuations contributed to $70.5 million of the decrease due to the depreciation of the euro, Polish złoty and Mexican peso when comparing the average exchange rates for the nine months ended September 30, 2015 to the average exchange rates for the nine months ended September 30, 2014.
Excluding the impact of foreign currency exchange rate fluctuations, rope sales for the nine months ended September 30, 2015 decreased $52.7 million primarily due to decreased sales in the onshore oil and gas and industrial and infrastructure end markets. Sales to our onshore oil and gas end market decreased $52.7 million primarily driven by a slowdown in domestic drilling activity evidenced by the decline in rig count. According to Baker Hughes, the average North American onshore rig count during the first nine months of 2015 was 1,218 compared to 2,155 during the same period in 2014, a 43.5% decrease. Sales to our industrial and infrastructure end market decreased $12.1 million primarily due to weakness with global OEM cranes and softening economic conditions in China, Brazil and Australia. However, offshore oil and gas project sales increased $13.0 million for the nine months ended September 30, 2015 compared to the same period last year. Rope sales represented 72% of our total consolidated net sales for the nine months ended September 30, 2015 compared to 73% for the same period in 2014.
Excluding the impact of foreign currency exchange rate fluctuations, specialty wire sales increased $1.3 million for the nine months ended September 30, 2015 compared to the same period in 2014 primarily due to increased activity in the Mexican construction sector, offset by a slowdown in the fencing wire business in Poland. Specialty wire sales represented 18% of our total consolidated net sales for the nine months ended September 30, 2015 compared to 16% for the same period in 2014.
Excluding the impact of foreign currency exchange rate fluctuations, sales of engineered products decreased $6.6 million for the nine months ended September 30, 2015 compared to the same period in 2014 primarily driven by lower sales within the mature oil and gas portfolio in 2015 and by higher end cap product sales in 2014 than in 2015, partially offset by buoyancy sales. End caps are highly engineered products produced for pipeline sealing applications. Engineered product sales represented 10% of our total consolidated net sales for the nine months ended September 30, 2015 compared to 11% for the same period in 2014.


27

Gross profit
Gross profit decreased $36.8 million and gross profit as a percentage of sales (“gross margin”) decreased from 24.5% for the nine months ended September 30, 2014 to 23.5% for the nine months ended September 30, 2015. The decline in gross profit was directly related to the decline in sales and the lower gross margin was primarily due to product mix. We saw volume growth in select specialty wire which generates lower margin than the products in the rope portfolio and conversely, saw volume declines in onshore oil and gas products which generate some of the Company's highest margins.

Other operating expenses
 
 
Nine months ended September 30,
 
Change
 
 
2015
 
2014
 
Dollars
 
Percent
 
 
(in thousands)
Selling expenses
 
$
(28,592
)
 
$
(33,328
)
 
$
4,736

 
(14.2
)%
Administrative expenses
 
(54,875
)
 
(62,971
)
 
8,096

 
(12.9
)%
Amortization expense
 
(6,738
)
 
(8,056
)
 
1,318

 
(16.4
)%
Other operating expenses
 
$
(90,205
)
 
$
(104,355
)
 
$
14,150

 
(13.6
)%

Other operating expenses decreased $14.2 million, or 13.6%, for the nine months ended September 30, 2015 compared to the same period in 2014. Overall, total other operating expenses as a percentage of net sales increased from 16.0% for the nine months ended September 30, 2014 to 17.2% for the nine months ended September 30, 2015.
Selling expenses decreased $4.7 million, or 14.2%, for the nine months ended September 30, 2015 compared to the same period in 2014 primarily due to foreign currency exchange rate fluctuations, which accounted for $3.6 million of the change. We incurred $0.5 million less labor and related expenses during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. We incurred $0.8 million less external distributor commissions during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to the decline in net sales during the period.
Administrative expenses decreased $8.1 million, or 12.9%, for the nine months ended September 30, 2015 compared to the same period in 2014. Foreign currency exchange rate fluctuations accounted for $4.1 million of the decrease due to the depreciation of the euro, Polish złoty and Mexican peso. During the first quarter of 2014, we incurred a non-cash impairment charge of $0.6 million related to an office building that was abandoned. Partially offsetting these decreases, reorganization and restructuring charges were $3.2 million higher during the nine months ended September 30, 2015 compared to the same period in 2014 due to current period production, workforce reductions and the corporate headquarters relocation. Due to the decline in Adjusted EBITDA, incentive compensation was $1.8 million lower during the nine months ended September 30, 2015 compared to the same period in 2014. We incurred $1.0 million less advisory fees during the nine months ended September 30, 2015 compared to the same period in 2014 due to external fees incurred on Paine & Partners' behalf related to business process improvements in 2014. We incurred $0.7 million less third party consultant fees during the nine months ended September 30, 2015 compared to the same period in 2014 primarily due to cost management initiatives, which included the management of more projects with internal resources instead of with external consultants. We incurred $0.9 million less lease expenses during the nine months ended September 30, 2015 compared to the same period in 2014 due to the corporate headquarters relocation. As a result of our workforce reductions during 2015, we incurred $0.5 million less personnel expenses during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. As a result of impairment recorded on certain intangibles during 2014 as part of our annual impairment analysis, we incurred $0.8 million less impairment charges during the nine months ended September 30, 2015 compared to the same period in 2014.
Amortization expense decreased $1.3 million, or 16.4%, primarily related to the depreciation of the euro, Polish złoty and Mexican peso during the nine months ended September 30, 2015.


28

Other expense, net
 
 
Nine months ended September 30,
 
Change
 
 
2015
 
2014
 
Dollars
 
Percent
 
 
(in thousands)
Interest expense, net
 
$
(55,221
)
 
$
(59,357
)
 
$
4,136

 
(7.0
)%
Foreign currency exchange gains (losses), net
 
(1,341
)
 
(35,131
)
 
33,790

 
(96.2
)%
Loss on extinguishment of debt
 
—

 
(617
)
 
617

 
100.0
 %
Other income (expense), net
 
(397
)
 
703

 
(1,100
)
 
(156.5
)%
Total other expense, net
 
$
(56,959
)
 
$
(94,402
)
 
$
37,443

 
(39.7
)%

Other expense decreased $37.4 million, or 39.7%, for the nine months ended September 30, 2015 compared to the same period in 2014. This decrease was primarily due to foreign currency exchange fluctuations.
Interest expense decreased $4.1 million for the nine months ended September 30, 2015 compared to 2014 primarily due to our cross-currency swaps.
Foreign currency exchange gains were $1.3 million for the nine months ended September 30, 2015 compared to foreign currency exchange losses of $35.1 million for the same period in 2014. At September 30, 2015 and 2014, we had intercompany loans that required remeasurement in the aggregate amounts of $383.7 million and $432.8 million, respectively. Foreign currency exchange losses for the nine months ended September 30, 2015 primarily related to the depreciation of the euro, Polish złoty and Mexican peso. The U.S. dollar to euro exchange rate at December 31, 2014 was $1.00 to €0.8237 compared to $1.00 to €0.8926 at September 30, 2015. The U.S. dollar to the Polish złoty exchange rate at December 31, 2014 was $1.00 to zł3.5196 compared to $1.00 to zł3.7890 at September 30, 2015. The U.S. dollar to the Mexican peso exchange rate at December 31, 2014 was $1.00 to $14.7348 compared to $1.00 to $17.0771 at September 30, 2015. These losses were offset by a $26.8 million unrealized gain on the fair value marked-to-market adjustment on the cross-currency swaps entered into during the third quarter of 2014. Foreign currency exchange losses for the nine months ended September 30, 2014 were primarily due to the depreciation of the euro. The U.S. dollar to euro exchange rate at December 31, 2013 was $1.00 to €0.7251 compared to $1.00 to €0.7947 at September 30, 2014.
Loss on extinguishment of debt decreased $0.6 million for the nine months ended September 30, 2015 compared to the same period in 2014 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 in 2014.

Income tax expense/benefit
For the nine months ended September 30, 2015, we recorded an income tax expense of $0.6 million compared to an income tax benefit of $1.2 million for the nine months ended September 30, 2014. The resulting effective tax rate for the nine months ended September 30, 2015 and 2014 was (2.5)% and 3.1%, respectively. The Company's effective tax rate differs from the applicable statutory tax rate primarily due to valuation allowances on deferred tax assets in various jurisdictions, mix of earnings (losses) by jurisdictions and the effects of foreign tax rate differences.

Adjusted EBITDA
Adjusted EBITDA is a Non-GAAP Financial Measure, defined in the indenture governing the 9.50% Senior Notes, as net income (loss) plus, without duplication: interest expense, income tax expense (benefit), depreciation and amortization, as further adjusted by (i) all fees and costs incurred in connection with any merger, consolidation, acquisition or offering of debt or equity securities, (ii) realized and unrealized gains (losses) resulting from foreign currency transactions, (iii) payments of advisory fees pursuant to the Management Fee Letter with Paine & Partners, LLC, (iv) all amounts deducted in arriving at net income (loss) in respect of severance packages payable in connection with the termination of any officer, director or employee, (v) business optimization expenses and other reorganization or restructuring charges, reserves or expenses (which, for the avoidance of doubt, will include, without limitation, the effect of inventory optimization programs, plant closures, facility consolidations, retention, system establishment costs, contract termination costs, future lease commitments and excess pension charges), (vi) other expenses, such as share-based compensation expense and income (loss) on our investments in joint ventures, and (vii) non-cash items, other than the accrual of revenue in the ordinary course of business.
We use this Non-GAAP Financial Measure internally to evaluate our performance, allocate resources, calculate debt covenant ratios and for incentive compensation purposes. We believe that our presentation of this measure provides investors with greater transparency with respect to our results of operations and is useful for peer comparisons.

29

The following is a reconciliation of net loss to Adjusted EBITDA:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Net loss (GAAP)
 
$
(5,192
)
 
$
(35,192
)
 
$
(24,305
)
 
$
(37,333
)
Plus:
 
 
 
 
 
 
 
 
Interest expense, net
 
19,597

 
19,603

 
55,221

 
59,357

Income tax expense (benefit)
 
1,446

 
(4,540
)
 
595

 
(1,177
)
Depreciation and amortization
 
11,232

 
12,192

 
33,746

 
38,140

Foreign currency exchange losses (gains), net
 
(5,626
)
 
31,816

 
1,341

 
35,131

Share-based compensation
 
1,926


1,969

 
5,779

 
5,539

Other expense (income), net
 
169

 
(125
)
 
397

 
(703
)
Loss on extinguishment of debt
 
—

 
617

 
—

 
617

Acquisition costs
 
—

 
—

 
—

 
347

Advisory fees
 
953

 
2,001

 
2,928

 
3,899

Reorganization and restructuring charges
 
2,956

 
832

 
5,212

 
1,968

Non-cash impairment of assets
 
—

 
246

 
—

 
844

Effect of Inventory Optimization Program
 
—

 
9,244

 
—

 
9,244

Other adjustments
 
58

 
289

 
998

 
872

Adjusted EBITDA (Non-GAAP)
 
$
27,519

 
$
38,952

 
$
81,912

 
$
116,745


Credit Agreement EBITDA
Credit Agreement EBITDA is a Non-GAAP Financial Measure, defined in the Credit Agreement as Consolidated Net Income, adjusted by adding thereto, (a) to the extent deducted in determining Consolidated Net Income, the sum of (i) Consolidated Interest Expense, (ii) provision for Taxes based on income of the Parent and its Subsidiaries, (iii) depreciation and amortization expense, (iv) Closing Date Transaction Expenses incurred in connection with the Closing Date Transactions, (v) Transaction Expenses of the type described in clause (a) of the definition thereof, provided that the amount of Transaction Expenses included pursuant to this clause (v) shall not exceed (a) with respect to Transaction Expenses paid to the Sponsor, 1.0% of the value of the applicable transaction and (b) with respect to Transaction Expenses paid to any other Person, such Transaction Expenses as are normal and customary, (vi) non-cash, stock-based compensation expense, (vii) non-recurring or unusual losses or expenses (including non-recurring or unusual losses on permitted sales or dispositions of assets and casualty events), (viii) all other non-cash charges that represent an accrual to the extent no cash is expected to be paid in the next twelve months (excluding any such non-cash item to the extent that it represents an accrual or reserve for potential cash items in any future period or amortization of a prepaid cash item that was paid in a prior period), (ix) Permitted Management Fees paid during such period, (x) non-cash, restricted stock award charges, (xi) unrealized non- cash losses resulting from foreign currency balance sheet adjustments required by GAAP, (xii) severance packages payable in connection with the termination of the ten highest paid officers, directors or employees of Parent or any of its Subsidiaries in an aggregate amount not to exceed $5,000,000 from the Closing Date until the date of determination and (xiii) non-cash minority interest expense; minus (b) to the extent included in determining Consolidated Net Income, the sum of (i) extraordinary, non-recurring or unusual gains (including extraordinary, non-recurring or unusual income or gains on permitted sales or dispositions of assets and casualty events), (ii) all other non-cash income to the extent no cash is expected to be received in the next twelve months (excluding any such non-cash item to the extent it represents the reversal of and accrual or reserve for potential cash item in any prior period), (iii) unrealized non-cash gains resulting from foreign currency balance sheet adjustments required by GAAP, and (iv) non-cash minority interest income.
We use this Non-GAAP Financial Measure to calculate debt covenant ratios, to the extent it differs from Adjusted EBITDA as described above. We believe that our presentation of this measure provides investors with greater transparency with respect to the inputs utilized to determine covenant compliance. For the last twelve months ended September 30, 2015, our Credit Agreement EBITDA is $127.3 million.

30

 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Adjusted EBITDA (Non-GAAP)
 
$
27,519

 
$
38,952

 
$
81,912

 
$
116,745

Plus:
 
 
 
 
 
 
 
 
Additional reorganization and restructuring charges
 
—

 
—

 
261

 
—

Additional effect of Inventory Optimization Program
 
143

 
—

 
143

 
—

Production curtailment
 
737

 
—

 
1,861

 
—

Impact of nonrecurring resin procurement costs
 
920

 
—

 
920

 
—

Impact of nonrecurring and unusual items in Brazil
 
—

 
—

 
3,745

 
—

Pro forma SG&A expense savings
 
—

 
1,175

 
2,000

 
3,525

Additional other adjustments
 
—

 
—

 
202

 
—

Credit Agreement EBITDA (Non-GAAP)
 
$
29,319

 
$
40,127

 
$
91,044

 
$
120,270


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. Based on our current assessment of our operating plan, we believe that our cash and cash equivalents balance, cash flow from operations, and availability under our Revolving Loan Facility will be adequate to fund anticipated operating, capital and debt service requirements and other commitments over the next twelve months.
Our debt financing consists of secured credit facilities due in February 2017 and senior notes due in May 2017. While these maturity dates are not impending, we have begun preliminary diligence on optimizing our capital structure. We are constantly evaluating capital markets and will be ready to refinance when market conditions are appropriate.
Total available liquidity, defined as availability under our Revolving Loan Facility plus cash and cash equivalents, was $123.4 million at September 30, 2015 compared to $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 if applicable, further restricted by certain covenants in our credit agreements. On June 24, 2015, we entered into a third amendment (the “Amendment”) to the credit agreement dated as of July 12, 2012 (the "Credit Agreement"). The Amendment, among other things, amended the Credit Agreement to (i) update the Interest Coverage Ratio financial covenant for fiscal quarters ending June 30, 2015 and thereafter from a range of 1.75x to 2.00x to a fixed ratio covenant of 1.50x and (ii) reduce incremental capacity to the greater of (a) $75.0 million and (b) 2.25:1.00 Senior Secured Leverage from the greater of (a) $125.0 million and (b) 2.75:1.00 Senior Secured Leverage. We do not anticipate that the Amendment will have a material impact on our available liquidity.
We reinvest the earnings of substantially all of our subsidiaries in those respective operations. The foreign operating subsidiaries use cash generated from earnings to fund working capital, invest in capital expenditures and service interest and principal payments on intercompany debt. Our outstanding debt is issued by the U.S. operating subsidiary and there are intercompany loans within the Company's legal structure that are paid with earnings from the operating subsidiaries in foreign jurisdictions to provide liquidity in the U.S. for interest and principal payments on our outstanding debt. Of the consolidated cash and cash equivalents balance of $34.6 million at September 30, 2015, cash and cash equivalents held by our foreign subsidiaries were $30.9 million, of which $5.1 million was in U.S. dollars. The cash balances in currencies other than the U.S. dollar are primarily in the euro and can be readily converted to U.S. dollars. It is our present intention to permanently reinvest the undistributed earnings associated with our foreign subsidiaries, and our current plans do not require repatriation of these earnings other than servicing intercompany loans.

Adjusted Working Capital 
Within our asset base, working capital management is our largest opportunity for cash generation. During these challenging market conditions, we continue to monitor working capital and our cash conversion cycle. Working Capital, which is all current assets minus all current liabilities, decreased from $283.1 million at December 31, 2014 to $243.5 million at September 30, 2015. Adjusted Working Capital, a Non-GAAP Financial Measure defined as accounts receivable plus

31

inventories less accounts payable and customer advances, decreased from $263.5 million at December 31, 2014 to $247.8 million at September 30, 2015. The decrease in Working Capital and Adjusted Working Capital was primarily due to foreign currency exchange rate fluctuations. During this downturn in certain end markets, we are trying to manage inventory levels in line with the demand. Also, we saw declines in accounts receivable and accounts payable related to the reduced demand in certain key end markets of our business. Our days sales outstanding increased from 61 days at December 31, 2014 to 64 days at September 30, 2015 due to supporting customers in our challenging end markets with longer terms. Our days payable outstanding decreased from 56 days at December 31, 2014 to 46 days at September 30, 2015 due to a large number of our rod suppliers having third quarter year-ends. Adjusted Working Capital as a percentage of annualized third quarter sales was 36.2% for the third quarter of 2015 compared to 32.5% for the fourth quarter of 2014 with a cash conversion cycle of 150 days and 136 days for the respective periods. We use Adjusted Working Capital to monitor our liquidity and believe that Adjusted Working Capital provides a meaningful measure of our efforts to manage inventory, our customer collections and vendor payments.

The following is a reconciliation of Adjusted Working Capital to working capital:
 
 
September 30, 2015
 
December 31, 2014
 
 
(in thousands)
Accounts receivable, net
 
$
134,297

 
$
143,068

Inventories, net
 
192,211

 
225,075

Accounts payable
 
(66,738
)
 
(98,914
)
Customer advances
 
(11,964
)
 
(5,716
)
Adjusted Working Capital (Non-GAAP)
 
247,806

 
263,513

Plus: All other current assets
 
53,049

 
78,908

Less: All other current liabilities
 
(57,331
)
 
(59,320
)
Working capital (GAAP)
 
$
243,524

 
$
283,101


Cash Flow Information
The following tables summarize our cash flows from operating, investing and financing activities for the nine months ended September 30, 2015 and 2014, respectively:
 
 
Nine months ended September 30,
 
 
2015
 
2014
 
 
(in thousands)
Cash flows provided by (used in)
 
 
 
 
Operating activities
 
$
36,003

 
$
48,426

Investing activities
 
(22,829
)
 
(18,835
)
Financing activities
 
(32,363
)
 
(20,954
)
Effect of exchange rates on cash and cash equivalents
 
(4,399
)
 
(1,906
)
Increase (decrease) in cash and cash equivalents
 
(23,588
)
 
6,731

Cash and cash equivalents, beginning of period
 
58,195

 
34,987

Cash and cash equivalents, end of period
 
$
34,607

 
$
41,718


Cash from Operating Activities
 
 
Nine months ended September 30,
 
 
2015
 
2014
 
 
(in thousands)
Net loss
 
$
(24,305
)
 
$
(37,333
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
43,658

 
83,170

Changes in assets and liabilities
 
16,650

 
2,589

Net cash provided by operating activities
 
$
36,003

 
$
48,426



32

Cash flows from operating activities decreased in the nine months ended September 30, 2015 over the prior period primarily due to less cash earnings related to business performance. Cash earnings is our net loss adjusted for non-cash items, such as depreciation and amortization among other reconciling items.

Cash from Investing Activities
 
 
Nine months ended September 30,
 
 
2015
 
2014
 
 
(in thousands)
Capital expenditures
 
$
(22,829
)
 
$
(16,213
)
Acquisition of business
 
—

 
(4,573
)
Other investing activities
 
—

 
1,951

Net cash used in investing activities
 
$
(22,829
)
 
$
(18,835
)

We expect capital expenditures to be between $25.0 million and $30.0 million for the year ended December 31, 2015. A significant portion of the anticipated capital expenditures in the fourth quarter of 2015 is committed. During the second quarter of 2014, we purchased certain assets from Endenburg B.V. for approximately $4.6 million.

Cash from Financing Activities
 
 
Nine months ended September 30,
 
 
2015
 
2014
 
 
(in thousands)
Principal payments on long-term debt
 
$
(17,116
)
 
$
(5,621
)
Debt issuance costs paid
 
(1,067
)
 
—

Retirement of long-term debt
 
—

 
(26,946
)
Net borrowings (repayments) under revolving credit agreement
 
(14,180
)
 
12,050

Other financing activities
 
—

 
(437
)
Net cash used in financing activities
 
$
(32,363
)
 
$
(20,954
)

During the nine months ended September 30, 2015, we paid down our long-term debt $32.4 million.

Long-term Debt
For a detailed discussion of our long-term debt, see Note 7—“Borrowings” to our audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of our annual report on Form 10-K for the year ended December 31, 2014.

Net Debt
At September 30, 2015, our total debt, including capital leases, was $844.3 million compared to Net Debt of $808.1 million, with the difference being cash currently and eventually available to pay down our outstanding debt. 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. Total debt decreased $32.3 million from year-end due to repayments on our revolver, routine principal payments and passage of time with our capital lease contracts. Net Debt increased because the decrease in our cash and cash equivalents balance was greater than the reduction in total debt. Our Net Leverage ratio, Net Debt to the last twelve months of Adjusted EBITDA, increased to 6.36x at September 30, 2015, compared to 5.42x at December 31, 2014, due to the decline in Adjusted EBITDA. 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.

33

The following is a reconciliation of total debt to Net Debt:
 
 
September 30, 2015
 
December 31, 2014
 
 
(in thousands)
Borrowings under Revolving Loan Facility
 
$
54,570

 
$
68,750

Term Loan due 2017
 
307,246

 
324,362

9.00% Senior Notes due 2017
 
56,000

 
56,000

9.50% Senior Notes due 2017
 
425,000

 
425,000

Other indebtedness
 
—

 
157

Capital lease obligations
 
1,460

 
2,328

Total debt at face value plus capital lease obligations (GAAP)
 
844,276

 
876,597

Less: Cash and cash equivalents
 
(34,607
)
 
(58,195
)
Less: Restricted cash
 
(1,584
)
 
(1,565
)
Net Debt (Non-GAAP)
 
$
808,085

 
$
816,837


Free Cash Flow
We generated cash flow from operations of $36.0 million during the nine months ended September 30, 2015 compared to a consumption of $8.8 million in Free Cash Flow during the same period. Free Cash Flow, a Non-GAAP Financial Measure, is defined as cash flows from operating activities less capital expenditures, and further adjusted by effect of exchange rates on cash and cash equivalents and other items. Our Free Cash Flow is lower than cash flow from operations primarily due to capital expenditures.
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. We use Free Cash Flow internally for incentive compensation purposes. 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. Free Cash Flow is also equivalent to the change in Net Debt.
The following is a reconciliation of net cash provided by operating activities to Free Cash Flow:
 
 
Nine months ended
 
 
September 30,
 
 
2015
 
2014
 
 
(in thousands)
Net cash provided by operating activities (GAAP)
 
$
36,003

 
$
48,426

Less: capital expenditures
 
(22,829
)
 
(16,213
)
Less: acquisition of business and other investing activities
 
—

 
(2,622
)
Effect of exchange rates on cash and cash equivalents
 
(4,399
)
 
(1,906
)
Other items
 
(23
)
 
312

Free Cash Flow (Non-GAAP)
 
$
8,752

 
$
27,997



34

Contractual Obligations and Commitments
As of September 30, 2015, the only material change in our contractual obligations and commitments from those reported in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our annual report on Form 10-K for the year ended December 31, 2014 is related to an operating lease agreement entered into for our corporate headquarters relocation.
 
Payments due by period
 
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Obligations:
(in thousands)
Long-term debt (1)
 
$
830

 
$
3,318

 
$
838,668

 
$
—

 
$
—

 
$
—

 
$
842,816

Interest on long-term debt (2)
 
16,860

 
67,292

 
25,601

 
—

 
—

 
—

 
109,753

Capital leases
 
432

 
323

 
138

 
122

 
299

 
1

 
1,315

Operating leases
 
1,508

 
3,554

 
2,514

 
1,559

 
956

 
3,814

 
13,905

Pension benefits
 
53

 
277

 
315

 
292

 
343

 
1,883

 
3,163

Total contractual obligations
 
$
19,683

 
$
74,764

 
$
867,236

 
$
1,973

 
$
1,598

 
$
5,698

 
$
970,952

(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.

Off-balance Sheet Arrangements
Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases, which have only materially changed from the disclosure in our annual report on Form 10-K for the year ended December 31, 2014 in relation to our corporate headquarters relocation. We also periodically maintain standby letters of credit for purchase of inventory, contract performance on certain sales contracts and other guarantees of our performance.

Critical Accounting Policies
A discussion of our critical accounting policies can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our annual report on Form 10-K for the year ended December 31, 2014. There have been no significant changes in our critical accounting policies since year-end.

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk
Other than as described below, there was no material change from the information included in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our annual report on Form 10-K for the year ended December 31, 2014.

Foreign Currency Exchange Rate Risk. The volatility in foreign currency exchange rates resulted in significant unrealized foreign currency exchange losses of $22.1 million on intercompany loans denominated in U.S. dollars for the nine months ended September 30, 2015. At September 30, 2015, we had intercompany loans that required remeasurement in the aggregate amount of $383.7 million, of which $282.7 million were with a subsidiary whose functional currency is the euro.

35

The unrealized foreign currency exchange gains (losses) due to a hypothetical 10% change in the exchange rates of the U.S. dollar to the euro, Polish złoty and Mexican peso are shown in the following table:
 
Nine months ended September 30,
 
2015
 
(in thousands)
 
+10%
 
-10%
Unrealized foreign currency exchange gains (losses) due to hypothetical 10% rate movement:

 
 
 
U.S. dollar to euro
$
(69,737
)
 
$
22,116

U.S. dollar to Polish złoty
(20,127
)
 
6,286

U.S. dollar to Mexican peso
(1,588
)
 
(308
)

At times, we have partially hedged foreign currency exchange rate volatility through the use of derivative instruments. During 2014, we entered into cross-currency swaps with an aggregate notional value of $300.0 million to hedge exposures to foreign currency exchange rate risk. During 2015, we entered into a cross-currency swap with a notional value of $125.0 million to hedge exposures to foreign currency exchange rate risk. Among other things, the table below includes the potential change in fair value of these instruments related to a hypothetical 10% change in the foreign currency exchange rates. Refer to Note 5—“Derivative Financial Instruments” to our unaudited interim consolidated financial statements in Part I, Item 1 of this quarterly report for further information on these cross-currency swap contracts.
Cross-currency swaps:
 
 
Fair value at December 31, 2014
 
$
16,133

Unrealized gain for the nine months ended September 30, 2015
 
23,428

Fair value at September 30, 2015
 
39,561

Change in fair value due to hypothetical 10% foreign currency exchange rate movement
 
44,803


Notwithstanding our efforts to mitigate some foreign currency exchange rate risk, we do not hedge all of our foreign currency exposures, and there can be no assurance that our mitigating activities related to the exposures that we hedge will adequately protect us against risks associated with foreign currency fluctuations.

Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
The Company's management, under the supervision and with the participation of our CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Exchange Act) at September 30, 2015. Based on this evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2015.

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

PART II – OTHER INFORMATION

Item 1.Legal Proceedings
We are not a party to any material legal proceedings. From time to time, we are involved in routine litigation arising in the ordinary course of business, which is incidental to our operations. For further information required by this item, refer to Note 11

36

—“Commitments and Contingencies” to our unaudited interim consolidated financial statements in Part I, Item 1 of this quarterly report.

Item 1A.Risk Factors
There have been no material changes in our Risk Factors from those disclosed in Item 1A, Risk Factors, in our annual report on Form 10-K for the year ended December 31, 2014.

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

Item 3.     Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures
Not applicable.

Item 5.     Other Information
None.

Item 6. Exhibits
Exhibit
No.

Description of Exhibits Filed with this Report
 
 
 
31.1

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

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

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

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

  
XBRL Instance Document
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB

 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document


37

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WireCo WorldGroup Inc.
 
 
 
 
 
 
 
(Registrant)
 
 
 
 
 
Dated:
November 10, 2015
 
 
 
By:
 
/s/ Brian G. Block
 
 
 
 
 
 
 
Brian G. Block
 
 
 
 
 
 
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
 
 
 
 




38

WireCo WorldGroup Inc. Reports

Also read