text: WireCo WorldGroup Inc. - FORM 10-Q - August 11, 2016
  EX-32.2 - EXHIBIT 32.2 - WireCo WorldGroup Inc. exhibit322_q2x2016.htm
  EX-32.1 - EXHIBIT 32.1 - WireCo WorldGroup Inc. exhibit321_q2x2016.htm
  EX-31.2 - EXHIBIT 31.2 - WireCo WorldGroup Inc. exhibit312_q2x2016.htm
  EX-31.1 - EXHIBIT 31.1 - WireCo WorldGroup Inc. exhibit311_q2x2016.htm
  EX-10.1 - EXHIBIT 10.1 - WireCo WorldGroup Inc. exhibit101q2_2016.htm
  Commission file number 333-174896
  27-0061302
  2400 West 75th Street
  (Address of registrant's executive offices)
  (816) 270-4700
  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.
  There is no market for the Registrant's equity, all of which is held by affiliates of WireCo WorldGroup (Cayman) Inc. (the "Company"). As of August 8, 2016 the Registrant had 100 shares of common stock outstanding.
  WIRECO WORLDGROUP (CAYMAN) INC. AND SUBSIDIARIES
  Accounts receivable, less allowance for doubtful accounts of $2,259 and $2,180, at June 30, 2016 and December 31, 2015, respectively
  372,881
  Property, plant and equipment, less accumulated depreciation of $192,508 and $196,653, at June 30, 2016 and December 31, 2015, respectively
  937,630
  971,329
  827,208
  943,839
  811,090
  992,935
  987,758
  Common stock, $0.01 par value. 3,000,000 shares authorized; 2,054,374 and 2,005,205 shares issued and outstanding, respectively at June 30, 2016 and December 31, 2015
  243,689
  240,379
  (80,584
  (80,694
  (205,871
  (164,263
  Treasury stock, at cost. 49,169 shares at June 30, 2016
  Total stockholders' deficit attributable to WireCo WorldGroup (Cayman) Inc.
  (16,429
  354,170
  (119,025
  (133,032
  (231,403
  (271,387
  (19,687
  (16,547
  (36,164
  (35,758
  (57,657
  (59,928
  (35,625
  (54,439
  (42,819
  (21,998
  (38,060
  (19,964
  (42,349
  Net loss attributable to WireCo WorldGroup (Cayman) Inc.
  (21,661
  (19,931
  (42,186
  (41,454
  Comprehensive loss attributable to WireCo WorldGroup (Cayman) Inc.
  (24,355
  (41,498
  (40,366
  Amortization of debt issuance costs, discounts and premium
  Unrealized gains on derivative instruments, net
  (23,649
  Realized losses on derivative instruments, net
  Proceeds from derivative instruments
  Unrealized foreign currency exchange losses (gains), net
  (7,349
  (16,324
  (42,550
  (40,550
  (1) Interim Financial Statement Presentation
  The financial information included in this quarterly report on Form 10-Q are those of WireCo WorldGroup (Cayman) Inc., its wholly-owned subsidiaries, including WireCo WorldGroup Inc., and subsidiaries in which it has a controlling interest (collectively, the "Company"). The accompanying unaudited interim consolidated financial statements included herein have been prepared in United States ("U.S.") dollars and in accordance with U.S. generally accepted accounting principles ("GAAP"). In the opinion of management, all material adjustments, which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented, have been reflected.
  Pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's annual report on Form 10-K for the year ended December 31, 2015.
  In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP. As a result of a deferral of the effective date enacted in July 2015, the new standard would be effective for public entities on January 1, 2018. ASU 2014-09 allows the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect of ASU 2014-09 and has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
  In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest, to reduce complexity in accounting standards and make the presentation of debt issuance costs consistent with the presentation of debt discounts. This ASU requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, rather than as an asset. ASU 2015-03 is limited to simplifying the presentation of debt issuance costs and there will be no effect on the income statement. The Company adopted the new guidance in the first quarter of 2016 and applied it retrospectively. The adoption of this standard resulted in the Company presenting its remaining unamortized debt issuance costs as a direct deduction from the carrying amount of the related debt liability, and there was no impact on the Company's operating results.
  In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. This ASU requires prospective adoption and is effective for the Company during the first quarter of 2017, with early adoption permitted. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements.
  In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements and related disclosures.
  In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which affects entities that issue share-based payment awards to their employees. This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 is effective for all interim and annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements.
  On June 25, 2016, the Company entered into a Stock Subscription Agreement (the "Subscription Agreement"), with Onex Wildcat LLC ("Onex") pursuant to which the Company agreed to issue and sell to Onex approximately 5.0 million newly issued ordinary shares, par value $0.01 per share, for a majority interest in the Company, in exchange for aggregate consideration of approximately $260,000, which will be paid in cash (collectively referred to as the "Transaction"). The cash received will be
  used to repay the Company's existing credit facilities and notes and fees and expenses in connection with the transactions. The purchase price and the aggregate number of shares to be issued to Onex at closing is subject to adjustment in accordance with the terms of the Subscription Agreement based on the amount of indebtedness of the Company as of June 30, 2016.
  The Subscription Agreement contains representations and warranties of the Company and Onex which are customary for transactions of this type and which do not survive the closing of the Transaction. The Company has agreed, subject to the terms of the Subscription Agreement, to various customary covenants, including, among others, to operate its business in the ordinary course and substantially in accordance with past practice. Onex has obtained committed financing in connection with the Transaction and has agreed, subject to the terms of the Subscription Agreement, to use its reasonable best efforts to obtain such financing on the terms of its commitment letters. The parties have also agreed to use their respective reasonable best efforts to obtain any approvals from governmental authorities necessary for the Transaction, including antitrust approvals. It is expected that in connection with the consummation of the Transaction, the Company's existing indebtedness will be repaid, redeemed or discharged.
  The issuance of shares under the Subscription Agreement is subject to customary closing conditions, including, among other things, (i) the absence of any law or order that would make the Company's issuance or Onex's purchase of the shares illegal or would otherwise prohibit such issuance, sale or purchase, or would otherwise prohibit the consummation of the transactions; (ii) expiration or termination of applicable waiting periods, or receipt of applicable approvals, under applicable antitrust laws, including European Commission approval and the expiration of waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iii) the availability of the senior debt financing required to consummate the Transaction; and (iv) the satisfaction of the conditions to repayment, redemption or discharge of the Company's existing financing. The Subscription Agreement contains customary termination rights for both the Company and Onex, including the right of either party to terminate the Subscription Agreement if the closing shall not have occurred on or before October 31, 2016. A termination fee may be payable by Onex if financing for the Transaction cannot be obtained by closing in accordance with the terms of the Subscription Agreement.
  (2) Inventories, net
  The major classes of inventories were as follows as of the dates indicated:
  (3) Intangible Assets and Goodwill
  The components of finite-lived intangible assets were as follows as of the dates indicated:
  Finite-lived assets
  (94,569
  (90,736
  Patented and unpatented technology
  (111,554
  141,068
  (107,221
  Using the exchange rates in effect at period end, estimated amortization of finite-lived intangible assets as of June 30, 2016 was as follows:
  Intangible assets with indefinite lives are not amortized. The carrying values of trade names as of June 30, 2016 and December 31, 2015 were $69,564 and $68,918, respectively.
  The change in the carrying value of goodwill was as follows as of the dates indicated:
  (4) Borrowings
  Outstanding debt consisted of the following as of the dates indicated:
  Borrowings under Revolving Loan Facility
  Term Loan due 2017
  9.00% Senior Notes due 2017
  9.50% Senior Notes due 2017
  Less: Unamortized discount, net
  Less: Deferred financing fees, net
  Current maturities of long-term debt, net of unamortized discount and deferred financing fees
  Less: Unamortized premium (discount), net
  Long-term debt, net of unamortized premium (discount) and deferred financing fees
  For a detailed discussion of the Company's borrowings, see Note 6—"Borrowings" to the Company's audited consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of the annual report on Form 10-K for the year ended December 31, 2015.
  The Company currently has $352,110 of outstanding debt which matures on February 15, 2017 and $481,000 of outstanding debt which matures on May 15, 2017. The Company plans to either raise additional equity capital or refinance its current debt, or some combination thereof, in order to satisfy these obligations before they become due. As discussed in Note 1—"Interim Financial Statement Presentation", Onex has obtained committed financing such that the proceeds of the credit facilities, together with the $260,000 equity investment from Onex and cash on hand at the Company, will be sufficient to repay the Company's existing credit facilities and notes before the debt becomes due.
  Senior Secured Credit Facilities - Revolving Loan Facility and Term Loan due 2017
  The Company's maximum borrowing capacity under the Revolving Loan Facility is $145,000. As of June 30, 2016, availability under the Revolving Loan Facility was $71,807. Availability is based upon the maximum borrowing capacity, less outstanding borrowings and letters of credit, and if applicable, further restricted by certain covenants in the Company's credit agreements. Outstanding letters of credit were $20,188 at June 30, 2016. The variable interest rate on the Revolving Loan Facility and Term Loan due 2017 at June 30, 2016 was 5.33% and 6.00%, respectively.
  Net interest expense consists of:
  During September 2014, the Company entered into cross-currency swaps with three counterparties to economically hedge exposures to foreign currency exchange risk related to its global operations. The notional value of the cross-currency swaps is $300,000, at a weighted average foreign currency exchange rate of $1.00 to €0.7820, and matures in February 2017. In accordance with the cross-currency swap agreements, on a semi-annual basis, the Company pays interest on €234,597 at a weighted average fixed rate of 8.79% and receives interest on $300,000 based on a fixed rate of 9.50%, which is included in Interest expense, net within the consolidated statements of operations.
  During June 2015, the Company entered into a cross-currency swap with a counterparty to economically hedge exposures to foreign currency exchange risk related to its global operations. The cross-currency swap notional value is $125,000, at a foreign currency exchange rate of $1.00 to €0.9125, and matures in February 2017. In accordance with the cross-currency swap agreement, on a quarterly basis, the Company pays interest on €114,062 at a fixed rate of 8.94% and receives interest on $125,000 based on a fixed rate of 9.50%, which is included in Interest expense, net within the consolidated statements of operations.
  During May 2016, the Company terminated all of its outstanding cross-currency swap agreements. On May 12, 2016, the Company settled $150,000 of its $300,000 of cross-currency swaps entered into in September 2014 and the entire $125,000 cross-currency swap entered into in June 2015, for total cash proceeds of $10,363 and a realized loss of $1,685 for the three months ended June 30, 2016 and a realized loss of $13,574 for the six months ended June 30, 2016. On May 19, 2016, the Company settled the remaining $150,000 of its $300,000 of cross-currency swaps entered into in September 2014 for total cash proceeds of $18,340 and a realized gain of $1,214 for the three months ended June 30, 2016 and a realized loss of $5,033 for the six months ended June 30, 2016.
  The Company incurred settlements with each of its counterparties during 2016, which resulted in a net reduction in Interest expense, net of $2,530 and $2,635 for the three and six months ended June 30, 2016, respectively.
  The Company's derivative financial instruments did not qualify for hedge accounting treatment and accordingly, changes in fair value were recorded in Foreign currency exchange gains (losses) within the consolidated statements of operations. The
  Company recognized a realized loss of $470 during the three months ended June 30, 2016 and a realized loss of $18,607 during the six months ended June 30, 2016 that were recorded in Foreign currency exchange gains (losses) in the consolidated statements of operations.
  From time to time, the Company enters into foreign currency forward contracts to mitigate the exchange rate risk associated with fluctuations of the U.S. dollar to various foreign currencies on internal cash movements associated with its global operations. The Company recognized an unrealized loss on foreign currency forward contracts of $127 during the three and six months ended June 30, 2016 that was recorded in Foreign currency exchange gains (losses) in the consolidated statements of operations.
  Refer to Note 6—"Fair Value Measurements" for additional information regarding the fair value of the Company's derivative arrangements included in the consolidated balance sheets.
  The Company's short-term financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying amounts reported on the consolidated balance sheets for these items approximate fair market value due to their relative short-term nature.
  The table below sets forth by level, within the fair value hierarchy, the fair value of the Company's derivative financial instruments that are measured on a recurring basis. The Company estimates the fair value of its derivative instruments using present value measurements based on the spot rate, forward option spreads and other relevant market conditions.
  The carrying amounts and estimated fair values of the Company's outstanding debt at June 30, 2016 were as follows:
  298,413
  As the Revolving Loan Facility is a revolving credit agreement, the carrying amount approximates fair value. The estimated fair value of the Term Loan due 2017 is based on rates currently available for obligations with similar terms and maturities (Level 2 inputs). The estimated fair value of the 9.00% Senior Notes is based on a model that incorporates assumptions a market participant would use in pricing the liability (Level 3 inputs) and the estimated fair value of the 9.50% Senior Notes is based on current market rates in inactive markets (Level 2 inputs).
  Changes in the Company's outstanding service-based stock option awards since December 31, 2015 were as follows:
  492,291
  At June 30, 2016, total unrecognized compensation cost related to the unvested portion of the Company's service-based stock option awards that remains to be expensed was $4,530, with the weighted average remaining years to vest of approximately 1.42 years. On August 1, 2016, the Company provided notice to its option and equity holders that pursuant to the 2008 Long Term Incentive Plan, all outstanding options, vested and unvested, shall be canceled upon the closing of the Transaction.
  (8) Restructuring Charges
  As part of the Company's initiatives to manage costs in response to the challenges in certain end markets, the Company reduced its production and administrative workforce during 2016. Restructuring charges related to employee termination and related benefits were recorded in Administrative expenses in the consolidated statement of operations. The accrual balance is included in Other current liabilities on the consolidated balance sheet.
  A rollforward of this restructuring activity is set forth below:
  Restructuring charges incurred in 2016
  Payments made in 2016
  The Company determines the interim tax provision by applying an estimate of the annual effective tax rate to the year-to-date pretax book income (loss) and adjusts for discrete items during the reporting period, if any. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded. Additionally, for certain tax jurisdictions where a reliable estimate of year-to-date income tax expense or benefit cannot be made, the Company applied the actual effective tax rate to year-to-date income.
  The effective income tax rate for the three months ended June 30, 2016 and 2015 was 0.6% and (80.5)%, respectively. The effective income tax rate for the six months ended June 30, 2016 and 2015 was (11.3)% and 4.3%, respectively. The Company's effective income tax rates differ from the applicable statutory tax rate primarily due to valuation allowances on deferred tax assets in various jurisdictions, mix of earnings (losses) by jurisdictions and the effects of foreign tax rate differences.
  Paine & Partners, LLC ("Paine & Partners"), which manages the funds that control the Company, has entered into a management agreement with the Company to provide administrative and other support services. During the first quarters of 2016 and 2015, the Company paid an annual management fee of $2,300 and $3,112, respectively. This annual management fee is deferred as a prepaid and recognized ratably over the year as the services are provided. The Company recognized management fee expense of $575 and $778 during the three months ended June 30, 2016 and 2015 respectively, and $1,150 and $1,556 during the six months ended June 30, 2016 and 2015, respectively, that was recorded in Administrative expenses in the consolidated statements of operations.
  During the three months ended June 30, 2016 and 2015, the Company had product sales of $368 and $163, and during the six months ended June 30, 2016 and 2015, the Company had product sales of $586 and $445, respectively, to its Spanish joint venture, Lankhorst Euronete Espana SA. The Company purchased $113 and $1,324 of product during the six months ended June 30, 2016 and 2015, respectively, from its Greek joint venture, Eurorope Performance Rope Producers SA.
  The Company is involved in various claims and legal actions arising in the ordinary course of business, which are incidental to its operations. Insurance coverage is maintained for certain risks, such as product liability and workers' compensation. The Company is not currently a party to any legal proceedings or other contingencies that it believes would have a material adverse effect on its financial position, results of operations or cash flows.
  The Company reports the manufacturing, marketing, selling and distribution of wire and synthetic ropes, specialty wire and engineered products as one operating and one reportable segment. The Company's net sales by product line for the periods presented was as follows:
  Product line net sales
  (13) Condensed Consolidating Financial Statements
  Guarantees of the 9.50% Senior Notes
  WireCo WorldGroup Inc. has registered 9.50% Senior Notes, which are unsecured obligations. These obligations are jointly and severally and fully and unconditionally guaranteed by WireCo WorldGroup (Cayman) Inc. Certain entities controlled by WireCo WorldGroup (Cayman) Inc. (collectively referred to as the "Guarantor Subsidiaries") also jointly and severally and fully and unconditionally guarantee these obligations, subject to customary release provisions. All voting shares for the entities presented in the "Guarantor Subsidiaries" column are 100% owned directly or indirectly by the Company. Certain subsidiaries with locations primarily in the Netherlands, Brazil and France do not guarantee the debt (collectively referred to as the "Non-Guarantor Subsidiaries"). The following condensed consolidating financial statements are prepared with each entity's investment in subsidiaries accounted for under the equity method. The adjustments eliminate investments in subsidiaries, related stockholders' equity and other intercompany balances and transactions. There are currently no significant restrictions on the ability of WireCo WorldGroup Inc. or any guarantor to obtain funds from its subsidiaries by dividend or loan.