Table of Contents

 

 

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 No. 001-35938

 

 

 

LOGO

GLOBAL BRASS AND COPPER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1826563

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

475 N. Martingale Road Suite 1050  
Schaumburg, IL   60173
(Address of principal executive offices)   (Zip Code)

(847) 240-4700

(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

On November 8, 2013, there were 21,110,000 shares of common stock outstanding.

 

 

 


Table of Contents

Global Brass and Copper Holdings, Inc.

Index

September 30, 2013

Table of Contents

 

PART I—FINANCIAL INFORMATION   

Item 1. Financial Statements.

  

Unaudited Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

     1   

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2013 and 2012

     2   

Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September  30, 2013 and 2012

     3   

Unaudited Consolidated Statements of Changes in (Deficit) / Equity for the Nine Months Ended September  30, 2013 and 2012

     4   

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

     5   

Notes to Unaudited Consolidated Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     39   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     70   

Item 4. Controls and Procedures

     71   
PART II—OTHER INFORMATION   

Item 1. Legal Proceedings

     72   

Item 1A. Risk Factors

     72   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     73   

Item 3. Defaults Upon Senior Securities

     73   

Item 4. Mine Safety Disclosures.

     73   

Item 5. Other Information.

     73   

Item 6. Exhibits.

     74   

SIGNATURE

     75   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Global Brass and Copper Holdings, Inc.

Consolidated Balance Sheets (Unaudited)

 

     As of  
     September 30,     December 31,  
(In thousands, except share and par value data)    2013     2012  

Assets

    

Current assets:

    

Cash

   $ 18,088      $ 13,862   

Accounts receivable (net of allowance of $1,506 and $1,408, respectively)

     198,473        164,317   

Inventories

     208,778        174,378   

Prepaid expenses and other current assets

     26,591        12,141   

Deferred income taxes

     32,122        33,465   

Income tax receivable, net

     625        1,300   
  

 

 

   

 

 

 

Total current assets

     484,677        399,463   

Property, plant and equipment, net

     78,137        71,127   

Investment in joint venture

     2,184        2,972   

Goodwill

     4,399        4,399   

Intangible assets, net

     762        839   

Deferred income taxes

     5,736        6,138   

Other noncurrent assets

     16,620        17,755   
  

 

 

   

 

 

 

Total assets

   $ 592,515      $ 502,693   
  

 

 

   

 

 

 

Liabilities and deficit

    

Current liabilities:

    

Accounts payable

   $ 105,311      $ 81,577   

Accrued liabilities

     59,639        48,424   

Accrued interest

     12,448        3,287   

Income tax payable

     156        248   
  

 

 

   

 

 

 

Total current liabilities

     177,554        133,536   

Long-term debt

     397,500        389,522   

Other noncurrent liabilities

     26,312        27,436   
  

 

 

   

 

 

 

Total liabilities

     601,366        550,494   
  

 

 

   

 

 

 

Commitments and contingencies (Note 13)

     —          —     

Global Brass and Copper Holdings, Inc. stockholders’ deficit:

    

Common stock—$.01 par value; 80,000,000 shares authorized; 21,110,000 shares issued and outstanding

     211        211   

Additional paid-in capital

     30,260        —     

Accumulated deficit

     (43,948     (48,153

Accumulated other comprehensive income

     761        1,466   

Receivable from stockholder

     —          (4,875
  

 

 

   

 

 

 

Total Global Brass and Copper Holdings, Inc. stockholders’ deficit

     (12,716     (51,351

Noncontrolling interest

     3,865        3,550   
  

 

 

   

 

 

 

Total deficit

     (8,851     (47,801
  

 

 

   

 

 

 

Total liabilities and deficit

   $ 592,515      $ 502,693   
  

 

 

   

 

 

 

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

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Consolidated Statements of Operations (Unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(In thousands, except share and per share data)   2013     2012     2013     2012  

Net sales

  $ 439,238      $ 393,977      $ 1,345,678      $ 1,254,347   

Cost of sales

    393,991        349,580        1,201,815        1,112,875   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    45,247        44,397        143,863        141,472   

Selling, general and administrative expenses (including non-cash profits interest expense of $0, $0, $29,271 and $19,517, respectively)

    20,089        17,353        92,622        73,241   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    25,158        27,044        51,241        68,231   

Interest expense

    10,104        9,936        29,938        29,894   

Loss on extinguishment of debt

    —          —          —          19,612   

Other expense (income), net

    65        (537     256        172   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes and equity income

    14,989        17,645        21,047        18,553   

Provision for income taxes

    5,259        6,769        17,762        13,996   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity income

    9,730        10,876        3,285        4,557   

Equity income, net of tax

    288        261        1,148        736   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    10,018        11,137        4,433        5,293   

Less: Net income attributable to noncontrolling interest

    69        105        228        273   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Global Brass and Copper Holdings, Inc.

  $ 9,949      $ 11,032      $ 4,205      $ 5,020   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Global Brass and Copper Holdings, Inc. per common share:

       

Basic

  $ 0.47      $ 0.52      $ 0.20      $ 0.24   

Diluted

  $ 0.47      $ 0.52      $ 0.20      $ 0.24   

Weighted average common shares outstanding:

       

Basic

    21,110,000        21,110,000        21,110,000        21,110,000   

Diluted

    21,174,708        21,110,000        21,134,169        21,110,000   

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

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(In thousands)    2013      2012     2013     2012  

Net income

   $ 10,018       $ 11,137      $ 4,433      $ 5,293   

Other comprehensive income (loss):

         

Foreign currency translation adjustment

     300         (1     (1,095     (199

Less: Income tax expense (benefit) on other comprehensive income (loss)

     106         6        (477     (69
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

     10,212         11,130        3,815        5,163   

Less: Comprehensive income attributable to noncontrolling interest

     89         83        315        273   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Global Brass and Copper Holdings, Inc.

   $ 10,123       $ 11,047      $ 3,500      $ 4,890   
  

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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Global Brass and Copper Holdings, Inc.

Consolidated Statements of Changes in (Deficit) / Equity (Unaudited)

 

(In thousands)   Common
stock
    Additional
paid-in
capital
    (Accumulated
deficit) /
Retained
earnings
    Accumulated
other
comprehensive
income
    Receivable
from
stockholder
    Total Global
Brass and
Copper
Holdings,
Inc.
stockholders’
(deficit) /
equity
    Noncontrolling
interest
    Total
(deficit) /
equity
 

Balance at December 31, 2011

  $ 211      $ 11,091      $ 68,718      $ 1,923      $ (2,451     79,492      $ 3,168      $ 82,660   

Profits interest compensation

    —          19,517        —          —          —          19,517        —          19,517   

Distribution to stockholder

    —          (30,608     (129,392     —          —          (160,000     —          (160,000

Amounts due from stockholder

    —          —          —          —          (2,398     (2,398     —          (2,398

Net income

    —          —          5,020        —          —          5,020        273        5,293   

Other comprehensive loss, net of tax

    —          —          —          (130     —          (130     —          (130
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

  $ 211      $ —        $ (55,654   $ 1,793      $ (4,849   $ (58,499   $ 3,441      $ (55,058
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(In thousands)   Common
stock
    Additional
paid-in
capital
    Accumulated
deficit
    Accumulated
other
comprehensive
income
    Receivable
from
stockholder
    Total Global
Brass and
Copper
Holdings,
Inc.
stockholders’
deficit
    Noncontrolling
interest
    Total
deficit
 

Balance at December 31, 2012

  $ 211      $ —        $ (48,153   $ 1,466      $ (4,875   $ (51,351   $ 3,550      $ (47,801

Profits interest compensation

    —          29,271        —          —          —          29,271        —          29,271   

Share-based compensation

    —          989        —          —          —          989        —          989   

Payment from stockholder

    —          —          —          —          4,875        4,875        —          4,875   

Net income

    —          —          4,205        —          —          4,205        228        4,433   

Other comprehensive (loss) income, net of tax

    —          —          —          (705     —          (705     87        (618
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ 211      $ 30,260      $ (43,948   $ 761      $ —        $ (12,716   $ 3,865      $ (8,851
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

     Nine Months Ended
September 30,
 
(In thousands)    2013     2012  

Cash flows from operating activities

    

Net income

   $ 4,433      $ 5,293   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Lower of cost or market adjustment to inventory

     318        302   

Mark to market on commodity contracts

     1,062        (1,473

Mark to market on interest rate cap agreements

     1        156   

Depreciation

     6,023        4,805   

Amortization of intangible assets

     78        86   

Amortization of debt discount and issuance costs

     1,857        3,961   

Loss on extinguishment of debt

     —          19,612   

Profits interest compensation expense

     29,271        19,517   

Share-based compensation expense

     989        —     

Provision for bad debts, net of reductions

     73        (627

Deferred income taxes

     691        2,273   

Loss (gain) on sale of property, plant and equipment

     3        (9

Equity income, net of tax

     (1,148     (736

Distributions from equity method investment

     452        500   

Change in assets and liabilities:

    

Accounts receivable

     (33,959     (48,917

Inventories

     (34,610     1,343   

Prepaid expenses and other current assets

     (14,988     5,440   

Accounts payable

     23,893        30,787   

Accrued liabilities

     10,676        12,083   

Accrued interest

     9,160        8,127   

Income taxes, net

     574        2,702   

Other, net

     (317     (6,973
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,532        58,252   

Cash flows from investing activities

    

Capital expenditures

     (13,205     (11,360

Proceeds from sale of property, plant and equipment

     174        25   
  

 

 

   

 

 

 

Net cash used in investing activities

     (13,031     (11,335

Cash flows from financing activities

    

Deferred financing fees

     —          (12,981

Proceeds from senior secured notes

     —          375,000   

Payments on term loan

     —          (310,875

Borrowings on ABL Facility

     337,236        142,400   

Payments on ABL Facility

     (329,258     (113,900

Distribution to stockholder

     —          (160,000

Net payment (amounts due) from stockholder

     4,875        (2,398
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     12,853        (82,754

Effect of foreign currency exchange rates

     (128     (682
  

 

 

   

 

 

 

Net increase (decrease) in cash

     4,226        (36,519

Cash at beginning of period

     13,862        49,537   
  

 

 

   

 

 

 

Cash at end of period

   $ 18,088      $ 13,018   
  

 

 

   

 

 

 

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

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

1. Basis of Presentation and Principles of Consolidation

Global Brass and Copper Holdings, Inc. (“Holdings” or the “Company”) was incorporated in Delaware, on October 10, 2007. Holdings, through its wholly-owned principal operating subsidiary, Global Brass and Copper, Inc. (“GBC”), commenced commercial operations on November 19, 2007 through the acquisition of the metals business from Olin Corporation. GBC is a leading, value-added converter, fabricator, distributor and processor of specialized copper and brass products in North America. On May 29, 2013, the Company completed its initial public offering of 8,050,000 shares of its common stock (the “initial public offering” or “IPO”). The shares began trading on the New York Stock Exchange on May 23, 2013 under the ticker symbol “BRSS”. Halkos Holdings, LLC (“Halkos”), the sole stockholder of the Company prior to the IPO, sold all of the shares in the initial public offering and received all of the net proceeds from the offering. After giving effect to the IPO, Halkos beneficially owned approximately 61.5% of the outstanding common stock of the Company. Halkos’s beneficial ownership percentage remained approximately the same as of September 30, 2013. On October 1, 2013, the Company completed its follow-on public offering of 5,750,000 shares of its common stock (the “follow-on public offering”). Halkos sold all of the shares in the follow-on public offering and received all of the net proceeds from the offering. After giving effect to the follow-on public offering, Halkos beneficially owns approximately 34.4% of the outstanding common stock of the Company. KPS Capital Partners, L.P. and its affiliates (“KPS”) are the majority shareholders of Halkos.

The Company is operated and managed through three distinct divisions which are also the Company’s reportable segments: Olin Brass, Chase Brass (“Chase”) and A.J. Oster (“Oster”).

These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned subsidiaries in which the Company has a controlling interest. All significant intercompany accounts and transactions relative to wholly- and majority-owned subsidiaries have been eliminated. The equity method is used to account for investments in affiliated companies, that are 20% to 50% owned where the Company does not hold a controlling voting interest and does not direct the matters that most significantly impact the investee’s operations.

The accompanying unaudited interim financial statements include all normal recurring adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The December 31, 2012 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amount of net sales and expenses during the reporting periods. Actual amounts could differ from those estimates.

Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. There have been no significant changes to the Company’s significant accounting policies during the nine months ended September 30, 2013. These interim financial statements should be read in conjunction with the December 31, 2012 audited financial statements of the Company.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

Revision of Prior Period Financial Statements

During 2012, the Company identified immaterial errors in previously issued consolidated financial statements related to the three and nine months ended September 30, 2012, which were corrected in the period identified, including:

 

  1. An error in the accounting for raw material in-transit was identified, which resulted in an overstatement of cost of sales of $811 and $423 for the three months and nine months ended September 30, 2012, respectively.

 

  2. Duplicate accruals for the receipt of raw material were identified, which resulted in an understatement of cost of sales of $1,396 and $389 for the three and nine months ended September 30, 2012, respectively.

The Company assessed the materiality of all errors, individually and in the aggregate, on previously issued consolidated financial statements and concluded that the errors were not material to any of the Company’s previously issued financial statements.

A summary of the revisions to the consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 is as follows:

 

    As
Previously
Reported
    Adjustment     As Revised  
    Three Months Ended September 30, 2012  

Consolidated Statement of Operations

     

Cost of sales

  $ 348,995      $ 585      $ 349,580   

Gross profit

    44,982        (585     44,397   

Operating income

    27,629        (585     27,044   

Income before provision for income taxes and equity income

    18,230        (585     17,645   

Provision for income taxes

    6,670        99        6,769   

Income before equity income

    11,560        (684     10,876   

Net income

    11,821        (684     11,137   

Net income attributable to Global Brass and Copper Holdings, Inc.

    11,716        (684     11,032   

Net income attributable to Global Brass and Copper Holdings, Inc. per common share:

     

Basic

  $ 0.55      $ (0.03   $ 0.52   

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

    As
Previously
Reported
    Adjustment     As Revised  
    Nine Months Ended September 30, 2012  

Consolidated Statement of Operations

     

Cost of sales

  $ 1,112,909      $ (34   $ 1,112,875   

Gross profit

    141,438        34        141,472   

Operating income

    68,197        34        68,231   

Income before provision for income taxes and equity income

    18,519        34        18,553   

Provision for income taxes

    13,891        105        13,996   

Income before equity income

    4,628        (71     4,557   

Net income

    5,364        (71     5,293   

Net income attributable to Global Brass and Copper Holdings, Inc.

    5,091        (71     5,020   

Net income attributable to Global Brass and Copper Holdings, Inc. per common share:

     

Basic

  $ 0.24      $ —        $ 0.24   
    Three Months Ended September 30, 2012  

Consolidated Statement of Comprehensive Income

     

Net income

  $ 11,821      $ (684   $ 11,137   

Comprehensive income

    11,814        (684     11,130   

Comprehensive income attributable to Global Brass and Copper Holdings, Inc.

    11,731        (684     11,047   
    Nine Months Ended September 30, 2012  

Consolidated Statement of Comprehensive Income

     

Net income

  $ 5,364      $ (71   $ 5,293   

Comprehensive income

    5,234        (71     5,163   

Comprehensive income attributable to Global Brass and Copper Holdings, Inc.

    4,961        (71     4,890   
    Nine Months Ended September 30, 2012  

Consolidated Statement of Changes in Deficit

     

Net income

  $ 5,364      $ (71   $ 5,293   

Net income attributable to Global Brass and Copper Holdings, Inc.

    5,091        (71     5,020   

Accumulated deficit—Balance, September 30, 2012

    (56,083     429        (55,654

Total Global Brass and Copper Holdings, Inc. stockholders’ deficit—Balance, September 30, 2012

    (58,928     429        (58,499

Total deficit—Balance, September 30, 2012

    (55,487     429        (55,058

Recently Issued and Recently Adopted Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance requires entities to provide disclosures about items that are required by U.S. GAAP to be reclassified from accumulated other comprehensive income (“AOCI”) to net income in their entirety in the same reporting period. The disclosure includes the amount of the reclassification and identifies the line item on the statement where net income is presented that is affected by the reclassification. For other items reclassified from AOCI, the disclosure cross-

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

references to other disclosures where additional details about their effects are disclosed. This guidance is effective for reporting periods beginning after December 15, 2012. The adoption of this guidance in the first quarter of 2013 did not have a material effect on the Company’s consolidated financial statements and disclosures.

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. This guidance requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This guidance does not amend existing guidance on when it is appropriate to offset. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which limits the scope of ASU 2011-11 to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending arrangements. The guidance is effective for annual periods beginning January 1, 2013 and interim periods within those annual periods. The Company adopted this guidance in the first quarter of 2013 and has included the required disclosures in note 10, “Derivative Contracts”.

2. Inventories

The Company’s inventories were as follows:

 

     As of  
     September 30,      December 31,  
     2013      2012  

Raw materials and supplies

   $ 34,646       $ 37,766   

Work-in-process

     99,119         69,286   

Finished goods

     75,013         67,326   
  

 

 

    

 

 

 

Total inventories

   $ 208,778       $ 174,378   
  

 

 

    

 

 

 

Inventories include costs attributable to direct labor and manufacturing overhead but are primarily comprised of raw material costs. The material component of inventories that is valued on a last-in, first-out (“LIFO”) basis comprises approximately 73% and 70% of total inventory at September 30, 2013 and December 31, 2012, respectively. Other manufactured inventories, including the non-material components and certain non-U.S. inventories, are valued on a first-in, first-out (“FIFO”) basis. During the nine months ended September 30, 2013, the Company reduced the recorded value of inventory by $318. This non-cash, lower of cost or market adjustment was recorded in cost of sales in the accompanying consolidated statement of operations for the nine months ended September 30, 2013.

If all inventories had been valued at period-end market values, inventories would have been approximately $331,213 and $319,282 at September 30, 2013 and December 31, 2012, respectively.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

3. Prepaid Expenses and Other Current Assets

The Company’s prepaid expenses and other current assets were as follows:

 

     As of  
     September 30,      December 31,  
     2013      2012  

Collateral on deposit—commodity derivative contracts

   $ 1,861       $ 767   

Commodity derivative contracts

     5         548   

Deferred expense

     13,018         —     

Loss fund payments—workers’ compensation

     6,466         6,968   

Prepaid insurance

     1,705         1,261   

Prepaid tooling

     1,926         764   

Other

     1,610         1,833   
  

 

 

    

 

 

 

Total prepaid expenses and other current assets

   $ 26,591       $ 12,141   
  

 

 

    

 

 

 

4. Goodwill

On January 31, 2008, the Company, through its Chase reportable segment, acquired certain assets of the brass business of Bolton Metals Product Company (“Bolton”). As of September 30, 2013 and December 31, 2012, the carrying value of goodwill was $4,399. All goodwill is assigned to Chase, which is the Company’s applicable reporting unit for purposes of testing goodwill impairment. The Bolton acquisition is treated as an asset acquisition for tax purposes. As of September 30, 2013, $1,973 of goodwill is expected to be deductible for tax purposes.

5. Investment in Joint Venture

The Company owns a 50% interest in Dowa – Olin Metal Corporation (“Dowa”), a joint venture based in Japan. The Company accounts for Dowa under the equity method of accounting. Due to the timing of the receipt of available financial information, the results of Dowa are recorded on a one-month lag basis.

In November 2007, the equity investment in Dowa, which was purchased as part of the metals business acquired from Olin Corporation, was recorded at a carrying value of zero as a result of the bargain purchase event recognized under the purchase method of accounting for the acquisition, creating a negative basis difference of $9,416. Based on management’s estimate as to the underlying commercial utility of the alloys that Dowa manufactured and sold at the date of acquisition, the negative basis difference is being accreted on a straight-line basis over a 13-year period as an increase to equity earnings. Accretion of the negative basis difference of $181 was reflected in equity income, net of tax in the accompanying consolidated statements of operations for each of the three months ended September 30, 2013 and 2012 and $543 for each of the nine months ended September 30, 2013 and 2012. At September 30, 2013 and December 31, 2012, the remaining negative basis difference was $5,192 and $5,735, respectively.

During the nine months ended September 30, 2013 and 2012, the Company received cash dividends from Dowa of $452 and $500, respectively, which were recorded as a reduction in the Company’s investment in Dowa. During the three months ended September 30, 2013 and 2012,

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

the Company recorded $288 and $261, respectively, of equity income, net of tax, including $181 of accretion of the negative basis difference in each period. During the nine months ended September 30, 2013 and 2012, the Company recorded equity income, net of tax of $1,148 and $736, respectively, including $543 of accretion of the negative basis difference in each period. The undistributed earnings of Dowa in GBC’s retained earnings as of September 30, 2013 and December 31, 2012 totaled $758 and $62, respectively.

6. Other Noncurrent Assets

Other noncurrent assets consisted of the following:

 

     As of  
     September 30,      December 31,  
     2013      2012  

Deferred financing fees, net

   $ 15,225       $ 17,082   

Utility and other deposits

     1,395         668   

Interest rate cap agreements

     —           1   

Other

     —           4   
  

 

 

    

 

 

 

Total other noncurrent assets

   $ 16,620       $ 17,755   
  

 

 

    

 

 

 

7. Accrued Liabilities

Accrued liabilities consisted of the following:

 

     As of  
     September 30,      December 31,  
     2013      2012  

Personnel expense

   $ 20,685       $ 20,872   

Workers’ compensation

     14,383         15,754   

Deferred revenue

     13,018         —     

Professional fees

     1,826         2,145   

Insurance

     2,358         2,253   

Utilities

     1,877         1,844   

Taxes

     1,371         1,745   

Tooling

     737         686   

Commodity derivative contracts

     357         —     

Other

     3,027         3,125   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 59,639       $ 48,424   
  

 

 

    

 

 

 

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

8. Financing

Long-term debt consisted of the following:

 

     As of  
     September 30,      December 31,  
     2013      2012  

ABL Facility

   $ 22,500       $ 14,522   

Senior Secured Notes

     375,000         375,000   
  

 

 

    

 

 

 

Total long-term debt

   $ 397,500       $ 389,522   
  

 

 

    

 

 

 

Senior Secured Notes

On June 1, 2012, GBC issued $375,000 in aggregate principal amount of 9.50% Senior Secured Notes due 2019 (the “Senior Secured Notes”), which are guaranteed by Holdings. The Senior Secured Notes mature on June 1, 2019. Interest on the Senior Secured Notes accrues at the rate of 9.50% per annum and is payable semiannually in arrears on June 1 and December 1, commencing on December 1, 2012.

The credit agreement governing the ABL Facility (hereinafter defined) and the indenture governing the Senior Secured Notes (the “Indenture”) limit the ability of GBC and its subsidiaries to dividend or distribute cash to Holdings and to its equityholders, although ordinary course dividends and distributions to meet the limited holding company expenses and related obligations at Holdings of up to $5 million per year are permitted under those agreements. Under the terms of the Indenture, GBC is also permitted to dividend or distribute to Holdings and its equityholders up to 50% of its “Consolidated Net Income” (as such term is used in the Indenture) from April 1, 2012 to the end of GBC’s most recently ended fiscal quarter. As of September 30, 2013, all of the net assets of the subsidiaries are restricted except for $34,957, which are permitted for dividend distributions under the Indenture. As of September 30, 2013, GBC was in compliance with all of its covenants relating to the Senior Secured Notes.

Pursuant to a registration rights agreement, on October 7, 2013, GBC completed an exchange offer to issue registered new notes (with substantially the same terms as the Senior Secured Notes) in exchange for the Senior Secured Notes that GBC issued in a private offering on June 1, 2012.

ABL Facility

Concurrent with the issuance of the Senior Secured Notes in 2012, the Company amended the agreement governing its asset-based revolving loan facility (the “ABL Facility”).

The unused portion of the ABL Facility was $177,000 and $184,978 as of September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013 and December 31, 2012, amounts outstanding under the ABL Facility accrued interest at a rate of 3.33% and 4.50%, respectively.

The ABL Facility has an expiration date of June 1, 2017 and contains various debt covenants to which the Company is subject on an ongoing basis. As of September 30, 2013, the Company was in compliance with all of its covenants under the ABL Facility.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

9. Income Taxes

The effective income tax rate, which is provision for income taxes as a percentage of income before provision for income taxes and equity income, differs from the amount determined by applying the applicable U.S. statutory federal income tax rate to pretax results primarily as a result of the following:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Statutory provision rate

     35.0     35.0     35.0     35.0

Permanent differences and other items

        

State tax provision

     3.3     3.8     7.9     3.6

Section 199 manufacturing credit

     (2.7 %)      (2.9 %)      (6.9 %)      (2.8 %) 

Return to provision adjustments / Uncertain tax positions

     (1.0 %)      0.3     (1.4 %)      (3.1 %) 

Non-deductible non-cash compensation

     —          —          48.7     41.2

Other

     0.5     2.2     1.1     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     35.1     38.4     84.4     75.4
  

 

 

   

 

 

   

 

 

   

 

 

 

The “Non-deductible non-cash compensation” expense as described further in note 14, “Profits Interest Awards,” is not deductible in the Company’s tax returns and has been reflected as a permanent difference in the effective tax rate reconciliations above.

As of September 30, 2013 and December 31, 2012, the Company had $25,841 and $27,401 respectively, of unrecognized tax benefits, none of which would impact the effective tax rate, if recognized. Estimated interest and penalties related to the underpayment of income taxes were $14 and $29 for the three and nine months ended September 30, 2013, respectively, and were increased by $22 and reduced by $138 for the three and nine months ended September 30, 2012, respectively, and are classified as a component of income tax expense in the accompanying consolidated statements of operations. Accrued interest and penalties as of September 30, 2013 and December 31, 2012 were $64 and $35, respectively, inclusive of the estimated interest and penalties mentioned above. The Company’s liability for uncertain tax positions of $25,905 and $27,436 at September 30, 2013 and December 31, 2012, respectively, are presented in other noncurrent liabilities.

The Company is subject to income taxation in several jurisdictions around the world. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company believes it has adequately reserved for any potential tax exposures at September 30, 2013. The Internal Revenue Service completed its examination of the Corporation’s income tax returns through the period ended December 31, 2010. The Company’s U.S. federal returns for the period ended December 31, 2011 and all subsequent periods remain open for audit. The majority of state returns for the period ended September 30, 2010 and all subsequent periods remain open for audit.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

10. Derivative Contracts

The Company maintains a metal, natural gas and electricity pricing risk-management strategy that uses commodity derivative contracts to minimize significant, unanticipated gains or losses that may arise from volatility of the commodity indices.

The Company’s commodity derivative contracts consist of delivery contracts matched in quantity, price and maturity to firm price sales orders in order to protect sales margins from metal price fluctuations between the firm price sale order date and shipment date.

The prices of natural gas and electricity can be particularly volatile. The Company attempts to mitigate short-term volatility in natural gas and electricity costs through the use of derivatives contracts in an effort to offset the effect of increasing costs.

The Company also utilized interest rate cap agreements in compliance with the requirement under its prior senior secured term loan credit facility (the “Term Loan Facility”) to provide that at least 50% of the Term Loan Facility be subject to a fixed rate or interest rate protection for a period of not less than three years. These interest rate cap agreements were not designated as an accounting hedge and changes in the fair value of the interest rate cap agreements have been recorded as non-cash interest expense. The agreements expired in August 2013.

By using derivative contracts to limit exposures to fluctuations in metal, natural gas and electricity prices and interest rate movements, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty might fail to fulfill its performance obligations under the terms of the derivative contract. Market risk is the risk that the value of a derivative instrument might be adversely affected by a change in commodity price or interest rates. The Company manages the market risk associated with derivative contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The Company manages credit risk associated with derivative contracts by only executing derivative instruments with counterparties with investment-grade credit ratings. The amount of such credit risk is limited to the fair value of the derivative contract plus the unpaid portion of amounts due to the Company pursuant to terms of the derivative contracts, if any. If a downgrade in the credit rating of these counterparties occurs, management believes that this exposure is mitigated by provisions in the derivative arrangements which allow for the legal right of offset of any amounts due to the Company from the counterparties with any amounts payable to the counterparties by the Company.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

The fair values of derivative contracts in the consolidated balance sheet include the impact of netting derivative assets and liabilities when a legally enforceable master netting arrangement exists. The following tables summarize the gross amounts of recognized derivative assets and liabilities, the net amounts presented in the consolidated balance sheet, and the net amounts after deducting collateral that has been deposited with counterparties:

 

    As of September 30, 2013  
                      Amounts Not Offset in the
Consolidated Balance
Sheet
       
    Gross Amounts of
Recognized
Assets
    Gross Amounts
Offset in Consolidated
Balance Sheet
    Net Amounts of
Assets Presented in
Consolidated Balance Sheet
    Financial
Instruments
    Cash
Collateral
Received
    Net
Amount
 

Open metal contracts
(361 contracts)

  $ 722      $ (722   $ —        $ —        $ —        $ —     

Open electricity contracts
(10 contracts)

    56        (51     5        —          —          5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 778      $ (773   $ 5      $ —        $ —        $ 5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated balance sheet location:

           

Prepaid expenses and other current assets

    $ 5           
   

 

 

         

Total

    $ 5           
   

 

 

         
                      Amounts Not Offset in the
Consolidated Balance
Sheet
       
    Gross Amounts of
Recognized
Liabilities
    Gross Amounts Offset
in Consolidated
Balance Sheet
    Net Amounts of Liabilities
Presented in Consolidated
Balance Sheet
    Financial
Instruments
    Cash
Collateral
Deposited
    Net
Amount
 

Open metal contracts
(406 contracts)

  $ 1,074      $ (722   $ 352      $ —        $ 352      $ —     

Open natural gas contracts
(4 contracts)

    5        —          5        —          5        —     

Open electricity contracts
(14 contract)

    51        (51     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,130      $ (773   $ 357      $ —        $ 357      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated balance sheet location:

           

Accrued liabilities

    $ 357           
   

 

 

         

Total

    $ 357           
   

 

 

         

Not included in the above table is $1,504 of collateral included in prepaid expenses and other current assets, which is because collateral is limited to the net amounts of assets or liabilities presented in the consolidated balance sheet.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

    As of December 31, 2012  
                      Amounts Not Offset
in the
Consolidated Balance
Sheet
       
    Gross Amounts of
Recognized
Assets
    Gross Amounts
Offset in Consolidated
Balance Sheet
    Net Amounts of
Assets Presented in
Consolidated Balance Sheet
    Financial
Instruments
    Cash
Collateral
Received
    Net
Amount
 

Open metals contracts
(208 contracts)

  $ 603      $ (224   $ 379      $ —        $ —        $ 379   

Open natural gas contracts
(6 contracts)

    2        —          2        —          —          2   

Open electricity contracts
(17 contracts)

    169        (2     167        —          —          167   

Interest rate cap agreements
(2 contracts)

    1        —          1        —          —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 775      $ (226   $ 549      $ —        $ —        $ 549   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated balance sheet location:

           

Prepaid expenses and other current assets

  

  $ 548           

Other noncurrent assets

      1           
   

 

 

         

Total

    $ 549           
   

 

 

         
                      Amounts Not Offset
in the Consolidated
Balance
Sheet
       
    Gross Amounts of
Recognized
Liabilities
    Gross Amounts Offset
in Consolidated
Balance Sheet
    Net Amounts of Liabilities
Presented in Consolidated
Balance Sheet
    Financial
Instruments
    Cash
Collateral
Deposited
    Net
Amount
 

Open metals contracts
(85 contracts)

  $ 224      $ (224   $ —        $ —        $ —        $ —     

Open electricity contracts
(1 contract)

    2        (2     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 226      $ (226   $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Not included in the above table is $767 of collateral included in prepaid expenses and other current assets, which is because collateral is limited to the net amounts of assets or liabilities presented in the consolidated balance sheet.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

The following table summarizes the effects of derivative contracts in the consolidated statements of operations:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Cost of sales

        

Realized and unrealized (loss) gain—metal contracts

   $ (794   $ 110      $ (143   $ 614   

Realized and unrealized (loss) gain—natural gas contracts

     (10     44        (12     113   

Realized and unrealized (loss) gain—electricity contracts

     (138     257        (193     222   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (942   $ 411      $ (348   $ 949   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Unrealized loss—interest rate cap agreements

   $ —        $ (10   $ (1   $ (156
  

 

 

   

 

 

   

 

 

   

 

 

 

11. Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements but does not change existing guidance as to whether or not an instrument is carried at fair value. This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. In accordance with this guidance, fair value measurements are classified under the following hierarchy:

 

    Level 1—Quoted prices for identical instruments in active markets.

 

    Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

 

    Level 3—Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

The following tables provide the hierarchy of inputs used to derive the fair value of the Company’s assets and liabilities at fair value on a recurring basis as of September 30, 2013 and December 31, 2012:

 

     As of September 30, 2013  
     Level 1      Level 2      Level 3      Total  

Open electricity contracts

   $ —         $ 5       $ —         $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ 5       $ —         $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Open metal contracts

   $ —         $ 352       $ —         $ 352   

Open natural gas contracts

     —           5         —           5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 357       $ —         $ 357   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     As of December 31, 2012  
     Level 1      Level 2      Level 3      Total  

Open metal contracts

   $ —         $ 379       $ —         $ 379   

Open natural gas contracts

     —           2         —           2   

Open electricity contracts

     —           167         —           167   

Interest rate cap agreements

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ 549       $ —         $ 549   
  

 

 

    

 

 

    

 

 

    

 

 

 

In accordance with ASC 820, the Company determines the fair value of its interest rate agreement and commodity derivative contracts using Level 2 inputs.

The Company’s metal, natural gas and electricity commodity derivative contracts are considered Level 2 as fair value measurements consist of both quoted price inputs and inputs provided by a third party that are derived principally from or corroborated by observable market data by correlation. These assumptions include, but are not limited to, those concerning interest rates, credit rates, discount rates, default rates and other factors. All derivative commodity contracts have a set term of 24 months or less.

The Company’s interest rate cap agreements are considered Level 2 fair value measurements as the pricing is derived from discounting the future expected cash flows that would occur if variable interest rates rise above the strike rates of the caps. The variable interest rates used in the calculation of projected cash flows on the caps are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities that are observable at commonly quoted intervals.

The Company does not hold assets or liabilities requiring a Level 3 measurement and there have not been any transfers between the hierarchy levels during 2013 or 2012.

For purposes of financial reporting, the Company has determined that the carrying value of cash, accounts receivable, accounts payable, and accrued expenses approximates fair value due to the short maturities of these instruments. Additionally, given the revolving nature and the variable interest rates, the Company has determined that the carrying value of the ABL Facility also approximates fair value. As of September 30, 2013, the fair value of the Company’s Senior Secured Notes approximated $415,781. The fair value of the Senior Secured Notes was based upon quotes from financial institutions (Level 2 in the fair value hierarchy as defined by ASC 820).

12. Related Parties

KPS Special Situations Fund II, L.P., KPS Special Situations Fund II (A), L.P., KPS Special Situations Fund III, L.P. and KPS Special Situations Fund III (A), L.P. (together, “KPS Funds”) are majority shareholders of Halkos. As of September 30, 2013, Halkos beneficially owned 61.5% of the outstanding shares of Holdings. On October 1, 2013, the Company completed its follow-on public offering of 5,750,000 shares of its common stock. Halkos sold all of the shares in the follow-on public offering and received all of the net proceeds from the offering. After giving effect to the follow-on public offering, Halkos beneficially owns approximately 34.4% of the outstanding common stock of the Company.

The Company and affiliates of KPS Funds entered into an agreement whereby affiliates of KPS Funds charged the Company for services of their personnel engaged in line or staff functions relating specifically to the operations of the Company (the “Management Services Agreement”). In May 2013, in connection with the IPO, the Company terminated the Management Services

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

Agreement prior to the expiration of the initial term and was required to pay the affiliates of KPS Funds an early termination fee equal to the value of the advisory fee that would have otherwise been payable to the affiliates of KPS Funds through the end of the Management Services Agreement. The Company paid $4,500 to the affiliates of KPS Funds related to the Company’s early termination and all unpaid management advisory fees. The total charges, which are included in selling, general and administrative expenses, were $4,750 for the nine months ended September 30, 2013, all of which were recorded in the first six months of 2013, and $250 and $750 for the three and nine months ended September 30, 2012, respectively. As of December 31, 2012, $250 of these charges were accrued for in accrued liabilities. Additionally, pursuant to the Management Services Agreement, the Company was required to reimburse the affiliates of KPS Funds for all reasonable costs and expenses incurred in connection with the services provided. These costs were $6 and $24 for the three and nine months ended September 30, 2013, respectively, and $62 for the nine months ended September 30, 2012. There were no costs incurred during the three months ended September 30, 2012.

The Company and KPS Funds entered into an agreement dated October 18, 2011 whereby the KPS Funds agreed to reimburse the Company for specific incremental costs directly attributable to the offering of equity securities (the “KPS Reimbursement Obligation”). Pursuant to the completion of the offering that occurred on May 29, 2013, KPS Funds reimbursed the Company all amounts owed in connection with the KPS Reimbursement Obligation. As of December 31, 2012, the Company had recorded $4,875 as a receivable from stockholder pertaining to the KPS Reimbursement Obligation.

13. Commitments and Contingencies

Environmental Considerations

The Company is subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. Although the Company believes it is in material compliance with all of the various regulations applicable to its business, there can be no assurance that requirements will not change in the future or that the Company will not incur significant costs to comply with such requirements. The Company employs responsible personnel at each facility, along with various environmental engineering consultants from time to time to assist with ongoing management of environmental, health and safety requirements. Management expenses environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures that extend the life of the related property are capitalized. The Company determines its liability on a location by location basis and records a liability at the time it is deemed probable and can be reasonably estimated. The Company is currently not aware of any environmental matters which may have a material impact on the Company’s financial position, results of operations, or liquidity.

On November 19, 2007 (the date of inception of GBC), the Company acquired the assets and operations relating to the worldwide metals business of Olin Corporation. Olin Corporation agreed to retain liability arising out of the existing conditions on certain of our properties for any remedial actions required by environmental laws, and agreed to indemnify the Company for all or part of a number of other environmental liabilities. Since 2007, Olin Corporation has been performing remedial actions at the facilities in East Alton, Illinois and Waterbury, Connecticut, and has been participating in remedial actions at certain other properties as well. If Olin Corporation were to stop its environmental remedial activities at the Company’s properties, the Company could be required to assume responsibility for these activities, the cost of which could be material.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

Insurance Coverage

The Company maintains Comprehensive Medical Plans for employees of GBC and its subsidiaries (the “Plans”) to provide health insurance for eligible employees on a self-insured basis. The Plans are covered by a stop loss policy for those benefits provided on a self-insured basis with a deductible of $275 per occurrence for all GBC employees, except for employees of our Chase Brass division, which has a deductible of $100 per occurrence. The policy for our Chase Brass division also has a specific stop loss maximum resulting in the Company being responsible for paying the amount in excess of $2,000 per occurrence.

The Company is self-insured for workers’ compensation claims assumed from its predecessor company for activity prior to November 19, 2007. Workers’ compensation claims relating to activity after November 19, 2007 are covered by a loss funding insurance arrangement whereby the Company makes a fixed payment to the insurer which is used to pay submitted claims. The Company is self-insured for annual workers’ compensation costs relating to activity after November 19, 2007 of up to $500 per occurrence.

Legal Considerations

The Company is party to various legal proceedings arising in the ordinary course of business. The Company believes that none of its lawsuits are individually material or that the aggregate exposure of all of its lawsuits, including those that are probable and those that are only reasonably possible, is material to its financial condition, results of operations or cash flows.

14. Profits Interest Awards

Halkos granted, pursuant to the Halkos Equity Plan, non-voting membership interests to select members of the Company’s management titled “Class B Shares.” The Class B Shares are profits interests in Halkos.

Certain members of the Company’s management receive distributions from Halkos to the extent their Class B Shares are vested. During the nine months ended September 30, 2013 and 2012, GBC executives received $8,902 and $19,517, respectively. These distributions were accounted for by GBC as non-cash compensation expense with a corresponding increase in additional paid-in capital in the period in which the distributions were determined to be probable.

In June 2013, Halkos modified the Halkos LLC Agreement to eliminate its right to acquire all or a portion of the Class B Shares. This modification to the Halkos LLC Agreement triggered the recognition of additional non-cash compensation expense reflecting the fair value of vested Class B Shares as of the date of modification. The observable market price of the Company’s publicly traded shares was used to determine the fair value of the Class B Shares. In June 2013, the Company recognized $20,369 of incremental non-cash compensation expense as a result of the modification.

15. Segment Information

The Company’s Chief Operating Decision Maker allocates resources and evaluates performance at the divisional level. As such, the Company has determined that it has three reportable segments: Olin Brass, Chase and Oster.

Olin Brass is a leading manufacturer and converter of copper and brass sheet, strip and fabricated products. Olin Brass also rerolls and forms other alloys such as stainless, carbon steel and aluminum. Olin Brass’s products are used in five primary end markets: building and housing, munitions, automotive, coinage, and electronics/electrical components.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

Chase is a leading manufacturer of brass rod in North America. Chase primarily manufactures brass rod, including round and other shapes, ranging from 1/4 inch to 4.5 inches in diameter. The key attributes of brass rod include its machinability, corrosion resistance and moderate strength, making it especially suitable for forging and machining products such as valves and fittings. Brass rod is generally manufactured from copper or copper-alloy scrap. Chase produces brass rod used in production applications which can be grouped into four primary end markets: building and housing, transportation, electronics/electrical components and industrial machinery and equipment.

Oster is a processing distributor of copper and copper-alloy sheet, strip and foil. Oster operates six strategically-located service centers in the United States, Puerto Rico and Mexico. Each Oster service center reliably provides a broad range of high quality products at quick lead-times in small quantities. These capabilities, combined with Oster’s operations of precision slitting, hot tinning, traverse winding, cutting, edging and special packaging, provide value to a broad customer base. Oster’s products are used in three primary end markets: building and housing, automotive and electronics/electrical components.

The Chief Operating Decision Maker evaluates performance and determines resource allocations based on a number of factors, the primary performance measure being Segment Adjusted EBITDA.

Segment Adjusted EBITDA is an EBITDA-based measure of operating performance, with EBITDA being defined by the Company as net income before depreciation and amortization, interest expense, and income taxes. The Company defines Segment Adjusted EBITDA as EBITDA further adjusted to exclude unrealized gains and losses on derivative contracts, lower of cost or market adjustments to inventory, LIFO-based gains and losses, non-cash compensation expense, share-based compensation expense, loss on extinguishment of debt and non-cash income accretion related to the Company’s joint venture investment, each of which are excluded because management believes they are not indicative of the ongoing performance of the Company’s core operations. Corporate and Other includes compensation for corporate executives and officers, corporate office and administrative salaries, and professional fees for accounting, tax and legal services. Corporate and Other also includes interest expense, state and Federal income taxes, overhead costs that management has not allocated to our operating segments and the elimination of intercompany balances.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

Below is a reconciliation of the Company’s Segment Adjusted EBITDA to income before provision for income taxes and equity income:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Net Sales, External Customers

        

Olin Brass

   $ 210,861      $ 164,696      $ 613,926      $ 496,786   

Chase

     149,296        151,342        488,475        505,951   

Oster

     79,081        77,939        243,277        251,610   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales, external customers

   $ 439,238      $ 393,977      $ 1,345,678      $ 1,254,347   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intersegment Net Sales

        

Olin Brass

   $ 11,991      $ 11,208      $ 40,539      $ 36,315   

Chase

     —          —          7        302   

Oster

     65        59        173        81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total intersegment net sales

   $ 12,056      $ 11,267      $ 40,719      $ 36,698   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Adjusted EBITDA

        

Olin Brass

   $ 13,526      $ 13,681      $ 41,209      $ 37,432   

Chase

     15,996        16,120        53,831        53,311   

Oster

     4,311        4,709        13,164        15,137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment adjusted EBITDA

     33,833        34,510        108,204        105,880   

Corporate and Other

     (4,774     (5,235     (19,101     (14,664

Loss on extinguishment of debt

     —          —          —          (19,612

Depreciation and amortization

     (2,120     (1,686     (6,101     (4,891

Interest expense

     (10,104     (9,936     (29,938     (29,894

Equity method investment income (A)

     (107     (80     (605     (193

Net income attributable to noncontrolling interest

     69        105        228        273   

Lower of cost or market adjustment to inventory

     —          (302     (318     (302

(Loss) gain on derivative contracts

     (1,000     269        (1,062     1,473   

Share-based compensation expense

     (808     —          (989     —     

Compensation expense—profits interest awards

     —          —          (29,271     (19,517
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes and equity income

   $ 14,989      $ 17,645      $ 21,047      $ 18,553   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Excludes accretion income of $181 and $543 in each of the three and nine months ended September 30, 2013 and 2012. Equity method investment income is exclusive to Olin Brass.

16. Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of common shares outstanding and diluted earnings per share is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock options and nonvested share awards. Nonvested performance-based share awards are included in the average diluted shares outstanding for each period if established performance criteria have been met at the end of the respective periods.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

The following table sets forth the computation of basic and diluted earnings per share attributable to the Company:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2013     2012     2013     2012  

Numerator

       

Net income attributable to Global Brass and Copper Holdings, Inc.

  $ 9,949      $ 11,032      $ 4,205      $ 5,020   

Denominator

       

Weighted-average common shares outstanding

    21,110,000        21,110,000        21,110,000        21,110,000   

Effect of potentially dilutive securities:

       

Stock options and nonvested share awards

    64,708        —          24,169        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, assuming dilution

    21,174,708        21,110,000        21,134,169        21,110,000   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Global Brass and Copper Holdings, Inc. per common share:

       

Basic

  $ 0.47      $ 0.52      $ 0.20      $ 0.24   

Diluted

  $ 0.47      $ 0.52      $ 0.20      $ 0.24   

During the nine months ended September 30, 2013, the Company granted 107,895 options to purchase shares of common stock, 141,486 nonvested shares of restricted stock, and 101,754 nonvested performance-based shares to certain members of the Company’s management and its Board of Directors. The computation of weighted-average common shares outstanding, assuming dilution, for the three and nine months ended September 30, 2013, includes the average common shares outstanding that would result from the assumed exercise of outstanding stock options and vesting of restricted stock awards. Nonvested performance-based shares are excluded from the computation because the established performance criterion was not met at September 30, 2013.

17. Stock Split

On April 10, 2013 the Company’s Board of Directors authorized a 211,100-to-1 stock split to be effected after the effective date of the Company’s Form S-1 Registration Statement and prior to the completion of the Company’s initial public offering. On May 29, 2013, the Company completed its initial public offering of 8,050,000 shares of its common stock at a price of $11.00 per share. The share numbers and per share amounts disclosed in the consolidated financial statements and notes to consolidated financial statements have been retroactively adjusted to give effect to the stock split.

The balance sheets have been retroactively adjusted for the impact of the stock split by an increase to common stock of $211 with an offsetting charge to accumulated deficit.

18. Condensed Consolidating Financial Information

In June 2012, Holdings (presented as “Parent” in the following tables), through its wholly-owned principal operating subsidiary, GBC (presented as “Issuer” in the following tables), issued Senior Secured Notes as further described in note 8, “Financing”. The Senior Secured Notes are jointly

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

and severally guaranteed on a senior secured basis by Holdings and substantially all existing 100%-owned U.S. subsidiaries of GBC and any future restricted subsidiaries who guarantee or incur certain types of Permitted Debt under the Indenture (collectively, the “Guarantors”). The guarantees are full and unconditional, except that a Guarantor can be automatically released and relieved of its obligations under certain customary provisions contained in the Indenture. Under these customary provisions, a Guarantor is automatically released from its obligations as a guarantor upon the sale of the Guarantor or substantially all of its assets to a third party, the designation of the Guarantor as an unrestricted subsidiary in accordance with the terms of the Indenture, the release or discharge of all guarantees by such Guarantor and the repayment of all indebtedness, or upon the Issuer’s exercise of its legal defeasance option or covenant defeasance option or if the obligations under the Indenture are discharged in accordance with the terms of the Indenture. All other subsidiaries of GBC, whether direct or indirect, do not guarantee the Senior Secured Notes (collectively, the “Non-Guarantors”).

Holdings is also a guarantor of the ABL Facility and substantially all of its 100%-owned U.S. subsidiaries are borrowers under, or guarantors of, the ABL Facility on a senior secured basis.

The following condensed consolidating financial information presents the financial position, results of operations, comprehensive income and cash flows of (1) the Parent, (2) the Issuer, (3) the Guarantors, (4) the Non-Guarantors and (5) eliminations to arrive at the information for the Company on a consolidated basis. The condensed consolidating financial information presented below is not necessarily indicative of the financial position, results of operations, comprehensive income or cash flows of the Parent, the Issuer, the Guarantors or the Non-Guarantors on a stand-alone basis.

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Balance Sheet
As of September 30, 2013
 
     Parent     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

              

Current assets:

              

Cash

   $ —        $ 11,164      $ 2,633       $ 4,291       $ —        $ 18,088   

Accounts receivable, net of allowance

     —          4,914        176,272         17,287         —          198,473   

Inventories

     —          —          193,825         15,363         (410     208,778   

Prepaid expenses and other current assets

     —          10,064        16,441         86         —          26,591   

Deferred income taxes

     —          32,122        —           —           —          32,122   

Income tax receivable, net

     —          799        —           —           (174     625   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —          59,063        389,171         37,027         (584     484,677   

Property, plant and equipment, net

     —          976        76,810         351         —          78,137   

Investment in joint venture

     —          —          2,184         —           —          2,184   

Investment in subsidiaries

     —          623,442        19,974         —           (643,416     —     

Intercompany accounts

     —          —          270,599         —           (270,599     —     

Goodwill

     —          —          4,399         —           —          4,399   

Intangible assets, net

     —          —          762         —           —          762   

Deferred income taxes

     —          5,736        —           —           —          5,736   

Other noncurrent assets

     —          15,705        915         —           —          16,620   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ —        $ 704,922      $ 764,814       $ 37,378       $ (914,599   $ 592,515   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and (deficit) / equity

              

Current liabilities:

              

Accounts payable

   $ —        $ 2,455      $ 101,105       $ 2,161       $ (410   $ 105,311   

Accrued liabilities

     —          18,710        40,232         697         —          59,639   

Accrued interest

     —          12,448        —           —           —          12,448   

Income tax payable

     —          —          35         295         (174     156   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     —          33,613        141,372         3,153         (584     177,554   

Long-term debt

     —          397,500        —           —           —          397,500   

Other noncurrent liabilities

     —          26,312        —           —           —          26,312   

Obligations and advances in excess of investment in subsidiary

     5,447        —          —           —           (5,447     —     

Intercompany accounts

     7,269        252,944        —           10,386         (270,599     —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     12,716        710,369        141,372         13,539         (276,630     601,366   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Commitments and contingencies

     —          —          —           —           —          —     

Global Brass and Copper Holdings, Inc. stockholders’ (deficit) / equity

     (12,716     (5,447     623,442         19,974         (637,969     (12,716

Noncontrolling interest

     —          —          —           3,865         —          3,865   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total (deficit) / equity

     (12,716     (5,447     623,442         23,839         (637,969     (8,851
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and (deficit) / equity

   $ —        $ 704,922      $ 764,814       $ 37,378       $ (914,599   $ 592,515   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Balance Sheet
As of December 31, 2012
 
     Parent     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

            

Current assets:

            

Cash

   $ —        $ 8,537      $ —         $ 5,446       $ (121   $ 13,862   

Accounts receivable, net of allowance

     —          4,630        144,533         15,154         —          164,317   

Inventories

     —          343        158,713         15,885         (563     174,378   

Prepaid expenses and other current assets

     —          9,229        2,600         312         —          12,141   

Deferred income taxes

     —          33,465        —           —           —          33,465   

Income tax receivable, net

     —          1,656        —           —           (356     1,300   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —          57,860        305,846         36,797         (1,040     399,463   

Property, plant and equipment, net

     —          1,154        69,646         327         —          71,127   

Investment in joint venture

     —          —          2,972         —           —          2,972   

Investment in subsidiaries

     —          522,912        19,850         —           (542,762     —     

Intercompany accounts

     —          —          223,081         —           (223,081     —     

Goodwill

     —          —          4,399         —           —          4,399   

Intangible assets, net

     —          —          839         —           —          839   

Deferred income taxes

     —          6,138        —           —           —          6,138   

Other noncurrent assets

     —          17,115        640         —           —          17,755   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ —        $ 605,179      $ 627,273       $ 37,124       $ (766,883   $ 502,693   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and (deficit) / equity

            

Current liabilities:

            

Accounts payable

   $ —        $ 1,398      $ 77,390       $ 2,910       $ (121   $ 81,577   

Accrued liabilities

     —          20,592        26,971         861         —          48,424   

Accrued interest

     —          3,287        —           —           —          3,287   

Income tax payable

     —          248        —           356         (356     248   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     —          25,525        104,361         4,127         (477     133,536   

Long-term debt

     —          389,522        —           —           —          389,522   

Other noncurrent liabilities

     —          27,436        —           —           —          27,436   

Obligations and advances in excess of investment in subsidiary

     42,522        —          —           —           (42,522     —     

Intercompany accounts

     8,829        205,218        —           9,597         (223,644     —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     51,351        647,701        104,361         13,724         (266,643     550,494   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Commitments and contingencies

     —          —          —           —           —          —     

Global Brass and Copper Holdings, Inc. stockholders’ (deficit) / equity

     (51,351     (42,522     522,912         19,850         (500,240     (51,351

Noncontrolling interest

     —          —          —           3,550         —          3,550   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total (deficit) / equity

     (51,351     (42,522     522,912         23,400         (500,240     (47,801
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and (deficit) / equity

   $ —        $ 605,179      $ 627,273       $ 37,124       $ (766,883   $ 502,693   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

26


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Operations  
     Three Months Ended September 30, 2013  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 422,679      $ 25,088       $ (8,529   $ 439,238   

Cost of sales

     —          1,092        378,132        23,296         (8,529     393,991   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit (loss)

     —          (1,092     44,547        1,792         —          45,247   

Selling, general and administrative expenses

     202        4,713        14,388        786         —          20,089   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (202     (5,805     30,159        1,006         —          25,158   

Interest expense

     —          10,104        —          —           —          10,104   

Other (income) expense, net

     —          77        (51     39         —          65   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes and equity income

     (202     (15,986     30,210        967         —          14,989   

Provision for (benefit from) income taxes

     (78     (5,800     10,986        151         —          5,259   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before equity income

     (124     (10,186     19,224        816         —          9,730   

Equity income, net of tax

     10,073        20,259        1,035        —           (31,079     288   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     9,949        10,073        20,259        816         (31,079     10,018   

Less: Net income attributable to noncontrolling interest

     —          —          —          69         —          69   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to Global Brass and Copper Holdings, Inc.

   $ 9,949      $ 10,073      $ 20,259      $ 747       $ (31,079   $ 9,949   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

27


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Operations  
     Three Months Ended September 30, 2012  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 375,335      $ 25,060      $ (6,418   $ 393,977   

Cost of sales

     —          9        333,285        22,704        (6,418     349,580   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     —          (9     42,050        2,356        —          44,397   

Selling, general and administrative expenses

     351        4,411        11,925        666        —          17,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (351     (4,420     30,125        1,690        —          27,044   

Interest expense

     —          9,935        1        —          —          9,936   

Other (income) expense, net

     —          92        (249     (380     —          (537
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes and equity income

     (351     (14,447     30,373        2,070        —          17,645   

Provision for (benefit from) income taxes

     (135     (5,652     12,048        508        —          6,769   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income

     (216     (8,795     18,325        1,562        —          10,876   

Equity income, net of tax

     11,248        20,043        1,718        —          (32,748     261   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     11,032        11,248        20,043        1,562        (32,748     11,137   

Less: Net income attributable to noncontrolling interest

     —          —          —          105        —          105   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Global Brass and Copper Holdings, Inc.

   $ 11,032      $ 11,248      $ 20,043      $ 1,457      $ (32,748   $ 11,032   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Operations  
     Nine Months Ended September 30, 2013  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 1,294,809      $ 73,586       $ (22,717   $ 1,345,678   

Cost of sales

     —          1,208        1,155,186        68,138         (22,717     1,201,815   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit (loss)

     —          (1,208     139,623        5,448         —          143,863   

Selling, general and administrative expenses

     5,390        33,569        51,444        2,219         —          92,622   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (5,390     (34,777     88,179        3,229         —          51,241   

Interest expense

     —          29,938        —          —           —          29,938   

Other (income) expense, net

     —          264        (134     126         —          256   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes and equity income

     (5,390     (64,979     88,313        3,103         —          21,047   

Provision for (benefit from) income taxes

     (2,075     (15,753     34,676        914         —          17,762   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before equity income

     (3,315     (49,226     53,637        2,189         —          3,285   

Equity income, net of tax

     7,520        56,746        3,109        —           (66,227     1,148   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     4,205        7,520        56,746        2,189         (66,227     4,433   

Less: Net income attributable to noncontrolling interest

     —          —          —          228         —          228   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to Global Brass and Copper Holdings, Inc.

   $ 4,205      $ 7,520      $ 56,746      $ 1,961       $ (66,227   $ 4,205   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

29


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Operations  
     Nine Months Ended September 30, 2012  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 1,204,470      $ 69,679      $ (19,802   $ 1,254,347   

Cost of sales

     —          (1,896     1,071,405        63,168        (19,802     1,112,875   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          1,896        133,065        6,511        —          141,472   

Selling, general and administrative expenses

     1,086        26,223        43,969        1,963        —          73,241   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1,086     (24,327     89,096        4,548        —          68,231   

Interest expense (income)

     —          29,896        (2     —          —          29,894   

Loss on extinguishment of debt

     —          19,612        —          —          —          19,612   

Other (income) expense, net

     —          689        2        (519     —          172   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes and equity income

     (1,086     (74,524     89,096        5,067        —          18,553   

Provision for (benefit from) income taxes

     (418     (24,813     38,710        517        —          13,996   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income

     (668     (49,711     50,386        4,550        —          4,557   

Equity income, net of tax

     5,688        55,399        5,013        —          (65,364     736   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     5,020        5,688        55,399        4,550        (65,364     5,293   

Less: Net income attributable to noncontrolling interest

     —          —          —          273        —          273   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Global Brass and Copper Holdings, Inc.

   $ 5,020      $ 5,688      $ 55,399      $ 4,277      $ (65,364   $ 5,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Comprehensive Income  
     Three Months Ended September 30, 2013  
     Parent      Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net income

   $ 9,949       $ 10,073       $ 20,259       $ 816       $ (31,079   $ 10,018   

Foreign currency translation adjustment, net of tax

     174         174         281         131         (566     194   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     10,123         10,247         20,540         947         (31,645     10,212   

Less: Comprehensive income attributable to noncontrolling interest

     —           —           —           89         —          89   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Global Brass and Copper Holdings, Inc.

   $ 10,123       $ 10,247       $ 20,540       $ 858       $ (31,645   $ 10,123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

31


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Comprehensive Income  
     Three Months Ended September 30, 2012  
     Parent      Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net income

   $ 11,032       $ 11,248       $ 20,043       $ 1,562       $ (32,748   $ 11,137   

Foreign currency translation adjustment, net of tax

     15         15         22         184         (243     (7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     11,047         11,263         20,065         1,746         (32,991     11,130   

Less: Comprehensive income attributable to noncontrolling interest

     —           —           —           83         —          83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Global Brass and Copper Holdings, Inc.

   $ 11,047       $ 11,263       $ 20,065       $ 1,663       $ (32,991   $ 11,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

32


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Comprehensive Income  
     Nine Months Ended September 30, 2013  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net income

   $ 4,205      $ 7,520      $ 56,746      $ 2,189       $ (66,227   $ 4,433   

Foreign currency translation adjustment, net of tax

     (705     (705     (1,181     340         1,633        (618
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

     3,500        6,815        55,565        2,529         (64,594     3,815   

Less: Comprehensive income attributable to noncontrolling interest

     —          —          —          315         —          315   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Global Brass and Copper Holdings, Inc.

   $ 3,500      $ 6,815      $ 55,565      $ 2,214       $ (64,594   $ 3,500   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

33


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Comprehensive Income  
     Nine Months Ended September 30, 2012  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net income

   $ 5,020      $ 5,688      $ 55,399      $ 4,550       $ (65,364   $ 5,293   

Foreign currency translation adjustment, net of tax

     (130     (130     (200     983         (653     (130
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

     4,890        5,558        55,199        5,533         (66,017     5,163   

Less: Comprehensive income attributable to noncontrolling interest

     —          —          —          273         —          273   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Global Brass and Copper Holdings, Inc.

   $ 4,890      $ 5,558      $ 55,199      $ 5,260       $ (66,017   $ 4,890   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

34


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Cash Flows  
     Nine Months Ended September 30, 2013  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities

            

Net cash provided by (used in) operating activities

   $ —        $ (5,275   $ 15,537      $ 1,024      $ (6,754   $ 4,532   

Cash flows from investing activities

            

Capital expenditures

     —          (76     (13,074     (55     —          (13,205

Payable to subsidiaries

     (4,875     —          —          —          4,875        —     

Proceeds from sale of property, plant and equipment

     —          —          170        4        —          174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4,875     (76     (12,904     (51     4,875        (13,031

Cash flows from financing activities

            

Borrowings on ABL Facility

     —          337,236        —          —          —          337,236   

Payments on ABL Facility

     —          (329,258     —          —          —          (329,258

Distribution to stockholder

     —          —          —          (2,000     2,000        —     

Net payments (amounts due) from stockholder

     4,875        —          —          —          —          4,875   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     4,875        7,978        —          (2,000     2,000        12,853   

Effect of foreign currency exchange rate changes

     —          —          —          (128     —          (128
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     —          2,627        2,633        (1,155     121        4,226   

Cash at beginning of period

     —          8,537        —          5,446        (121     13,862   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

   $ —        $ 11,164      $ 2,633      $ 4,291      $ —        $ 18,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(All amounts in thousands, except share and per share data)

 

     Condensed Consolidating Statement of Cash Flows  
     Nine Months Ended September 30, 2012  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities

            

Net cash provided by (used for) operating activities

   $ 73,624      $ 49,063      $ 10,765      $ (30   $ (75,170   $ 58,252   

Cash flows from investing activities

            

Capital expenditures

     —          (549     (10,790     (21     —          (11,360

Capital distributions from subsidiary

     86,376        —          —            (86,376     —     

Payable to subsidiaries

     2,398        —          —          —          (2,398     —     

Proceeds from sale of property, plant and equipment

     —          —          25        —          —          25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     88,774        (549     (10,765     (21     (88,774     (11,335

Cash flows from financing activities

            

Deferred financing fees

     —          (12,981     —          —          —          (12,981

Proceeds from senior secured notes

     —          375,000        —          —          —          375,000   

Payments on term loan

     —          (310,875     —          —          —          (310,875

Borrowings on ABL Facility

     —          142,400        —          —          —          142,400   

Payments on ABL Facility

     —          (113,900     —          —          —          (113,900

Distribution to stockholder

     (160,000     (160,000     —          —          160,000        (160,000

Amounts due from stockholder

     (2,398     —          —          —          —          (2,398
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (162,398     (80,356     —          —          160,000        (82,754

Effect of foreign currency exchange rate changes

     —          —          —          (682     —          (682
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash

     —          (31,842     —          (733     (3,944     (36,519

Cash at beginning of period

     —          45,302        —          4,648        (413     49,537   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

   $ —        $ 13,460      $ —        $ 3,915      $ (4,357   $ 13,018   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

19. Subsequent Events

On October 1, 2013, the Company completed its follow-on public offering. See further discussion in note 1, “Basis of Presentation and Principles of Consolidation” and note 12, “Related Parties”.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “projects,” “may,” “would,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “anticipates,” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements contained in this report are based upon information available to us on the date of this report. Important factors that could cause actual results to differ materially from our expectations, which we refer to as “cautionary statements”, are disclosed under the “Risk Factors” section in Amendment No. 1 to our Form S-1 Registration Statement filed with the Securities and Exchange Commission (“SEC”) on September 20, 2013, in Item 1A “Risk Factors” and elsewhere in this Report on Form 10-Q, including, without limitation, in conjunction with the forward-looking statements included in this Report on Form 10-Q and in our other SEC filings. All forward-looking information in this report and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results include:

 

    general economic conditions affecting the markets in which our products are sold;

 

    our ability to implement our business strategies, including acquisition activities;

 

    our ability to continue implementing our balanced book approach to substantially reduce the impact of fluctuations in metal prices on our earnings and operating margins;

 

    shrinkage from processing operations and metal price fluctuations, particularly copper;

 

    the condition of various markets in which our customers operate, including the housing and commercial construction industries;

 

    our ability to maintain business relationships with our customers on favorable terms;

 

    our ability to compete effectively with existing and new competitors;

 

    limitations on our ability to purchase raw materials, particularly copper;

 

    fluctuations in commodity and energy prices and costs;

 

    our ability to maintain sufficient liquidity as commodity and energy prices rise;

 

    the effects of industry consolidation or competition in our business lines;

 

    operational factors affecting the ongoing commercial operations of our facilities, including technology failures, catastrophic weather-related damage, regulatory approvals, permit issues, unscheduled blackouts, outages or repairs or unanticipated changes in energy costs;

 

    supply, demand, prices and other market conditions for our products;

 

    our ability to accommodate increases in production to meet demand for our products;

 

    our ability to continue our operations internationally and the risks applicable to international operations;

 

    government regulations relating to our products and services, including new legislation relating to derivatives and the elimination of the dollar bill;

 

    our ability to maintain effective internal control over financial reporting as we become subject to public company requirements;

 

    our ability to realize the planned cost savings and efficiency gains as part of our various initiatives;

 

    workplace safety issues;

 

    our ability to retain key employees;

 

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    adverse developments in our relationship with our employees or the future terms of our collective bargaining agreements;

 

    rising employee medical costs;

 

    environmental costs;

 

    our exposure to product liability claims;

 

    our ability to maintain cost-effective insurance policies;

 

    our ability to maintain the confidentiality of our proprietary information and to protect the validity, enforceability or scope of our intellectual property rights;

 

    our limited experience managing and operating a public company;

 

    our ability to service our substantial indebtedness;

 

    fluctuations in interest rates; and

 

    restrictive covenants in our indebtedness that may adversely affect our operational flexibility.

We caution you that the foregoing list of factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. Accordingly, investors should not place undue reliance on those statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this filing. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in the section entitled “Cautionary Statement Concerning Forward-Looking Statements” included elsewhere in this report.

Overview

Our Business

Global Brass and Copper Holdings, Inc. (“Holdings,” the “Company,” “we,” “us,” or “our”) is a leading value-added converter, fabricator, distributor and processor of specialized copper and brass products in North America. We offer a broad range of products, and we sell our products to multiple distinct end markets including the building and housing, munitions, automotive, transportation, coinage, electronics/electrical components, industrial machinery and equipment and general consumer end markets. Unlike other metals companies, including those who may engage in mining, smelting and refining activities, we are purely a metal converter, fabricator, distributor and processor and do not attempt to generate profits from fluctuations in metal prices. We engage in melting and casting, rolling, drawing, extruding and stamping to manufacture finished and semi-finished alloy products from processed scrap, copper cathode and other refined metals. We participate in two distinct segments of the fabrication value chain: sheet, strip, foil, tube and plate and alloy rod.

Our leading market positions in each of our operating segments allow us to achieve attractive operating margins. Our strong operating margins are a function of four key characteristics of our business: (1) we earn a premium margin over the cost of metal because of our value-added processing capabilities, patent-protected technologies, and first-class service; (2) we have strategically shifted our product portfolio toward value-added, higher margin products; (3) we are driving a lean cost structure through fixed and variable cost reductions, process improvements, and workforce flexibility initiatives; and (4) we employ our balanced book approach (as discussed below) to substantially reduce the financial impact of metal price volatility on our earnings and operating margins. We have undertaken substantial cost reduction activities since our formation in 2007, which have reduced our fixed costs, improved our net working capital balances and improved our competitive positioning while increasing operating margins.

Our Operating Segments

We operate through three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster.

Our Olin Brass segment is the leading manufacturer and converter of copper and copper-alloy sheet, strip, foil, tube, and plate and fabricated components in North America. While primarily processing copper and copper-alloys, the segment also rerolls and forms other metals such as stainless and carbon steel. Olin Brass’s products are used in five primary end markets: building and housing, munitions, automotive, coinage, and electronics/electrical components. Over the past three twelve-month periods ended September 30, 2013, a per-period average of 17.8% of Olin Brass’s products have been sold to A.J. Oster.

 

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Chase Brass is a leading North American manufacturer of brass rod. The segment principally produces brass rod in sizes ranging from 1/4 inch to 4.5 inches in diameter. The key attributes of brass rod include its machinability, corrosion resistance and moderate strength, making it especially suitable for forging and machining products such as valves and fittings. Chase Brass produces brass rod used in production applications which can be grouped into four end markets: building and housing, transportation, electronics/electrical components and industrial machinery and equipment.

Our A.J. Oster segment is a leading copper-alloy distributor and processor. The segment, through its family of metal service centers, is strategically focused on satisfying its customers’ needs for brass and copper strip and other products, with a high level of service, quality and flexibility by offering customization and just-in-time delivery. Our value-added processing services include precision slitting and traverse winding to provide greater customer press up-time, hot air level tinning for superior corrosion resistance and product enhancements such as edging and cutting. Important A.J. Oster end markets include building and housing, automotive and electronics/electrical components (primarily for housing and commercial construction). Over the past three twelve-month periods ended September 30, 2013, a per-period average of 68.3% of A.J. Oster’s brass and copper material requirements have been supplied by our Olin Brass segment.

All three segments generate revenue from product sales and earn a premium margin over the cost of metal as a result of our value-added processing and metal conversion capabilities and first-class service. Our financial performance is driven by metal conversion economics, not by the underlying movements in the price of copper and the other metal we use. In all three segments, most of the risk of changes in the metal cost of the products we make is borne by our customers or third parties rather than by us.

We also have a Corporate and Other segment, which includes certain administrative costs and expenses that management has not allocated to our operating segments. These costs include compensation for corporate executives and officers, corporate office and administrative salaries, and professional fees for accounting, tax and legal services. The Corporate and Other segment also includes interest expense, state and federal income taxes and the elimination of intercompany balances.

Refinancing Activities

In June 2012, we amended the agreement governing our asset-based revolving loan facility to extend its maturity to June 1, 2017 and increase the commitments under the facility to $200.0 million, which we refer to as the “ABL Facility.” On June 1, 2012, we completed a refinancing, which included Global Brass and Copper, Inc.’s (“GBC”) issuance of $375.0 million in aggregate principal amount of 9.50% Senior Secured Notes due 2019 (the “Senior Secured Notes”). The Senior Secured Notes mature on June 1, 2019. Interest on the Senior Secured Notes accrues at the rate of 9.50% per annum and is payable semiannually in arrears on June 1 and December 1. The Senior Secured Notes are guaranteed by Holdings and substantially all of GBC’s existing and certain of its future wholly-owned U.S. subsidiaries. The Senior Secured Notes are collateralized by a senior-priority security interest in our fixed assets and by a junior-priority security interest in our accounts receivable and inventory. We used a portion of the proceeds from the Senior Secured Notes to repay in full the $266.5 million of principal outstanding under our senior secured term loan credit facility (the “Term Loan Facility”), which we refer to as the “Term Loan Refinancing”. In the Term Loan Refinancing, we paid our lenders a total of $275.5 million, including the $266.5 million of principal, an early repayment premium of $8.0 million and accrued and unpaid interest of $1.0 million, and we recognized a $19.6 million loss on extinguishment of debt. Pursuant to the registration rights agreement governing the Senior Secured Notes, on October 7, 2013, GBC completed an exchange offer (“Exchange Offer”) to issue registered notes (with substantially the same terms as the Senior Secured Notes) in exchange for the Senior Secured Notes that GBC issued in a private offering on June 1, 2012.

 

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In connection with the offering of the Senior Secured Notes, the Term Loan Refinancing and the amendment of the ABL Facility, we used a portion of the net proceeds of the issuance of the Senior Secured Notes, together with cash on hand, to make a cash distribution of $160.0 million to Halkos Holdings, LLC (“Halkos”), our sole stockholder prior to our initial public offering (the “initial public offering” or “IPO”), which we refer to as the “Parent Distribution.” Halkos distributed the proceeds of the Parent Distribution pro rata to its equityholders (which include certain of our officers and directors) in accordance with the terms of its operating agreement.

Initial and Follow-On Public Offerings of Holdings

On May 29, 2013, we completed our initial public offering of 8,050,000 shares of our common stock at a price of $11.00 per share. The shares began trading on the New York Stock Exchange on May 23, 2013 under the ticker symbol “BRSS.” Halkos, our sole stockholder prior to the IPO, sold all of the shares in the IPO and received all of the net proceeds from the offering. After giving effect to the IPO, Halkos beneficially owned approximately 61.5% of the outstanding common stock of Holdings and owned approximately the same percentage of Holdings’ stock as of September 30, 2013.

On October 1, 2013, we completed a follow-on offering of 5,750,000 shares of its common stock. Halkos sold all of the shares in the follow-on public offering and received all of the net proceeds from the offering. After giving effect to the follow-on public offering, Halkos beneficially owned approximately 34.4% of our outstanding common stock.

Key Factors Affecting Our Results of Operations

Metal Cost

We are a leading, value-added converter, fabricator, distributor and processor of specialized copper and brass products in North America. Our profitability is primarily driven by the value added from the manufacturing and fabrication of metal products, and not by fluctuations in the price of copper and metal. Our business model uses various methods to substantially reduce the financial impact of fluctuations in metal prices, such that our operating margins are largely unaffected by metal price trends. Nevertheless, metal price fluctuations will impact the total amount of our net sales, the cost of shrinkage loss, the impact of LIFO liquidations and our working capital requirements.

Shrinkage loss, which is primarily the loss of raw material that occurs in the melting and casting operations, is an inherent part of our metal casting process. While the shrinkage loss rate is very low relative to the total volume of metal casting, the cost of the shrinkage loss and its impact on financial performance increases as metal prices increase.

We sell our products on a “toll” and “non-toll” basis. For sales on a toll basis, our customer is responsible for metal procurement. For sales on a non-toll basis, we assume responsibility for metal procurement and then recover the metal replacement cost from the customer. During the year ended December 31, 2012, 75.9% of our unit sales volume was on a non-toll basis. For sales on a non-toll basis, we use our balanced book approach, discussed below, to substantially reduce the impact of metal price movements on earnings and operating margins.

 

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The raw materials component of inventories that is valued on a LIFO basis comprises approximately 73% and 70% of total inventory at September 30, 2013 and December 31, 2012, respectively. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period. The impact of LIFO accounting on our financial results may be significant with respect to period-to-period comparisons. During 2012 and 2011 inventory quantities were reduced, resulting in a liquidation of LIFO inventory layers carried at lower costs prevailing in prior years as compared with current costs. The effect of this reduction of inventory decreased cost of sales by $4.8 million and $15.2 million during 2012 and 2011, respectively.

Metal prices will also impact our investment in working capital because our collection terms with our customers are longer than our payment terms to our suppliers, so when metal prices increase, even if the number of pounds processed does not change, our working capital requirements will also increase. In 2012, the spread between our receivable collection cycle and purchase payment cycle was approximately 20 days. As a result, when metal prices are rising, we tend to draw more on the ABL Facility to cover the cash flow delay between material replacement purchase and cash collection. When metal prices fall, we replace our metal at a lower cost than the metal content of cash collections and generally reduce our use of the ABL Facility. We believe that our cash flow from operations, supplemented with cash available under the ABL Facility, will provide sufficient liquidity to meet our needs in the current metal price environment.

Balanced Book

Most of our sales volume is from non-toll customers. During the fiscal year ended December 31, 2012, non-toll sales accounted for 75.9% of our volume. To substantially reduce the financial impact of metal price volatility on earnings and operating margins, we use our balanced book approach for non-toll sales to offset forward metal sales with forward metal purchases. Using our balanced book approach, we seek to minimize the financial impact of metal price movements in the period between date of order and date of shipment by matching the timing, quantity and price of the metal cost recovery component of net sales made on a non-toll basis with the timing, quantity and price of the replacement metal purchases. Our balanced book approach has improved the consistency of our margins despite underlying copper price volatility.

For any non-toll sale, we achieve our balanced book through one of the following three mechanisms:

 

    Metal sales and replacement purchases on “price date of shipment” terms, meaning that metal sale prices and the metal replacement prices are set on the date of shipment. The customer bears the risk of metal price changes from the date of order to the date of shipment, so all fluctuations in metal costs are passed through to the customer.

 

    Metal sales and replacement purchases on a “firm price basis”, meaning that metal sale prices are fixed on the order date, and a matching replacement purchase at a fixed price is established with a metal supplier. The supplier therefore bears the risk of metal price changes from the date of order to the date of shipment.

 

    Metal sales on a firm price basis in circumstances where a matching firm price purchase is unavailable. In this situation, we execute a forward purchase on “price date of shipment” terms and enter into a financial derivative transaction in the form of a forward purchase contract. The impact of price changes from date of order to the date of shipment on the previously required metal replacement purchase is offset by gains or losses on the derivative contract. The derivative counterparty bears the risk of metal price changes from the date of order to the date of shipment.

Price date of shipment transactions accounted for approximately 65% of non-toll unit sales volume in the year ended December 31, 2012. Firm price basis transactions that are supported with either firm price replacement purchases or price date of shipment replacement purchases plus a derivative contract accounted for the remaining approximately 35% of non-toll volume for the year ended December 31, 2012.

 

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Metal Cost Hedging

In the ordinary course of business, we use derivative contracts in support of our balanced book approach. These derivative contracts are not accounted for as hedges but are recorded at fair value in accordance with ASC Topic 820. Unrealized and realized gains and losses are reported in cost of sales.

Other Initiatives

We have also implemented the following initiatives to improve margins, increase profitability and reduce working capital requirements:

 

    market-driven product mix improvements;

 

    management-led product portfolio enhancements;

 

    development of dedicated supply chain organizations in each business unit which have begun the implementation of robust sales and operations planning systems across the business units;

 

    management-led productivity and production enhancements; and

 

    establishment of more rigid business rules resulting in reduced customer optionality and improved pricing across our product portfolio.

Non-GAAP Measures

In addition to the results reported in accordance with U.S. GAAP, we have provided information regarding “Consolidated EBITDA”, “Segment EBITDA”, “Consolidated Adjusted EBITDA”, “Segment Adjusted EBITDA”, and “Adjusted sales”, each of which is defined below.

EBITDA-Based Measures

We define Consolidated EBITDA as net income (loss) attributable to Global Brass and Copper Holdings, Inc., adjusted to exclude interest expense, provision for (benefit from) income taxes and depreciation and amortization expense. Segment EBITDA is defined by us as income (loss) before provision for (benefit from) income taxes and equity income, adjusted to exclude interest expense and depreciation and amortization expense, in each case, to the extent such items are attributable to such segment.

We use Consolidated EBITDA only to calculate Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA is Consolidated EBITDA, further adjusted to exclude extraordinary gains from the bargain purchase that occurred in the acquisition of the worldwide metals business of Olin Corporation, realized and unrealized gains and losses related to the collateral hedge contracts that were previously required under our former ABL Facility, unrealized gains and losses on derivative contracts in support of our balanced book approach, unrealized gains and losses associated with derivative contracts related to electricity and natural gas costs, non-cash gains and losses due to lower of cost or market adjustments to inventory, LIFO-based gains and losses due to the depletion of a LIFO layer of metal inventory, non-cash compensation expense related to payments made to members of our management by Halkos, share-based compensation expense, loss on extinguishment of debt, non-cash income accretion related to the joint venture with Dowa – Olin Metal Corporation (“Dowa”), management fees paid to KPS Management II, L.P. and KPS Management III, L.P., restructuring and other business transformation charges, specified legal and professional expenses and certain other items.

 

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We use Segment EBITDA only to calculate Segment Adjusted EBITDA. Segment Adjusted EBITDA is Segment EBITDA, further adjusted to exclude unrealized gains and losses on derivative contracts in support of our balanced book approach, unrealized gains and losses associated with derivative contracts related to electricity and natural gas costs, non-cash gains and losses due to lower of cost or market adjustments to inventory, LIFO-based gains and losses due to the depletion of a LIFO layer of metal inventory, non-cash compensation expense related to payments made to certain employees by Halkos, share-based compensation expense, loss on extinguishment of debt, and non-cash income accretion related to the joint venture with Dowa, in each case, to the extent such items are attributable to the relevant segment.

We present the above-described EBITDA-based measures because we consider them important supplemental measures and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Nevertheless, our EBITDA-based measures may not be comparable to similarly titled measures presented by other companies.

We present Consolidated Adjusted EBITDA as a supplemental measure of our performance because we believe it represents a meaningful presentation of the financial performance of our core operations, without the impact of the various items excluded, in order to provide period-to-period comparisons that are more consistent and more easily understood. Management uses Consolidated Adjusted EBITDA per pound in order to measure the effectiveness of the balanced book approach in reducing the financial impact of metal price volatility on earnings and operating margins, and to measure the effectiveness of our business transformation initiatives in improving earnings and operating margins. In addition, Segment Adjusted EBITDA is the key metric used by our Chief Operating Decision Maker to evaluate the business performance of our segments in comparison to budgets, forecasts and prior-year financial results, providing a measure that management believes reflects our core operating performance. Measures similar to Consolidated Adjusted EBITDA, namely “EBITDA” and “Adjusted EBITDA”, are defined and used in the agreements governing the ABL Facility and the Senior Secured Notes to determine compliance with various financial covenants and tests.

Our EBITDA-based measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 

    they do not reflect every expenditure, future requirements for capital expenditures or contractual commitments;

 

    they do not reflect the significant interest expense or the amounts necessary to service interest or principal payments on our debt;

 

    they do not reflect income tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate;

 

    although depreciation and amortization are eliminated in the calculation of EBITDA-based measures, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and our EBITDA-based measures do not reflect any costs of such replacements or improvements;

 

    they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

 

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    segment-based measures do not reflect the elimination of intercompany transactions, including those between Olin Brass and A.J. Oster;

 

    they do not reflect limitations on our costs related to transferring earnings from our subsidiaries to us; and

 

    other companies in our industry may calculate these measures differently from the way we do, limiting their usefulness as comparative measures.

We compensate for these limitations by using our EBITDA-based measures along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income (loss), net income (loss), cash flows from operations and other cash flow data. We have significant uses of cash, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in our EBITDA-based measures.

Our EBITDA-based measures are not intended as alternatives to net income (loss) as indicators of our operating performance, as alternatives to any other measure of performance in conformity with GAAP or as alternatives to cash flow provided by operating activities as measures of liquidity. You should therefore not place undue reliance on our EBITDA-based measures or ratios calculated using those measures. Our GAAP-based measures can be found in our consolidated financial statements and the related notes thereto included elsewhere in this report.

Adjusted sales

Adjusted sales is defined as net sales less the metal component of net sales. Net sales is the most directly comparable GAAP measure to adjusted sales. Adjusted sales represents the value-added premium we earn over our conversion and fabrication costs. Management uses Adjusted sales on a consolidated basis to monitor the revenues that are generated from our value-added conversion and fabrication processes excluding the effects of fluctuations in metal costs, reflecting our toll sales and our balanced book approach for non-toll sales. We believe that Adjusted sales supplements our GAAP results to provide a more complete understanding of the results of our business, and we believe it is useful to our investors and other parties for these same reasons. Adjusted sales may not be comparable to similarly titled measures presented by other companies and is not a measure of operating performance or liquidity defined by GAAP.

Revision of Prior Period Financial Statements

Our financial information as of and for the three months and nine months ended September 30, 2012 in this discussion and analysis reflects those revisions disclosed in note 1, “Basis of Presentation and Principles of Consolidation” to our unaudited consolidated financial statements included elsewhere in this report.

 

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Results of Operations

Consolidated Results of Operations for the Three Months Ended September 30, 2013, Compared to the Three Months Ended September 30, 2012.

 

     Three Months Ended
September 30,
    Change:
2013 vs. 2012
 
(in millions)    2013      % of Net Sales     2012     % of Net Sales     Amount     Percent  

Net sales

   $ 439.3         100.0   $ 394.0        100.0   $ 45.3        11.5

Cost of sales

     394.0         89.7     349.6        88.7     44.4        12.7
  

 

 

      

 

 

     

 

 

   

Gross profit

     45.3         10.3     44.4        11.3     0.9        2.0

Selling, general and administrative expenses

     20.1         4.6     17.4        4.4     2.7        15.5
  

 

 

      

 

 

     

 

 

   

Operating income

     25.2         5.7     27.0        6.9     (1.8     (6.7 %) 

Interest expense

     10.1         2.3     9.9        2.5     0.2        2.0

Other expense (income), net

     0.1         0.0     (0.5     (0.1 %)      0.6        (120.0 %) 
  

 

 

      

 

 

     

 

 

   

Income before provision for income taxes and equity income

     15.0         3.4     17.6        4.5     (2.6     (14.8 %) 

Provision for income taxes

     5.3         1.2     6.8        1.7     (1.5     (22.1 %) 
  

 

 

      

 

 

     

 

 

   

Income before equity income

     9.7         2.2     10.8        2.7     (1.1     (10.2 %) 

Equity income, net of tax

     0.3         0.1     0.3        0.1     —          0.0
  

 

 

      

 

 

     

 

 

   

Net income

     10.0         2.3     11.1        2.8     (1.1     (9.9 %) 

Less: Net income attributable to noncontrolling interest

     0.1         0.0     0.1        0.0     —          0.0
  

 

 

      

 

 

     

 

 

   

Net income attributable to Global Brass and Copper Holdings, Inc.

   $ 9.9         2.3   $ 11.0        2.8   $ (1.1     (10.0 %) 
  

 

 

      

 

 

     

 

 

   

Consolidated Adjusted EBITDA

   $ 30.5         6.9   $ 30.4        7.7   $ 0.1        0.3

Net sales

Net sales increased by $45.3 million, or 11.5%, from $394.0 million for the three months ended September 30, 2012 to $439.3 million for the three months ended September 30, 2013. Net sales increased by $16.6 million due to an increase in volume, $35.7 million as a result of the sales of unprocessed metal and $0.8 million due to higher average selling prices in the three months ended September 30, 2013. These increases were partially offset by lower metal prices, which decreased net sales by $7.8 million. Metal prices reflect the replacement cost recovery from the customer, whereas the sales prices represent the pricing component of adjusted sales, which we define as the excess of net sales over the metal cost recovery component of net sales.

Volume increased by 7.6 million pounds, or 6.1%, from 124.4 million pounds for the three months ended September 30, 2012 to 132.0 million pounds for the three months ended September 30, 2013. The increase in volume was the result of higher demand in building and housing, munitions, coinage and automotive end markets. These increases were partially offset by lower demand in the electronics/electrical components end market resulting from increased competition from foreign imports. Additionally, volume growth in the building and housing end market was dampened by foreign competition.

The metal cost recovery component of net sales increased by $36.5 million, or 13.9%, from $263.1 million for the three months ended September 30, 2012 to $299.6 million for the three months ended September 30, 2013.

 

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Higher volume increased the metal cost recovery component of net sales by $8.6 million in the three months ended September 30, 2013 as compared to the same period in 2012. Additionally, sales of unprocessed metal increased the metal cost recovery component of net sales by $35.7 million in the three months ended September 30, 2013. Partially offsetting the increase in the metal cost recovery component of net sales was the change in customer mix and lower metal prices which decreased the metal cost recovery component of net sales by $7.8 million. The metal cost recovery component of net sales per pound of finished product shipped increased by 7.1%, due primarily to the inclusion of the sales of unprocessed metal, the quantity of which is not included in pounds shipped. The metal cost recovery component of net sales per pound of finished product sold excluding the sales of unprocessed metal (the quantity of which is not included in pounds shipped) decreased by 5.5%, primarily as a result of an 8.5% decrease in average daily copper prices reported by COMEX.

Adjusted sales

Adjusted sales, the excess of net sales over the metal cost recovery component of net sales, increased by $8.8 million, or 6.7%, from $130.9 million for the three months ended September 30, 2012 to $139.7 million for the three months ended September 30, 2013. Higher volume and higher average selling prices increased adjusted sales by $8.0 million and $0.8 million, respectively. Adjusted sales per pound increased in the three months ended September 30, 2013 by 1.0% compared to the same period in 2012, which was the result of a net increase in average selling prices at the segment level, partially offset by the shift in product mix within each segment.

Adjusted sales is a non-GAAP financial measure. See “—Non-GAAP Measures—Adjusted sales”. The following table presents a reconciliation of net sales to Adjusted sales and net sales per pound to Adjusted sales per pound:

 

     Three Months Ended
September 30,
     Change:
2013 vs. 2012
 
(in millions, except per pound values)    2013      2012      Amount     Percent  

Pounds shipped (a)

     132.0         124.4         7.6        6.1

Net sales

   $ 439.3       $ 394.0       $ 45.3        11.5

Metal component of net sales

     299.6         263.1         36.5        13.9
  

 

 

    

 

 

    

 

 

   

Adjusted sales

   $ 139.7       $ 130.9       $ 8.8        6.7
  

 

 

    

 

 

    

 

 

   

$ per pound shipped

          

Net sales per pound

   $ 3.33       $ 3.17       $ 0.16        5.0

Metal component of net sales per pound

     2.27         2.12         0.15        7.1
  

 

 

    

 

 

    

 

 

   

Adjusted sales per pound

   $ 1.06       $ 1.05       $ 0.01        1.0
  

 

 

    

 

 

    

 

 

   

Average copper price per pound reported by COMEX

   $ 3.23       $ 3.53       $ (0.30     (8.5 %) 

 

(a) Amounts exclude quantity of unprocessed metals sold.

Gross profit

Gross profit increased by $0.9 million, or 2.0%, from $44.4 million for the three months ended September 30, 2012 to $45.3 million for the three months ended September 30, 2013. Gross profit per pound shipped decreased from $0.36 for the three months ended September 30, 2012 as compared to $0.34 for the three months ended September 30, 2013.

 

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Gross profit for the three months ended September 30, 2013 included a loss of $1.0 million related to net unrealized losses on derivative contracts. Gross profit for the three months ended September 30, 2012 included a gain of $0.3 million related to net unrealized gains on derivative contracts and a $0.3 million non-cash charge related to a lower of cost or market adjustment for the write down of inventory. We exclude the above items in calculating Segment Adjusted EBITDA and Consolidated Adjusted EBITDA. See “—Non-GAAP Measures—EBITDA-Based Measures”.

Depreciation expense included in gross profit increased from $1.4 million for the three months ended September 30, 2012 to $1.8 million for the three months ended September 30, 2013. The increase is attributable to an increase in our depreciable asset base from $78.3 million at September 30, 2012 to $100.3 million at September 30, 2013.

Several other offsetting factors increased gross profit by $2.3 million in the three months ended September 30, 2013 as compared to the same period in 2012. Higher volume, higher average selling prices and lower shrinkage costs due to lower metal costs and higher yields in the three months ended September 30, 2013 contributed $2.0 million, $0.8 million and $0.5 million, respectively, to the increase in gross profit. These factors were partially offset by higher manufacturing conversion costs of $1.0 million, of which an estimated $0.6 million was in support of our continuous improvement efforts and development of our information systems.

Selling, general and administrative Expenses

Selling, general and administrative expenses increased by $2.7 million, or 15.5%, from $17.4 million for the three months ended September 30, 2012 to $20.1 million for the three months ended September 30, 2013.

During the second quarter, in connection with the IPO, we terminated our Management Services Agreement with affiliates of the KPS Funds prior to the expiration of the initial term and thus, we did not incur any management advisory fees during the three months ended September 30, 2013. The management advisory fees for the three months ended September 30, 2012 were $0.2 million.

We incurred professional fees for accounting, tax, legal and consulting services related to costs incurred as a publicly traded company, including follow-on offering costs and costs associated with the Exchange Offer, of $1.4 million during the three months ended September 30, 2013. We incurred professional fees for accounting, tax, legal and consulting services related to our Exchange Offer and public company readiness efforts of $0.9 million during the three months ended September 30, 2012. Additionally, for the three months ended September 30, 2013, we recognized $0.8 million related to share-based compensation resulting from the grant of non-qualified stock options, restricted stock and performance-based shares to certain employees and members of our management and our Board of Directors.

For the three months ended September 30, 2013, we increased the allowance for doubtful accounts by $0.2 million compared to a decrease of $0.8 million for the three months ended September 30, 2012, which in both cases was due to management’s change in the estimate of the recoverability of accounts receivable.

Several other factors contributed to the remaining $0.6 million increase in selling, general and administrative expenses in the three months ended September 30, 2013 as compared to the same period in 2012. Other selling, general and administrative expenses associated with marketing and product development, labor contract negotiations and development of our information systems increased by an estimated $1.1 million, outside services increased by $0.2 million and salaries, benefits and incentive compensation increased by $0.2 million. Partially offsetting the increase was the decrease in other professional fees for accounting, tax, legal and consulting services of $0.8 million and a decrease in other miscellaneous selling, general and administrative expenses of $0.1 million.

 

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Operating income

Operating income decreased by $1.8 million, or 6.7%, from $27.0 million for the three months ended September 30, 2012 to $25.2 million for the three months ended September 30, 2013 due to the changes in gross profit and selling, general and administrative expenses described above.

Interest expense

Interest expense increased by $0.2 million from $9.9 million for the three months ended September 30, 2012 to $10.1 million for the three months ended September 30, 2013. The increase was due to a higher interest rates (a weighted average of 9.22% per annum during the third quarter of 2013 compared to 8.89% per annum during the third quarter of 2012), partially offset by lower average borrowings on our debt facilities of $392.0 million for the three months ended September 30, 2013 as compared to $400.7 million for the three months ended September 30, 2012.

The following table summarizes the components of interest expense:

 

     Three Months Ended  
     September 30,  
(in millions)    2013      2012  

Interest on principal

   $ 9.2       $ 9.1   

Amortization of debt issuance costs

     0.6         0.6   

Other borrowing costs (a)

     0.3         0.2   
  

 

 

    

 

 

 

Interest expense

   $ 10.1       $ 9.9   
  

 

 

    

 

 

 

 

(a) Includes fees related to letters of credit and unused line of credit fees.

Other expense (income), net

We recorded other expense, net of $0.1 million for the three months ended September 30, 2013 compared to other income, net of $0.5 million for the three months ended September 30, 2012.

Provision for income taxes

We recognized a provision for income taxes of $5.3 million for the three months ended September 30, 2013 compared to $6.8 million for the three months ended September 30, 2012. The change in the provision for income taxes was primarily due to the decrease in income before provision for income taxes and equity income of $2.6 million for the three months ended September 30, 2013 as compared to the same period in 2012. The effective income tax rate decreased from 38.4% for the three months ended September 30, 2012 to 35.1% for the three months ended September 30, 2013.

 

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The following table summarizes the effective income tax rate components for the three months ended September 30, 2013 and 2012, respectively:

 

     Three Months Ended  
     September 30,  
     2013     2012  

Statutory provision rate

     35.0     35.0

Permanent differences and other items

    

State tax provision

     3.3     3.8

Section 199 manufacturing credit

     (2.7 %)      (2.9 %) 

Return to provision adjustments / Uncertain tax positions

     (1.0 %)      0.3

Other

     0.5     2.2
  

 

 

   

 

 

 

Effective income tax rate

     35.1     38.4
  

 

 

   

 

 

 

Equity income, net of tax

Equity income, net of tax, remained relatively flat for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Net income attributable to Global Brass and Copper Holdings, Inc.

Net income attributable to Global Brass and Copper Holdings, Inc. decreased by $1.1 million, or 10.0%, from $11.0 million for the three months ended September 30, 2012, to $9.9 million for the three months ended September 30, 2012 mainly due to the increase in selling, general and administrative expenses and partially offset by a decrease in the provision for income taxes, both of which are described above.

Consolidated Adjusted EBITDA

Consolidated Adjusted EBITDA increased by $0.1 million, or 0.3%, from $30.4 million for the three months ended September 30, 2012 to $30.5 million for the three months ended September 30, 2013. The increase was due to higher volume of $2.0 million, higher average selling prices of $0.8 million and lower shrinkage costs due to lower metal costs and higher yields of $0.5 million, a decrease in other professional fees for accounting, tax, legal and consulting services of $0.8 million, and a decrease of $0.1 million in other miscellaneous selling, general and administrative expenses. Partially offsetting the increase were higher manufacturing conversion costs of $1.0 million, of which an estimated $0.6 million was associated with our continuous improvement efforts and development of our information systems, an increase in other selling, general and administrative expenses of $1.1 million associated with marketing and product development, labor contract negotiations and development of our information systems, the change in accounts receivable recoverability estimate resulting in the increase in the allowance for doubtful accounts of $0.2 million in the three months ended September 30, 2013 (compared to a decrease of $0.8 million for the three months ended September 30, 2012), an increase of $0.2 million in outside services, an increase of $0.2 million in salaries, benefits and incentive compensation and a decrease in other adjustments included in the calculation of Consolidated Adjusted EBITDA of $0.6 million.

Consolidated EBITDA and Consolidated Adjusted EBITDA are non-GAAP financial measures. See “—Non-GAAP Measures—EBITDA-Based Measures”.

 

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Below is a reconciliation of net income attributable to Global Brass and Copper Holdings, Inc. to Consolidated EBITDA and Consolidated Adjusted EBITDA for the three months ended September 30, 2013 and 2012:

 

     Three Months Ended
September 30,
 
(in millions)    2013     2012  

Net income attributable to Global Brass and Copper Holdings, Inc.

   $ 9.9      $ 11.0   

Interest expense

     10.1        9.9   

Provision for income taxes

     5.3        6.8   

Depreciation expense

     2.1        1.7   

Amortization expense

     —          —     
  

 

 

   

 

 

 

Consolidated EBITDA

   $ 27.4      $ 29.4   

Loss (gain) on derivative contracts (a)

     1.0        (0.3

Non-cash accretion of income of Dowa joint venture (b)

     (0.1     (0.1

Management fees (c)

     —          0.2   

Specified legal/professional expenses (d)

     1.4        0.9   

Lower of cost or market adjustment to inventory (e)

     —          0.3   

Share-based compensation expense (f)

     0.8        —     
  

 

 

   

 

 

 

Consolidated Adjusted EBITDA

   $ 30.5      $ 30.4   
  

 

 

   

 

 

 

 

(a) Represents unrealized gains and losses on derivative contracts in support of our balanced book approach and unrealized gains and losses associated with derivative contracts with respect to electricity and natural gas costs.
(b) As a result of the application of purchase accounting in connection with the November 2007 acquisition, no carrying value was initially assigned to our equity investment in our joint venture with Dowa. This adjustment represents the accretion of equity in our joint venture with Dowa at the date of the acquisition over a 13-year period (which represents the estimated useful life of the technology and patents of the joint venture). See note 5 to our unaudited consolidated financial statements, which are included elsewhere in this report.
(c) The 2012 amount represents a portion of the annual advisory fees payable to affiliates of KPS. See note 12 to our unaudited consolidated financial statements, which are included elsewhere in this report.
(d) Specified legal/professional expenses for the three months ended September 30, 2013 includes $1.4 million of professional fees for accounting, tax, legal and consulting services related to costs incurred as a publicly traded company, including follow-on offering costs and costs associated with the Exchange Offer. Specified legal/professional expenses for the three months ended September 30, 2012 includes $0.9 million of professional fees for accounting, tax, legal and consulting services related to the Exchange Offer and public company readiness efforts.
(e) Represents a non-cash lower of cost or market charge for the write down of inventory recorded during the three months ended September 30, 2012.
(f) Represents share-based compensation expense resulting from the grant of non-qualified stock options, restricted stock and performance-based shares to certain employees and members of our management and our Board of Directors.

 

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Segment Results of Operations

Segment Results of Operations for the Three Months Ended September 30, 2013, Compared to the Three Months Ended September 30, 2012.

 

     Three Months Ended     Change  
     September 30,     2013 vs. 2012  
(in millions)    2013     2012     Amount     Percent  

Pounds shipped (a)

        

Olin Brass

     70.3        67.2        3.1        4.6

Chase Brass

     53.5        52.7        0.8        1.5

A.J. Oster

     17.0        16.3        0.7        4.3

Corporate & other (b)

     (8.8     (11.8     3.0        (25.4 %) 
  

 

 

   

 

 

   

 

 

   

Total

     132.0        124.4        7.6        6.1
  

 

 

   

 

 

   

 

 

   

Net Sales

        

Olin Brass

   $ 222.9      $ 175.9      $ 47.0        26.7

Chase Brass

     149.3        151.4        (2.1     (1.4 %) 

A.J. Oster

     79.1        78.0        1.1        1.4

Corporate & other (b)

     (12.0     (11.3     (0.7     6.2
  

 

 

   

 

 

   

 

 

   

Total

   $ 439.3      $ 394.0      $ 45.3        11.5
  

 

 

   

 

 

   

 

 

   

Segment Adjusted EBITDA

        

Olin Brass

   $ 13.5      $ 13.7      $ (0.2     (1.5 %) 

Chase Brass

     16.0        16.1        (0.1     (0.6 %) 

A.J. Oster

     4.3        4.7        (0.4     (8.5 %) 
  

 

 

   

 

 

   

 

 

   

Total for operating segments

   $ 33.8      $ 34.5      $ (0.7     (2.0 %) 
  

 

 

   

 

 

   

 

 

   

 

(a) Amounts exclude quantity of unprocessed metals sold.
(b) Amounts represent intercompany eliminations.

Below is a reconciliation of income before provision for income taxes and equity income to Segment EBITDA and Segment Adjusted EBITDA:

 

     Three Months Ended      Three Months Ended  
     September 30, 2013      September 30, 2012  
(in millions)    Olin
Brass
    Chase
Brass
     A.J.
Oster
     Olin
Brass
    Chase
Brass
     A.J.
Oster
 

Income before provision for income taxes and equity income:

   $ 12.2      $ 15.3       $ 4.2       $ 12.8      $ 15.5       $ 4.6   

Interest expense

     —          —           —           —          —           —     

Depreciation expense

     1.2        0.7         0.1         0.8        0.6         0.1   

Amortization expense

     —          —           —           —          —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Segment EBITDA (a)

   $  13.4      $  16.0       $ 4.3       $  13.6      $  16.1       $ 4.7   

Equity income, net of tax

     0.3        —           —           0.3        —           —     

Net income attributable to non-controlling interest

     (0.1     —           —           (0.1     —           —     

Non-cash accretion of income of Dowa joint venture (b)

     (0.1     —           —           (0.1     —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Segment Adjusted EBITDA(a)

   $ 13.5      $ 16.0       $ 4.3       $ 13.7      $ 16.1       $ 4.7   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) Segment EBITDA and Segment Adjusted EBITDA are non-GAAP financial measures. See “ Non-GAAP Measures EBITDA-Based Measures”.
(b) As a result of the application of purchase accounting in connection with the November 2007 acquisition, no carrying value was initially assigned to our equity investment in our joint venture with Dowa. This adjustment represents the accretion of equity in our joint venture with Dowa over a 13-year period (which represents the estimated useful life of the technology and patents of the joint venture). See note 5 to our unaudited consolidated financial statements, which are included elsewhere in this report.

 

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Olin Brass

Olin Brass net sales increased by $47.0 million, or 26.7%, from $175.9 million for the three months ended September 30, 2012 to $222.9 million for the three months ended September 30, 2013. The increase was due to sales of unprocessed metal, higher volume, and higher average selling prices, including increases in selling prices to A.J. Oster (which are eliminated in our consolidated results) and partially offset by a shift in product mix as well as lower metal prices.

The sales of unprocessed metal and higher average selling prices, partially offset by lower metal prices, increased net sales by $39 million for the three months ended September 30, 2013 as compared to the same period in 2012.

Volume increased by 3.1 million pounds, or 4.6%, from 67.2 million pounds for the three months ended September 30, 2012 to 70.3 million pounds for the three months ended September 30, 2013. The increase in volume, which contributed $8.0 million to the increase in net sales, was the result of higher demand in the building and housing, munitions and coinage end markets, partially offset by lower demand in the electronics/electrical components end market and lower volume to A.J. Oster. In the three months ended September 30, 2013, A.J. Oster reduced purchases from Olin Brass and increased purchases from third party suppliers by approximately 3.1 million pounds compared to the same period in 2012. Excluding sales to A.J. Oster, Olin Brass volumes increased by 6.2 million pounds, or 11.2% in the three months ended September 30, 2013 compared to the same period in 2012.

Segment Adjusted EBITDA of Olin Brass decreased by $0.2 million, from $13.7 million for the three months ended September 30, 2012 to $13.5 million for the three months ended September 30, 2013. The decrease was due primarily to higher manufacturing conversion costs due to product mix and operational issues which adversely impacted product flow and yield, additional expenses associated with our continuous improvement efforts and development of our information systems, an increase in salaries, benefits and incentive compensation, an increase in outside services, an increase in other selling, general and administrative expenses incurred in support of marketing and product development, labor contract negotiations and development of our information systems, and a decrease in other adjustments included in the calculation of Segment Adjusted EBITDA. Partially offsetting the decrease were higher volume, lower shrinkage costs due to lower metal costs and higher yields, a decrease in other miscellaneous selling, general and administrative expenses and higher average selling prices, including increases in selling prices to A.J. Oster (which are eliminated in our consolidated results) and partially offset by a shift in product mix.

Chase Brass

Chase Brass net sales decreased by $2.1 million, or 1.4%, from $151.4 million for the three months ended September 30, 2012 to $149.3 million for the three months ended September 30, 2013. The decrease was due primarily to lower metal prices, partially offset by higher average selling prices and higher volume.

Lower metal prices, partially offset by higher average selling prices, for the three months ended September 30, 2013 contributed $4.4 million to the decrease in net sales as compared to the same period in 2012.

Volume increased by 0.8 million pounds, or 1.5%, from 52.7 million pounds for the three months ended September 30, 2012 to 53.5 million pounds for the three months ended September 30, 2013. The increase in volume, which contributed $2.3 million to the increase in net sales, was primarily the result of higher demand in the building and housing end market, partially offset by lower demand in the electronics/electrical components end market resulting from increased competition from foreign imports. Additionally, volume growth in the building and housing end market was dampened by foreign competition.

 

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Segment Adjusted EBITDA of Chase Brass decreased by $0.1 million, from $16.1 million for the three months ended September 30, 2012 to $16.0 million for the three months ended September 30, 2013. The decrease was due primarily to a change in management’s estimate of the recoverability of accounts receivable resulting in the reversal of the provision for bad debt in the prior year, additional expenses associated with our continuous improvement efforts, an increase in salaries, benefits and incentive compensation, an increase in other selling, general and administrative expenses incurred in support of marketing and product development as well as development of our information systems and a decrease in other adjustments included in the calculation of Segment Adjusted EBITDA, partially offset by higher average selling prices, higher volume, lower shrinkage costs due to lower metal costs and higher yields, and lower manufacturing conversion costs.

A.J. Oster

A.J. Oster net sales increased by $1.1 million, or 1.4%, from $78.0 million for the three months ended September 30, 2012 to $79.1 million for the three months ended September 30, 2013. The increase was due primarily to higher volume in the three months ended September 30, 2013 compared to the same period in 2012 and higher average selling prices, partially offset by lower metal prices.

Lower metal prices, partially offset by higher average selling prices, decreased net sales by $2.1 million for the three months ended September 30, 2013 as compared to the same period in 2012.

Volume increased by 0.7 million pounds, or 4.3%, from 16.3 million pounds for the three months ended September 30, 2012 to 17.0 million pounds for the three months ended September 30, 2013. The increase in volume, which contributed $3.2 million to the increase in net sales, was primarily the result of higher demand in the automotive end market and the electronics/electrical components end markets.

Segment Adjusted EBITDA of A.J. Oster decreased by $0.4 million, from $4.7 million for the three months ended September 30, 2012 to $4.3 million for the three months ended September 30, 2013. The decrease was due to higher prices on purchases from Olin Brass, which resulted in higher conversion costs (which are eliminated in our consolidated results), as well as an increase in outside services and a decrease in other adjustments included in the calculation of Segment Adjusted EBITDA. Partially offsetting the decrease were higher average selling prices and higher volume.

 

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Results of Operations

Consolidated Results of Operations for the Nine Months Ended September 30, 2013, Compared to the Nine Months Ended September 30, 2012.

 

    Nine Months Ended
September 30,
    Change:
2013 vs. 2012
 
(in millions)   2013     % of Net Sales     2012     % of Net Sales     Amount     Percent  

Net sales

  $ 1,345.7        100.0   $ 1,254.3        100.0   $ 91.4        7.3

Cost of sales

    1,201.8        89.3     1,112.9        88.7     88.9        8.0
 

 

 

     

 

 

     

 

 

   

Gross profit

    143.9        10.7     141.4        11.3     2.5        1.8

Selling, general and administrative expenses (a)

    92.6        6.9     73.2        5.8     19.4        26.5
 

 

 

     

 

 

     

 

 

   

Operating income

    51.3        3.8     68.2        5.4     (16.9     (24.8 %) 

Interest expense

    29.9        2.2     29.9        2.4     —          0.0

Loss on extinguishment of debt

    —          0.0     19.6        1.6     (19.6     (100.0 %) 

Other expense, net

    0.3        0.0     0.1        0.0     0.2        200.0
 

 

 

     

 

 

     

 

 

   

Income before provision for income taxes and equity income

    21.1        1.6     18.6        1.5     2.5        13.4

Provision for income taxes

    17.8        1.3     14.0        1.1     3.8        27.1
 

 

 

     

 

 

     

 

 

   

Income before equity income

    3.3        0.2     4.6        0.4     (1.3     (28.3 %) 

Equity income, net of tax

    1.1        0.1     0.7        0.1     0.4        57.1
 

 

 

     

 

 

     

 

 

   

Net income

    4.4        0.3     5.3        0.4     (0.9     (17.0 %) 

Less: Net income attributable to noncontrolling interest

    0.2        0.0     0.3        0.0     (0.1     (33.3 %) 
 

 

 

     

 

 

     

 

 

   

Net income attributable to Global Brass and Copper Holdings, Inc.

  $ 4.2        0.3   $ 5.0        0.4   $ (0.8     (16.0 %) 
 

 

 

     

 

 

     

 

 

   

Consolidated Adjusted EBITDA

  $ 96.9        7.2   $ 94.4        7.5   $ 2.5        2.6

 

(a) Amounts include non-cash profits interest compensation expense of $29.3 million and $19.5 million for the nine months ended September 30, 2013 and 2012, respectively.

Net sales

Net sales increased by $91.4 million, or 7.3%, from $1,254.3 million for the nine months ended September 30, 2012 to $1,345.7 million for the nine months ended September 30, 2013. Net sales increased by $27.3 million due to an increase in volume, by $87.2 million as a result of the sales of unprocessed metal and by $2.8 million as a result of higher average selling prices in the nine months ended September 30, 2013. These increases were partially offset by lower metal prices, which decreased net sales by $25.9 million. Metal prices reflect the replacement cost recovery from the customer, whereas the sales prices represent the pricing component of adjusted sales, which we define as the excess of net sales over the metal cost recovery component of net sales.

Volume increased by 15.8 million pounds, or 4.1%, from 386.1 million pounds for the nine months ended September 30, 2012 to 401.9 million pounds for the nine months ended September 30, 2013. The increase in volume was the result of higher demand in building and housing, munitions, coinage and automotive end markets. These increases were partially offset by lower demand in the electronics/electrical components end market resulting from increased competition from foreign imports. Additionally, volume growth in the building and housing end market was dampened by foreign competition.

 

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The metal cost recovery component of net sales increased by $72.4 million, or 8.5%, from $851.7 million for the nine months ended September 30, 2012 to $924.1 million for the nine months ended September 30, 2013.

Higher volume increased the metal cost recovery component of net sales by $11.1 million in the nine months ended September 30, 2013 as compared to the same period in 2012. Additionally, sales of unprocessed metal increased the metal cost recovery component of net sales by $87.2 million in the nine months ended September 30, 2013. Partially offsetting the increase in the metal cost recovery component of net sales was the change in customer mix and lower metal prices, which decreased the metal cost recovery component of net sales by $25.9 million. The metal cost recovery component of net sales per pound of finished product shipped increased by 4.1%, due primarily to the inclusion of the sales of unprocessed metal, the quantity of which is not included in pounds shipped. The metal cost recovery component of net sales per pound of finished product sold excluding the sales of unprocessed metal (the quantity of which is not included in pounds shipped) decreased by 5.6%, primarily as a result of a 7.2% decrease in the average daily copper prices reported by COMEX.

Adjusted sales

Adjusted sales, the excess of net sales over the metal cost recovery component of net sales, increased by $19.0 million, or 4.7%, from $402.6 million for the nine months ended September 30, 2012 to $421.6 million for the nine months ended September 30, 2013. Higher volume and higher average selling prices contributed $16.2 million and $2.8 million, respectively, to the increase. Adjusted sales per pound increased in the nine months ended September 30, 2013 by 1.0% compared to the same period in 2012 which was the result of a net increase in average selling prices at the segment level, partially offset by the shift in product mix within each segment.

Adjusted sales is a non-GAAP financial measure. See “—Non-GAAP Measures—Adjusted sales”. The following table presents a reconciliation of net sales to Adjusted sales and net sales per pound to Adjusted sales per pound:

 

     Nine Months Ended
September 30,
     Change:
2013 vs. 2012
 
(in millions, except per pound values)    2013      2012      Amount     Percent  

Pounds shipped (a)

     401.9         386.1         15.8        4.1

Net sales

   $ 1,345.7       $ 1,254.3       $ 91.4        7.3

Metal component of net sales

     924.1         851.7         72.4        8.5
  

 

 

    

 

 

    

 

 

   

Adjusted sales

   $ 421.6       $ 402.6       $ 19.0        4.7
  

 

 

    

 

 

    

 

 

   

$ per pound shipped

          

Net sales per pound

   $ 3.35       $ 3.25       $ 0.10        3.1

Metal component of net sales per pound

     2.30         2.21         0.09        4.1
  

 

 

    

 

 

    

 

 

   

Adjusted sales per pound

   $ 1.05       $ 1.04       $ 0.01        1.0
  

 

 

    

 

 

    

 

 

   

Average copper price per pound reported by COMEX

   $ 3.36       $ 3.62       $ (0.26     (7.2 %) 

 

(a) Amounts exclude quantity of unprocessed metals sold.

 

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Gross profit

Gross profit increased by $2.5 million, or 1.8%, from $141.4 million for the nine months ended September 30, 2012 to $143.9 million for the nine months ended September 30, 2013. Gross profit per pound shipped decreased from $0.37 for the nine months ended September 30, 2012 as compared to $0.36 for the nine months ended September 30, 2013.

Gross profit for the nine months ended September 30, 2013 included a loss of $1.1 million related to net unrealized losses on derivative contracts and a charge of $0.3 million related to non-cash lower of cost or market charges for the write down of inventory. Gross profit for the nine months ended September 30, 2012 included a gain of $1.5 million related to net unrealized gains on derivative contracts and a $0.3 million non-cash lower of cost or market charge for the write-down of inventory. We exclude the above items in calculating Segment Adjusted EBITDA and Consolidated Adjusted EBITDA. See “—Non-GAAP Measures—EBITDA-Based Measures”.

Depreciation expense included in gross profit increased from $4.2 million for the nine months ended September 30, 2012 to $5.2 million for the nine months ended September 30, 2013. The increase is attributable to an increase in our depreciable asset base from $78.3 million at September 30, 2012 to $100.3 million at September 30, 2013.

Several other offsetting factors increased gross profit by $6.1 million in the nine months ended September 30, 2013 as compared to the same period in 2012. Higher volume, higher average selling prices and lower shrinkage costs due to lower metal costs and higher yields contributed $3.3 million, $2.9 million and $2.3 million, respectively, to the increase in gross profit. These factors were partially offset by higher manufacturing conversion costs of $2.4 million, of which an estimated $1.0 million was associated with our continuous improvement efforts and development of our information systems.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $19.4 million, or 26.5%, from $73.2 million for the nine months ended September 30, 2012 to $92.6 million for the nine months ended September 30, 2013.

Non-cash compensation charges for vested profits interest shares included in selling, general and administrative expenses were $8.9 million and $19.5 million for the nine months ended September 30, 2013 and 2012, respectively. Additionally, in the nine months ended September 30, 2013, Halkos modified its operating agreement to eliminate its right to acquire all or a portion of the Class B Shares. This modification to its operating agreement triggered the recognition of $20.4 million of incremental non-cash compensation expense.

During the nine months ended September 30, 2013, in connection with the IPO, we terminated our Management Services Agreement with affiliates of KPS Funds prior to the expiration of the initial term and were required to pay an early termination fee equal to the value of the advisory fee that would have otherwise been payable to affiliates of KPS Funds through the end of the Management Services Agreement. We paid affiliates of KPS Funds $4.5 million related to our early termination and all unpaid management advisory fees and recorded the charges in selling, general and administrative expenses. The management advisory fees for the nine months ended September 30, 2013 and 2012 were $0.3 million and $0.7 million, respectively.

We incurred professional fees for accounting, tax, legal and consulting services related to costs incurred as a publicly traded company, including IPO efforts, follow-on offering costs and costs associated with the Exchange Offer, of $2.9 million during the nine months ended September 30, 2013. We incurred professional fees for accounting, tax, legal and consulting services related to

 

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our Exchange Offer and public company readiness efforts of $2.0 million during the nine months ended September 30, 2012. Additionally, for the nine months ended September 30, 2013, we recognized $1.0 million related to share-based compensation resulting from the grant of non-qualified stock options, restricted stock and performance-based shares to certain employees and members of our management and our Board of Directors.

For the nine months ended September 30, 2013, we increased the allowance for doubtful accounts by $0.1 million compared to a decrease of $0.6 million for the nine months ended September 30, 2012, which in both cases was due to management’s change in the estimate of the recoverability of accounts receivable.

Several other offsetting factors contributed to the remaining $2.9 million increase in selling, general and administrative expenses in the nine months ended September 30, 2013 as compared to the same period in 2012. Other selling, general and administrative costs associated with marketing and product development, labor contract negotiations and development of our information systems increased by an estimated $1.7 million, salaries, benefits and incentive compensation increased by $1.8 million and outside services increased by $0.2 million, partially offset by a decrease in other professional fees for accounting, tax, legal and consulting services of $0.5 million and a decrease in other miscellaneous selling, general and administrative expenses of $0.3 million.

Operating income

Operating income decreased by $16.9 million, or 24.8%, from $68.2 million for the nine months ended September 30, 2012 to $51.3 million for the nine months ended September 30, 2013 due to the changes in gross profit and selling, general and administrative expenses described above.