10-Q 1 a2013q310-q.htm 10-Q 2013 Q3 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 333-174896

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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ¨   NO  x 
NOTE: While the Registrant is a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
 
Non-accelerated filer
 
x
  
Smaller reporting company
 
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    YES  ¨   NO  x
There is no market for the Registrant’s equity, all of which is held by affiliates of WireCo WorldGroup (Cayman) Inc. (the “Company”). As of November 1, 2013 the Registrant had 100 shares of common stock outstanding.



WireCo WorldGroup Inc.
Quarterly Report
For the period ended September 30, 2013
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 per share data)
(unaudited)
Assets
September 30, 2013
 
December 31, 2012
Current assets:
 
 
 
Cash and cash equivalents
$
38,566

 
$
49,244

Restricted cash
3,111

 
4,254

Accounts receivable, less allowance for doubtful accounts of $3,419 and $3,416, at September 30, 2013 and December 31, 2012, respectively
160,277

 
152,998

Inventories, net
235,005

 
247,559

Current deferred income tax assets
4,533

 
5,128

Prepaid expenses and other current assets
13,636

 
14,507

Total current assets
$
455,128

 
$
473,690

Property, plant and equipment, less accumulated depreciation of $148,160 and $119,121, at September 30, 2013 and December 31, 2012, respectively
363,937

 
372,461

Intangible assets, net
152,094

 
162,876

Goodwill
197,068

 
197,437

Investments in non-consolidated affiliates
2,833

 
2,768

Deferred financing fees, net
24,501

 
27,923

Other non-current assets
15,322

 
13,105

Total assets
$
1,210,883

 
$
1,250,260

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
—

 
$
1,594

Current maturities of long-term debt
11,906

 
20,653

Interest payable
19,352

 
6,576

Accounts payable
73,900

 
83,086

Accrued compensation and benefits
16,950

 
16,697

Other current liabilities
27,956

 
19,479

Total current liabilities
$
150,064

 
$
148,085

Long-term debt, excluding current maturities
879,354

 
893,217

Non-current deferred income tax liabilities
59,947

 
65,291

Other non-current liabilities
29,780

 
31,655

Total liabilities
$
1,119,145

 
$
1,138,248

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common stock, $0.01 par value. 3,000,000 shares authorized; 2,053,174 shares issued and 2,004,005 shares outstanding at September 30, 2013 and December 31, 2012
$
21

 
$
21

Additional paid-in capital
222,856

 
219,137

Accumulated other comprehensive loss
(22,349
)
 
(24,028
)
Accumulated deficit
(93,332
)
 
(68,350
)
Treasury stock, at cost. 49,169 shares at September 30, 2013 and December 31, 2012
(14,465
)
 
(14,465
)
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
$
92,731

 
$
112,315

Non-controlling interests
(993
)
 
(303
)
Total stockholders’ equity
$
91,738

 
$
112,012

Total liabilities and stockholders’ equity
$
1,210,883

 
$
1,250,260

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 September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Net sales
 
$
203,777

 
$
200,786

 
$
616,173

 
$
532,407

Cost of sales
 
(155,396
)
 
(162,905
)
 
(469,303
)
 
(414,418
)
Gross profit
 
48,381

 
37,881

 
146,870

 
117,989

Other operating expenses:
 

 

 

 

Selling expenses
 
(9,897
)
 
(9,168
)
 
(30,938
)
 
(21,953
)
Administrative expenses
 
(22,120
)
 
(20,416
)
 
(64,663
)
 
(50,503
)
Amortization expense
 
(4,637
)
 
(4,105
)
 
(13,232
)
 
(10,522
)
Total other operating expenses
 
(36,654
)
 
(33,689
)
 
(108,833
)
 
(82,978
)
Operating income
 
11,727

 
4,192

 
38,037

 
35,011

Other income (expense):
 

 

 

 

Interest expense, net
 
(19,991
)
 
(19,248
)
 
(60,448
)
 
(44,246
)
Equity in loss of non-consolidated affiliates, net
 
(1
)
 
(370
)
 
(26
)
 
(1,088
)
Foreign currency exchange gains, net
 
14,417

 
13,969

 
4,400

 
13,935

Loss on extinguishment of debt
 
—

 
(2,358
)
 
—

 
(2,358
)
Other expense, net
 
(1,164
)
 
(127
)
 
(425
)
 
(491
)
Total other expense, net
 
(6,739
)
 
(8,134
)
 
(56,499
)
 
(34,248
)
Income (loss) before income taxes
 
4,988

 
(3,942
)
 
(18,462
)
 
763

Income tax expense
 
(5,632
)
 
(2,366
)
 
(6,985
)
 
(10,985
)
Net loss
 
(644
)
 
(6,308
)
 
(25,447
)
 
(10,222
)
Less: Net loss attributable to non-controlling interests
 
(110
)
 
(1,621
)
 
(465
)
 
(2,017
)
Net loss attributable to WireCo WorldGroup (Cayman) Inc.
 
$
(534
)
 
$
(4,687
)
 
$
(24,982
)
 
$
(8,205
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.


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


 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Net loss
 
$
(644
)
 
$
(6,308
)
 
$
(25,447
)
 
$
(10,222
)
Other comprehensive income:
 
 
 
 
 
 
 

Foreign currency translation gain
 
1,622

 
8,951

 
1,454

 
9,516

Comprehensive income (loss)
 
$
978

 
$
2,643

 
$
(23,993
)
 
$
(706
)
Less: Comprehensive loss attributable to non-controlling interests
 
(248
)
 
(1,520
)
 
(690
)
 
(1,787
)
Comprehensive income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
 
$
1,226

 
$
4,163

 
$
(23,303
)
 
$
1,081

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



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


 
 
Nine months ended
 
 
September 30,
 
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(25,447
)
 
$
(10,222
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 

Depreciation and amortization
 
42,753

 
32,480

Amortization of debt issuance costs, discounts and premium
 
6,619

 
5,537

Loss on extinguishment of debt
 
—

 
2,358

Equity in loss of non-consolidated affiliates, net
 
26

 
1,088

Share-based compensation
 
3,719

 
806

Other non-cash items
 
2,046

 
(1,448
)
Unrealized foreign currency exchange gains, net
 
(5,164
)
 
(20,723
)
Provision for deferred income taxes
 
(4,423
)
 
(1,365
)
Changes in assets and liabilities:
 

 

Accounts receivable
 
(5,697
)
 
2,152

Inventories
 
15,060

 
6,877

Prepaids and other assets
 
54

 
395

Interest payable
 
12,774

 
10,766

Accounts payable
 
(10,644
)
 
(26,286
)
Other accrued liabilities
 
7,330

 
8,924

Net cash provided by operating activities
 
$
39,006

 
$
11,339

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(22,479
)
 
(26,688
)
Acquisition of business, net of cash acquired
 
—

 
(169,243
)
Investments in non-consolidated affiliates
 
(35
)
 
(1,048
)
Net cash used in investing activities
 
$
(22,514
)
 
$
(196,979
)
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(11,043
)
 
(5,087
)
Proceeds from issuance of long-term debt
 
—

 
414,150

Debt issuance costs paid
 
(1,880
)
 
(16,411
)
Retirement of long-term debt
 
—

 
(158,150
)
Net repayments under former revolving credit agreements
 
—

 
(44,696
)
Borrowings under current Revolving Loan Facility
 
108,630

 
83,700

Repayments under current Revolving Loan Facility
 
(121,530
)
 
(50,900
)
Repayments of short-term borrowings
 
(1,586
)
 
—

Acquisition installment payments
 
—

 
(9,418
)
Repurchase of common stock
 
—

 
(14,127
)
Proceeds from exercise of stock options
 
—

 
386

Net cash provided by (used in) financing activities
 
$
(27,409
)
 
$
199,447

Effect of exchange rates on cash and cash equivalents
 
239

 
2,858

Increase (decrease) in cash and cash equivalents
 
$
(10,678
)
 
$
16,665

Cash and cash equivalents, beginning of period
 
49,244

 
27,663

Cash and cash equivalents, end of period
 
$
38,566

 
$
44,328

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid for interest, net of interest capitalized
 
$
41,901

 
$
30,987

Cash paid for income taxes, net of refunds
 
6,139

 
5,930

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 and subsidiaries in which it has a controlling interest, including WireCo WorldGroup Inc. (collectively, the “Company”), and contains certain footnote disclosures regarding the financial information of WireCo WorldGroup (Cayman) Inc. and certain of its wholly-owned subsidiaries that guarantee, subject to customary release provisions, substantially all of the outstanding indebtedness of WireCo WorldGroup Inc. The consolidated financial statements include the activity of two entities located in Brazil and the United States ("U.S."), that are not wholly-owned, but over which the Company has control. The Company reports the non-controlling interests in these consolidated subsidiaries as a component of equity separate from the Company's equity. The Company's ownership interest in certain other entities are accounted for under the equity method and are not consolidated. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements included herein have been prepared in U.S. dollars and in accordance with U.S. generally accepted accounting principles (“GAAP”) by the Company without audit in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for quarterly reports on Form 10-Q and, accordingly, do not include all of the annual disclosures required by GAAP. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.
In the opinion of management, the unaudited interim consolidated financial statements reflect all normal, recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented using management’s best estimates and assumptions where appropriate. Management’s estimates and assumptions about future events affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates are inherently subject to judgment and actual results could differ.
Accounting Pronouncement Issued During 2013
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". ASU 2013-11 requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. ASU 2013-11 was issued to provide explicit guidance on the financial statement presentation in order to eliminate the diversity in practice. The new financial statement presentation provisions relating to this update are prospective and effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The Company does not expect this standard to have a material impact on its consolidated financial statements.

(2) Inventories
The major classes of inventories were as follows as of the dates indicated:
 
 
September 30, 2013
 
December 31, 2012
Raw materials
 
$
79,607

 
$
82,558

Work in process
 
19,525

 
22,906

Finished goods, net
 
135,873

 
142,095

Inventories, net
 
$
235,005

 
$
247,559


During the third quarter of 2013, the Company adjusted certain inventory to its net realizable value in connection with the Company’s inventory optimization program.  As a result, the Company recognized a charge of $2,970, which is included in Cost of sales in the accompanying consolidated statements of operations.  


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

(3) Intangible Assets and Goodwill
The components of intangible assets were as follows as of the dates indicated:
 
 
September 30, 2013
 
December 31, 2012
 
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Finite-lived Assets
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
131,208

 
$
(78,413
)
 
$
52,795

 
$
130,433

 
$
(67,382
)
 
$
63,051

Trade name
 
682

 
(682
)
 
—

 
682

 
(265
)
 
417

Patented and unpatented technology
 
24,050

 
(9,026
)
 
15,024

 
23,792

 
(7,760
)
 
16,032

Other
 
6,390

 
(6,099
)
 
291

 
6,320

 
(5,961
)
 
359

Total finite-lived intangible assets
 
$
162,330

 
$
(94,220
)
 
$
68,110

 
$
161,227

 
$
(81,368
)
 
$
79,859

Indefinite-lived Assets
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
83,984

 
 
 
83,984

 
83,017

 
 
 
83,017

Total intangible assets
 
$
246,314

 
$
(94,220
)
 
$
152,094

 
$
244,244

 
$
(81,368
)
 
$
162,876


In the third quarter of 2013, the Company began implementing a new branding strategy. This was considered a triggering event and the Company performed an assessment of its indefinite-lived trade names at a date other than the Company's annual date of October 1st. As a result of this interim assessment, it was determined that the fair value of these assets, given effect to the branding changes, exceeded their carrying amounts and accordingly, no impairment charge was recorded.

Using the exchange rates in effect at period end, estimated amortization of intangible assets as of September 30, 2013 was as follows:
Remainder of 2013
 
$
3,807

2014
 
11,169

2015
 
10,278

2016
 
10,081

2017
 
8,060

Thereafter
 
24,715

Total
$
68,110


The change in the carrying value of goodwill was as follows as of the dates indicated:
 
Lifting Products
 
All other
 
Total
December 31, 2012
$
179,224

 
$
18,213

 
$
197,437

Foreign currency translation
(798
)
 
429

 
(369
)
September 30, 2013
$
178,426

 
$
18,642

 
$
197,068


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

(4) Borrowings
Long-term debt consisted of the following as of the dates indicated:
 
 
September 30, 2013
 
December 31, 2012
Borrowings under Revolving Loan Facility
 
$
37,376

 
$
50,276

Polish Debt due 2014
 
17,047

 
25,882

Term Loan due 2017
 
331,650

 
334,163

9.50% Senior Notes due 2017
 
425,000

 
425,000

11.75% Senior Notes due 2017
 
82,500

 
82,500

Other indebtedness
 
622

 
575

Total debt at face value
 
$
894,195

 
$
918,396

Less: Unamortized discount, net
 
(2,935
)
 
(4,526
)
Less: Current maturities of long-term debt
 
(11,906
)
 
(20,653
)
Total long-term debt
 
$
879,354

 
$
893,217

As of September 30, 2013, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. For a detailed discussion of the Company's borrowings, see Note 8—“Borrowings” to the Company's audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of the annual report on Form 10-K for the year ended December 31, 2012.

Senior Secured Credit Facilities - Revolving Loan Facility and Term Loan due 2017
The Company's maximum borrowing capacity under the Revolving Loan Facility is $145,000. As of September 30, 2013, availability under the Revolving Loan Facility was approximately $105,000. Availability is based upon the maximum borrowing capacity, less outstanding borrowings and letters of credit, and further restricted by certain covenants in the Company's credit agreements. Outstanding letters of credit were $1,110 at September 30, 2013. The interest rate on the Revolving Loan Facility and Term Loan due 2017 at September 30, 2013 was 5.13% and 6.00%, respectively.
On July 1, 2013, the Company entered into a second amendment (the “Amendment”) to the credit agreement dated as of July 12, 2012 (the "Credit Agreement"). The Amendment, among other things, amended the Credit Agreement to (i) update the Total Net Leverage Ratio financial covenant for fiscal quarters ending June 30, 2013 and thereafter to a Senior Secured Net Leverage Ratio financial covenant and (ii) modify certain defined terms used in the calculation of the Company's financial covenants. The Senior Secured Net Leverage Ratio was set at 3.50x with proposed step-downs thereafter to 3.25x effective December 31, 2014 and 3.00x effective June 30, 2016. During 2013, the Company paid $1,880 in debt issuance costs in connection with this Amendment that are being amortized to interest expense over the term of the debt instrument.

Interest expense, net
Net interest expense consists of:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Interest on long-term debt and revolvers
 
$
18,423

 
$
17,638

 
$
55,299

 
$
41,636

Amortization of debt issuance costs, discounts and premium
 
2,391

 
2,141

 
6,619

 
5,537

Capitalized interest
 
(255
)
 
(460
)
 
(1,068
)
 
(2,903
)
Other
 
(568
)
 
(71
)
 
(402
)
 
(24
)
Interest expense, net
 
$
19,991

 
$
19,248

 
$
60,448

 
$
44,246


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

Security for Borrowings
 
  
Respective borrowings secured by(1):
 
  
United States /Canada /Cayman Islands /
Mexico /Germany /Luxembourg
  
Poland
Borrowings:
  
A/R and Inventory
  
All Other Assets
  
A/R and Inventory
  
All Other Assets
Senior Secured Credit Facilities
  
first-priority lien
  
first-priority lien
  
first-priority lien
  
first-priority lien
(except second-
priority lien on certain
PP&E)
Polish Debt
  
 
  
 
  
 
  
first-priority lien on
certain PP&E(2)
(1)
Assets at the Company's Portuguese and Dutch subsidiaries are not collateral under any of the Company's borrowings.
(2)
The collateral is being released gradually with the payment of each installment on the Polish Debt, first personal property and then real estate.

(5) 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 carrying amounts and estimated fair values of the Company’s long-term debt at September 30, 2013 were as follows:
 
 
Carrying
amount
 
Estimated
fair value
Revolving Loan Facility
 
$
37,376

 
$
37,376

Polish Debt due 2014
 
15,904

 
15,810

Term Loan due 2017
 
329,209

 
333,308

9.50% Senior Notes due 2017
 
425,649

 
439,875

11.75% Senior Notes due 2017
 
82,500

 
82,500

As the Revolving Loan Facility is a revolving credit agreement, the carrying amount approximates fair value. The estimated fair value of the Polish Debt, which is not actively traded, is determined using a discounted cash flow model (Level 3 inputs) at a discount rate of 10.00%. The estimated fair value of the Term Loan due 2017 is based on rates currently available for obligations with similar terms and maturities (Level 2 inputs). The estimated fair value of the 9.50% Senior Notes is based on current market rates in inactive markets (Level 2 inputs) and the estimated fair value of the privately placed 11.75% Senior Notes is based on a model that incorporates assumptions a market participant would use in pricing the liability (Level 3 inputs).


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

(6) Restructuring
During 2013, the Company underwent an organizational restructuring, which included among other positions, a change in its chief executive officer and chief financial officer. Additionally, the Company reduced headcount at certain manufacturing facilities as a result of lower than expected sales volumes and initiatives to maintain a competitive cost structure. As a result of these actions, the Company incurred restructuring charges related to employee termination and related benefits of $1,075 and $5,559 for the three and nine months ended September 30, 2013, respectively. These charges are recorded in Administrative expenses in the consolidated statements of operations. The accrual balance at September 30, 2013 is included in Other current liabilities on the consolidated balance sheet.
A rollforward of the restructuring activities is set forth below:
Balance at December 31, 2012
$
—

Restructuring charges incurred in 2013
5,559

Payments made in 2013
(3,523
)
Balance at September 30, 2013
$
2,036


(7) Share-based Compensation
The Company maintains the 2008 Long Term Incentive Plan (the "Plan") pursuant to which the Company may grant up to 563,216 shares of common stock pursuant to non-qualified stock options and restricted stock to directors, officers and key employees. There were 40,732 shares available for future grants under the Plan at September 30, 2013.

(a)
Service-based Stock Options
Changes in the Company's outstanding service-based stock option awards were as follows:
 
 
Number of
options
 
Weighted
average
exercise price
 
Weighted
average
remaining
contractual term
(years)
Outstanding at December 31, 2012
 
387,648

 
$
144.81

 

Granted
 
143,000

 
255.90

 
 
Forfeited
 
(39,462
)
 
$
288.07

 
 
Outstanding at September 30, 2013
 
491,186

 
$
165.64

 
5.9
Vested and expected to vest as of September 30, 2013
 
491,186

 
$
165.64

 
5.9
Exercisable at September 30, 2013
 
313,170

 
$
113.01

 
3.8

The fair value of the stock options granted during 2013 were estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table.
 
August 2013
 
September 2013
Expected volatility (1)
45.81
%
 
45.47
%
Risk-free interest rate (2)
1.70
%
 
1.86
%
Expected term of the option (years) (3)
6.0

 
6.5

Expected dividend yield
—
%
 
—
%
Grant-date fair value
$
116.30

 
$
120.72

(1) Based on the average historical volatility of similar entities with publicly traded shares since the Company's shares are privately held.
(2) Based on the U.S. Treasury interest rate whose term is consistent with the expected term of the stock options.

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

(3) Based on the expected terms considering vesting and contractual terms. The August awards vest over a three-year period, with 33% vesting each year and expire if unexercised 10 years from the grant date. The September awards vest over a five-year period, with 20% vesting each year and expire if unexercised 10 years from the grant date.

Share-based compensation expense previously recognized is reversed when the employee fails to provide the requisite service and forfeits awards. The expected term of certain stock option awards were modified in accordance with various separation agreements executed in conjunction with the Company's organizational restructuring. The Company immediately recognized the incremental compensation cost of $968 and $2,095 for the three and nine months ended September 30, 2013, respectively, associated with these modified vested awards in Administrative expenses in the consolidated statements of operations.
At September 30, 2013, total unrecognized compensation cost related to the unvested portion of the Company's service-based stock options that remains to be expensed was $20,026, with the weighted average remaining years to vest of approximately 3.4 years.

(b)
Performance Conditions
In conjunction with the organizational restructuring, 60,724 shares under non-qualified performance-based stock options were forfeited, leaving 12,552 shares under non-qualified performance-based stock options outstanding at September 30, 2013. Compensation expense of $533 will be recognized based on the grant date fair value when and if a liquidity event occurs that provides the stated cash return to Paine & Partners Capital Fund III, L.P.
In conjunction with the CEO's employment agreement, a special bonus may be awarded upon a change in control. The special bonus ranges from an amount equal to the product of 30,000 and the per share price associated with the closing (the “Deal Share Price”) (if the deal occurs within the first year of his employment), the product of 20,000 and the Deal Share Price (if the deal occurs within the second year of his employment), and the product of 10,000 and the Deal Share Price (if the deal occurs within the third year of his employment). The Company will not begin accruing any compensation cost until a liquidity event occurs. The award is payable in the same proportion of cash and/or equity consideration received by the controlling shareholders of the Company in connection with the change in control.

(c) Restricted Stock
On July 8, 2013, the Company granted 13,800 shares of restricted stock that cliff vest after a four-year service period. If a change in control occurs, all unvested shares of restricted stock will immediately vest. At September 30, 2013, total unrecognized compensation cost related to the unvested portion of the Company's restricted stock that remains to be expensed was $3,311, with the weighted average remaining years to vest of approximately 3.8 years.

(8) Income Taxes
The Company determines the interim tax provision by applying an estimate of the annual effective tax rate to the year-to-date pretax book income (loss) and adjusts for discrete items, if any, during the reporting period. The effective income tax rate for the three and nine months ended September 30, 2013 was 112.9% and (37.8)%, respectively, compared to (60.0)% and 1,439.7% for the three and nine months ended September 30, 2012, respectively. The Company's effective tax rate differs from the applicable statutory tax rate due to a valuation allowance recorded against domestic deferred tax assets, as the Company does not have a history of significant taxable income in the U.S. The decrease in the effective tax rate for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily due to lower pre-tax earnings in foreign tax jurisdictions during 2013. There was also tax expense of $9,322 recorded in 2012 related to the sale of the U.S. entity's investment in the stock of the Mexican subsidiaries to a foreign affiliate.
Unrecognized tax benefits increased $1,263 for the nine months ended September 30, 2013.


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

(9) Contingencies
The Company is involved in various claims and legal actions arising in the ordinary course of business, which are incidental to its operations. The Company currently maintains insurance coverage for certain risks, such as product liability and workers’ compensation. The Company establishes accruals for litigation matters when the Company believes it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. As of September 30, 2013, the Company had accrued approximately $646 for certain outstanding legal proceedings.
If the Company has not accrued an amount because the litigation does not meet the criteria for accrual as set forth above, the Company discloses the matter if a material loss is reasonably possible and the Company is able to estimate a range of possible losses. At September 30, 2013, no legal proceedings met that criteria.

(10) Segment Reporting
The Company reports the manufacturing, marketing, selling and distribution of ropes and specialty steel wire as one reportable segment entitled Lifting Products. During 2013, the Company changed the way it assesses performance and allocates resources. Effective for the third quarter of 2013, the Company has two operating segments, which are lifting products and engineered products. As the engineered products operating segment did not meet the quantitative threshold on an annual basis to be a reportable segment, the Company included its results in the "All other" category, as a reconciling item to consolidated amounts.
Financial information for the Company's only reportable segment, reconciled to the consolidated amounts, is presented below.
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
 
 
2013
 
2012
 
2013
 
2012
Net sales
 
 
 
 
 
 
 
 
Lifting Products
$
180,280

 
$
179,119

 
$
549,333

 
$
510,740

 
All other
23,497

 
21,667

 
68,201

 
21,667

 
Elimination of intersegment net sales
—

 
—

 
(1,361
)
 
—

 
 
Total net sales
$
203,777

 
$
200,786

 
$
616,173

 
$
532,407

 
 
 
 
 
 
 
 
 
 
 
Operating income
 
 
 
 
 
 
 
 
Lifting Products
$
7,821

 
$
2,633

 
$
28,969

 
$
33,452

 
All other
3,906

 
1,559

 
9,408

 
1,559

 
Elimination of intersegment operating income
—

 
—

 
(340
)
 
—

 
 
Total operating income
$
11,727

 
$
4,192

 
$
38,037

 
$
35,011



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

(11) Condensed Consolidating Financial Statements
Guarantees of the 9.50% Senior Notes
The Company has registered 9.50% Senior Notes, which are unsecured obligations of WireCo WorldGroup Inc. These obligations are jointly and severally and fully and unconditionally guaranteed by WireCo WorldGroup (Cayman) Inc. Certain entities controlled by the Company (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 in the Netherlands, France, Brazil and Hong Kong are collectively referred to as the “Non-Guarantor Subsidiaries”. The adjustments eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions. There are currently no significant restrictions on the ability of WireCo WorldGroup Inc. or any guarantor to obtain funds from its subsidiaries by dividend or loan.
The following condensed consolidating financial statements are prepared with each entity’s investment in subsidiaries accounted for under the equity method. The total stockholders' equity presentation under the parent, guarantor and elimination columns was adjusted to reflect equity method accounting for accumulated other comprehensive income (loss) and comprehensive income (loss). During the first quarter of 2013, Lankhorst Touwfabrieken B.V. and Lankhorst Recycling Deutschland GmbH became guarantors. Also, during the third quarter of 2012 all Mexican subsidiaries became guarantors and in the fourth quarter of 2012 WireCo Dutch Acquisition B.V., Lankhorst Euronete Portugal, S.A., and Lankhorst Euronete Australia Pty Ltd became guarantors. These changes in the guarantor pool have been retroactively reflected in all condensed consolidating financial statements presented.

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

Condensed Consolidating Balance Sheets
 
September 30, 2013
 
WireCo
WorldGroup
(Cayman) Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
26

 
$
2,610

 
$
15,697

 
$
20,233

 
$
—

 
$
38,566

Restricted cash
—

 
—

 
1,084

 
2,027

 
—

 
3,111

Accounts receivable, net
—

 
41,489

 
91,408

 
27,380

 
—

 
160,277

Intercompany accounts receivable
18,821

 
58,131

 
54,812

 
7,008

 
(138,772
)
 
—

Inventories, net
—

 
89,535

 
128,331

 
28,187

 
(11,048
)
 
235,005

Current deferred income tax assets
—

 
3,240

 
1,288

 
5

 
—

 
4,533

Prepaid expenses and other current assets
—

 
3,106

 
10,783

 
(253
)
 
—

 
13,636

Total current assets
$
18,847

 
$
198,111

 
$
303,403

 
$
84,587

 
$
(149,820
)
 
$
455,128

Long-term intercompany notes receivable
—

 
479,039

 
36,869

 
114,187

 
(630,095
)
 
—

Property, plant and equipment, net
—

 
60,339

 
251,825

 
51,773

 
—

 
363,937

Intangible assets, net
—

 
38,522

 
86,979

 
26,593

 
—

 
152,094

Goodwill
—

 
117,124

 
55,016

 
24,928

 
—

 
197,068

Investments in subsidiaries
80,882

 
—

 
147,484

 
—

 
(228,366
)
 
—

Investments in non-consolidated affiliates
—

 
—

 
2,833

 
—

 
—

 
2,833

Deferred financing fees, net
—

 
24,501

 
—

 
—

 
—

 
24,501

Other non-current assets
—

 
201

 
14,711

 
410

 
—

 
15,322

Total assets
$
99,729

 
$
917,837

 
$
899,120

 
$
302,478

 
$
(1,008,281
)
 
$
1,210,883

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

 
$
3,350

 
$
8,556

 
$
—

 
$
—

 
$
11,906

Interest payable
—

 
19,124

 
228

 
—

 
—

 
19,352

Accounts payable
—

 
10,931

 
44,653

 
18,316

 
—

 
73,900

Accrued compensation and benefits
—

 
5,539

 
10,521

 
890

 
—

 
16,950

Intercompany accounts payable
1,291

 
69,051

 
66,056

 
3,247

 
(139,645
)
 
—

Other current liabilities
—

 
2,789

 
18,435

 
6,732

 
—

 
27,956

Total current liabilities
$
1,291

 
$
110,784

 
$
148,449

 
$
29,185

 
$
(139,645
)
 
$
150,064

Long-term debt, excluding current maturities
—

 
871,385

 
7,925

 
44

 
—

 
879,354

Long-term intercompany notes payable
6,700

 
—

 
587,738

 
39,226

 
(633,664
)
 
—


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

Non-current deferred income tax liabilities
—

 
5,760

 
41,168

 
13,019

 
—

 
59,947

Other non-current liabilities
—

 
8,575

 
19,376

 
1,829

 
—

 
29,780

Total liabilities
$
7,991

 
$
996,504

 
$
804,656

 
$
83,303

 
$
(773,309
)
 
$
1,119,145

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
92,731

 
(78,667
)
 
95,457

 
217,206

 
(233,996
)
 
92,731

Non-controlling interests
(993
)
 
—

 
(993
)
 
1,969

 
(976
)
 
(993
)
Total stockholders’ equity
$
91,738

 
$
(78,667
)
 
$
94,464

 
$
219,175

 
$
(234,972
)
 
$
91,738

Total liabilities and stockholders’ equity
$
99,729

 
$
917,837

 
$
899,120

 
$
302,478

 
$
(1,008,281
)
 
$
1,210,883


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

 
December 31, 2012
 
WireCo
WorldGroup
(Cayman)
Inc.
(Parent)
 
WireCo
WorldGroup
Inc.
(Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
34

 
$
2,867

 
$
24,993

 
$
21,350

 
$
—

 
$
49,244

Restricted cash
—

 
—

 
1,059

 
3,195

 
—

 
4,254

Accounts receivable, net
—

 
46,449

 
80,852

 
25,697

 
—

 
152,998

Intercompany accounts receivable
17,145

 
47,156

 
49,251

 
982

 
(114,534
)
 
—

Short-term intercompany notes receivable
—

 
3,163

 
—

 
—

 
(3,163
)
 
—

Inventories, net
—

 
97,057

 
127,022

 
32,282

 
(8,802
)
 
247,559

Current deferred income tax assets
—

 
3,240

 
1,888

 
—

 
—

 
5,128

Prepaid expenses and other current assets
—

 
2,163

 
10,932

 
1,412

 
—

 
14,507

Total current assets
$
17,179

 
$
202,095

 
$
295,997

 
$
84,918

 
$
(126,499
)
 
$
473,690

Long-term intercompany notes receivable
—

 
485,185

 
41,921

 
113,215

 
(640,321
)
 
—

Property, plant and equipment, net
—

 
65,158

 
253,800

 
53,503

 
—

 
372,461

Intangible assets, net
—

 
42,818

 
92,897

 
27,161

 
—

 
162,876

Goodwill
—

 
117,855

 
54,752

 
24,830

 
—

 
197,437

Investment in subsidiaries
102,558

 
—

 
170,145

 
—

 
(272,703
)
 
—

Investment in non-consolidated affiliates
—

 
—

 
2,768

 
—

 
—

 
2,768

Deferred financing fees, net
—

 
27,923

 
—

 
—

 
—

 
27,923

Other non-current assets
—

 
177

 
12,897

 
31

 
—

 
13,105

Total assets
$
119,737

 
$
941,211

 
$
925,177

 
$
303,658

 
$
(1,039,523
)
 
$
1,250,260

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
—

 
$
—

 
$
—

 
$
1,594

 
$
—

 
$
1,594

Current maturities of long-term debt
—

 
3,350

 
17,303

 
—

 
—

 
20,653

Interest payable
—

 
6,471

 
35

 
70

 
—

 
6,576

Accounts payable
—

 
14,829

 
47,294

 
20,963

 
—

 
83,086

Accrued compensation and benefits
—

 
4,687

 
9,195

 
2,815

 
—

 
16,697

Intercompany accounts payable
1,025

 
57,790

 
50,756

 
3,624

 
(113,195
)
 
—

Short-term intercompany notes payable
—

 
—

 
7,304

 
—

 
(7,304
)
 
—

Other current liabilities
—

 
3,609

 
13,709

 
3,396

 
(1,235
)
 
19,479

Total current liabilities
$
1,025

 
$
90,736

 
$
145,596

 
$
32,462

 
$
(121,734
)
 
$
148,085


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

Long-term debt, excluding current maturities
—

 
886,383

 
6,834

 
—

 
—

 
893,217

Long-term intercompany notes payable
6,700

 
—

 
590,329

 
43,273

 
(640,302
)
 
—

Non-current deferred income tax liabilities
—

 
7,010

 
44,938

 
13,343

 
—

 
65,291

Other non-current liabilities
—

 
7,508

 
21,825

 
(1,812
)
 
4,134

 
31,655

Total liabilities
$
7,725

 
$
991,637

 
$
809,522

 
$
87,266

 
$
(757,902
)
 
$
1,138,248

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity attributable to WireCo WorldGroup (Cayman) Inc.
112,315

 
(50,426
)
 
115,958

 
214,787

 
(280,319
)
 
112,315

Non-controlling interests
(303
)
 
—

 
(303
)
 
1,605

 
(1,302
)
 
(303
)
Total stockholders’ equity
$
112,012

 
$
(50,426
)
 
$
115,655

 
$
216,392

 
$
(281,621
)
 
$
112,012

Total liabilities and stockholders’ equity
$
119,737

 
$
941,211

 
$
925,177

 
$
303,658

 
$
(1,039,523
)
 
$
1,250,260




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

Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
 
Three months ended September 30, 2013
 
WireCo
WorldGroup
(Cayman)
Inc. (Parent)
 
WireCo
WorldGroup
Inc. (Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$
—

 
$
72,428

 
$
116,446

 
$
42,361

 
$
(27,458
)
 
$
203,777

Cost of sales
—

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

 
(155,396
)
Gross profit
—

 
18,629

 
22,518

 
9,877

 
(2,643
)
 
48,381

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
—

 
(2,791
)
 
(5,065
)
 
(2,041
)
 
—

 
(9,897
)
Administrative expenses
(57
)
 
(11,531
)
 
(7,583
)
 
(2,399
)
 
(550
)
 
(22,120
)
Amortization expense
—

 
(1,432
)
 
(2,637
)
 
(568
)
 
—

 
(4,637
)
Total other operating expenses
(57
)
 
(15,754
)
 
(15,285
)
 
(5,008
)
 
(550
)
 
(36,654
)
Operating income (loss)
(57
)
 
2,875

 
7,233

 
4,869

 
(3,193
)
 
11,727

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(103
)
 
(11,333
)
 
(9,662
)
 
1,107

 
—

 
(19,991
)
Equity in loss of non-consolidated affiliates, net
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Equity losses from subsidiaries
(374
)
 
—

 
(8,129
)
 
—

 
8,503

 
—

Foreign currency exchange gains (losses), net
—

 
(347
)
 
17,114

 
(2,350
)
 
—

 
14,417

Other expense, net
—

 
(828
)
 
(332
)
 
(4
)
 
—

 
(1,164
)
Total other expense, net
(477
)
 
(12,509
)
 
(1,009
)
 
(1,247
)
 
8,503

 
(6,739
)
Income (loss) before income taxes
(534
)
 
(9,634
)
 
6,224

 
3,622

 
5,310

 
4,988

Income tax expense
—

 
(494
)
 
(4,470
)
 
(668
)
 
—

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

 
2,954

 
5,310

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

 
—

 
(343
)
 
233

 
—

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

 
$
2,721

 
$
5,310

 
$
(534
)
Comprehensive income (loss)
$
978

 
$
(10,128
)
 
$
3,376

 
$
9,819

 
$
(3,067
)
 
$
978

 

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

 
Three months ended September 30, 2012
 
WireCo
WorldGroup
(Cayman)
Inc. (Parent)
 
WireCo
WorldGroup
Inc. (Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$
—

 
$
79,969

 
$
117,768

 
$
31,437

 
$
(28,388
)
 
$
200,786

Cost of sales
—

 
(64,178
)
 
(104,623
)
 
(26,271
)
 
32,167

 
(162,905
)
Gross profit
—

 
15,791

 
13,145

 
5,166

 
3,779

 
37,881

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
—

 
(3,061
)
 
(4,237
)
 
(1,870
)
 
—

 
(9,168
)
Administrative expenses
(568
)
 
(17,277
)
 
405

 
(2,976
)
 
—

 
(20,416
)
Amortization expense
—

 
(1,432
)
 
(2,178
)
 
(495
)
 
—

 
(4,105
)
Total other operating expenses
(568
)
 
(21,770
)
 
(6,010
)
 
(5,341
)
 
—

 
(33,689
)
Operating income (loss)
(568
)
 
(5,979
)
 
7,135

 
(175
)
 
3,779

 
4,192

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
(27
)
 
(11,001
)
 
(7,710
)
 
(510
)
 
—

 
(19,248
)
Equity in income (loss) of non-consolidated affiliates, net
—

 
(366
)
 
52

 
—

 
(56
)
 
(370
)
Equity losses from subsidiaries
(4,092
)
 
(24,393
)
 
(46,310
)
 
—

 
74,795

 
—

Foreign currency exchange gains (losses), net
—

 
(8,762
)
 
22,520

 
211

 
—

 
13,969

Loss on extinguishment of debt
—

 
(2,358
)
 
—

 
—

 
—

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

 
29

 
(156
)
 
—

 
—

 
(127
)
Other expense, net
(4,119
)
 
(46,851
)
 
(31,604
)
 
(299
)
 
74,739

 
(8,134
)
Loss before income taxes
(4,687
)
 
(52,830
)
 
(24,469
)
 
(474
)
 
78,518

 
(3,942
)
Income tax expense (benefit)
—

 
5,199

 
(3,769
)
 
(3,796
)
 
—

 
(2,366
)
Net loss
(4,687
)
 
(47,631
)
 
(28,238
)
 
(4,270
)
 
78,518

 
(6,308
)
Less: Net income (loss) attributable to non-controlling interests
—

 
—

 
(1,660
)
 
39

 
—

 
(1,621
)
Net loss attributable to WireCo WorldGroup (Cayman) Inc.
$
(4,687
)
 
$
(47,631
)
 
$
(26,578
)
 
$
(4,309
)
 
$
78,518

 
$
(4,687
)
Comprehensive income (loss)
$
2,643

 
$
(47,631
)
 
$
(19,287
)
 
$
2,368

 
$
64,550

 
$
2,643



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

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


$
224,943


$
365,943


$
110,510


$
(85,223
)
 
$
616,173

Cost of sales
—


(171,817
)

(291,636
)

(88,827
)

82,977

 
(469,303
)
Gross profit
—


53,126


74,307


21,683


(2,246
)
 
146,870

Other operating expenses:









 

Selling expenses
—


(9,252
)

(15,599
)

(6,087
)

—

 
(30,938
)
Administrative expenses
(805
)

(31,598
)

(24,722
)

(6,988
)

(550
)
 
(64,663
)
Amortization expense
—


(4,296
)

(7,292
)

(1,644
)

—

 
(13,232
)
Total other operating expenses
(805
)

(45,146
)

(47,613
)

(14,719
)

(550
)
 
(108,833
)
Operating income (loss)
(805
)

7,980


26,694


6,964


(2,796
)
 
38,037

Other income (expense):









 

Interest income (expense), net
(307
)

(33,406
)

(29,935
)

3,200


—

 
(60,448
)
Equity in loss of non-consolidated affiliates, net
—


(26
)

—


—


—

 
(26
)
Equity losses from subsidiaries
(23,870
)

—


(20,748
)

—


44,618

 
—

Foreign currency exchange gains (losses), net
—


(519
)

7,292


(2,373
)

—

 
4,400

Other income (expense), net
—


(1,053
)

628


—


—

 
(425
)
Total other income (expense), net
(24,177
)

(35,004
)

(42,763
)

827


44,618

 
(56,499
)
Income (loss) before income taxes
(24,982
)

(27,024
)

(16,069
)

7,791


41,822

 
(18,462
)
Income tax expense
—


(485
)

(5,834
)

(666
)

—

 
(6,985
)
Net income (loss)
(24,982
)

(27,509
)

(21,903
)

7,125


41,822

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


—


(931
)

466


—

 
(465
)
Net income (loss) attributable to WireCo WorldGroup (Cayman) Inc.
$
(24,982
)

$
(27,509
)

$
(20,972
)

$
6,659


$
41,822

 
$
(24,982
)
Comprehensive income (loss)
$
(23,993
)

$
(27,509
)

$
(20,449
)

$
28,919


$
19,039

 
$
(23,993
)

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

 
Nine months ended September 30, 2012
 
WireCo
WorldGroup
(Cayman)
Inc. (Parent)
 
WireCo
WorldGroup
Inc. (Issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Elimination
Adjustments
 
Consolidated
Net sales
$
—


$
249,487


$
332,454


$
31,437


$
(80,971
)
 
$
532,407

Cost of sales
—


(199,444
)

(273,765
)

(26,271
)

85,062

 
(414,418
)
Gross profit
—


50,043


58,689


5,166


4,091

 
117,989

Other operating expenses:









 

Selling expenses
—


(9,061
)

(11,022
)

(1,870
)

—

 
(21,953
)
Administrative expenses
(686
)

(36,478
)

(9,801
)

(3,538
)

—

 
(50,503
)
Amortization expense
—


(4,296
)

(5,731
)

(495
)

—

 
(10,522
)
Total other operating expenses
(686
)

(49,835
)

(26,554
)

(5,903
)

—

 
(82,978
)
Operating income (loss)
(686
)

208


32,135


(737
)

4,091

 
35,011

Other income (expense):









 

Interest expense, net
(27
)

(29,026
)

(14,681
)

(512
)

—

 
(44,246
)
Equity in income (loss) of non-consolidated affiliates, net
—


(1,048
)

52


—


(92
)
 
(1,088
)
Equity losses from subsidiaries
(7,493
)

(17,175
)

(53,800
)

—


78,468

 
—

Foreign currency exchange gains (losses), net
1


(6,357
)

20,080


211


—

 
13,935

Loss on extinguishment of debt
—


(2,358
)

—


—


—

 
(2,358
)
Other expense, net
—


(310
)

(181
)

—


—

 
(491
)
Other expense, net
(7,519
)

(56,274
)

(48,530
)

(301
)

78,376

 
(34,248
)
Loss before income taxes
(8,205
)

(56,066
)

(16,395
)

(1,038
)

82,467

 
763

Income tax benefit (expense)
—


288


(7,477
)

(3,796
)

—

 
(10,985
)
Net loss
(8,205
)

(55,778
)

(23,872
)

(4,834
)

82,467

 
(10,222
)
Less: Net income (loss) attributable to non-controlling interests
—


—


(2,056
)

39


—

 
(2,017
)
Net loss attributable to WireCo WorldGroup (Cayman), Inc.
$
(8,205
)

$
(55,778
)

$
(21,816
)

$
(4,873
)

$
82,467

 
$
(8,205
)
Comprehensive loss
$
(706
)

$
(55,778
)

$
(14,356
)

$
2,254


$
67,880

 
$
(706
)


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

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

 
$
12,763

 
$
14,777

 
$
—

 
$
39,006

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(3,711
)
 
(14,571
)
 
(4,197
)
 
—

 
(22,479
)
Investments in non-consolidated affiliates
—

 
(35
)
 
—

 
—

 
—

 
(35
)
Intercompany dividends received
5,800

 
—

 
4,008

 
—

 
(9,808
)
 
—

Investment in subsidiaries
(5,800
)
 
—

 
—

 
—

 
5,800

 
—

Net cash used in investing activities
—

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

 
(2,513
)
 
(8,530
)
 
—

 
—

 
(11,043
)
Debt issuance costs paid
—

 
(1,880
)
 
—

 
—

 
—

 
(1,880
)
Increases (decreases) in intercompany notes
—

 
9,308

 
(2,670
)
 
(6,638
)
 
—

 
—

Borrowings under Revolving Loan Facility
—

 
108,630

 
—

 
—

 
—

 
108,630

Repayments under Revolving Loan Facility
—

 
(121,530
)
 
—

 
—

 
—

 
(121,530
)
Repayments of short-term borrowings
—

 
—

 
—

 
(1,586
)
 
—

 
(1,586
)
Capital contributions received
—

 
—

 
5,800

 
—

 
(5,800
)
 
—

Intercompany dividends paid
—

 
—

 
(5,800
)
 
(4,008
)
 
9,808

 
—

Net cash used in financing activities
—

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

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

 
—

 
(296
)
 
535

 
—

 
239

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

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

 
2,867

 
24,993

 
21,350

 
—

 
49,244

Cash and cash equivalents, end of period
$
26

 
$
2,610

 
$
15,697

 
$
20,233

 
$
—

 
$
38,566






22
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

 
Nine months ended September 30, 2012
 
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
$
(360
)
 
$
(46,589
)
 
$
30,492

 
$
27,796

 
$
—

 
$
11,339

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(6,999
)
 
(17,075
)
 
(2,614
)
 
—

 
(26,688
)
Acquisition of business, net of cash acquired
—

 
—

 
(296,169
)
 
—

 
126,926

 
(169,243
)
Investments in non-consolidated affiliates
—

 
(1,048
)
 
—

 
—

 
—

 
(1,048
)
Proceeds from sale of business
—

 
126,926

 
—

 
—

 
(126,926
)
 
—

Intercompany dividends received
40,000

 
—

 
—

 
—

 
(40,000
)
 
—

Investment in subsidiaries
(31,721
)
 
—

 
—

 
—

 
31,721

 
—

Net cash provided by (used in) investing activities
8,279

 
118,879

 
(313,244
)
 
(2,614
)
 
(8,279
)
 
(196,979
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
—

 
(612
)
 
(4,475
)
 
—

 
—

 
(5,087
)
Proceeds from issuance of long-term debt
—

 
414,150

 
—

 
—

 
—

 
414,150

Debt issuance costs paid
—

 
(16,411
)
 
—

 
—

 
—

 
(16,411
)
Retirement of long-term debt
—

 
(98,750
)
 
—

 
(59,400
)
 
—

 
(158,150
)
Net repayments under former revolving credit agreements
—

 
(44,696
)
 
—

 
—

 
—

 
(44,696
)
Borrowings under Revolving Loan Facility
—

 
83,700

 
—

 
—

 
—

 
83,700

Repayments under Revolving Loan Facility
—

 
(50,900
)
 
—

 
—

 
—

 
(50,900
)
Acquisition installment payments
—

 
—

 
(9,418
)
 
—

 
—

 
(9,418
)
Increases (decreases) in intercompany notes
6,700

 
(358,120
)
 
310,433

 
40,987

 
—

 
—

Repurchase of common stock
(14,127
)
 
—

 
—

 
—

 
—

 
(14,127
)
Proceeds from exercise of stock options
386

 
—

 
—

 
—

 
—

 
386

Capital contributions received
—

 
—

 
31,721

 
—

 
(31,721
)
 
—

Intercompany dividends paid
—

 
—

 
(40,000
)
 
—

 
40,000

 
—

Net cash provided by (used in) financing activities
(7,041
)
 
(71,639
)
 
288,261

 
(18,413
)
 
8,279

 
199,447


23
WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands)
(unaudited)

Effect of exchange rates on cash and cash equivalents
—

 
—

 
2,187

 
671

 
—

 
2,858

Increase in cash and cash equivalents
878

 
651

 
7,696

 
7,440

 
—

 
16,665

Cash and cash equivalents, beginning of period
3

 
2,265

 
25,385

 
10

 
—

 
27,663

Cash and cash equivalents, end of period
$
881

 
$
2,916

 
$
33,081

 
$
7,450

 
$
—

 
$
44,328



24

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, the use of the terms “WireCo,” the “Company,” “we,” “our” or “us” in the following refers to WireCo WorldGroup (Cayman) Inc., its wholly-owned subsidiaries and subsidiaries in which it has a controlling interest, including WireCo WorldGroup Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a reader of our financial statements with a narrative from the perspective of our management on our consolidated financial condition, results of operations, liquidity and capital resources on a historical basis and certain other factors that have affected recent earnings, as well as those factors that may affect future earnings. This MD&A is provided as a supplement to, and should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes included in this quarterly report. Additionally, our MD&A should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2012.

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. In some cases, forward-looking statements are identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek” or “continue” or the negative of those terms 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, 2012. Such factors include, among others:

•
the general economic conditions in markets and countries where we have operations;
•
our ability to meet quality standards;
•
risks associated with our manufacturing activities;
•
the competitive environment in which we operate;
•
changes in the availability or cost of raw materials, energy and labor;
•
foreign currency exchange rate fluctuations;
•
the impact of environmental issues and changes in environmental laws and regulations;
•
violations of laws and regulations;
•
our ability to develop and maintain competitive advantages;
•
our ability to successfully execute and integrate acquisitions;
•
breach in technology;
•
labor disturbances, including any resulting from suspension or termination of our collective bargaining agreements;
•
the impact of safety issues and changes in safety laws and regulations;
•
our ability to implement and maintain sufficient internal controls;
•
comparability of our specified scaled disclosure requirements applicable to emerging growth companies;
•
our significant indebtedness;
•
covenant restrictions; and
•
the interests of our principal equity holder may not be aligned with the holders of our 9.5% Senior Notes.

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.

25


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

We provide Pro Forma Net Sales, Adjusted EBITDA and Acquisition Adjusted EBITDA as a means to enhance communication with security holders by providing additional information regarding our operating results. We use these Non-GAAP Financial Measures internally to evaluate our performance, allocate resources and for incentive compensation purposes. We believe that our presentation of these measures provides investors with greater transparency with respect to our results of operations and that these measures are useful for debt covenant calculation purposes, peer comparisons and period-to-period comparison of results considering our history of acquisitions.
We provide Net Debt and Adjusted Working Capital as additional information regarding our liquidity. Management believes that Net Debt is meaningful to investors because management assesses the Company's leverage position after factoring in available cash that could be used to repay outstanding debt. We believe that Adjusted Working Capital provides a meaningful measure of our efforts to reduce inventory and manage our customer collections and vendor payments.
These measures are not in accordance with, or an alternative to GAAP, and may be different from Non-GAAP Financial Measures used by other companies. These measures have important limitations as analytical tools and should not be considered in isolation, nor as a substitute for, or superior to, analysis of our results as reported under GAAP. We recommend that investors view these measures in conjunction with the GAAP measures included in this MD&A and have provided reconciliations of reported GAAP amounts to the Non-GAAP amounts.

Third Quarter and Year-to-Date 2013 Highlights
Despite relatively flat net sales, Acquisition Adjusted EBITDA increased 5.5% compared to third quarter 2012 and we generated over $37.4 million in cash flow from operating activities during the quarter ended September 30, 2013 on $35.7 million of Acquisition Adjusted EBITDA for the three months ended September 30, 2013.  We remain focused internally on creating a culture of accountability, executing on clear business strategies in each of our markets to best serve our customers, improving our operations to maximize the opportunities available to us for growth, reducing costs to run a more efficient operation in both increasing and decreasing revenue environments, actively managing inventory, accounts receivable and accounts payable to reduce working capital and applying more rigorous return on investment standards to our capital spending.  As a result of these efforts, our Acquisition Adjusted EBITDA as a percentage of pro forma sales increased from 16.6% for the quarter ended September 30, 2012 to 17.5% for the quarter ended September 30, 2013.
Our net sales increased $3.0 million and $83.8 million during the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012 primarily due to our acquisition of Lankhorst on July 12, 2012. Fluctuations in foreign currency exchange rates attributed to an increase in sales of $6.1 million and $10.7 million for the three and nine months ended September 30, 2013, respectively. Our organic sales decreased by $9.4 million and $54.9 million for the quarter and year-to-date, respectively. These declines were principally driven by: (i) lower sales of our products used in oil and gas drilling rigs in North America, (ii) softer economic climate in the geographies utilizing commercial construction and general industrial application products, and (iii) reduced demand for our fishing applications, with one of our key markets blocked from activity in 2013. Our specialty steel wire business, which is primarily driven by infrastructure and construction, has continued to suffer from fewer governmental projects in Mexico as compared to 2012 and lower sales of our tire bead product used in tire production. These declines have been partially offset by growth in offshore oil and gas applications.






26

The table below depicts actual net sales and Pro Forma Net Sales for the three and nine months ended September 30, 2013 compared to the same periods in 2012. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. The following is a reconciliation of reported net sales to Pro Forma Net Sales. Pro Forma Net Sales decreased $0.3 million and $47.9 million for the quarter and year-to-date, respectively.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(dollars in thousands)
Net sales as reported (GAAP)
 
$
203,777

 
$
200,786

 
$
616,173

 
$
532,407

Lankhorst pre-acquisition net sales
 
—

 
3,293

 
—

 
131,627

Pro Forma Net Sales (Non-GAAP)
 
$
203,777

 
$
204,079

 
$
616,173

 
$
664,034

For the three months ended September 30, 2013, we reported Acquisition Adjusted EBITDA of $35.7 million and a net loss of $0.6 million, compared to Acquisition Adjusted EBITDA of $33.8 million, which includes Lankhorst pre-acquisition Adjusted EBITDA, and a net loss of $6.3 million for the same period in 2012. This increase in Acquisition Adjusted EBITDA was primarily due to higher gross margins.
For the nine months ended September 30, 2013, we reported Acquisition Adjusted EBITDA of $104.2 million and a net loss of $25.4 million, compared to Acquisition Adjusted EBITDA of $110.1 million, which includes Lankhorst pre-acquisition Adjusted EBITDA, and a net loss of $10.2 million for the same period in 2012. These declines in Acquisition Adjusted EBITDA were primarily a result of the decline in sales. For the definitions of Adjusted EBITDA and Acquisition Adjusted EBITDA and formal reconciliations to net loss, see the section titled “Adjusted EBITDA and Acquisition Adjusted EBITDA”.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(dollars in thousands)
Adjusted EBITDA (Non-GAAP)
 
$
35,679

 
$
31,613

 
$
104,223


$
94,172

Lankhorst pre-acquisition Adjusted EBITDA
 
—

 
2,220

 
—


15,908

Acquisition Adjusted EBITDA
 
$
35,679

 
$
33,833

 
$
104,223

 
$
110,080

Net loss as reported (GAAP)
 
$
(644
)
 
$
(6,308
)
 
$
(25,447
)

$
(10,222
)
The decrease in net loss of $5.7 million for the third quarter of 2013 was primarily due to the increase in gross profit of $10.5 million and no loss on extinguishment of debt in 2013, partially offset by higher selling, administrative and amortization expenses of $3.0 million primarily related to restructuring activities and an increase in income tax expense of $3.3 million. We continue to implement cost reduction initiatives and streamline our global organizational structure to operate more efficiently.
The net loss of $25.4 million for the nine months ended September 30, 2013 compared to the net loss of $10.2 million for the nine months ended September 30, 2012 was primarily due to $16.2 million more in interest expense related to the increase in outstanding debt, lower foreign currency exchange gains of $9.5 million, and $7.0 million more in restructuring charges, which includes modifications to stock option awards incurred during 2013 related to personnel changes within our management team, partially offset by lower acquisition costs of $10.3 million and a decrease in income tax expense of $4.0 million. The majority of the foreign currency exchange gain/loss activity is unrealized and relates to the revaluation of intercompany loans.

Consolidated Results of Operations
This section focuses on significant items that impacted our operating results for the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012. Most notably, our acquisition of Lankhorst on July 12, 2012 affects the comparability of period-over-period results. Operating results of Lankhorst are included in our consolidated statements of operations since the date of acquisition. Our results of operations have been converted to U.S. dollars from multiple currencies, which primarily include the euro, the Mexican peso and the Polish złoty. Our revenues and certain expenses are affected by fluctuations in the value of the U.S. dollar against these local currencies. The results of operations for any quarter are not necessarily indicative of the results to be expected for other periods or the full fiscal year.





27



Three months ended September 30, 2013 compared to three months ended September 30, 2012
The following table presents selected consolidated financial data for the three months ended September 30, 2013 and 2012:
 
 
Three months ended September 30,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(dollars in thousands)
 
 
Net sales
 
$
203,777

 
$
200,786

 
$
2,991

 
1.5
 %
Gross profit
 
48,381

 
37,881

 
10,500

 
27.7
 %
Other operating expenses
 
(36,654
)
 
(33,689
)
 
(2,965
)
 
8.8
 %
Other expense, net
 
(6,739
)
 
(8,134
)
 
1,395

 
(17.2
)%
Income tax expense
 
(5,632
)
 
(2,366
)
 
(3,266
)
 
NM

Net loss
 
$
(644
)
 
$
(6,308
)
 
$
5,664

 
NM

Gross profit as % of net sales
 
23.7
%
 
18.9
%
 
 
 
 
Other operating expenses as % of net sales
 
18.0
%
 
16.8
%
 
 
 
 
NM = Not Meaningful

Net sales
Our consolidated net sales increased $3.0 million, or 1.5%, during the quarter ended September 30, 2013 as compared to the same period in 2012. Approximately $7.2 million of the increase was attributable to eleven more days of Lankhorst activity. This increase was partially offset by a $5.4 million decline in specialty steel wire sales and a $4.0 million decline in rope sales excluding the impact of the Lankhorst acquisition. Foreign currency exchange rate fluctuations contributed to an increase in sales of $6.1 million.
The decline in rope sales was driven primarily by commercial and industrial, mining and general industrial end markets. Sales to commercial and industrial markets utilizing our crane ropes declined due to customer inventory reduction initiatives and weakness in the European and Asian markets. Sales in our mining end markets are lower than third quarter 2012 due to a decline in coal production in North America, our largest mining market. According to the U.S. Energy Information Administration, coal production in the U.S. declined 4.0% from 508.3 million short tons year-to-date through the second quarter of 2012 to 488.2 million short tons for the same period in 2013. We don’t believe the market has improved for the third quarter of 2013. These declines were partially offset by an increase in offshore oil and gas projects due to new contracts. Rope sales represented 71.9% of our total consolidated net sales for the three months ended September 30, 2013 compared to 70.4% for the same period in 2012.
We saw improvement in our specialty steel wire sales this quarter compared to last quarter, but sales declined $5.4 million this quarter compared to third quarter of 2012. The decline was driven by fewer Mexican government infrastructure projects period over period and our decision in the fourth quarter of 2012 to reduce production of certain wire products due to low margins primarily in Mexico. Specialty steel wire sales represented 16.4% of our total consolidated net sales for the three months ended September 30, 2013 compared to 19.1% for the same period in 2012.
Sales of engineered products did not significantly change period over period. Engineered products sales represented 11.7% of our total consolidated net sales for the three months ended September 30, 2013 compared to 10.5% for the three months ended September 30, 2012.

Gross profit
Gross profit increased $10.5 million, and gross profit as a percentage of sales (“gross margin”) increased from 18.9% for the three months ended September 30, 2012 to 23.7% for the three months ended September 30, 2013. Improved margin performance is attributable to favorable product mix towards higher margin products, margin improvement initiatives in targeted rope end markets, such as offshore oil and gas, reduced sales of low margin wire products, and reducing operating costs in our production and distribution facilities to mitigate the earnings impact of lower sales. These improvements were partially offset by a $3.0 million write-down of inventory related to changes in expected use from our inventory optimization program. In the third quarter of 2012, Lankhorst's gross profit was negatively impacted due to the recognition of $6.8 million of higher cost of sales due to the inventory step-up related to the purchase accounting. We monitor the cost of our raw materials

28

and pass along price increases and decreases accordingly. The impact of the inventory adjustment resulted in a decrease of our gross margin of 3.3% in 2012.

Other operating expenses
 
 
Three months ended September 30,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(dollars in thousands)
Selling expenses
 
$
(9,897
)
 
$
(9,168
)
 
$
(729
)
 
8.0
%
Administrative expenses
 
(22,120
)
 
(20,416
)
 
(1,704
)
 
8.3
%
Amortization expense
 
(4,637
)
 
(4,105
)
 
(532
)
 
13.0
%
Other operating expenses
 
$
(36,654
)
 
$
(33,689
)
 
$
(2,965
)
 
8.8
%
Other operating expenses increased $3.0 million, or 8.8%, for the three months ended September 30, 2013 compared to the same period in 2012. Overall, total other operating expenses as a percentage of net sales increased from 16.8% for the period ended September 30, 2012 to 18.0% for the period ended September 30, 2013. Foreign currency exchange rate fluctuations had no material impact on the change.
Selling expenses increased $0.7 million, or 8.0%, over the same period in 2012. Eleven additional days of Lankhorst activity accounted for most of this change.
Administrative expenses increased $1.7 million, or 8.3%, over the same period in 2012. Of the increase, approximately $0.5 million was related to Lankhorst administrative expenses for the eleven additional days of activity. Share-based compensation was $1.7 million higher due to award modifications and options and restricted stock granted in the third quarter of 2013. Also, incentive compensation earned was $0.9 million higher in the third quarter of 2013 compared to the third quarter of 2012 as there was no bonus earned in the third quarter of 2012 based on quarterly Adjusted EBITDA. Restructuring charges were $0.7 million more than the same period in 2012 due to severance costs associated with organizational changes and business performance. Depreciation expense increased $1.6 million due to new assets placed in service including a new ERP system at one of our locations. Also, other administrative expenses such as information technology costs, consulting fees, and travel expenses increased $1.0 million. These increases in administrative expenses were partially offset by lower acquisition costs. Acquisition costs related to the July 12, 2012 purchase of Lankhorst were $4.5 million for the three months ended September 30, 2012.
Amortization expense increased $0.5 million, or 13.0%, over the same period in 2012 primarily due to the acceleration of amortization associated with a definite-lived trade name that will no longer be used.

Other expense, net
Other expense decreased by $1.4 million, or 17.2%, for the three months ended September 30, 2013, compared to the same period in 2012. Significant components of this change were as follows:
 
 
Three months ended September 30,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(dollars in thousands)
Interest expense, net
 
$
(19,991
)
 
$
(19,248
)
 
$
(743
)
 
3.9
 %
Equity in loss of non-consolidated affiliates, net
 
(1
)
 
(370
)
 
369

 
(99.7
)%
Foreign currency exchange gains, net
 
14,417

 
13,969

 
448

 
3.2
 %
Loss on extinguishment of debt
 
—

 
(2,358
)
 
2,358

 
(100.0
)%
Other expense, net
 
(1,164
)
 
(127
)
 
(1,037
)
 
816.5
 %
Total other expense, net
 
$
(6,739
)
 
$
(8,134
)
 
$
1,395

 
(17.2
)%
Interest expense increased $0.7 million for the three months ended September 30, 2013 primarily due to additional debt outstanding to fund the Lankhorst acquisition and refinance existing debt. On July 12, 2012, we issued $82.5 million aggregate principal amount of 11.75% Senior Notes and we retired the Term Loan due 2014 with a portion of the proceeds from the $335.0 million Term Loan due 2017.
For the three months ended September 30, 2013, foreign currency exchange gains were $14.4 million compared to foreign currency exchange gains of $14.0 million for the same period in 2012. At September 30, 2013 and 2012, we had intercompany

29

loans that required remeasurement in the aggregate amounts of $478.4 million and $523.4 million, respectively. The revaluation of intercompany loans denominated in U.S. dollars for subsidiaries whose functional currency is the euro resulted in $10.7 million of gains recognized. The U.S. dollar to euro exchange rate at June 30, 2013 was $1.00 to €0.7645 compared to $1.00 to €0.7405 at September 30, 2013. The revaluation of U.S. dollar denominated intercompany loans at our Polish subsidiary resulted in $4.0 million of additional gains recognized during the third quarter of 2013. The U.S. dollar to Polish złoty exchange rate at June 30, 2013 was $1.00 to zł.3.3162 compared to $1.00 to zł.3.1313 at September 30, 2013. The loss associated with the intercompany loans issued to the affiliated Mexican acquisition company were immaterial. In 2012, the net foreign currency exchange gains recognized of $14.0 million was due to the revaluation of $247.0 million new and existing intercompany loans, offset by an $8.8 million foreign currency exchange loss related to the settlement of two foreign currency forward contracts. In the third quarter of 2012, the euro, the Polish złoty and the Mexican peso appreciated against the U.S. dollar.
Loss on extinguishment of debt decreased $2.4 million for the three months ended September 30, 2013 compared to
the same period in 2012. In July 2012, we wrote-off $2.4 million of unamortized debt issuance costs in conjunction with the refinancing of the senior secured credit facilities.
Other expense increased $1.0 million for the three months ended September 30, 2013 compared to the same period in 2012, primarily due to a loss of $1.4 million on the disposal of assets.

Income tax expense
For the three months ended September 30, 2013, we recorded income tax expense of $5.6 million compared to $2.4 million for the three months ended September 30, 2012. The resulting effective tax rate for the third quarter of 2013 and 2012 was 112.9% and (60.0)%, respectively. The effective tax rate for the third quarter of 2013 and 2012 includes a valuation allowance against our U.S. income tax net operating losses and U.S. interest expense deferred tax asset carryforwards as it is more likely than not that a tax benefit will not be realized. The effective tax rate for the third quarter of 2013 also includes a valuation allowance against the net deferred tax assets of Portugal as it is more likely than not that a tax benefit will not be realized.


Nine months ended September 30, 2013 compared to nine months ended September 30, 2012
The following table presents selected consolidated financial data for the nine months ended September 30, 2013 and 2012:
 
 
Nine months ended September 30,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(dollars in thousands)
 
 
Net sales
 
$
616,173


$
532,407

 
$
83,766

 
15.7
%
Gross profit
 
146,870


117,989

 
28,881

 
24.5
%
Other operating expenses
 
(108,833
)

(82,978
)
 
(25,855
)
 
31.2
%
Other expense, net
 
(56,499
)

(34,248
)
 
(22,251
)
 
65.0
%
Income tax expense
 
(6,985
)

(10,985
)
 
4,000

 
NM

Net loss
 
$
(25,447
)

$
(10,222
)
 
$
(15,225
)
 
NM

Gross profit as % of net sales
 
23.8
%
 
22.2
%
 
 
 
 
Other operating expenses as % of net sales
 
17.7
%
 
15.6
%
 
 
 
 
NM = Not Meaningful

Net sales
Our consolidated net sales increased $83.8 million, or 15.7%, during the nine months ended September 30, 2013 as compared to the same period in 2012. Of the increase, $127.9 million was attributable to our acquisition of Lankhorst, which is comprised of both rope and engineered products sales, partially offset by a $30.0 million decline in rope sales excluding the impact of the Lankhorst acquisition and a $24.9 million decline in specialty steel wire sales. Foreign currency exchange rate fluctuations contributed to an increase in sales of $10.7 million.
The decline in rope sales was driven primarily by a reduction in demand in onshore oil and gas activities and commercial and general industrial end markets in Europe and Asia. Sales of rope in the oil and gas end market declined due to continued weakness in the U.S. and Canada onshore markets. Rig counts, while still down relative to last year, are declining at a slower

30

pace as we get further away from the rig count peak period in the end of 2011 and first half of 2012. Stabilizing average last twelve month rig counts is an important indicator for our onshore oil and gas business. The average rig count during this nine-month period in 2013 was 2,109 as compared to 2,319 during the same period in 2012, a 9.1% decrease. The North American rig count per Baker Hughes was 2,147 rigs as of September 30, 2013 compared to 2,214 rigs as of September 30, 2012, a 3.0% decrease year-over-year. Sales to commercial and industrial markets utilizing our crane ropes declined due to weakness in the European and Asian markets. Also, sales in our mining end markets are down compared to the same period in 2012 due to a decline in coal production in North America, our largest mining market. According to the U.S. Energy Information Administration, coal production in the U.S. declined 4.0% from 508.3 million short tons year-to-date through the second quarter of 2012 to 488.2 million short tons for the same period in 2013. We don’t believe the market improved for the third quarter of 2013. Rope sales represented 72.3% of our total consolidated net sales for the nine months ended September 30, 2013 compared to 79.0% for the same period in 2012.
Specialty steel wire sales decreased primarily due to lower demand of prestressed concrete strand related to delays of Mexican governmental infrastructure projects and our decision to reduce production of certain low margin wire products primarily in Mexico. Specialty steel wire sales represented 15.7% of our total consolidated net sales for the nine months ended September 30, 2013 compared to 21.0% for the same period in 2012.
The Lankhorst acquisition contributed engineered products to our business mix, and as a result we do not have comparable results period over period. Sales of engineered products were $73.2 million for the nine months ended September 30, 2013, or 12.0% of our total consolidated net sales.

Gross profit
Gross profit increased $28.9 million and gross profit as a percentage of sales (“gross margin”) increased from 22.2% for the nine months ended September 30, 2012 to 23.8% for the nine months ended September 30, 2013. Improved margin performance is attributable to improved margin performance in targeted end markets, reduced sales of low margin wire products and cost reduction initiatives from the Lankhorst integration. These improvements were partially offset by lower volumes of high margin products and the inclusion of Lankhorst's engineered products, which has lower margins than our rope products. Also, a $3.0 million write-down of inventory related to changes in expected use from our inventory optimization program negatively impacted gross profit. In the third quarter of 2012, Lankhorst's gross profit was negatively impacted due to the recognition of $6.8 million of higher cost of sales due to the inventory step-up related to the purchase accounting. The impact of the inventory adjustment resulted in a decrease of our gross margin of 1.2% in 2012. We monitor the cost of our raw materials and pass along price increases and decreases accordingly.

Other operating expenses
 
 
Nine months ended September 30,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(dollars in thousands)
Selling expenses
 
(30,938
)

(21,953
)
 
$
(8,985
)
 
40.9
%
Administrative expenses
 
(64,663
)

(50,503
)
 
(14,160
)
 
28.0
%
Amortization expense
 
(13,232
)

(10,522
)
 
(2,710
)
 
25.8
%
Other operating expenses
 
(108,833
)

(82,978
)
 
$
(25,855
)
 
31.2
%
Other operating expenses increased $25.9 million, or 31.2%, for the nine months ended September 30, 2013 compared to the same period in 2012. Our acquisition of Lankhorst accounted for $20.5 million of the increase. Overall, total other operating expenses as a percentage of net sales increased from 15.6% for the nine months ended September 30, 2012 to 17.7% for the nine months ended September 30, 2013.
Selling expenses increased $9.0 million, or 40.9%, over the same period in 2012. Of the increase, approximately $7.1 million was related to our acquisition of Lankhorst. The remaining increase was primarily due to additional payroll costs associated with our investment in our international sales force, higher rent expense due to opening more global sales offices, incurrence of more advertising charges and other costs directly related to growing our organic sales. Foreign currency exchange rate fluctuations had no material impact on the change.
Administrative expenses increased $14.2 million, or 28.0%, over the same period in 2012. Of the increase, approximately $12.0 million was related to Lankhorst administrative expenses. Compensation costs have increased $2.8 million due to higher incentive bonuses, new positions, and salary increases during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Also, we recognized $4.9 million more in reorganization and restructuring charges

31

primarily related to changes in our organizational structure and business performance. Share-based compensation was $2.9 million higher due to modifications and awards granted, partially offset by the reversal of previously recognized expense associated with forfeitures. Depreciation expense increased $1.8 million due to new assets placed in service including a new ERP system at one of our locations. Also, other administrative expenses such as information technology costs, consulting fees, and travel expenses increased $1.7 million. These increases in administrative expenses were partially offset by lower acquisition costs of $10.3 million related to the July 12, 2012 purchase of Lankhorst. Foreign currency exchange rate fluctuations had no material impact on the change.
Amortization expense increased $2.7 million, or 25.8%, over the same period in 2012 due to the amortization of Lankhorst's intangibles.

Other expense, net
Other expense increased by $22.3 million, or 65.0%, for the nine months ended September 30, 2013, compared to the same period in 2012. Significant components of this change were as follows:
 
 
Nine months ended September 30,
 
Change
 
 
2013
 
2012
 
Dollars
 
Percent
 
 
(dollars in thousands)
Interest expense, net
 
$
(60,448
)

$
(44,246
)
 
$
(16,202
)
 
36.6
 %
Equity in loss of non-consolidated affiliates, net
 
(26
)

(1,088
)
 
1,062

 
(97.6
)%
Foreign currency exchange gains, net
 
4,400


13,935

 
(9,535
)
 
68.4
 %
Loss on extinguishment of debt
 
—


(2,358
)
 
2,358

 
(100.0
)%
Other expense, net
 
(425
)

(491
)
 
66

 
(13.4
)%
Total other expense, net
 
$
(56,499
)

$
(34,248
)
 
$
(22,251
)
 
65.0
 %
Interest expense increased $16.2 million for the nine months ended September 30, 2013 primarily due to additional debt outstanding to fund the Lankhorst acquisition and refinance existing debt. On July 12, 2012, we issued $82.5 million aggregate principal amount of 11.75% Senior Notes resulting in approximately $5.5 million of increased interest expense. Also on July 12, 2012, we retired the Term Loan due 2014 with a portion of the proceeds from the $335.0 million Term Loan due 2017, resulting in $7.9 million of net additional interest expense. The amortization of debt issuance costs and the discount related to the new issuances resulted in an additional $1.1 million in interest expense for the nine months ended September 30, 2013. Additionally, we were able to capitalize $1.8 million more in interest in 2012 compared to 2013, resulting in more interest expense. Prior to 2012, we did not capitalize interest on construction in progress for property, plant and equipment at our Mexican subsidiaries. During the first quarter of 2012, we corrected this error and capitalized $1.9 million of interest.
For the nine months ended September 30, 2013, foreign currency exchange gains were $4.4 million compared to foreign currency exchange gains of $13.9 million for the same period in 2012. At September 30, 2013 and 2012, we had intercompany loans that required remeasurement in the aggregate amounts of $478.4 million and $523.4 million, respectively. The revaluation of intercompany loans denominated in U.S. dollars for subsidiaries whose functional currency is the euro resulted in $8.1 million of the gains recognized. The U.S. dollar to the euro exchange rate at December 31, 2012 was $1.00 to €0.7579 compared to $1.00 to €0.7405 at September 30, 2013. These foreign currency exchange gains were offset by losses recognized during 2013 related to the revaluation of U.S. dollar denominated intercompany loans for our Polish subsidiary and Mexican subsidiary of $1.0 million and $1.1 million, respectively. The U.S. dollar to the Polish złoty exchange rate at December 31, 2012 was $1.00 to zł.3.0878 compared to $1.00 to zł.3.1313 at September 30, 2013. The U.S. dollar to the Mexican peso exchange rate at December 31, 2012 was $1.00 to $12.9880 compared to $1.00 to $13.1450 at September 30, 2013. In 2012, the net foreign currency exchange gains recognized of $13.9 million was due to the revaluation of $247.0 million new and existing intercompany loans, offset by a $7.3 million foreign currency exchange loss related to the settlement of two foreign currency forward contracts. In the third quarter of 2012, the euro, the Polish złoty and Mexican peso appreciated against the U.S. dollar.
Loss on extinguishment of debt decreased $2.4 million for the nine months ended September 30, 2013 compared to
the same period in 2012. In July 2012, we wrote-off $2.4 million of unamortized debt issuance costs in conjunction with the refinancing of the senior secured credit facilities.

Income tax expense
For the nine months ended September 30, 2013, we recorded income tax expense of $7.0 million compared to $11.0 million for the nine months ended September 30, 2012. The resulting effective tax rate for 2013 and 2012 was (37.8)% and 1,439.7%, respectively. The effective tax rate for the first nine months of 2013 and 2012 includes a valuation allowance against our U.S.

32

income tax net operating losses and U.S. interest expense deferred tax asset carryforwards as it is more likely than not that a tax benefit will not be realized. The effective tax rate for the first nine months of 2013 also includes a valuation allowance against the net deferred tax assets of Portugal as it is more likely than not that this tax benefit will not be realized. The decrease in the effective tax rate for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily due to lower pre-tax earnings in foreign tax jurisdictions during 2013. There was also tax expense of $9.3 million recorded in 2012 related to the September 7, 2012 sale of the U.S. entity's investment in the stock of the Mexican subsidiaries to a foreign affiliate.

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


33

The following is a reconciliation of net income (loss) to Adjusted EBITDA and Acquisition Adjusted EBITDA:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(dollars in thousands)
Net loss (GAAP)
 
$
(644
)
 
$
(6,308
)
 
$
(25,447
)
 
$
(10,222
)
Plus:
 
 
 
 
 
 
 
 
Interest expense, net
 
19,991

 
19,248

 
60,448

 
44,246

Income tax expense
 
5,632

 
2,366

 
6,985

 
10,985

Depreciation and amortization
 
14,436

 
12,879

 
42,753

 
32,480

Equity in loss of non-consolidated affiliates, net
 
1

 
370

 
26

 
1,088

Foreign currency exchange gains, net
 
(14,417
)
 
(13,969
)
 
(4,400
)
 
(13,935
)
Share-based compensation
 
1,993


269

 
3,719


806

Other expense, net
 
1,164

 
127

 
425


491

Loss on extinguishment of debt
 
—

 
2,358

 
—

 
2,358

Acquisition costs
 
—

 
4,533

 
369

 
10,667

Purchase accounting (inventory step-up and other)
 
393

 
6,776

 
2,155

 
6,776

Bank fees
 
389

 
555

 
1,608

 
1,594

Management and advisory fees
 
1,220

 
867

 
3,554

 
2,548

Reorganization and restructuring charges
 
2,005

 
1,292

 
7,556

 
2,672

Sarbanes-Oxley implementation
 
282

 
237

 
513

 
1,242

Effect of inventory optimization program
 
2,970

 
—

 
2,970

 
—

Other adjustments
 
264

 
13

 
989

 
376

Adjusted EBITDA (Non-GAAP)
 
$
35,679

 
$
31,613

 
$
104,223

 
$
94,172

Lankhorst pre-acquisition Adjusted EBITDA (a)
 
—

 
2,220

 
—

 
15,908

Acquisition Adjusted EBITDA (Non-GAAP)
 
$
35,679

 
$
33,833

 
$
104,223

 
$
110,080


(a)
The Lankhorst acquisition closed on July 12, 2012 and its results have been included in our consolidated statements of operations since the date of acquisition. Pro forma adjustments were included for the 11-day period ended July 11, 2012 and the 193-day period ended July 11, 2012 as if the acquisition had been consummated on the first day of 2012 for comparative purposes. These amounts represent the net income of Lankhorst before deductions for interest, taxes, depreciation and amortization, adjusted for the purchase of the remaining 40% of our Australian subsidiary and disposal of the yachting division and certain other transactions related to percentage-of-completion accounting and start-up costs. These pro forma adjustments were converted from euros to U.S. dollars using the average exchange rate for the 11-day period ended July 11, 2012 and the 193-day period ended July 11, 2012 of $1.00 to €0.8049 and $1.00 to €0.7867, respectively.


LIQUIDITY AND CAPITAL RESOURCES
Overview
For the nine months ended September 30, 2013, we generated cash flow from operating activities of $39.0 million, of which$37.4 million was from the three months ended September 30, 2013. During the third quarter, we implemented programs to increase cash flow generation which could be used to retire debt, including reducing excess inventory, more focused collection efforts to shorten our days of sales outstanding, selling unused property and increasing our return on investment thresholds for capital projects. We have paid principal and interest payments on our long-term debt of $11.0 million and $43.0 million, respectively, and reduced our borrowings outstanding under the Revolving Loan Facility by $12.9 million. Deleveraging remains a key priority and we will continue to apply excess cash towards our outstanding debt balances.

Net Debt

34

Net Debt was $856.0 million and $872.5 million at September 30, 2013 and December 31, 2012, respectively. 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. As calculated per our respective credit agreements, our net leverage ratio, which considers synergies, at September 30, 2013 was 5.94x compared to 5.65x at December 31, 2012. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. The following is a reconciliation of total debt to Net Debt.
 
 
September 30, 2013

 
December 31, 2012

 
 
(in thousands)
Borrowings under Revolving Loan Facility
 
$
37,376

 
$
50,276

Short-term borrowings
 
—

 
1,594

Polish Debt due 2014
 
17,047

 
25,882

Term Loan due 2017
 
331,650

 
334,163

9.50% Senior Notes due 2017
 
425,000

 
425,000

11.75% Senior Notes due 2017
 
82,500

 
82,500

Other indebtedness
 
622

 
575

Capital lease obligations
 
3,464

 
6,045

Total debt at face value plus capital lease obligations (GAAP)
 
$
897,659

 
$
926,035

Less: Cash and cash equivalents
 
(38,566
)
 
(49,244
)
Less: Restricted cash
 
(3,111
)
 
(4,254
)
Net Debt (Non-GAAP)
 
$
855,982

 
$
872,537


Adjusted Working Capital 
Within our asset base, working capital management is our largest opportunity for cash generation. We began implementing initiatives in the third quarter of 2013 to increase collection efforts on our accounts receivable, optimize inventory balances and negotiate payment terms with our suppliers. We saw improvement with a few of these initiatives during the quarter. Adjusted Working Capital, a Non-GAAP Financial Measure defined as accounts receivable plus inventories less accounts payable, decreased from $332.8 million as of June 30, 2013 to $321.4 million as of September 30, 2013. See the section entitled "Non-GAAP Financial Measures" for further information on our Non-GAAP Financial Measures. The following is a reconciliation of working capital to Adjusted Working Capital:
 
 
September 30, 2013
 
June 30, 2013
 
 
(dollars in thousands)
Accounts receivable
 
$
160,277

 
172,301

Inventories
 
235,005

 
243,712

Accounts payable
 
(73,900
)
 
(83,241
)
Adjusted Working Capital (Non-GAAP)
 
$
321,382

 
$
332,772

Plus: All other current assets
 
59,846

 
56,900

Less: All other current liabilities
 
(76,164
)
 
(60,245
)
Working capital (GAAP)
 
$
305,064

 
$
329,427


Available Liquidity
Our principal sources of liquidity consist of cash from operations and borrowings under our Revolving Loan Facility. Our principal uses of cash are to support operations and service our debt. Our liquidity is influenced by many factors, including the amount and timing of cash collections from our customers and fluctuations in the cost of our raw materials.

35

Our Revolving Loan Facility activity for the nine months ended September 30, 2013 was as follows:
 
 
Amount
 
Weighted-average
interest rate
 
 
(dollars in thousands)
Amount outstanding at September 30, 2013
 
$
37,376

 
5.13
%
Average amount outstanding from January 1, 2013 through September 30, 2013
 
55,391

 
6.04
%
Maximum amount outstanding from January 1, 2013 through September 30, 2013
 
79,876

 
5.33
%

Total available liquidity, defined as availability under our Revolving Loan Facility plus cash and cash equivalents, was approximately $143.6 million at September 30, 2013. Availability under the Revolving Loan Facility is based upon the maximum borrowing capacity of $145.0 million, less outstanding borrowings, letters of credit and further restricted by certain covenants in our credit agreements.
We reinvest the earnings of substantially all of our non-U.S. subsidiaries in those respective operations. The foreign operating subsidiaries use cash generated from earnings to fund working capital, invest in capital expenditures and service interest and principal payments on intercompany debt. Our outstanding debt is primarily issued by the U.S. operating subsidiary and there are intercompany loans within the corporate legal structure that are paid with earnings from the operating subsidiaries in foreign jurisdictions to provide liquidity in the U.S. for interest and principal payments on our outstanding debt. Of the consolidated cash and cash equivalents balance of $38.6 million at September 30, 2013, cash and cash equivalents held in foreign countries were $35.5 million, of which $4.3 million was in U.S. dollars. The cash balances in currencies other than the U.S. dollar are primarily in the euro, the Mexican peso and the Polish złoty, all of which can be readily converted to U.S. dollars.
Based on our current assessment of our operating plan, we believe that cash flow from operations, cash and cash equivalents and available borrowing under our Revolving Loan Facility will be adequate to fund anticipated operating, capital and debt service requirements and other commitments over the next twelve months. However, there can be no assurance of the cost or availability of future borrowings, if any, under our credit facilities or in the debt markets.

Cash Flow Information
The following tables summarize our cash flows from operating, investing and financing activities for the nine months ended September 30, 2013 and 2012, respectively.
 
 
Nine months ended September 30,
 
 
2013
 
2012
 
 
(dollars in thousands)
Cash flows provided by (used in)
 
 
 
 
Operating activities
 
$
39,006

 
$
11,339

Investing activities
 
(22,514
)
 
(196,979
)
Financing activities
 
(27,409
)
 
199,447

Effect of exchange rates on cash and cash equivalents
 
239

 
2,858

Net increase (decrease) in cash and cash equivalents
 
$
(10,678
)
 
$
16,665

Cash and cash equivalents, beginning of period
 
49,244

 
27,663

Cash and cash equivalents, end of period
 
$
38,566

 
$
44,328



36

Cash from Operating Activities
 
 
Nine months ended September 30,
 
 
2013
 
2012
 
 
(dollars in thousands)
Net loss
 
$
(25,447
)
 
$
(10,222
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
45,576


18,733

Changes in assets and liabilities
 
18,877


2,828

Net cash provided by operating activities
 
$
39,006

 
$
11,339

Cash flow from operations increased over the prior period primarily due to an increase in cash earnings and working capital management, specifically for inventories and accounts payable.

Cash from Investing Activities
 
 
Nine months ended September 30,
 
 
2013
 
2012
 
 
(dollars in thousands)
Capital expenditures
 
$
(22,479
)
 
$
(26,688
)
Acquisition of business, net of cash acquired
 
—

 
(169,243
)
Investments in non-consolidated affiliates
 
(35
)
 
(1,048
)
Net cash used in investing activities
 
$
(22,514
)
 
$
(196,979
)
We plan to fund capital projects with cash from operations and short-term borrowings on our Revolving Loan Facility.

Cash from Financing Activities
 
 
Nine months ended September 30,
 
 
2013
 
2012
 
 
(dollars in thousands)
Principal payments on long-term debt
 
$
(11,043
)
 
$
(5,087
)
Proceeds from issuance of long-term debt
 
—

 
414,150

Debt issuance costs paid
 
(1,880
)
 
(16,411
)
Retirement of long-term debt
 
—

 
(158,150
)
Net repayments under revolving credit agreements
 
(12,900
)
 
(11,896
)
Repayments of short-term borrowings
 
(1,586
)
 
—

Acquisition installment payments
 
—

 
(9,418
)
Repurchase of common stock
 
—

 
(14,127
)
Other, net
 
—

 
386

Net cash provided by (used in) financing activities
 
$
(27,409
)
 
$
199,447

We have paid $23.9 million on our long-term debt and we expect to continue to pay down our Revolving Loan Facility balance in the fourth quarter of 2013.

Long-term Debt
For a detailed discussion of our borrowings, see Note 8—“Borrowings” to our audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of our annual report on Form 10-K for the year ended December 31, 2012.


37

Debt Covenant Compliance
On July 1, 2013, we entered into a Second Amendment (the "Amendment") to the credit agreement dated as of July 12, 2012 (the "Credit Agreement"). The Amendment, among other things, amended the Credit Agreement to update the Total Net Leverage Ratio financial covenant for fiscal quarters ending June 30, 2013 and thereafter to a Senior Secured Net Leverage Ratio financial covenant. The maximum Senior Secured Net Leverage Ratio was set at 3.50x of Acquisition Adjusted EBITDA, with more restricted step-downs thereafter to 3.25x effective December 31, 2014 and 3.00x effective June 30, 2016. The Amendment also permits losses associated with the sale of certain inventory to be added back to Adjusted EBITDA on the condition that proceeds from such sales be swept quarterly to pay down the Term Loan due 2017.
For the third quarter of 2013, we were in compliance with all restrictive and financial covenants associated with our borrowings, including the Senior Secured Net Leverage to Acquisition Adjusted EBITDA ratio. Per the calculation defined within the respective credit agreements, the Senior Secured Net Leverage to Acquisition Adjusted EBITDA ratio was 2.43x at September 30, 2013.

Off-balance Sheet Arrangements
Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases, which have not materially changed from our Contractual Obligations and Commitments table as disclosed in our annual report on Form 10-K for the year ended December 31, 2012.

Contractual Obligations and Commitments
As of September 30, 2013, 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, 2012.

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, 2012. Other than as discussed below, there have been no significant changes in our critical accounting policies since year-end.

In the third quarter of 2013, we began implementing a new branding strategy. This was considered a triggering event and a quantitative interim impairment assessment relative to the Company's non-amortizing trade names was conducted. We used the relief from royalty method to determine the fair value of the select reporting units. Discount rates ranged from 13.0% to 17.0% and royalty rates from 1.0% to 3.0% based on comparable industrial manufacturers. As a result of the interim indefinite-lived intangible impairment test assessment, it was determined that the fair value of these assets, given effect to the branding changes, exceeded their carrying amounts and accordingly, no impairment charge was recorded. In future periods, if our indefinite-lived trade names were to become impaired, the resulting impairment charge could have a material impact on our financial position and results of operations.

Recently Issued Accounting Standard
Note 1—“Interim Financial Statement Presentation” to the unaudited interim consolidated financial statements contained in this quarterly report includes a description of the recently issued accounting standard.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Other than as discussed below, there was no material change from the information included in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our annual report on Form 10-K for the year ended December 31, 2012.
Foreign Currency Exchange Rate Risk. The consolidated financial statements are prepared in U.S. dollars.  The assets and liabilities of certain of our foreign subsidiaries are denominated in foreign currencies, which create exposure to changes in foreign currency exchange rates. The activity in the Foreign currency exchange gains (losses), net line item included in our consolidated statements of operations primarily results from foreign currency exchange rate fluctuations related to intercompany loans denominated in U.S. dollars with subsidiaries whose functional currency is primarily the euro, Polish złoty or Mexican peso. At September 30, 2013, we had intercompany loans that required remeasurement in the aggregate amount of $478.4 million. For the three months ended September 30, 2013, we recognized unrealized foreign currency exchange gains of $13.7 million on these intercompany loans. A hypothetical 10% change in the U.S. dollar to the euro exchange rate would

38

result in an increase or decrease in the foreign currency exchange gain of approximately $33.0 million. A hypothetical 10% change in the U.S. dollar to the Polish złoty exchange rate would result in an increase or decrease in the foreign currency exchange gain of approximately $7.0 million. A hypothetical 10% change in the U.S. dollar to the Mexican peso exchange rate would result in an increase or decrease in the foreign currency exchange loss of approximately $9.8 million. The foreign currency exchange gains and losses recognized as a result of remeasurement are unrealized until such time that the loans are paid. We manage this risk by monitoring our foreign currency denominated cash inflows and outflows.

Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, under the supervision and with the participation of its chief executive officer and chief financial officer, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures provide reasonable assurance that information required to be disclosed in reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Based on that evaluation, the Company's chief executive officer and chief financial officer concluded that, due to an unremediated material weakness in internal control over financial reporting in the area of accounting for income taxes described below, the Company's disclosure controls and procedures were not effective.
Notwithstanding the unremediated material weakness, management, including our chief executive officer and chief financial officer, believes the consolidated financial statements included in this quarterly report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

Changes in Internal Control over Financial Reporting
As reported in the quarterly report on Form 10-Q for the period ended September 30, 2012 and in the annual report on Form 10-K for the period ended December 31, 2012, the Company identified a material weakness in internal control over financial reporting in the area of accounting for income taxes. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, the Company did not maintain sufficient, effective controls over the preparation and review of income taxes related to the complete and accurate recording of the Company's tax provision, deferred tax balances (net of required valuation allowance) and uncertain tax positions.
There was no change in the Company's internal control over financial reporting that occurred during the Company's third quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company is, however, continuing to implement remedial actions as outlined in its plan disclosed in Item 9A of the annual report on Form 10-K for the year ended December 31, 2012. The Company has (i) provided for additional time for tax preparation and review in the Company's closing process and (ii) improved internal communications through planning meetings and status calls with the tax advisors, provision preparers, reviewers, and international component teams. Due to the departure of individuals within the Company's tax department, management has outsourced certain of the Company's corporate tax functions to external service providers given the complexity of operating in several global tax jurisdictions. The Company is evaluating whether to continue to outsource these corporate tax functions or hire additional internal tax resources.
Management anticipates the actions described above and the resulting improvements in controls will strengthen the Company's internal control over financial reporting and will, over time, address the related material weakness identified. However, the above material weakness will not be considered remediated until these improvements have been fully implemented and are operating effectively for an adequate period of time.


39

PART II – OTHER INFORMATION

Item 1.Legal Proceedings
We are not a party to any material legal proceedings. From time to time, we are involved in routine litigation arising in the ordinary course of business, which is incidental to our operations. For further information required by this item, refer to Note 9—“Contingencies” to our unaudited interim consolidated financial statements included 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, 2012.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuance of Restricted Stock
On July 8, 2013, the Company issued 13,800 shares of restricted common stock under the Company's 2008 Long Term Incentive Plan to Christopher Ayers in connection with his appointment as our CEO. The restricted stock cliff vests after a four-year service period. The Company claims an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for the issuance, because, among other things, the transaction did not involve a public offering, Mr. Ayers is an executive of the Company and had access to information about the Company and his investment, he took the securities for investment and not resale, and the Company took appropriate measures to restrict the transfer of the securities.

Item 3.     Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures
Not applicable.

Item 5.     Other Information

None.

40



Item 6. Exhibits
Exhibit
No.

 
Description of Exhibits Filed with this Report
 
 
31.1

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

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

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

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

  
XBRL Instance Document
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB

 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document

Exhibit
No.

 
Description of Exhibits Incorporated by Reference
 
 
10.1

 
The Second Amendment to the Credit Agreement, dated July 1, 2013, filed as Exhibit 10.1 to the Company's current report on Form 8-K on July 3, 2013 (File No. 333-174896), is incorporated herein by reference.
 
 
 

41

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WireCo WorldGroup Inc.
 
 
 
 
 
 
 
(Registrant)
 
 
 
 
 
Dated:
November 8, 2013
 
 
 
By:
 
/s/ Brian G. Block
 
 
 
 
 
 
 
Brian G. Block
 
 
 
 
 
 
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Signatory for Registrant)
 
 
 
 
 
 
 




42