WireCo WorldGroup Inc. - FORM 10-Q - August 11, 2016

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EX-32.2 - EXHIBIT 32.2 - WireCo WorldGroup Inc.exhibit322_q2x2016.htm
EX-32.1 - EXHIBIT 32.1 - WireCo WorldGroup Inc.exhibit321_q2x2016.htm
EX-31.2 - EXHIBIT 31.2 - WireCo WorldGroup Inc.exhibit312_q2x2016.htm
EX-31.1 - EXHIBIT 31.1 - WireCo WorldGroup Inc.exhibit311_q2x2016.htm
EX-10.1 - EXHIBIT 10.1 - WireCo WorldGroup Inc.exhibit101q2_2016.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
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 August 8, 2016 the Registrant had 100 shares of common stock outstanding.



WireCo WorldGroup Inc.
Quarterly Report
For the period ended June 30, 2016
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
 
June 30, 2016
 
December 31, 2015
Current assets:
 
(unaudited)
 
 
Cash and cash equivalents
 
$
43,124

 
$
21,060

Restricted cash
 
1,819

 
1,522

Accounts receivable, less allowance for doubtful accounts of $2,259 and $2,180, at June 30, 2016 and December 31, 2015, respectively
 
128,412

 
124,463

Other receivables
 
3,395

 
2,779

Inventories, net
 
188,403

 
186,964

Prepaid expenses and other current assets
 
7,728

 
8,133

Total current assets
 
$
372,881

 
$
344,921

Property, plant and equipment, less accumulated depreciation of $192,508 and $196,653, at June 30, 2016 and December 31, 2015, respectively
 
272,960

 
283,655

Intangible assets, net
 
99,630

 
102,765

Goodwill
 
182,782

 
181,738

Non-current deferred income tax assets
 
142

 
1,459

Non-current derivative assets
 
—

 
47,519

Other non-current assets
 
9,235

 
9,272

Total assets
 
$
937,630

 
$
971,329

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
827,208

 
$
8,948

Interest payable
 
6,085

 
6,159

Accounts payable
 
67,890

 
72,153

Accrued compensation and benefits
 
19,081

 
18,516

Other current liabilities
 
23,575

 
22,967

Total current liabilities
 
$
943,839

 
$
128,743

Long-term debt, excluding current maturities
 
—

 
811,090

Non-current deferred income tax liabilities
 
34,476

 
34,214

Other non-current liabilities
 
14,620

 
13,711

Total liabilities
 
$
992,935

 
$
987,758

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 June 30, 2016 and December 31, 2015
 
$
21

 
$
21

Additional paid-in capital
 
243,689

 
240,379

Accumulated other comprehensive loss
 
(80,584
)
 
(80,694
)
Accumulated deficit
 
(205,871
)
 
(164,263
)
Treasury stock, at cost. 49,169 shares at June 30, 2016
and December 31, 2015
 
(14,465
)
 
(14,465
)
Total stockholders’ deficit attributable to WireCo WorldGroup (Cayman) Inc.
 
$
(57,210
)
 
$
(19,022
)
Non-controlling interests
 
1,905

 
2,593

Total stockholders’ deficit
 
$
(55,305
)
 
$
(16,429
)
Total liabilities and stockholders’ deficit
 
$
937,630

 
$
971,329

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

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


 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
156,438

 
$
173,814

 
$
305,439

 
$
354,170

Cost of sales
(119,025
)
 
(133,032
)
 
(231,403
)
 
(271,387
)
Gross profit
37,413

 
40,782

 
74,036

 
82,783

Other operating expenses:

 

 

 

Selling expenses
(8,714
)
 
(9,912
)
 
(17,248
)
 
(19,687
)
Administrative expenses
(16,547
)
 
(17,786
)
 
(36,164
)
 
(35,758
)
Amortization expense
(2,167
)
 
(2,174
)
 
(4,245
)
 
(4,483
)
Total other operating expenses
(27,428
)
 
(29,872
)
 
(57,657
)
 
(59,928
)
Operating income
9,985

 
10,910

 
16,379

 
22,855

Other income (expense):

 

 

 

Interest expense, net
(16,204
)
 
(16,637
)
 
(35,175
)
 
(35,625
)
Foreign currency exchange losses, net
(13,869
)
 
(2,689
)
 
(17,413
)
 
(6,966
)
Other income (expense), net
(1,910
)
 
80

 
(1,851
)
 
(228
)
Total other expense, net
(31,983
)
 
(19,246
)
 
(54,439
)
 
(42,819
)
Loss before income taxes
(21,998
)
 
(8,336
)
 
(38,060
)
 
(19,964
)
Income tax benefit (expense)
123

 
(6,709
)
 
(4,289
)
 
852

Net loss
(21,875
)
 
(15,045
)
 
(42,349
)
 
(19,112
)
Less: Net loss attributable to non-controlling interests
(214
)
 
(926
)
 
(741
)
 
(246
)
Net loss attributable to WireCo WorldGroup (Cayman) Inc.
$
(21,661
)
 
$
(14,119
)
 
$
(41,608
)
 
$
(18,866
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.




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


 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(21,875
)
 
$
(15,045
)
 
$
(42,349
)
 
$
(19,112
)
Other comprehensive loss:
 
 
 
 
 
 

Foreign currency translation gain (loss)
(2,793
)
 
(4,886
)
 
163

 
(22,342
)
Comprehensive loss
(24,668
)
 
(19,931
)
 
(42,186
)
 
(41,454
)
Less: Comprehensive loss attributable to non-controlling interests
(313
)
 
(1,946
)
 
(688
)
 
(1,088
)
Comprehensive loss attributable to WireCo WorldGroup (Cayman) Inc.
$
(24,355
)
 
$
(17,985
)
 
$
(41,498
)
 
$
(40,366
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.



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


 
 
Six months ended
 
 
June 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(42,349
)
 
$
(19,112
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 

Depreciation and amortization
 
21,529

 
22,514

Amortization of debt issuance costs, discounts and premium
 
3,820

 
3,836

Share-based compensation
 
3,310

 
3,852

Unrealized gains on derivative instruments, net
 
—

 
(23,649
)
Realized losses on derivative instruments, net

 
18,607

 
—

Proceeds from derivative instruments
 
28,704

 
—

Unrealized foreign currency exchange losses (gains), net
 
(3,627
)
 
27,951

Provision for deferred income taxes
 
1,245

 
(30
)
Other adjustments
 
2,032

 
(131
)
Changes in assets and liabilities:
 

 

Accounts receivable
 
(1,348
)
 
4,319

Inventories
 
(1,177
)
 
11,153

Prepaid expenses and other assets
 
(768
)
 
(2,465
)
Interest payable
 
(76
)
 
(103
)
Accounts payable
 
(4,119
)
 
(19,781
)
Other accrued liabilities
 
2,269

 
3,350

Net cash provided by operating activities
 
$
28,052

 
$
11,704

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(9,013
)
 
(17,462
)
Net cash used in investing activities
 
$
(9,013
)
 
$
(17,462
)
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(7,349
)
 
(16,324
)
Debt issuance costs paid
 
—

 
(1,067
)
Borrowings under revolving credit agreement
 
53,250

 
47,400

Repayments under revolving credit agreement
 
(42,550
)
 
(40,550
)
Net cash provided by (used in) financing activities
 
$
3,351

 
$
(10,541
)
Effect of exchange rates on cash and cash equivalents
 
(326
)
 
(3,852
)
Increase (decrease) in cash and cash equivalents
 
$
22,064

 
$
(20,151
)
Cash and cash equivalents, beginning of period
 
21,060

 
58,195

Cash and cash equivalents, end of period
 
$
43,124

 
$
38,044

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid for interest, net of interest capitalized
 
$
30,777

 
$
33,865

Cash paid for income taxes, net of refunds
 
4,279

 
3,384

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, 2015.
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. The Company adopted the new guidance in the first quarter of 2016 and applied it retrospectively. The adoption of this standard resulted in the Company presenting its remaining unamortized debt issuance costs as a direct deduction from the carrying amount of the related debt liability, and there was no impact on the Company's operating results.
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 the Company during the first quarter of 2017, with early adoption permitted. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which affects entities that issue share-based payment awards to their employees. This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 is effective for all interim and 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.
Stock Subscription Agreement
On June 25, 2016, the Company entered into a Stock Subscription Agreement (the "Subscription Agreement"), with Onex Wildcat LLC ("Onex") pursuant to which the Company agreed to issue and sell to Onex approximately 5.0 million newly issued ordinary shares, par value $0.01 per share, for a majority interest in the Company, in exchange for aggregate consideration of approximately $260,000, which will be paid in cash (collectively referred to as the "Transaction"). The cash received will be

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

used to repay the Company’s existing credit facilities and notes and fees and expenses in connection with the transactions. The purchase price and the aggregate number of shares to be issued to Onex at closing is subject to adjustment in accordance with the terms of the Subscription Agreement based on the amount of indebtedness of the Company as of June 30, 2016.
The Subscription Agreement contains representations and warranties of the Company and Onex which are customary for transactions of this type and which do not survive the closing of the Transaction. The Company has agreed, subject to the terms of the Subscription Agreement, to various customary covenants, including, among others, to operate its business in the ordinary course and substantially in accordance with past practice. Onex has obtained committed financing in connection with the Transaction and has agreed, subject to the terms of the Subscription Agreement, to use its reasonable best efforts to obtain such financing on the terms of its commitment letters. The parties have also agreed to use their respective reasonable best efforts to obtain any approvals from governmental authorities necessary for the Transaction, including antitrust approvals. It is expected that in connection with the consummation of the Transaction, the Company’s existing indebtedness will be repaid, redeemed or discharged.
The issuance of shares under the Subscription Agreement is subject to customary closing conditions, including, among other things, (i) the absence of any law or order that would make the Company’s issuance or Onex’s purchase of the shares illegal or would otherwise prohibit such issuance, sale or purchase, or would otherwise prohibit the consummation of the transactions; (ii) expiration or termination of applicable waiting periods, or receipt of applicable approvals, under applicable antitrust laws, including European Commission approval and the expiration of waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iii) the availability of the senior debt financing required to consummate the Transaction; and (iv) the satisfaction of the conditions to repayment, redemption or discharge of the Company’s existing financing. The Subscription Agreement contains customary termination rights for both the Company and Onex, including the right of either party to terminate the Subscription Agreement if the closing shall not have occurred on or before October 31, 2016. A termination fee may be payable by Onex if financing for the Transaction cannot be obtained by closing in accordance with the terms of the Subscription Agreement.

(2) Inventories, net
The major classes of inventories were as follows as of the dates indicated:
 
 
June 30, 2016
 
December 31, 2015
Raw materials, net
 
$
66,960

 
$
64,826

Work in process, net
 
6,753

 
9,535

Finished goods, net
 
114,690

 
112,603

Inventories, net
 
$
188,403

 
$
186,964


(3) Intangible Assets and Goodwill
The components of finite-lived intangible assets were as follows as of the dates indicated:
 
 
June 30, 2016
 
December 31, 2015
 
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Finite-lived assets
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
117,951

 
$
(94,569
)
 
$
23,382

 
$
117,459

 
$
(90,736
)
 
$
26,723

Patented and unpatented technology
 
17,419

 
(10,735
)
 
6,684

 
17,395

 
(10,271
)
 
7,124

Other
 
6,250

 
(6,250
)
 
—

 
6,214

 
(6,214
)
 
—

Total finite-lived intangible assets
 
$
141,620

 
$
(111,554
)
 
$
30,066

 
$
141,068

 
$
(107,221
)
 
$
33,847



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

Using the exchange rates in effect at period end, estimated amortization of finite-lived intangible assets as of June 30, 2016 was as follows:
Remainder of 2016
 
$
4,201

2017
 
6,852

2018
 
3,224

2019
 
2,986

2020
 
2,748

Thereafter
 
10,055

Total
$
30,066


Intangible assets with indefinite lives are not amortized. The carrying values of trade names as of June 30, 2016 and December 31, 2015 were $69,564 and $68,918, respectively.

The change in the carrying value of goodwill was as follows as of the dates indicated:
December 31, 2015
$
181,738

Foreign currency translation
1,044

June 30, 2016
$
182,782


(4) Borrowings
Outstanding debt consisted of the following as of the dates indicated:
 
 
June 30, 2016
 
December 31, 2015
Current
 
 
 
 
Borrowings under Revolving Loan Facility
 
53,005

 
—

Term Loan due 2017
 
299,105

 
—

9.00% Senior Notes due 2017
 
56,000

 
—

9.50% Senior Notes due 2017
 
425,000

 
—

Current maturities of long-term debt
 
—

 
8,948

Less: Unamortized discount, net
 
(522
)
 
—

Less: Deferred financing fees, net
 
(5,380
)
 
—

Current maturities of long-term debt, net of unamortized discount and deferred financing fees
 
$
827,208

 
$
8,948

Long-Term
 
 
 
 
Borrowings under Revolving Loan Facility
 
—

 
42,305

Term Loan due 2017
 
—

 
306,454

9.00% Senior Notes due 2017
 
—

 
56,000

9.50% Senior Notes due 2017
 
—

 
425,000

Less: Unamortized premium (discount), net
 
—

 
(603
)
Less: Deferred financing fees, net
 
—

 
(9,118
)
Less: Current maturities of long-term debt
 
—

 
(8,948
)
Long-term debt, net of unamortized premium (discount) and deferred financing fees
 
$
—

 
$
811,090


For a detailed discussion of the Company's borrowings, see Note 6—“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, 2015.

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

The Company currently has $352,110 of outstanding debt which matures on February 15, 2017 and $481,000 of outstanding debt which matures on May 15, 2017. The Company plans to either raise additional equity capital or refinance its current debt, or some combination thereof, in order to satisfy these obligations before they become due. As discussed in Note 1—“Interim Financial Statement Presentation”, Onex has obtained committed financing such that the proceeds of the credit facilities, together with the $260,000 equity investment from Onex and cash on hand at the Company, will be sufficient to repay the Company's existing credit facilities and notes before the debt becomes due.

Senior Secured Credit Facilities - Revolving Loan Facility and Term Loan due 2017
The Company's maximum borrowing capacity under the Revolving Loan Facility is $145,000. As of June 30, 2016, availability under the Revolving Loan Facility was $71,807. 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 $20,188 at June 30, 2016. The variable interest rate on the Revolving Loan Facility and Term Loan due 2017 at June 30, 2016 was 5.33% and 6.00%, respectively.

Interest expense, net
Net interest expense consists of:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Interest on debt
$
14,516

 
$
14,570

 
$
31,714

 
$
31,685

Amortization of debt issuance costs, discounts and premium
1,824

 
1,980

 
3,820

 
3,836

Capitalized interest
(152
)
 
(60
)
 
(331
)
 
(123
)
Other
16

 
147

 
(28
)
 
227

Interest expense, net
$
16,204

 
$
16,637

 
$
35,175

 
$
35,625


(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 notional value of the cross-currency swaps 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 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.
During May 2016, the Company terminated all of its outstanding cross-currency swap agreements. On May 12, 2016, the Company settled $150,000 of its $300,000 of cross-currency swaps entered into in September 2014 and the entire $125,000 cross-currency swap entered into in June 2015, for total cash proceeds of $10,363 and a realized loss of $1,685 for the three months ended June 30, 2016 and a realized loss of $13,574 for the six months ended June 30, 2016. On May 19, 2016, the Company settled the remaining $150,000 of its $300,000 of cross-currency swaps entered into in September 2014 for total cash proceeds of $18,340 and a realized gain of $1,214 for the three months ended June 30, 2016 and a realized loss of $5,033 for the six months ended June 30, 2016.
The Company incurred settlements with each of its counterparties during 2016, which resulted in a net reduction in Interest expense, net of $2,530 and $2,635 for the three and six months ended June 30, 2016, respectively.
The Company's derivative financial instruments did not qualify for hedge accounting treatment and accordingly, changes in fair value were recorded in Foreign currency exchange gains (losses) within the consolidated statements of operations. The

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

Company recognized a realized loss of $470 during the three months ended June 30, 2016 and a realized loss of $18,607 during the six months ended June 30, 2016 that were recorded in Foreign currency exchange gains (losses) in the consolidated statements of operations.
From time to time, the Company enters into foreign currency forward contracts to mitigate the exchange rate risk associated with fluctuations of the U.S. dollar to various foreign currencies on internal cash movements associated with its global operations. The Company recognized an unrealized loss on foreign currency forward contracts of $127 during the three and six months ended June 30, 2016 that was 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.
 
 
 
June 30, 2016
 
 
 
Level 1
 
Level 2
 
Level 3
Derivatives Designated
Balance Sheet Classification
 
 
 
 
 
 
Cross-currency swaps
Current derivative assets
 
$
—

 
$
—

 
$
—

Cross-currency swap
Other current liabilities
 
—

 
—

 
—

Foreign currency forward contract
Other current liabilities
 
—

 
127

 
—

 
 
 
December 31, 2015
 
 
 
Level 1
 
Level 2
 
Level 3
Derivatives Designated
Balance Sheet Classification
 
 
 
 
 
 
Cross-currency swaps
Non-current derivative assets
 
$
—

 
$
47,519

 
$
—

Cross-currency swap
Other non-current liabilities
 
—

 
208

 
—

Foreign currency forward contract
Other current liabilities
 
—

 
—

 
—

The carrying amounts and estimated fair values of the Company’s outstanding debt at June 30, 2016 were as follows:
 
 
Carrying
amount
 
Estimated
fair value
Revolving Loan Facility
 
$
53,005

 
$
53,005

Term Loan due 2017
 
298,413

 
297,856

9.00% Senior Notes due 2017
 
56,000

 
55,300

9.50% Senior Notes due 2017
 
425,170

 
420,750

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).

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

(7) Share-based Compensation
Changes in the Company's outstanding service-based stock option awards since December 31, 2015 were as follows:
Options
 
Number of
options
 
Weighted
average
exercise price
 
Weighted
average
remaining
contractual term
(years)
Outstanding at December 31, 2015
 
508,591

 
$
171.15

 
 
Granted
 
—

 
—

 
 
Exercised
 
—

 
—

 
 
Expired
 
(10,300
)
 
221.82

 
 
Forfeited
 
(6,000
)
 
270.85

 
 
Other
 
—

 
—

 
 
Outstanding at June 30, 2016
 
492,291

 
$
168.87

 
3.3
Vested and expected to vest as of June 30, 2016
 
492,291

 
168.87

 
3.3
Exercisable at June 30, 2016
 
414,858

 
151.77

 
2.6
At June 30, 2016, total unrecognized compensation cost related to the unvested portion of the Company's service-based stock option awards that remains to be expensed was $4,530, with the weighted average remaining years to vest of approximately 1.42 years. On August 1, 2016, the Company provided notice to its option and equity holders that pursuant to the 2008 Long Term Incentive Plan, all outstanding options, vested and unvested, shall be canceled upon the closing of the Transaction.

(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 2016. 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, 2015
$
1,118

Restructuring charges incurred in 2016
2,632

Payments made in 2016
(1,929
)
Balance at June 30, 2016
$
1,821


(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 June 30, 2016 and 2015 was 0.6% and (80.5)%, respectively. The effective income tax rate for the six months ended June 30, 2016 and 2015 was (11.3)% and 4.3%, 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.

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

(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 2016 and 2015, the Company paid an annual management fee of $2,300 and $3,112, 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 $575 and $778 during the three months ended June 30, 2016 and 2015 respectively, and $1,150 and $1,556 during the six months ended June 30, 2016 and 2015, respectively, that was recorded in Administrative expenses in the consolidated statements of operations.
During the three months ended June 30, 2016 and 2015, the Company had product sales of $368 and $163, and during the six months ended June 30, 2016 and 2015, the Company had product sales of $586 and $445, respectively, to its Spanish joint venture, Lankhorst Euronete Espana SA. The Company purchased $113 and $1,324 of product during the six months ended June 30, 2016 and 2015, respectively, from its Greek joint venture, Eurorope Performance Rope Producers SA.

(11) Contingencies
The Company is involved in various claims and legal actions arising in the ordinary course of business, which are incidental to its operations. Insurance coverage is maintained for certain risks, such as product liability and workers’ compensation. The Company is not currently a party to any legal proceedings 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
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Product line net sales
($)
(%)
 
($)
(%)
 
($)
(%)
 
($)
(%)
Rope
$
108,936

70
%
 
$
125,935

72
%
 
$
215,361

71
%
 
$
256,268

72
%
Specialty wire
29,959

19
%
 
30,946

18
%
 
58,121

19
%
 
63,822

18
%
Engineered products
17,543

11
%
 
16,933

10
%
 
31,957

10
%
 
34,080

10
%
Total net sales
$
156,438

100
%
 
$
173,814

100
%
 
$
305,439

100
%
 
$
354,170

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
 
June 30, 2016
 
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

 
$
7,066

 
$
27,876

 
$
8,159

 
$
—

 
$
43,124

Restricted cash
—

 
—

 
801

 
1,018

 
—

 
1,819

Accounts receivable, net
—

 
28,630

 
62,847

 
36,935

 
—

 
128,412

Intercompany accounts receivable
3,333

 
30,867

 
23,321

 
30,284

 
(87,805
)
 
—

Other receivables
—

 
(2,873
)
 
5,056

 
1,212

 
—

 
3,395

Inventories, net
—

 
67,427

 
93,652

 
27,324

 
—

 
188,403

Prepaid expenses and other current assets
—

 
2,837

 
3,923

 
968

 
—

 
7,728

Total current assets
$
3,356

 
$
133,954

 
$
217,476

 
$
105,900

 
$
(87,805
)
 
$
372,881

Long-term intercompany notes receivable
(20
)
 
403,913

 
15,765

 
108,594

 
(528,252
)
 
—

Property, plant and equipment, net
—

 
46,443

 
183,805

 
42,712

 
—

 
272,960

Intangible assets, net
—

 
29,031

 
55,516

 
15,083

 
—

 
99,630

Goodwill
—

 
116,842

 
46,946

 
18,994

 
—

 
182,782

Investments in subsidiaries
(60,291
)
 
—

 
85,303

 
7,833

 
(32,845
)
 
—

Non-current deferred income tax assets
—

 
—

 
(345
)
 
487

 
—

 
142

Other non-current assets
—

 
257

 
8,970

 
8

 
—

 
9,235

Total assets
$
(56,955
)
 
$
730,440

 
$
613,436

 
$
299,611

 
$
(648,902
)
 
$
937,630

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

 
$
827,208

 
$
—

 
$
—

 
$
—

 
$
827,208

Interest payable
—

 
6,026

 
—

 
59

 
—

 
6,085

Accounts payable
—

 
11,783

 
46,839

 
9,268

 
—

 
67,890

Accrued compensation and benefits
—

 
2,638

 
12,974

 
3,469

 
—

 
19,081

Intercompany accounts payable
25

 
34,822

 
42,476

 
10,299

 
(87,622
)
 
—

Other current liabilities
230

 
4,397

 
16,476

 
2,472

 
—

 
23,575

Total current liabilities
$
255

 
$
886,874

 
$
118,765

 
$
25,567

 
$
(87,622
)
 
$
943,839

Long-term intercompany notes payable
—

 
—

 
505,634

 
22,613

 
(528,247
)
 
—

Non-current deferred income tax liabilities
—

 
10,373

 
16,905

 
7,198

 
—

 
34,476

Other non-current liabilities
—

 
879

 
12,359

 
1,382

 
—

 
14,620

Total liabilities
$
255

 
$
898,126

 
$
653,663

 
$
56,760

 
$
(615,869
)
 
$
992,935


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

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
(57,210
)
 
(167,686
)
 
(34,641
)
 
235,360

 
(33,033
)
 
(57,210
)
Non-controlling interests
—

 
—

 
(5,586
)
 
7,491

 
—

 
1,905

Total stockholders’ equity
$
(57,210
)
 
$
(167,686
)
 
$
(40,227
)
 
$
242,851

 
$
(33,033
)
 
$
(55,305
)
Total liabilities and stockholders’ equity
$
(56,955
)
 
$
730,440

 
$
613,436

 
$
299,611

 
$
(648,902
)
 
$
937,630



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

 
December 31, 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
$
21

 
$
2,378

 
$
10,906

 
$
7,755

 
$
—

 
$
21,060

Restricted cash
—

 
—

 
533

 
989

 
—

 
1,522

Accounts receivable, net
—

 
28,087

 
59,211

 
37,165

 
—

 
124,463

Intercompany accounts receivable
1,252

 
60,560

 
41,627

 
27,418

 
(130,857
)
 
—

Other receivables
—

 
11

 
2,191

 
577

 
—

 
2,779

Inventories, net
—

 
67,319

 
90,982

 
28,663

 
—

 
186,964

Prepaid expenses and other current assets
—

 
2,983

 
3,701

 
1,449

 
—

 
8,133

Total current assets
$
1,273

 
$
161,338

 
$
209,151

 
$
104,016

 
$
(130,857
)
 
$
344,921

Long-term intercompany notes receivable
—

 
422,668

 
16,984

 
107,887

 
(547,539
)
 
—

Property, plant and equipment, net
—

 
51,833

 
190,285

 
41,537

 
—

 
283,655

Intangible assets, net
—

 
30,512

 
57,458

 
14,795

 
—

 
102,765

Goodwill
—

 
116,842

 
46,824

 
18,072

 
—

 
181,738

Investment in subsidiaries
(59,270
)
 
—

 
115,440

 
7,805

 
(63,975
)
 
—

Non-current deferred income tax assets
—

 
171

 
697

 
591

 
—

 
1,459

Non-current derivative assets
40,284

 
7,235

 
—

 
—

 
—

 
47,519

Other non-current assets
—

 
199

 
9,065

 
8

 
—

 
9,272

Total assets
$
(17,713
)
 
$
790,798

 
$
645,904

 
$
294,711

 
$
(742,371
)
 
$
971,329

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

 
$
8,948

 
$
—

 
$
—

 
$
—

 
$
8,948

Interest payable
—

 
5,970

 
21

 
168

 
—

 
6,159

Accounts payable
—

 
17,808

 
39,351

 
14,994

 
—

 
72,153

Accrued compensation and benefits
—

 
6,039

 
9,670

 
2,807

 
—

 
18,516

Intercompany accounts payable
871

 
48,758

 
69,636

 
11,532

 
(130,797
)
 
—

Other current liabilities
230

 
6,054

 
14,687

 
1,996

 
—

 
22,967

Total current liabilities
$
1,101

 
$
93,577

 
$
133,365

 
$
31,497

 
$
(130,797
)
 
$
128,743

Long-term debt, excluding current maturities
—

 
811,090

 
—

 
—

 
—

 
811,090

Long-term intercompany notes payable
—

 
—

 
520,684

 
26,831

 
(547,515
)
 
—

Non-current deferred income tax liabilities
—

 
9,295

 
17,918

 
7,001

 
—

 
34,214

Other non-current liabilities
208

 
714

 
11,371

 
1,418

 
—

 
13,711


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

Total liabilities
$
1,309

 
$
914,676

 
$
683,338

 
$
66,747

 
$
(678,312
)
 
$
987,758

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
(19,022
)
 
(123,878
)
 
(33,244
)
 
221,181

 
(64,059
)
 
(19,022
)
Non-controlling interests
—

 
—

 
(4,190
)
 
6,783

 
—

 
2,593

Total stockholders’ equity
$
(19,022
)
 
$
(123,878
)
 
$
(37,434
)
 
$
227,964

 
$
(64,059
)
 
$
(16,429
)
Total liabilities and stockholders’ equity
$
(17,713
)
 
$
790,798

 
$
645,904

 
$
294,711

 
$
(742,371
)
 
$
971,329




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 June 30, 2016
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$
—

 
$
42,884

 
$
94,949

 
$
40,076

 
$
(21,471
)
 
$
156,438

Cost of sales
—

 
(35,176
)
 
(73,631
)
 
(32,295
)
 
22,077

 
(119,025
)
Gross profit
—

 
7,708

 
21,318

 
7,781

 
606

 
37,413

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
—

 
(2,369
)
 
(3,845
)
 
(2,500
)
 
—

 
(8,714
)
Administrative expenses
(191
)
 
(10,777
)
 
(5,762
)
 
(1,318
)
 
1,501

 
(16,547
)
Amortization expense
—

 
(757
)
 
(1,199
)
 
(211
)
 
—

 
(2,167
)
Total other operating expenses
(191
)
 
(13,903
)
 
(10,806
)
 
(4,029
)
 
1,501

 
(27,428
)
Operating income (loss)
(191
)
 
(6,195
)
 
10,512

 
3,752

 
2,107

 
9,985

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
2,116

 
(11,266
)
 
(8,478
)
 
1,424

 
—

 
(16,204
)
Equity loss from subsidiaries
(22,529
)
 
—

 
(17,596
)
 
(173
)
 
40,298

 
—

Foreign currency exchange gains (losses), net
(1,057
)
 
473

 
(13,454
)
 
169

 
—

 
(13,869
)
Other income (expense), net
—

 
(1,675
)
 
(251
)
 
16

 
—

 
(1,910
)
Total other income (expense), net
(21,470
)
 
(12,468
)
 
(39,779
)
 
1,436

 
40,298

 
(31,983
)
Income (loss) before income taxes
(21,661
)
 
(18,663
)
 
(29,267
)
 
5,188

 
42,405

 
(21,998
)
Income tax benefit (expense)
—

 
(157
)
 
(344
)
 
624

 
—

 
123

Net income (loss)
(21,661
)
 
(18,820
)
 
(29,611
)
 
5,812

 
42,405

 
(21,875
)
Less: Net income (loss) attributable to non-controlling interests
—

 
—

 
(620
)
 
406

 
—

 
(214
)
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
(21,661
)
 
(18,820
)
 
(28,991
)
 
5,406

 
42,405

 
(21,661
)
Comprehensive income (loss)
$
(24,668
)
 
$
(18,820
)
 
$
(32,404
)
 
$
8,819

 
$
42,405

 
$
(24,668
)
 

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

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

 
$
48,695

 
$
109,690

 
$
37,957

 
$
(22,528
)
 
$
173,814

Cost of sales
—

 
(38,041
)
 
(88,029
)
 
(28,848
)
 
21,886

 
(133,032
)
Gross profit
—

 
10,654

 
21,661

 
9,109

 
(642
)
 
40,782

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
—

 
(2,874
)
 
(4,244
)
 
(2,794
)
 
—

 
(9,912
)
Administrative expenses
(421
)
 
(7,714
)
 
(8,258
)
 
(1,393
)
 
—

 
(17,786
)
Amortization expense
—

 
(757
)
 
(1,128
)
 
(289
)
 
—

 
(2,174
)
Total other operating expenses
(421
)
 
(11,345
)
 
(13,630
)
 
(4,476
)
 
—

 
(29,872
)
Operating income (loss)
(421
)
 
(691
)
 
8,031

 
4,633

 
(642
)
 
10,910

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(102
)
 
(8,183
)
 
(9,819
)
 
1,467

 
—

 
(16,637
)
Equity income (loss) from subsidiaries
(13,596
)
 
—

 
(21,959
)
 
465

 
35,090

 
—

Foreign currency exchange gains (losses), net
—

 
(16,501
)
 
15,907

 
(2,095
)
 
—

 
(2,689
)
Other income (expense), net
—

 
(34
)
 
112

 
2

 
—

 
80

Total other expense, net
(13,698
)
 
(24,718
)
 
(15,759
)
 
(161
)
 
35,090

 
(19,246
)
Income (loss) before income taxes
(14,119
)
 
(25,409
)
 
(7,728
)
 
4,472

 
34,448

 
(8,336
)
Income tax expense
—

 
(171
)
 
(4,295
)
 
(2,243
)
 
—

 
(6,709
)
Net income (loss)
(14,119
)
 
(25,580
)
 
(12,023
)
 
2,229

 
34,448

 
(15,045
)
Less: Net loss attributable to non-controlling interests
—

 
—

 
(853
)
 
(73
)
 
—

 
(926
)
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
(14,119
)
 
(25,580
)
 
(11,170
)
 
2,302

 
34,448

 
(14,119
)
Comprehensive income (loss)
$
(19,931
)
 
$
(25,580
)
 
$
(16,909
)
 
$
8,041

 
$
34,448

 
$
(19,931
)

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

 
Six months ended June 30, 2016
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$
—

 
$
81,539

 
$
189,096

 
$
78,803

 
$
(43,999
)
 
$
305,439

Cost of sales
—

 
(65,433
)
 
(147,142
)
 
(62,827
)
 
43,999

 
(231,403
)
Gross profit
—

 
16,106

 
41,954

 
15,976

 
—

 
74,036

Other operating expenses:


 


 


 


 


 


Selling expenses
—

 
(4,744
)
 
(7,345
)
 
(5,159
)
 
—

 
(17,248
)
Administrative expenses
(382
)
 
(24,962
)
 
(9,356
)
 
(2,964
)
 
1,500

 
(36,164
)
Amortization expense
—

 
(1,481
)
 
(2,355
)
 
(409
)
 
—

 
(4,245
)
Total other operating expenses
(382
)
 
(31,187
)
 
(19,056
)
 
(8,532
)
 
1,500

 
(57,657
)
Operating income (loss)
(382
)
 
(15,081
)
 
22,898

 
7,444

 
1,500

 
16,379

Other income (expense):


 


 


 


 


 


Interest income (expense), net
2,221

 
(22,941
)
 
(17,170
)
 
2,715

 
—

 
(35,175
)
Equity income (loss) from subsidiaries
(26,284
)
 
—

 
(30,137
)
 
27

 
56,394

 
—

Foreign currency exchange gains (losses), net
(17,163
)
 
(1,552
)
 
6,660

 
(5,358
)
 
—

 
(17,413
)
Other income (expense), net
—

 
(1,693
)
 
(225
)
 
67

 
—

 
(1,851
)
Total other expense, net
(41,226
)
 
(26,186
)
 
(40,872
)
 
(2,549
)
 
56,394

 
(54,439
)
Income (loss) before income taxes
(41,608
)
 
(41,267
)
 
(17,974
)
 
4,895

 
57,894

 
(38,060
)
Income tax expense
—

 
(251
)
 
(3,109
)
 
(929
)
 
—

 
(4,289
)
Net income (loss)
(41,608
)
 
(41,518
)
 
(21,083
)
 
3,966

 
57,894

 
(42,349
)
Less: Net income (loss) attributable to non-controlling interests
—

 
—

 
(1,395
)
 
654

 
—

 
(741
)
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
(41,608
)
 
(41,518
)
 
(19,688
)
 
3,312

 
57,894

 
(41,608
)
Comprehensive income (loss)
$
(42,186
)
 
$
(41,518
)
 
$
(20,920
)
 
$
4,544

 
$
57,894

 
$
(42,186
)

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

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

 
$
106,662

 
$
225,787

 
$
72,061

 
$
(50,340
)
 
$
354,170

Cost of sales
—

 
(85,363
)
 
(178,993
)
 
(57,288
)
 
50,257

 
(271,387
)
Gross profit
—

 
21,299

 
46,794

 
14,773

 
(83
)
 
82,783

Other operating expenses:

 

 

 

 

 

Selling expenses
—

 
(5,923
)
 
(8,151
)
 
(5,613
)
 
—

 
(19,687
)
Administrative expenses
(612
)
 
(19,817
)
 
(12,730
)
 
(2,599
)
 
—

 
(35,758
)
Amortization expense
—

 
(1,514
)
 
(2,381
)
 
(588
)
 
—

 
(4,483
)
Total other operating expenses
(612
)
 
(27,254
)
 
(23,262
)
 
(8,800
)
 
—

 
(59,928
)
Operating income (loss)
(612
)
 
(5,955
)
 
23,532

 
5,973

 
(83
)
 
22,855

Other income (expense):

 

 

 

 

 

Interest income (expense), net
(204
)
 
(18,735
)
 
(19,579
)
 
2,893

 
—

 
(35,625
)
Equity income (loss) from subsidiaries
(18,050
)
 
—

 
2,011

 
666

 
15,373

 
—

Foreign currency exchange gains (losses), net
—

 
23,949

 
(36,682
)
 
5,767

 
—

 
(6,966
)
Other income (expense), net
—

 
(127
)
 
(109
)
 
8

 
—

 
(228
)
Total other income (expense), net
(18,254
)
 
5,087

 
(54,359
)
 
9,334

 
15,373

 
(42,819
)
Income (loss) before income taxes
(18,866
)
 
(868
)
 
(30,827
)
 
15,307

 
15,290

 
(19,964
)
Income tax benefit (expense)
—

 
(132
)
 
(1,053
)
 
2,037

 
—

 
852

Net income (loss)
(18,866
)
 
(1,000
)
 
(31,880
)
 
17,344

 
15,290

 
(19,112
)
Less: Net loss attributable to non-controlling interests
—

 
—

 
(49
)
 
(197
)
 
—

 
(246
)
Net income (loss) attributable to WireCo WorldGroup (Cayman), Inc.
(18,866
)
 
(1,000
)
 
(31,831
)
 
17,541

 
15,290

 
(18,866
)
Comprehensive income (loss)
$
(41,454
)
 
$
(1,000
)
 
$
(51,171
)
 
$
36,881

 
$
15,290

 
$
(41,454
)


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

Condensed Consolidating Statements of Cash Flows
 
Six months ended June 30, 2016
 
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
$
25,135

 
$
(14,961
)
 
$
11,258

 
$
6,620

 
$
—

 
$
28,052

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(2,459
)
 
(5,262
)
 
(1,292
)
 
—

 
(9,013
)
Repayments from intercompany loans
—

 
18,757

 
1,594

 
—

 
(20,351
)
 
—

Investment in subsidiaries
(25,133
)
 
—

 
—

 
—

 
25,133

 
—

Net cash provided by (used in) investing activities
$
(25,133
)
 
$
16,298

 
$
(3,668
)
 
$
(1,292
)
 
$
4,782

 
$
(9,013
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
—

 
(7,349
)
 
—

 
—

 
—

 
(7,349
)
Decreases in intercompany notes
—

 
—

 
(15,757
)
 
(4,594
)
 
20,351

 
—

Borrowings under revolving credit agreement
—

 
53,250

 
—

 
—

 
—

 
53,250

Repayments under revolving credit agreement
—

 
(42,550
)
 
—

 
—

 
—

 
(42,550
)
Capital contributions received
—

 
—

 
25,133

 
—

 
(25,133
)
 
—

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

 
$
3,351

 
$
9,376

 
$
(4,594
)
 
$
(4,782
)
 
$
3,351

Effect of exchange rates on cash and cash equivalents
—

 
—

 
4

 
(330
)
 
—

 
(326
)
Increase in cash and cash equivalents
$
2

 
$
4,688

 
$
16,970

 
$
404

 
$
—

 
$
22,064

Cash and cash equivalents, beginning of period
21

 
2,378

 
10,906

 
7,755

 
—

 
21,060

Cash and cash equivalents, end of period
$
23

 
$
7,066

 
$
27,876

 
$
8,159

 
$
—

 
$
43,124


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

 
Six months ended June 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
$
—

 
$
14,560

 
$
5,409

 
$
(8,265
)
 
$
—

 
$
11,704

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(4,223
)
 
(9,659
)
 
(3,580
)
 
—

 
(17,462
)
Repayments from intercompany loans
—

 
959

 
—

 
—

 
(959
)
 
—

Net cash used in investing activities
$
—

 
$
(3,264
)
 
$
(9,659
)
 
$
(3,580
)
 
$
(959
)
 
$
(17,462
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
—

 
(16,324
)
 
—

 
—

 
—

 
(16,324
)
Debt issuance costs paid
—

 
(1,067
)
 
—

 
—

 
—

 
(1,067
)
Borrowings under revolving credit agreement
—

 
47,400

 
—

 
—

 
—

 
47,400

Repayments under revolving credit agreement
—

 
(40,550
)
 
—

 
—

 
—

 
(40,550
)
Repayments of intercompany loans
—

 
—

 
(2,959
)
 
2,000

 
959

 
—

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

 
$
(10,541
)
 
$
(2,959
)
 
$
2,000

 
$
959

 
$
(10,541
)
Effect of exchange rates on cash and cash equivalents
—

 
—

 
(2,771
)
 
(1,081
)
 
—

 
(3,852
)
Increase (decrease) in cash and cash equivalents
$
—

 
$
755

 
$
(9,980
)
 
$
(10,926
)
 
$
—

 
$
(20,151
)
Cash and cash equivalents, beginning of period
24

 
4,178

 
35,792

 
18,201

 
—

 
58,195

Cash and cash equivalents, end of period
$
24

 
$
4,933

 
$
25,812

 
$
7,275

 
$
—

 
$
38,044


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, 2015.

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, 2015. 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;
•
an information technology system failure or breach of security;
•
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 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
•
Credit Agreement 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.

Second Quarter 2016 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 June 30, 2016, we reported sales of $156.4 million, a net loss of $21.9 million and Adjusted EBITDA of $25.6 million compared to sales of $173.8 million, a net loss of $15.0 million and Adjusted EBITDA of $27.1 million for the same period in 2015. For the six months ended June 30, 2016, we reported sales of $305.4 million, a net loss of $42.3 million and Adjusted EBITDA of $49.1 million compared to sales of $354.2 million, a net loss of $19.1 million and Adjusted EBITDA of $54.4 million for the same period in 2015. Given our global operations, the strengthening of the U.S. dollar as compared to the first half of 2015 had a negative impact on our results for the six months ended June 30, 2016.  For the six months ended June 30, 2016, approximately 70% of our sales were generated in currencies other than the U.S. dollar. The euro, Polish zloty and Mexican peso all devalued in relation to the U.S. dollar compared to the six months ended June 30, 2015.  Given the translation of our international results into U.S. dollars, this devaluation unfavorably impacted our sales by $2.0 million and $8.2 million and our Adjusted EBITDA by $0.5 million and $1.7 million for the three months and six months ended June 30, 2016, respectively. The foreign currency exchange impact on cash for the six months ended June 30, 2016 is a decrease of $0.3 million.
As a result of the weakening global oil, gas and crane rope markets, we announced in March 2016 the phased shutdown and ultimate closure of our steel wire rope manufacturing facility in St. Joseph, Missouri. The machinery and equipment will be moved to our other facilities and the land and buildings will be sold to a non-competitor located next door to our facility. We will continue to operate our fabricated products facility in St. Joseph at its existing site. Also in response to these weakening end markets, we reduced our factory workforce and implemented workforce reductions in several administrative departments. In addition, we took other cost containment measures in procurement and other non-personnel selling and administrative expenses. The disciplined management of capital expenditures continues to contribute to our cost savings initiatives.
We continue to believe that our targeted strategies will provide attractive long-term opportunities for sustainable growth despite short-term challenges in some of our end markets. 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.
As discussed in Note 1—“Interim Financial Statement Presentation” to our unaudited interim consolidated financial statements in Part I, Item 1 of this quarterly report, on June 25, 2016, we entered into a Stock Subscription Agreement with Onex pursuant to which we agreed to issue and sell to Onex approximately 5.0 million newly issued ordinary shares, par value $0.01 per share, for a majority interest in the Company, in exchange for aggregate consideration of approximately $260.0 million, which will be paid in cash. The cash received will be used to repay the Company's existing credit facilities and notes and fees and expenses in connection with the transactions. The purchase price and the aggregate number of shares to be issued to Onex at closing is subject to adjustment in accordance with the terms of the Subscription Agreement based on the amount of indebtedness of the Company as of June 30, 2016.


24

Consolidated Results of Operations
This section focuses on significant items that impacted our operating results for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015. Our results of operations have been converted to U.S. dollars from multiple currencies, which primarily include the euro, Polish zloty 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 June 30, 2016 compared to three months ended June 30, 2015
 
Three months ended
 
 
 
 
 
June 30,
 
Change
 
2016
 
2015
 
Dollars
 
Percent
 
(in thousands)
Net sales
$
156,438

 
$
173,814

 
$
(17,376
)
 
(10.0
)%
Gross profit
37,413

 
40,782

 
(3,369
)
 
(8.3
)%
Other operating expenses
(27,428
)
 
(29,872
)
 
2,444

 
(8.2
)%
Other expense, net
(31,983
)
 
(19,246
)
 
(12,737
)
 
66.2
 %
Income tax benefit (expense)
123

 
(6,709
)
 
6,832

 
NM

Net loss
$
(21,875
)
 
$
(15,045
)
 
$
(6,830
)
 
NM

Gross profit as % of net sales
23.9
%
 
23.5
%
 

 
 
Other operating expenses as % of net sales
17.5
%
 
17.2
%
 
 
 
 
NM = Not Meaningful

Net sales
Our consolidated net sales decreased $17.4 million, or 10.0%, for the three months ended June 30, 2016 as compared to the same period in 2015. Foreign currency exchange rate fluctuations contributed $2.0 million of the decrease due to the depreciation of the Polish zloty and Mexican peso when comparing the average exchange rates for the three months ended June 30, 2016 to the average exchange rates for the three months ended June 30, 2015.
Excluding the impact of foreign currency exchange rate fluctuations, rope sales for the quarter decreased $17.4 million primarily due to decreased sales in the oil and gas, industrial and infrastructure and maritime end markets. Sales to our offshore oil and gas end market decreased $6.1 million primarily due to timing of projects. Sales to our onshore oil and gas end market decreased $5.8 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 second quarter of 2016 was 448 compared to 971 in the second quarter of 2015, a 53.9% decline, and the rig count at June 30, 2016 was 486 compared to 962 at June 30, 2015. Sales to our industrial and infrastructure end market decreased $5.3 million primarily due to decreased demand for general purpose ropes related to oil and gas activities and weakening original equipment manufacturers ("OEM") crane backlogs. Sales to our maritime end market decreased $3.1 million primarily due to a global decline in ocean cargo shipments. Partially offsetting these decreases, sales to our mining end market increased $1.7 million and sales to our structures end market increased $1.2 million primarily due to timing of projects. Rope sales represented 70% of our total consolidated net sales for the three months ended June 30, 2016 compared to 72% for the same period in 2015.
Excluding the impact of foreign currency exchange rate fluctuations, specialty wire sales increased $1.5 million for the three months ended June 30, 2016 compared to the same period last year primarily due to more Mexican governmental infrastructure projects than the second quarter of 2015. Specialty wire sales represented 19% of our total consolidated net sales for the three months ended June 30, 2016 compared to 18% for the same period in 2015.
Excluding the impact of foreign currency exchange rate fluctuations, engineered products sales increased $0.3 million for the three months ended June 30, 2016 compared to the same period last year. Engineered product sales represented 11% of our total consolidated net sales for the three months ended June 30, 2016 compared to 10% for the same period in 2015.

Gross profit
Gross profit decreased $3.4 million for the three months ended June 30, 2016 compared to the same period in 2015, and gross profit as a percentage of sales (“gross margin”) increased from 23.5% for the three months ended June 30, 2015 to 23.9% for the three months ended June 30, 2016. The decline in gross profit was directly related to the decline in sales, and the higher gross margin was due to cost savings initiatives executed throughout 2015 and the first half of 2016.


25

Other operating expenses
 
 
Three months ended June 30,
 
Change
 
 
2016
 
2015
 
Dollars
 
Percent
 
 
(in thousands)
Selling expenses
 
$
(8,714
)
 
$
(9,912
)
 
$
1,198

 
(12.1
)%
Administrative expenses
 
(16,547
)
 
(17,786
)
 
1,239

 
(7.0
)%
Amortization expense
 
(2,167
)
 
(2,174
)
 
7

 
(0.3
)%
Other operating expenses
 
$
(27,428
)
 
$
(29,872
)
 
$
2,444

 
(8.2
)%

Other operating expenses decreased $2.4 million, or 8.2%, for the three months ended June 30, 2016 compared to the same period in 2015. Total other operating expenses as a percentage of net sales increased from 17.2% for the second quarter of 2015 to 17.5% for the second quarter of 2016.
Selling expenses decreased $1.2 million, or 12.1%, for the three months ended June 30, 2016 compared to the same period in 2015. We incurred $0.7 million less labor expenses, $0.2 million less external distributor commissions and $0.2 million less travel and entertainment expenses during the three months ended June 30, 2016 compared to the three months ended June 30, 2015 due to cost savings initiatives and the decline in net sales during the period.
Administrative expenses decreased $1.2 million, or 7.0%, for the three months ended June 30, 2016 compared to the same period in 2015. We incurred $1.9 million less bonus expenses in the second quarter of 2016 than the same period last year primarily due to workforce reductions. Partially offsetting this decrease, severance expense was $0.7 million higher during the three months ended June 30, 2016 compared to the three months ended June 30, 2015 due to workforce reductions.

Other expense, net
 
 
Three months ended June 30,
 
Change
 
 
2016
 
2015
 
Dollars
 
Percent
 
 
(in thousands)
Interest expense, net
 
$
(16,204
)
 
$
(16,637
)
 
$
433

 
(2.6
)%
Foreign currency exchange losses, net
 
(13,869
)
 
(2,689
)
 
(11,180
)
 
415.8
 %
Other income (expense), net
 
(1,910
)
 
80

 
(1,990
)
 
(2,487.5
)%
Total other expense, net
 
$
(31,983
)
 
$
(19,246
)
 
$
(12,737
)
 
66.2
 %

Total other expense increased by $12.7 million, or 66.2%, for the three months ended June 30, 2016 compared to the same period in 2015. For the three months ended June 30, 2016, foreign currency exchange losses were $13.9 million compared to $2.7 million for the same period in 2015. At June 30, 2016 and 2015, we had intercompany loans that required remeasurement in the aggregate amounts of $360.4 million and $397.2 million, respectively. The U.S. dollar to euro exchange rate at June 30, 2015 was $1.00 to €0.8937 compared to $1.00 to €0.9007 at June 30, 2016. The U.S. dollar to the Polish zloty exchange rate at June 30, 2015 was $1.00 to zł3.7457 compared to $1.00 to zł3.9959 at June 30, 2016. The U.S. dollar to the Mexican peso exchange rate at June 30, 2015 was $1.00 to $15.6599 compared to $1.00 to $18.5550 at June 30, 2016.

Income tax expense/benefit
For the three months ended June 30, 2016, we recorded an income tax benefit of $0.1 million compared to an income tax expense of $6.7 million for the three months ended June 30, 2015. The resulting effective tax rate for the second quarter of 2016 and 2015 was 0.6% and (80.5)%, 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.





26

Six months ended June 30, 2016 compared to six months ended June 30, 2015
 
 
Six months ended June 30,
 
Change
 
 
2016
 
2015
 
Dollars
 
Percent
 
 
(in thousands)
Net sales
 
$
305,439

 
$
354,170

 
$
(48,731
)
 
(13.8
)%
Gross profit
 
74,036

 
82,783

 
(8,747
)
 
(10.6
)%
Other operating expenses
 
(57,657
)
 
(59,928
)
 
2,271

 
(3.8
)%
Other expense, net
 
(54,439
)
 
(42,819
)
 
(11,620
)
 
27.1
 %
Income tax benefit (expense)
 
(4,289
)
 
852

 
(5,141
)
 
NM

Net loss
 
$
(42,349
)
 
$
(19,112
)
 
$
(23,237
)
 
NM

Gross profit as % of net sales
 
24.2
%
 
23.4
%
 

 
 
Other operating expenses as % of net sales
 
18.9
%
 
16.9
%
 
 
 
 
NM = Not Meaningful

Net sales
Our consolidated net sales decreased $48.7 million, or 13.8%, for the six months ended June 30, 2016 as compared to the same period in 2015. Foreign currency exchange rate fluctuations contributed $8.2 million of the decrease due to the depreciation of the euro, Polish zloty and Mexican peso when comparing the average exchange rates for the six months ended June 30, 2016 to the average exchange rates for the six months ended June 30, 2015.
Excluding the impact of foreign currency exchange rate fluctuations, rope sales for the quarter decreased $39.0 million primarily due to decreased sales in the oil and gas, industrial and infrastructure and maritime end markets. Sales to our onshore oil and gas end market decreased $19.1 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 six months of 2016 was 569 compared to 1,318 during the same period in 2015, a 56.8% decline. Sales to our industrial and infrastructure end market decreased $8.9 million primarily due to decreased demand for general purpose ropes related to oil and gas activities and weakening OEM crane backlogs. Sales to our offshore oil and gas end market decreased $6.1 million primarily due to timing of projects. Sales to our maritime end market decreased $4.5 million primarily due to a global decline in ocean cargo shipments. Rope sales represented 71% of our total consolidated net sales for the six months ended June 30, 2016 compared to 72% for the same period in 2015.
Excluding the impact of foreign currency exchange rate fluctuations, specialty wire sales increased $0.1 million for the six months ended June 30, 2016 compared to the same period last year. Specialty wire sales represented 19% of our total consolidated net sales for the six months ended June 30, 2016 compared to 18% for the same period in 2015.
Excluding the impact of foreign currency exchange rate fluctuations, engineered products sales decreased $2.0 million for the six months ended June 30, 2016 compared to the same period last year primarily due to lower sales of traditional offshore projects driven by the downturn in the oil and gas industry. Engineered product sales represented 10% of our total consolidated net sales for the six months ended June 30, 2016 compared to 10% for the same period in 2015.

Gross profit
Gross profit decreased $8.7 million for the six months ended June 30, 2016 compared to the same period in 2015, and gross margin increased from 23.4% for the six months ended June 30, 2015 to 24.2% for the six months ended June 30, 2016. The decline in gross profit was directly related to the decline in sales, and the higher gross margin was due to cost savings initiatives executed throughout 2015 and the first half of 2016.


27

Other operating expenses
 
 
Six months ended June 30,
 
Change
 
 
2016
 
2015
 
Dollars
 
Percent
 
 
(in thousands)
Selling expenses
 
$
(17,248
)
 
$
(19,687
)
 
$
2,439

 
(12.4
)%
Administrative expenses
 
(36,164
)
 
(35,758
)
 
(406
)
 
1.1
 %
Amortization expense
 
(4,245
)
 
(4,483
)
 
238

 
(5.3
)%
Other operating expenses
 
$
(57,657
)
 
$
(59,928
)
 
$
2,271

 
(3.8
)%

Other operating expenses decreased $2.3 million, or 3.8%, for the six months ended June 30, 2016 compared to the same period in 2015. Total other operating expenses as a percentage of net sales increased from 16.9% for the six months ended June 30, 2015 to 18.9% for the six months ended June 30, 2016.
Selling expenses decreased $2.4 million, or 12.4%, for the six months ended June 30, 2016 compared to the same period in 2015. We incurred $1.0 million less external distributor commissions, $0.9 million less labor expenses and $0.4 million less travel and entertainment expenses during the six months ended June 30, 2016 compared to the six months ended June 30, 2015 due to cost savings initiatives and the decline in net sales during the period.

Other expense, net
 
 
Six months ended June 30,
 
Change
 
 
2016
 
2015
 
Dollars
 
Percent
 
 
(in thousands)
Interest expense, net
 
$
(35,175
)
 
$
(35,625
)
 
$
450

 
(1.3
)%
Foreign currency exchange losses, net
 
(17,413
)
 
(6,966
)
 
(10,447
)
 
150.0
 %
Other expense, net
 
(1,851
)
 
(228
)
 
(1,623
)
 
711.8
 %
Total other expense, net
 
$
(54,439
)
 
$
(42,819
)
 
$
(11,620
)
 
27.1
 %

Total other expense increased by $11.6 million, or 27.1%, for the six months ended June 30, 2016 compared to the same period in 2015. For the six months ended June 30, 2016, foreign currency exchange losses were $17.4 million compared to $7.0 million for the same period in 2015. At June 30, 2016 and 2015, we had intercompany loans that required remeasurement in the aggregate amounts of $360.4 million and $397.2 million, respectively. The U.S. dollar to euro exchange rate at June 30, 2015 was $1.00 to €0.8937 compared to $1.00 to €0.9007 at June 30, 2016. The U.S. dollar to the Polish zloty exchange rate at June 30, 2015 was $1.00 to zł3.7457 compared to $1.00 to zł3.9959 at June 30, 2016. The U.S. dollar to the Mexican peso exchange rate at June 30, 2015 was $1.00 to $15.6599 compared to $1.00 to $18.5550 at June 30, 2016.

Income tax expense/benefit
For the six months ended June 30, 2016, we recorded an income tax expense of $4.3 million compared to an income tax benefit of $0.9 million for the six months ended June 30, 2015. The resulting effective tax rate for the six months ended June 30, 2016 and 2015 was (11.3)% and 4.3%, 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

28

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 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.
The following is a reconciliation of net loss to Adjusted EBITDA:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Net loss (GAAP)
 
$
(21,875
)
 
$
(15,045
)
 
$
(42,349
)
 
$
(19,112
)
Plus:
 
 
 
 
 
 
 
 
Interest expense, net
 
16,204

 
16,637

 
35,175

 
35,625

Income tax expense (benefit)
 
(123
)
 
6,709

 
4,289

 
(852
)
Depreciation and amortization
 
10,783

 
11,138

 
21,529

 
22,514

Foreign currency exchange losses, net
 
13,869

 
2,689

 
17,413

 
6,966

Share-based compensation
 
1,574

 
1,926

 
3,310

 
3,852

Other expense (income), net
 
1,910

 
(80
)
 
1,851

 
228

Advisory fees
 
744

 
991

 
1,511

 
1,975

Reorganization and restructuring charges
 
2,505

 
1,498

 
6,274

 
2,257

Other adjustments
 
28

 
587

 
75

 
940

Adjusted EBITDA (Non-GAAP)
 
$
25,619

 
$
27,050

 
$
49,078

 
$
54,393


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 June 30, 2016, our Credit Agreement EBITDA is $116.3 million.

29

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Adjusted EBITDA (Non-GAAP)
$
25,619

 
$
27,050

 
$
49,078

 
$
54,393

Plus:
 
 
 
 
 
 
 
Additional reorganization and restructuring charges
—

 
172

 
—

 
261

Additional effect of Inventory Optimization Program
193

 
—

 
523

 
—

Production curtailment
—

 
491

 
—

 
1,124

Impact of nonrecurring and unusual items in Brazil
—

 
1,136

 
—

 
3,745

Impact of nonrecurring and unusual items in Portugal
641

 
—

 
1,754

 
—

Pro forma selling and administrative expense savings
—

 
1,850

 
917

 
5,247

Pro forma manufacturing facility consolidation
1,173

 
1,173

 
2,346

 
2,346

Pro forma manufacturing facility labor savings
659

 
—

 
1,318

 
—

Additional other adjustments
—

 
—

 
—

 
202

Credit Agreement EBITDA (Non-GAAP)
$
28,285

 
$
31,872

 
$
55,936

 
$
67,318


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. As discussed in Note 4—“Borrowings” to our unaudited interim consolidated financial statements in Part I, Item 1 of this quarterly report, our debt financing consists of secured credit facilities due in February 2017 and senior notes due in May 2017. We plan to either raise additional equity capital or refinance our current debt, or some combination thereof, in order to satisfy these obligations before they become due. Onex has obtained committed financing such that the proceeds of such financing, together with the $260.0 million equity investment from Onex and cash on hand at the Company, will be sufficient to repay the Company's existing credit facilities and notes before the debt becomes due. The Transaction is expected to substantially reduce our leverage and annual interest expense is expected to be reduced by over $20.0 million.
Total available liquidity, defined as availability under our Revolving Loan Facility plus cash and cash equivalents, was $114.9 million at June 30, 2016 compared to $122.1 million at December 31, 2015. Availability under the Revolving Loan Facility is based upon the maximum borrowing capacity of $145.0 million, less outstanding borrowings, letters of credit and if applicable, further restricted by certain covenants in our credit agreements.
We 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 $43.1 million at June 30, 2016, cash and cash equivalents held by our foreign subsidiaries were $36.2 million, of which $5.9 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.

Working Capital Management
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 $216.2 million at December 31, 2015 to $(571.0) million at June 30, 2016. Adjusted Working Capital, a Non-GAAP Financial Measure defined as accounts receivable plus inventories less accounts payable and customer advances, increased from $230.4 million at December 31, 2015 to $239.8 million at June 30, 2016. The decrease in Working Capital was due to our secured credit facilities and senior notes being considered current liabilities as they

30

mature in February 2017 and May 2017, respectively. 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 66 days at December 31, 2015 to 69 days at June 30, 2016 due to supporting customers in our challenging end markets with longer terms. Our days payable outstanding decreased from 54 days at December 31, 2015 to 51 days at June 30, 2016. Adjusted Working Capital as a percentage of annualized second quarter sales was 38.3% for the second quarter of 2016 compared to 36.4% for the fourth quarter of 2015 with a cash conversion cycle of 160 days and 152 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:
 
 
June 30, 2016
 
December 31, 2015
 
 
(in thousands)
Accounts receivable, net
 
$
128,412

 
$
124,463

Inventories, net
 
188,403

 
186,964

Accounts payable
 
(67,890
)
 
(72,153
)
Customer advances
 
(9,121
)
 
(8,918
)
Adjusted Working Capital (Non-GAAP)
 
239,804

 
230,356

Plus: All other current assets
 
56,066

 
33,494

Less: All other current liabilities
 
(866,828
)
 
(47,672
)
Working capital (GAAP)
 
$
(570,958
)
 
$
216,178


Cash Flow Information
The following tables summarize our cash flows from operating, investing and financing activities for the six months ended June 30, 2016 and 2015, respectively:
 
 
Six months ended June 30,
 
 
2016
 
2015
 
 
(in thousands)
Cash flows provided by (used in)
 
 
 
 
Operating activities
 
$
28,052

 
$
11,704

Investing activities
 
(9,013
)
 
(17,462
)
Financing activities
 
3,351

 
(10,541
)
Effect of exchange rates on cash and cash equivalents
 
(326
)
 
(3,852
)
Increase (decrease) in cash and cash equivalents
 
22,064

 
(20,151
)
Cash and cash equivalents, beginning of period
 
21,060

 
58,195

Cash and cash equivalents, end of period
 
$
43,124

 
$
38,044


Cash from Operating Activities
 
 
Six months ended June 30,
 
 
2016
 
2015
 
 
(in thousands)
Net loss
 
$
(42,349
)
 
$
(19,112
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
75,620

 
34,343

Changes in assets and liabilities
 
(5,219
)
 
(3,527
)
Net cash provided by operating activities
 
$
28,052

 
$
11,704


Cash flows from operating activities increased in the six months ended June 30, 2016 over the prior period primarily due to greater cash earnings related to terminating our outstanding cross-currency swap agreements. Cash earnings is our net loss adjusted for non-cash items, such as depreciation and amortization among other reconciling items.


31

Cash from Investing Activities
 
 
Six months ended June 30,
 
 
2016
 
2015
 
 
(in thousands)
Capital expenditures
 
$
(9,013
)
 
$
(17,462
)
Net cash used in investing activities
 
$
(9,013
)
 
$
(17,462
)

We expect capital expenditures to be between $20.0 million and $30.0 million for the year ended December 31, 2016. A significant portion of the anticipated capital expenditures in the second half of 2016 is not committed and represents
discretionary capital investments that we plan to make as we believe they would generate an immediate return.

Cash from Financing Activities
 
 
Six months ended June 30,
 
 
2016
 
2015
 
 
(in thousands)
Principal payments on long-term debt
 
$
(7,349
)
 
$
(16,324
)
Debt issuance costs paid
 
—

 
(1,067
)
Net borrowings under revolving credit agreement
 
10,700

 
6,850

Net cash provided by (used in) financing activities
 
$
3,351

 
$
(10,541
)

During the six months ended June 30, 2016, we received net cash provided by financing activities of $3.4 million. During the second quarter of 2016, we paid $5.8 million on our Term Loan due 2017 related to the annual excess cash flow payment required pursuant to the Credit Agreement compared to a payment of $14.7 million during the same period in 2015.

Long-term Debt
For a detailed discussion of our long-term debt, see Note 6—“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, 2015.

Net Debt
At June 30, 2016, our total debt, including capital leases, was $834.8 million compared to Net Debt of $789.9 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 increased $3.4 million from year-end primarily due to our decision to leave more cash in our European and Brazilian entities for liquidity reasons during the six months ended June 30, 2016. Net Debt decreased primarily because the increase in our cash and cash equivalents balance was greater than the increase in total debt. Our Net Leverage ratio, Net Debt to the last twelve months of Adjusted EBITDA, increased to 6.81x at June 30, 2016, compared to 6.34x at December 31, 2015, due to the decline in Adjusted EBITDA as a result of challenging market conditions. 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.

32

The following is a reconciliation of total debt to Net Debt:
 
 
June 30, 2016
 
December 31, 2015
 
 
(in thousands)
Borrowings under Revolving Loan Facility
 
$
53,005

 
$
42,305

Term Loan due 2017
 
299,105

 
306,454

9.00% Senior Notes due 2017
 
56,000

 
56,000

9.50% Senior Notes due 2017
 
425,000

 
425,000

Capital lease obligations
 
1,693

 
1,619

Total debt at face value plus capital lease obligations (GAAP)
 
834,803

 
831,378

Less: Cash and cash equivalents
 
(43,124
)
 
(21,060
)
Less: Restricted cash
 
(1,819
)
 
(1,522
)
Net Debt (Non-GAAP)
 
$
789,860

 
$
808,796


As of June 30, 2016, we were in compliance with all restrictive and financial covenants associated with our borrowings. As defined in our respective credit agreements, the Senior Secured Net Leverage to Adjusted EBITDA ratio was 2.67x at June 30, 2016 compared to the maximum ratio of 3.00x. As defined in our respective credit agreements, the interest coverage ratio was 1.85x at June 30, 2016 compared to a required ratio of no less than 1.50x. Based on our current assessment of our operating plan, we expect to remain in compliance with our debt covenants throughout 2016.

Free Cash Flow
We generated cash flow from operations of $28.1 million during the six months ended June 30, 2016 compared to $18.9 million in Free Cash Flow generated during the same period in 2015. 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:
 
 
Six months ended
 
 
June 30,
 
 
2016
 
2015
 
 
(in thousands)
Net cash provided by operating activities (GAAP)
 
$
28,052

 
$
11,704

Less: capital expenditures
 
(9,013
)
 
(17,462
)
Effect of exchange rates on cash and cash equivalents
 
(326
)
 
(3,852
)
Other items
 
223

 
240

Free Cash Flow (Non-GAAP)
 
$
18,936

 
$
(9,370
)

Contractual Obligations and Commitments
As of June 30, 2016, there have been no material changes in our contractual obligations and commitments from those reported in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our annual report on Form 10-K for the year ended December 31, 2015.

Off-balance Sheet Arrangements
Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases, which have not materially changed from the disclosure in our annual report on Form 10-K for the year ended

33

December 31, 2015. 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, 2015. 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, 2015.

Foreign Currency Exchange Rate Risk. The volatility in foreign currency exchange rates resulted in significant unrealized foreign currency exchange gains of $3.6 million on intercompany loans denominated in U.S. dollars for the six months ended June 30, 2016. At June 30, 2016, we had intercompany loans that required remeasurement in the aggregate amount of $360.4 million, of which $268.8 million were with a subsidiary whose functional currency is the euro. 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 zloty and Mexican peso are shown in the following table:
 
Six months ended June 30,
 
2016
 
(in thousands)
 
+10%
 
-10%
Unrealized foreign currency exchange gains (losses) due to hypothetical 10% rate movement:

 
 
 
U.S. dollar to euro
$
(36,054
)
 
$
46,497

U.S. dollar to Polish zloty
(10,270
)
 
6,937

U.S. dollar to Mexican peso
(382
)
 
78


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, and 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. During May 2016, the Company terminated all of its outstanding cross-currency swap agreements. 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, 2015
 
$
47,311

Realized loss for the six months ended June 30, 2016
 
(18,607
)
Proceeds from derivative instruments
 
(28,704
)
Fair value at June 30, 2016
 
—


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.



34

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 June 30, 2016. Based on this evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2016.

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 second 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—“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, 2015.

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.

35

Item 6. Exhibits
Exhibit
No.

Description of Exhibits Filed with this Report
 
 
 
10.1

 
Stock Subscription Agreement dated June 25, 2016
 
 
 
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
*Pursuant to Item 601(b)(2) of Regulation S-K, the Company agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request.

36

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WireCo WorldGroup Inc.
 
 
 
 
 
 
 
(Registrant)
 
 
 
 
 
Dated:
August 11, 2016
 
 
 
By:
 
/s/ Brian G. Block
 
 
 
 
 
 
 
Brian G. Block
 
 
 
 
 
 
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
 
 
 
 




37

WireCo WorldGroup Inc. Reports

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