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 June 30, 2014

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 July 31, 2014, there were 21,344,207 shares of common stock outstanding.

 

 

 


Table of Contents

Global Brass and Copper Holdings, Inc.

Index

June 30, 2014

Table of Contents

 

PART I—FINANCIAL INFORMATION   

Item 1. Financial Statements

  

Unaudited Consolidated Balance Sheets as of June 30, 2014, December 31, 2013 and June  30, 2013

     1   

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013

     2   

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013

     3   

Unaudited Consolidated Statements of Changes in Equity / (Deficit) for the Six Months Ended June  30, 2014 and 2013

     4   

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

     5   

Notes to Unaudited Consolidated Financial Statements

     6   

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

     33   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     56   

Item 4. Controls and Procedures

     56   
PART II—OTHER INFORMATION   

Item 1. Legal Proceedings

     58   

Item 1A. Risk Factors

     58   

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

     60   

Item 3. Defaults Upon Senior Securities

     61   

Item 4. Mine Safety Disclosures

     61   

Item 5. Other Information

     61   

Item 6. Exhibits

     62   

SIGNATURE

     63   

 

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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  
     June 30,     December 31,     June 30,  
(In millions, except share and par value data)    2014     2013     2013  

Assets

      

Current assets:

      

Cash

   $ 19.4      $ 10.8      $ 34.0   

Accounts receivable (net of allowance of $1.0, $1.0 and $1.3, respectively)

     195.6        171.8        203.3   

Inventories

     192.3        190.9        199.5   

Prepaid expenses and other current assets

     25.7        22.2        25.1   

Deferred income taxes

     33.0        32.2        31.8   

Income tax receivable

     6.3        4.3        2.1   
  

 

 

   

 

 

   

 

 

 

Total current assets

     472.3        432.2        495.8   

Property, plant and equipment, net

     100.0        88.0        75.3   

Investment in joint venture

     2.8        2.2        2.2   

Goodwill

     4.4        4.4        4.4   

Intangible assets, net

     0.7        0.7        0.8   

Deferred income taxes

     2.9        4.6        6.8   

Other noncurrent assets

     15.8        16.6        16.9   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 598.9      $ 548.7      $ 602.2   
  

 

 

   

 

 

   

 

 

 

Liabilities and equity / (deficit)

      

Current liabilities:

      

Current maturities of long-term debt

   $ 0.7      $ —        $ —     

Accounts payable

     107.6        85.4        107.0   

Accrued liabilities

     49.3        56.1        52.7   

Accrued interest

     3.3        3.3        3.4   

Income tax payable

     —          0.5        0.3   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     160.9        145.3        163.4   

Long-term debt

     396.8        380.5        431.0   

Other noncurrent liabilities

     25.9        26.3        27.7   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     583.6        552.1        622.1   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies (Note 12)

      

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

      

Common stock—$.01 par value; 80,000,000 shares authorized; 21,344,207, 21,251,486 and 21,246,080 shares issued and outstanding, respectively

     0.2        0.2        0.2   

Additional paid-in capital

     32.4        30.5        29.5   

Accumulated deficit

     (21.5     (38.6     (53.9

Treasury stock, at cost—29,200, 0 and 0 shares, respectively

     (0.4     —          —     

Accumulated other comprehensive income

     0.4        0.5        0.5   
  

 

 

   

 

 

   

 

 

 

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

     11.1        (7.4     (23.7

Noncontrolling interest

     4.2        4.0        3.8   
  

 

 

   

 

 

   

 

 

 

Total equity / (deficit)

     15.3        (3.4     (19.9
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity / (deficit)

   $ 598.9      $ 548.7      $ 602.2   
  

 

 

   

 

 

   

 

 

 

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
June 30,
    Six Months Ended
June 30,
 
(In millions, except per share data)    2014      2013     2014      2013  

Net sales

   $ 440.5       $ 461.5      $ 884.3       $ 906.5   

Cost of sales

     396.3         409.8        796.5         807.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     44.2         51.7        87.8         98.6   

Selling, general and administrative expenses (including non-cash profits interest expense of $0.0, $29.3, $0.0 and $29.3, respectively)

     19.9         52.8        38.7         72.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income (loss)

     24.3         (1.1     49.1         26.1   

Interest expense

     9.8         10.0        19.7         19.9   

Other expense, net

     0.1         —          0.2         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

     14.4         (11.1     29.2         6.0   

Provision for income taxes

     5.5         6.5        10.8         12.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) before equity income

     8.9         (17.6     18.4         (6.5

Equity income, net of tax

     0.2         0.5        0.5         0.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss)

     9.1         (17.1     18.9         (5.6

Less: Net income attributable to noncontrolling interest

     0.1         —          0.2         0.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 9.0       $ (17.1   $ 18.7       $ (5.7
  

 

 

    

 

 

   

 

 

    

 

 

 

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

          

Basic

   $ 0.42       $ (0.81   $ 0.89       $ (0.27

Diluted

   $ 0.42       $ (0.81   $ 0.88       $ (0.27

Weighted average common shares outstanding:

          

Basic

     21.2         21.1        21.1         21.1   

Diluted

     21.3         21.1        21.2         21.1   

Dividends declared per common share

   $ 0.0375       $ —        $ 0.0750       $ —     

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 Comprehensive Income (Loss) (Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(In millions)    2014      2013     2014     2013  

Net income (loss)

   $ 9.1       $ (17.1   $ 18.9      $ (5.6

Other comprehensive income (loss):

         

Foreign currency translation adjustment

     0.1         (0.8     (0.1     (1.5

Less: Income tax expense (benefit) on foreign currency translation adjustment

     0.1         (0.3     —          (0.6
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     9.1         (17.6     18.8        (6.5

Less: Comprehensive income attributable to noncontrolling interest

     0.1         0.1        0.2        0.2   
  

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ 9.0       $ (17.7   $ 18.6      $ (6.7
  

 

 

    

 

 

   

 

 

   

 

 

 

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 Changes in Equity / (Deficit) (Unaudited)

 

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

Balance at December 31, 2012

  $ 0.2      $ —        $ (48.2   $ —        $ 1.5      $ (4.9   $ (51.4   $ 3.6      $ (47.8

Profits interest compensation

    —          29.3        —          —          —          —          29.3        —          29.3   

Share-based compensation (136,080 shares)

    —          0.2        —          —          —          —          0.2        —          0.2   

Payment from stockholder

    —          —          —          —          —          4.9        4.9        —          4.9   

Net (loss) income

    —          —          (5.7     —          —          —          (5.7     0.1        (5.6

Other comprehensive (loss) income, net of tax

    —          —          —          —          (1.0     —          (1.0     0.1        (0.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

  $ 0.2      $ 29.5      $ (53.9   $ —        $ 0.5      $ —        $ (23.7   $ 3.8      $ (19.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Balance at December 31, 2013

  $ 0.2      $ 30.5      $ (38.6   $ —        $ 0.5      $ —        $ (7.4   $ 4.0      $ (3.4

Share-based compensation (110,316 shares)

    —          1.6        —          —          —          —          1.6        —          1.6   

Exercise of stock options (11,605 shares)

    —          0.1        —          —          —          —          0.1        —          0.1   

Share repurchases (29,200 shares)

    —          —          —          (0.4     —          —          (0.4     —          (0.4

Excess tax benefit on share-based compensation

    —          0.2        —          —          —          —          0.2        —          0.2   

Dividends declared

    —          —          (1.6     —          —          —          (1.6     —          (1.6

Net income

    —          —          18.7        —          —          —          18.7        0.2        18.9   

Other comprehensive loss, net of tax

    —          —          —          —          (0.1     —          (0.1     —          (0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $ 0.2      $ 32.4      $ (21.5   $ (0.4   $ 0.4      $ —        $ 11.1      $ 4.2      $ 15.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 Cash Flows (Unaudited)

 

     Six Months Ended June 30,  
(In millions)    2014     2013  

Cash flows from operating activities

    

Net income (loss)

   $ 18.9      $ (5.6

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Lower of cost or market adjustment to inventory

     0.2        0.3   

Unrealized loss on derivatives

     0.4        0.1   

Depreciation

     5.3        3.9   

Amortization of debt issuance costs

     1.3        1.2   

Profits interest compensation expense

     —          29.3   

Provision for bad debts, net of reductions

     —          (0.1

Share-based compensation expense

     1.6        0.2   

Excess tax benefit from share-based compensation

     (0.2     —     

Deferred income taxes

     0.5        1.5   

Equity income, net of tax

     (0.5     (0.9

Change in assets and liabilities:

    

Accounts receivable

     (23.8     (38.7

Inventories

     (1.7     (25.4

Prepaid expenses and other current assets

     (2.9     (13.0

Accounts payable

     22.2        25.6   

Accrued liabilities

     (6.8     4.3   

Accrued interest

     —          0.1   

Income taxes, net

     (2.3     (0.8

Other, net

     (0.6     0.1   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     11.6        (17.9

Cash flows from investing activities

    

Capital expenditures

     (12.3     (8.3

Proceeds from sale of property, plant and equipment

     0.1        0.2   
  

 

 

   

 

 

 

Net cash used in investing activities

     (12.2     (8.1

Cash flows from financing activities

    

Borrowings on ABL Facility

     174.2        229.8   

Payments on ABL Facility

     (163.2     (188.3

Dividends paid

     (1.6     —     

Proceeds from exercise of stock options

     0.1        —     

Excess tax benefit from share-based compensation

     0.2        —     

Repurchase of shares to satisfy employee minimum tax withholdings

     (0.4     —     

Net payment from stockholder

     —          4.9   
  

 

 

   

 

 

 

Net cash provided by financing activities

     9.3        46.4   

Effect of foreign currency exchange rates

     (0.1     (0.3
  

 

 

   

 

 

 

Net increase in cash

     8.6        20.1   

Cash at beginning of period

     10.8        13.9   
  

 

 

   

 

 

 

Cash at end of period

   $ 19.4      $ 34.0   
  

 

 

   

 

 

 

Noncash investing and financing activities

    

Acquisition of equipment under capital lease obligation

   $ 6.0      $ —     

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

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation and Principles of Consolidation

Global Brass and Copper Holdings, Inc. (“Holdings” or the “Company”) through its wholly-owned principal operating subsidiary, Global Brass and Copper, Inc. (“GBC”), is operated and managed through three reportable segments: GBC Metals, LLC (“Olin Brass”), Chase Brass and Copper Company, LLC (“Chase”) and A.J. Oster, LLC (“Oster”).

These unaudited 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 consolidated 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, 2013 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 six months ended June 30, 2014. These interim unaudited consolidated financial statements should be read in conjunction with the December 31, 2013 audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Recently Issued and Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The guidance provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is that an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The new standard also will result in enhanced disclosures about revenue and provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications). ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

2. Inventories

The Company’s inventories were as follows:

 

     As of  
     June 30,      December 31,      June 30,  
(in millions)    2014      2013      2013  

Raw materials and supplies

   $ 36.8       $ 37.2       $ 37.1   

Work-in-process

     71.1         75.5         83.8   

Finished goods

     84.4         78.2         78.6   
  

 

 

    

 

 

    

 

 

 

Total inventories

   $ 192.3       $ 190.9       $ 199.5   
  

 

 

    

 

 

    

 

 

 

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 comprised approximately 71%, 70% and 72% of total inventory at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Other manufactured inventories, including the direct labor and manufacturing overhead components and certain non-U.S. inventories, are valued on a first-in, first-out (“FIFO”) basis. During the three months ended June 30, 2014 and 2013, the Company recorded a lower of cost or market adjustment that reduced inventory by $0.1 million and $0.3 million, respectively. During the six months ended June 30, 2014 and 2013, the Company recorded a lower of cost or market adjustment that reduced inventory by $0.2 million and $0.3 million, respectively. These non-cash adjustments were recorded in cost of sales in the accompanying consolidated statements of operations for the applicable periods.

If all inventories had been valued at period-end market values, inventories would have been approximately $309.8 million, $318.2 million and $303.9 million at June 30, 2014, December 31, 2013 and June 30, 2013, respectively.

3. Prepaid Expenses and Other Current Assets

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

 

     As of  
     June 30,      December 31,      June 30,  
(in millions)    2014      2013      2013  

Deferred expense

   $ 8.6       $ 9.8       $ 12.0   

Loss fund payments—workers’ compensation

     6.2         6.2         6.9   

Prepaid insurance

     5.2         1.9         2.1   

Prepaid tooling

     1.1         1.0         1.6   

Collateral on deposit—commodity derivative contracts

     1.0         0.3         0.3   

Commodity derivative contracts

     0.5         0.9         0.5   

Other

     3.1         2.1         1.7   
  

 

 

    

 

 

    

 

 

 

Total prepaid expenses and other current assets

   $ 25.7       $ 22.2       $ 25.1   
  

 

 

    

 

 

    

 

 

 

Deferred expense represents the deferral of cost of sales associated with sales of unprocessed metal to toll customers. The Company defers the expense and corresponding revenue until the finished product has been shipped at which time risk of loss and title passes to the customer. See note 6, “Accrued Liabilities” for the corresponding deferred revenue related to the sales of unprocessed metal to toll customers.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

4. Investment in Joint Venture

During the three months ended June 30, 2014 and 2013, the Company recorded $0.2 million and $0.5 million, respectively, of equity income, net of tax, including $0.2 million of accretion of negative basis difference in each period. During the six months ended June 30, 2014 and 2013, the Company recorded $0.5 million and $0.9 million, respectively, of equity income, net of tax, including $0.4 million of accretion of negative basis difference in each period. At June 30, 2014, December 31, 2013 and June 30, 2013, the remaining negative basis difference was $4.6 million, $5.0 million and $5.4 million, respectively. No cash dividends were received from Dowa Olin Metal Corporation (“Dowa Joint Venture”) during the six months ended June 30, 2014 or 2013. The undistributed earnings of the Dowa Joint Venture in GBC’s retained earnings as of June 30, 2014, December 31, 2013 and June 30, 2013 totaled $1.6 million, $1.1 million and $0.9 million, respectively.

5. Other Noncurrent Assets

Other noncurrent assets consisted of the following:

 

     As of  
     June 30,      December 31,      June 30,  
(in millions)    2014      2013      2013  

Deferred financing fees, net

   $ 13.3       $ 14.6       $ 15.9   

Utility and other deposits

     1.5         1.2         1.0   

Other

     1.0         0.8         —     
  

 

 

    

 

 

    

 

 

 

Total other noncurrent assets

   $ 15.8       $ 16.6       $ 16.9   
  

 

 

    

 

 

    

 

 

 

6. Accrued Liabilities

Accrued liabilities consisted of the following:

 

     As of  
     June 30,      December 31,      June 30,  
(in millions)    2014      2013      2013  

Workers’ compensation

   $ 15.6       $ 14.5       $ 15.3   

Personnel expense

     14.4         19.4         15.7   

Deferred revenue

     8.6         9.8         12.0   

Utilities

     2.2         1.6         1.6   

Insurance

     2.3         2.4         2.2   

Professional fees

     1.6         2.7         0.9   

Taxes

     0.7         1.6         1.1   

Tooling

     0.6         0.7         0.7   

Other

     3.3         3.4         3.2   
  

 

 

    

 

 

    

 

 

 

Total accrued liabilities

   $ 49.3       $ 56.1       $ 52.7   
  

 

 

    

 

 

    

 

 

 

Deferred revenue represents the deferral of revenue associated with sales of unprocessed metal to toll customers. The Company defers the revenue and corresponding expense until the finished product has been shipped at which time risk of loss and title passes to the customer. See note 3, “Prepaid Expenses and Other Current Assets” for the corresponding deferred expense related to the sales of unprocessed metal to toll customers.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

7. Financing

Long-term debt consisted of the following:

 

     As of  
     June 30,      December 31,      June 30,  
(in millions)    2014      2013      2013  

Senior Secured Notes

   $ 375.0       $ 375.0       $ 375.0   

ABL Facility

     16.5         5.5         56.0   

Obligations under capital lease

     6.0         —           —     
  

 

 

    

 

 

    

 

 

 
     397.5         380.5         431.0   

Less: Current maturities of capital lease obligations

     0.7         —           —     
  

 

 

    

 

 

    

 

 

 

Total long-term debt

     396.8         380.5         431.0   
  

 

 

    

 

 

    

 

 

 

Senior Secured Notes

On June 1, 2012, GBC issued, through a private offering, $375.0 million 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.

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 pay dividends 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 $5.0 million per year are permitted under those agreements. Under the terms of the Indenture, GBC is also permitted to pay dividends 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 June 30, 2014, all of the net assets of the subsidiaries are restricted except for $46.9 million, which are permitted for dividend distributions under the Indenture. As of June 30, 2014, 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 2012 (the “Exchange Offer”).

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 ABL facility provides for borrowings up to the lesser of $200.0 million or the borrowing base, in each case, less outstanding loans and letters of credit. Available borrowings under the ABL Facility were $183.0 million, $194.0 million and $143.5 million as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively. As of June 30, 2014, December 31, 2013 and June 30, 2013, amounts outstanding under the ABL Facility accrued interest at a rate of 4.25%. Unused amounts under the ABL Facility incur an unused line fee of 0.50% per annum, payable in full on a quarterly basis.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 June 30, 2014, the Company was in compliance with all of its covenants under the ABL Facility.

8. 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
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Statutory provision rate

     35.0     35.0     35.0     35.0

Permanent differences and other items

        

State tax provision

     3.2     (5.4 %)      3.2     19.2

Section 199 manufacturing credit

     (3.3 %)      5.0     (3.3 %)      (16.4 %) 

Return to provision adjustments

     0.1     0.7     —          (1.3 %) 

Non-deductible non-cash compensation

     —          (92.0 %)      —          169.1

Other

     3.2     (1.9 %)      2.1     2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     38.2     (58.6 %)      37.0     208.3
  

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2014, December 31, 2013 and June 30, 2013, the Company had $25.7 million, $26.0 million and $27.3 million, 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 are classified as a component of provision for income taxes. There were no such estimated amounts for the three or six months ended June 30, 2014 or June 30, 2013. Accrued interest and penalties as of June 30, 2014, December 31, 2013 and June 30, 2013 was $0.1 million. The Company’s liability for uncertain tax positions of $25.8 million, $26.1 million and $27.4 million at June 30, 2014, December 31, 2013 and June 30, 2013, respectively, are presented in other noncurrent liabilities in the accompanying consolidated balance sheets.

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 December 31, 2010 and all subsequent periods remain open for audit.

9. 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.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The Company’s metal 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.

By using derivative contracts to limit exposures to fluctuations in metal, natural gas and electricity prices, 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. 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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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 June 30, 2014  
     Gross      Gross Amounts     Net Amounts
of Assets
     Amounts Not Offset in
the Consolidated
Balance Sheet
        
(in millions, except contract data)    Amounts of
Recognized
Assets
     Offset in
Consolidated
Balance Sheet
    Presented in
Consolidated
Balance Sheet
     Financial
Instruments
     Cash
Collateral
Received
     Net
Amount
 

Open metal contracts (a)

   $ 0.9       $ (0.8   $ 0.1       $ —         $ —         $ 0.1   

Open natural gas contracts (a)

     0.1         —          0.1         —           —           0.1   

Open electricity contracts (a)

     0.4         (0.1     0.3         —           —           0.3   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1.4       $ (0.9   $ 0.5       $ —         $ —         $ 0.5   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) As of June 30, 2014, the Company had open metal, natural gas and electricity contracts of 267, 39 and 23, respectively, the values for which are presented above under the caption “Gross Amounts of Recognized Assets”.

 

Consolidated balance sheet location:

  

Prepaid expenses and other current assets

   $ 0.5   
  

 

 

 

Total

   $ 0.5   
  

 

 

 

 

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

Open metal contracts (b)

   $ 0.8       $ (0.8   $ —         $ —         $ —         $ —     

Open natural gas contracts (b)

     —           —          —           —           —           —     

Open electricity contracts (b)

     0.1         (0.1     —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.9       $ (0.9   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(b) As of June 30, 2014, the Company had open metal, natural gas and electricity contracts of 154, 34 and 15, respectively, the values for which are presented above under the caption “Gross Amounts of Recognized Liabilities”.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

     As of December 31, 2013  
     Gross      Gross Amounts     Net Amounts of
Assets
     Amounts Not Offset in
the Consolidated
Balance Sheet
        
(in millions, except contract data)    Amounts of
Recognized
Assets
     Offset in
Consolidated
Balance Sheet
    Presented in
Consolidated
Balance Sheet
     Financial
Instruments
     Cash
Collateral
Received
     Net
Amount
 

Open metal contracts (a)

   $ 0.8       $ (0.3   $ 0.5       $ —         $ —         $ 0.5   

Open natural gas contracts (a)

     0.2         —          0.2         —           —           0.2   

Open electricity contracts (a)

     0.3         (0.1     0.2         —           —           0.2   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1.3       $ (0.4   $ 0.9       $ —         $ —         $ 0.9   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) As of December 31, 2013, the Company had open metal, natural gas and electricity contracts of 265, 39 and 37, respectively, the values for which are presented above under the caption “Gross Amounts of Recognized Assets”.

 

Consolidated balance sheet location:

  

Prepaid expenses and other current assets

   $ 0.9   
  

 

 

 

Total

   $ 0.9   
  

 

 

 

 

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

Open metal contracts (b)

   $ 0.3       $ (0.3   $ —         $ —         $ —         $ —     

Open natural gas contracts (b)

     —           —          —           —           —           —     

Open electricity contracts (b)

     0.1         (0.1     —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.4       $ (0.4   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(b) As of December 31, 2013, the Company had open metal, natural gas and electricity contracts of 132, 4 and 20, respectively, the values for which are presented above under the caption “Gross Amounts of Recognized Liabilities”.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

     As of June 30, 2013  
     Gross      Gross Amounts     Net Amounts
of Assets
     Amounts Not Offset in
the Consolidated
Balance Sheet
        
(in millions, except contract data)    Amounts of
Recognized
Assets
     Offset in
Consolidated
Balance Sheet
    Presented in
Consolidated
Balance Sheet
     Financial
Instruments
     Cash
Collateral
Received
     Net
Amount
 

Open metal contracts (a)

   $ 2.0       $ (1.6   $ 0.4       $ —         $ —         $ 0.4   

Open electricity contracts (a)

     0.1         —          0.1         —           —           0.1   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2.1       $ (1.6   $ 0.5       $ —         $ —         $ 0.5   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) As of June 30, 2013, the Company had open metal and electricity contracts of 334 and 6, respectively, the values for which are presented above under the caption “Gross Amounts of Recognized Assets”.

 

Consolidated balance sheet location:

  

Prepaid expenses and other current assets

   $ 0.5   
  

 

 

 

Total

   $ 0.5   
  

 

 

 

 

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

Open metal contracts (b)

   $ 1.6       $ (1.6   $ —         $ —         $ —         $
 

  
 
  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1.6       $ (1.6   $ —         $ —         $ —         $
 

  
 
  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(b) As of June 30, 2013, the Company had 218 open metal contracts, the values for which are presented above under the caption “Gross Amounts of Recognized Liabilities”.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(in millions)    2014      2013     2014      2013  

Cost of sales

          

Realized and unrealized gain—metal contracts

   $ 0.6       $ 0.7      $ 0.5       $ 0.7   

Realized and unrealized gain—natural gas contracts

     —           —          0.2         —     

Realized and unrealized gain (loss)—electricity contracts

     0.2         (0.2     1.6         (0.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 0.8       $ 0.5      $ 2.3       $ 0.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

10. 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 June 30, 2014, December 31, 2013 and June 30, 2013:

 

     As of June 30, 2014  
(in millions)    Level 1      Level 2      Level 3      Total  

Open metal contracts

   $ —         $ 0.1       $ —         $ 0.1   

Open natural gas contracts

     —           0.1         —           0.1   

Open electricity contracts

     —           0.3         —           0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ 0.5       $ —         $ 0.5   
  

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2013  
     Level 1      Level 2      Level 3      Total  

Open metal contracts

   $ —         $ 0.5       $ —         $ 0.5   

Open natural gas contracts

     —           0.2         —           0.2   

Open electricity contracts

     —           0.2         —           0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ 0.9       $ —         $ 0.9   
  

 

 

    

 

 

    

 

 

    

 

 

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

Open metal contracts

   $ —         $ 0.4       $ —         $ 0.4   

Open electricity contracts

     —           0.1         —           0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ 0.5       $ —         $ 0.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

In accordance with ASC 820, 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 of the Company’s derivative commodity contracts have a set term of 24 months or less.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 2014 or 2013.

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 June 30, 2014, December 31, 2013 and June 30, 2013, the fair value of the Company’s Senior Secured Notes approximated $428.4 million, $428.4 million and $401.3 million, respectively. 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).

11. 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”) were majority shareholders of Halkos Holdings, LLC (“Halkos”). As of December 31, 2013, Halkos beneficially owned 34.4% of the outstanding shares of Holdings. On February 3, 2014 the Company completed an additional follow-on public offering of 7,310,000 shares of its common stock, including 910,000 shares of common stock sold in connection with the full exercise of the option to purchase additional shares granted to the underwriters (the “Additional Follow-on Public Offering”). Halkos participated as the selling stockholder and after giving effect to the Additional Follow-on Public Offering, Halkos no longer owns any of the outstanding common stock of the Company.

The Company and affiliates of KPS Funds had previously 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 initial public offering of 8,050,000 shares of common stock (the “IPO”), the Company terminated the Management Services Agreement prior to the expiration of its 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 $4.5 million 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 $4.5 million and $4.8 million for the three and six months ended June 30, 2013, respectively. As the Management Services Agreement is terminated, there were no costs for the three or six months ended June 30, 2014.

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 inconsequential for the three and six months ended June 30, 2013, respectively.

Pursuant to an amendment to the investor rights agreement, dated as of November 22, 2013, Halkos agreed to pay, subject to certain exceptions and qualifications, 50% of the registration expenses (as defined in the investor rights agreement) relating to the Additional Follow-on Public Offering. As of December 31, 2013, the Company had recorded a receivable of $0.2 million in prepaid expenses and other current assets in the consolidated balance sheet. During the first quarter of 2014, Halkos reimbursed the Company all amounts owed for registration expenses relating to the Additional Follow-on Public Offering.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

12. 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.

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 $0.3 million per participant for all GBC employees, except for employees of our Chase division, which has a deductible of $0.1 million per participant. The policy for our Chase division also has a specific stop loss maximum resulting in the Company being responsible for paying the amount in excess of $2.0 million per participant.

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 $0.5 million 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.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

13. 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. Olin Brass’s products are used in five primary end markets: building and housing, munitions, automotive, coinage, and electronics/electrical components.

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, copper-alloy, aluminum and stainless steel 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.

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.

The Chief Operating Decision Maker evaluates performance and determines resource allocations based on a number of factors, the primary performance measure being Adjusted EBITDA. The Chief Operating Decision Maker is not provided with, nor reviews, assets by segment for purposes of allocating resources.

Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization (“EBITDA”) 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 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 profits interest compensation expense related to payments made to certain members of our management by Halkos, share-based compensation expense, loss on extinguishment of debt, non-cash income accretion related to the Dowa Joint Venture, management fees paid to affiliates of KPS Capital Partners, L.P. (“KPS”), restructuring and other business transformation charges, specified legal and professional expenses and certain other items, each of which are excluded because management believes they are not indicative of the ongoing performance of the Company’s core operations.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Below is a reconciliation of Adjusted EBITDA of segments to income (loss) before provision for income taxes and equity income:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(in millions)    2014     2013     2014     2013  

Net Sales, External Customers

        

Olin Brass

   $ 212.9      $ 216.5      $ 412.6      $ 403.1   

Chase

     152.7        164.7        315.3        339.2   

Oster

     74.9        80.3        156.4        164.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales, external customers

   $ 440.5      $ 461.5      $ 884.3      $ 906.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intersegment Net Sales

        

Olin Brass

   $ 14.5      $ 14.2      $ 27.9      $ 28.5   

Oster

     —          —          —          0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total intersegment net sales

   $ 14.5      $ 14.2      $ 27.9      $ 28.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

        

Olin Brass

   $ 10.0      $ 16.2      $ 20.1      $ 27.7   

Chase

     17.7        18.9        36.1        37.8   

Oster

     4.0        4.4        8.1        8.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Adjusted EBITDA of segments

     31.7        39.5        64.3        74.4   

Corporate and Other

     (2.1     (3.2     (6.0     (8.0

Depreciation and amortization

     (3.0     (2.0     (5.3     (3.9

Interest expense

     (9.8     (10.0     (19.7     (19.9

Net income attributable to noncontrolling interest

     0.1        —          0.2        0.1   

Unrealized loss on derivative contracts (a)

     (0.2     (0.1     (0.4     (0.1

Equity method investment income (b)

     —          (0.3     (0.1     (0.5

Non-cash Halkos profits interest compensation expense (c)

     —          (29.3     —          (29.3

Management fees (d)

     —          (4.5     —          (4.8

Specified legal/professional expenses (e)

     (0.9     (0.7     (2.0     (1.5

Lower of cost or market adjustment to inventory (f)

     (0.1     (0.3     (0.2     (0.3

Share-based compensation expense (g)

     (1.3     (0.2     (1.6     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 14.4      $ (11.1   $ 29.2      $ 6.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Represents unrealized gains and losses on derivative contracts in support of the Company’s balanced book approach and unrealized gains and losses associated with derivative contracts with respect to electricity and natural gas costs.
(b) Excludes accretion income of $0.2 million and $0.4 million in each of the three and six months ended June 30, 2014 and 2013. Equity method investment income is exclusive to Olin Brass.
(c) The 2013 amount includes $20.4 million that represents incremental non-cash compensation as a result of the modification made to the Halkos Holdings, LLC Executive Equity Incentive Plan (“Halkos Equity Plan”) to eliminate Halkos’ right to acquire all or a portion of the Class B Shares for less than fair market value upon certain conditions. The 2013 amount also includes $8.9 million that represents dividend payments made by Halkos to members of the Company’s management that resulted in a non-cash compensation charge in connection with the IPO that occurred in May 2013.
(d) The 2013 amount represents an early termination fee equal to the value of the advisory fee that would have otherwise been payable to affiliates of KPS through the end of the agreement for the three and six months ended June 30, 2013. For the six months ended June 30, 2013, amount also represents a portion of the annual advisory fees paid to affiliates of KPS prior to the termination of the agreement.
(e) Specified legal/professional expenses for the three months ended June 30, 2014 includes $0.9 million of professional fees for accounting, tax, legal and consulting services related to costs incurred as a publicly traded company. Specified legal/professional expenses for the three months ended June 30, 2013 includes $0.7 million of professional fees for accounting, tax, legal and consulting services related to the IPO, the Exchange Offer, public company readiness efforts and certain regulatory and compliance matters.

Specified legal/professional expenses for the six months ended June 30, 2014 includes $2.0 million of professional fees for accounting, tax, legal and consulting services related to costs incurred as a publicly traded company, including Additional Follow-On Public Offering costs. Specified legal/professional expenses for the six months ended June 30, 2013 includes $1.5 million of professional fees for accounting, tax, legal and consulting services related to the IPO, the Exchange Offer, public company readiness efforts and certain regulatory and compliance matters.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

(f) Represents non-cash lower of cost or market charges for the write down of inventory recorded during the three and six months ended June 30, 2014 and 2013.
(g) Represents share-based compensation expense resulting from the grant of non-qualified stock options, restricted stock and performance-based shares to certain employees, members of the Company’s management and the Company’s Board of Directors.

14. 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.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(in millions)    2014      2013     2014      2013  

Numerator

          

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

   $ 9.0       $ (17.1   $ 18.7       $ (5.7

Denominator

          

Weighted-average common shares outstanding

     21.2         21.1        21.1         21.1   

Effect of potentially dilutive securities:

          

Stock options and nonvested share awards

     0.1         —          0.1         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average common shares outstanding, assuming dilution

     21.3         21.1        21.2         21.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

          

Basic

   $ 0.42       $ (0.81   $ 0.89       $ (0.27

Diluted

   $ 0.42       $ (0.81   $ 0.88       $ (0.27

The computation of weighted-average common shares outstanding, assuming dilution, for the periods presented, includes the average common shares outstanding that would result from the assumed exercise of outstanding stock options and vesting of restricted stock awards and vesting of the portion of performance-based shares for which the established performance criterion has been met. Weighted-average common shares outstanding, assuming dilution, for the three months and six months ended June 30, 2014 exclude stock options to purchase 147,136 shares because they were anti-dilutive. For the three months and six months ended June 30, 2013, the dilutive effect of 8,555 shares and 4,278 shares, respectively, of nonvested restricted stock was excluded from the earnings per share calculation as they would be anti-dilutive given the loss in the periods.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

15. 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 7, “Financing”. The Senior Secured Notes are jointly 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.

The Company identified an immaterial error in the previously issued condensed consolidating statement of cash flows for the six months ended June 30, 2013 related to the settlement of an advance between the Issuer and the Parent and has revised the presentation in this Quarterly Report on Form 10-Q. The Company has corrected the error by reclassifying a cash inflow of $4.9 million for the Issuer from cash flows from operating activities to cash flows from investing activities for the six months ended June 30, 2013. The revision had no impact to any other condensed consolidating financial statement, nor did it impact any of the Company’s unaudited consolidated financial statements contained herein.

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

     Condensed Consolidating Balance Sheet  
     As of June 30, 2014  
(in millions)    Parent      Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

                

Current assets:

                

Cash

   $ —         $ 14.7       $ 2.6       $ 4.8       $ (2.7   $ 19.4   

Accounts receivable, net of allowance

     —           2.7         177.9         15.0         —          195.6   

Inventories

     —           —           174.3         18.9         (0.9     192.3   

Prepaid expenses and other current assets

     —           12.8         12.4         0.5         —          25.7   

Deferred income taxes

     —           33.0         —           —           —          33.0   

Income tax receivable

     —           6.7         —           —           (0.4     6.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           69.9         367.2         39.2         (4.0     472.3   

Property, plant and equipment, net

     —           0.9         98.7         0.4         —          100.0   

Investment in joint venture

     —           —           2.8         —           —          2.8   

Investment in subsidiaries

     19.0         705.4         23.3         —           (747.7     —     

Intercompany accounts

     —           —           351.1         —           (351.1     —     

Goodwill

     —           —           4.4         —           —          4.4   

Intangible assets, net

     —           —           0.7         —           —          0.7   

Deferred income taxes

     —           2.9         —           —           —          2.9   

Other noncurrent assets

     —           13.9         1.9         —           —          15.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 19.0       $ 793.0       $ 850.1       $ 39.6       $ (1,102.8   $ 598.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and equity / (deficit)

                

Current liabilities:

                

Current maturities of long-term debt

   $ —         $ —         $ 0.7       $ —         $ —        $ 0.7   

Accounts payable

     —           1.2         107.5         2.5         (3.6     107.6   

Accrued liabilities

     —           17.8         31.0         0.5         —          49.3   

Accrued interest

     —           3.3         —           —           —          3.3   

Income tax payable

     —           —           0.1         0.3         (0.4     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     —           22.3         139.3         3.3         (4.0     160.9   

Long-term debt

     —           391.5         5.3         —           —          396.8   

Other noncurrent liabilities

     —           25.8         0.1         —           —          25.9   

Intercompany accounts

     7.9         334.4         —           8.8         (351.1     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     7.9         774.0         144.7         12.1         (355.1     583.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

     11.1         19.0         705.4         23.3         (747.7     11.1   

Noncontrolling interest

     —           —           —           4.2         —          4.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity / (deficit)

     11.1         19.0         705.4         27.5         (747.7     15.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equtiy / (deficit)

   $ 19.0       $ 793.0       $ 850.1       $ 39.6       $ (1,102.8   $ 598.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

     Condensed Consolidating Balance Sheet  
     As of December 31, 2013  
(in millions)    Parent     Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

               

Current assets:

               

Cash

   $ —        $ 3.3       $ 3.9       $ 3.6       $ —        $ 10.8   

Accounts receivable, net of allowance

     —          5.2         150.3         16.3         —          171.8   

Inventories

     —          0.1         172.4         18.4         —          190.9   

Prepaid expenses and other current assets

     —          8.9         13.1         0.2         —          22.2   

Deferred income taxes

     —          32.2         —           —           —          32.2   

Income tax receivable

     —          4.3         —           —           —          4.3   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —          54.0         339.7         38.5         —          432.2   

Property, plant and equipment, net

     —          0.9         86.7         0.4         —          88.0   

Investment in joint venture

     —          —           2.2         —           —          2.2   

Investment in subsidiaries

     0.2        646.6         21.1         —           (667.9     —     

Intercompany accounts

     —          —           310.5         —           (310.5     —     

Goodwill

     —          —           4.4         —           —          4.4   

Intangible assets, net

     —          —           0.7         —           —          0.7   

Deferred income taxes

     —          4.6         —           —           —          4.6   

Other noncurrent assets

     —          15.1         1.5         —           —          16.6   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 0.2      $ 721.2       $ 766.8       $ 38.9       $ (978.4   $ 548.7   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and (deficit) / equity

               

Current liabilities:

               

Accounts payable

   $ —        $ 0.3       $ 83.4       $ 1.7       $ —        $ 85.4   

Accrued liabilities

     —          18.7         36.7         0.7         —          56.1   

Accrued interest

     —          3.3         —           —           —          3.3   

Income tax payable

     —          0.1         0.1         0.3         —          0.5   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     —          22.4         120.2         2.7         —          145.3   

Long-term debt

     —          380.5         —           —           —          380.5   

Other noncurrent liabilities

     —          26.3         —           —           —          26.3   

Intercompany accounts

     7.6        291.8         —           11.1         (310.5     —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     7.6        721.0         120.2         13.8         (310.5     552.1   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

     (7.4     0.2         646.6         21.1         (667.9     (7.4

Noncontrolling interest

     —          —           —           4.0         —          4.0   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total (deficit) / equity

     (7.4     0.2         646.6         25.1         (667.9     (3.4
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and (deficit) / equity

   $ 0.2      $ 721.2       $ 766.8       $ 38.9       $ (978.4   $ 548.7   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

     Condensed Consolidating Balance Sheet  
     As of June 30, 2013  
(in millions)    Parent     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

              

Current assets:

              

Cash

   $ —        $ 34.5      $ —         $ 4.2       $ (4.7   $ 34.0   

Accounts receivable, net of allowance

     —          4.8        182.1         16.4         —          203.3   

Inventories

     —          —          181.9         17.9         (0.3     199.5   

Prepaid expenses and other current assets

     —          10.0        14.9         0.2         —          25.1   

Deferred income taxes

     —          31.8        —           —           —          31.8   

Income tax receivable

     —          2.1        —           —           —          2.1   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —          83.2        378.9         38.7         (5.0     495.8   

Property, plant and equipment, net

     —          1.0        74.0         0.3         —          75.3   

Investment in joint venture

     —          —          2.2         —           —          2.2   

Investment in subsidiaries

     —          591.6        19.3         —           (610.9     —     

Intercompany accounts

     —          —          253.9         —           (253.9     —     

Goodwill

     —          —          4.4         —           —          4.4   

Intangible assets, net

     —          —          0.8         —           —          0.8   

Deferred income taxes

     —          6.8        —           —           —          6.8   

Other noncurrent assets

     —          15.9        1.0         —           —          16.9   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ —        $ 698.5      $ 734.5       $ 39.0       $ (869.8   $ 602.2   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and (deficit) / equity

              

Current liabilities:

              

Accounts payable

   $ —        $ 0.3      $ 108.4       $ 3.3       $ (5.0   $ 107.0   

Accrued liabilities

     —          17.5        34.5         0.7         —          52.7   

Accrued interest

     —          3.4        —           —           —          3.4   

Income tax payable

     —          —          —           0.3         —          0.3   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     —          21.2        142.9         4.3         (5.0     163.4   

Long-term debt

     —          431.0        —           —           —          431.0   

Other noncurrent liabilities

     —          27.7        —           —           —          27.7   

Obligations and advances in excess of investment in subsidiary

     16.5        —          —           —           (16.5     —     

Intercompany accounts

     7.2        235.1        —           11.6         (253.9     —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     23.7        715.0        142.9         15.9         (275.4     622.1   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

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

     (23.7     (16.5     591.6         19.3         (594.4     (23.7

Noncontrolling interest

     —          —          —           3.8         —          3.8   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total (deficit) / equity

     (23.7     (16.5     591.6         23.1         (594.4     (19.9
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and (deficit) / equity

   $ —        $ 698.5      $ 734.5       $ 39.0       $ (869.8   $ 602.2   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

    Condensed Consolidating Statement of Operations  
    Three Months Ended June 30, 2014  
(in millions)   Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

  $ —        $ —        $ 424.1      $ 22.3      $ (5.9   $ 440.5   

Cost of sales

    —          (1.4     383.3        20.3        (5.9     396.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    —          1.4        40.8        2.0        —          44.2   

Selling, general and administrative expenses

    0.3        4.9        14.0        0.7        —          19.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (0.3     (3.5     26.8        1.3        —          24.3   

Interest expense

    —          9.8        —          —          —          9.8   

Other (income) expense, net

    —          0.1        —          —          —          0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (0.3     (13.4     26.8        1.3        —          14.4   

Provision for (benefit from) income taxes

    (0.1     (5.2     10.3        0.5        —          5.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income

    (0.2     (8.2     16.5        0.8        —          8.9   

Equity income, net of tax

    9.2        17.4        0.9        —          (27.3     0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    9.0        9.2        17.4        0.8        (27.3     9.1   

Less: Net income attributable to noncontrolling interest

    —          —          —          0.1        —          0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 9.0      $ 9.2      $ 17.4      $ 0.7      $ (27.3   $ 9.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Condensed Consolidating Statement of Operations  
    Three Months Ended June 30, 2013  
(in millions)   Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

  $ —        $ —        $ 444.0      $ 25.5      $ (8.0   $ 461.5   

Cost of sales

    —          (0.4     394.2        24.0        (8.0     409.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    —          0.4        49.8        1.5        —          51.7   

Selling, general and administrative expenses

    4.7        24.5        22.9        0.7        —          52.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (4.7     (24.1     26.9        0.8        —          (1.1

Interest expense

    —          10.0        —          —          —          10.0   

Other (income) expense, net

    —          0.1        (0.2     0.1        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (4.7     (34.2     27.1        0.7        —          (11.1

Provision for (benefit from) income taxes

    (1.8     (4.6     12.4        0.5        —          6.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income

    (2.9     (29.6     14.7        0.2        —          (17.6

Equity income, net of tax

    (14.2     15.4        0.7        —          (1.4     0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    (17.1     (14.2     15.4        0.2        (1.4     (17.1

Less: Net income (loss) attributable to noncontrolling interest

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (17.1   $ (14.2   $ 15.4      $ 0.2      $ (1.4   $ (17.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

    Condensed Consolidating Statement of Operations  
    Six Months Ended June 30, 2014  
(in millions)   Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

  $ —        $ —        $ 850.2      $ 47.4      $ (13.3   $ 884.3   

Cost of sales

    —          (0.6     767.3        43.1        (13.3     796.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    —          0.6        82.9        4.3        —          87.8   

Selling, general and administrative expenses

    0.6        9.2        27.4        1.5        —          38.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (0.6     (8.6     55.5        2.8        —          49.1   

Interest expense

    —          19.7        —          —          —          19.7   

Other (income) expense, net

    —          0.2        0.1        (0.1     —          0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (0.6     (28.5     55.4        2.9        —          29.2   

Provision for (benefit from) income taxes

    (0.2     (11.0     21.3        0.7        —          10.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income

    (0.4     (17.5     34.1        2.2        —          18.4   

Equity income, net of tax

    19.1        36.6        2.5        —          (57.7     0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    18.7        19.1        36.6        2.2        (57.7     18.9   

Less: Net income attributable to noncontrolling interest

    —          —          —          0.2        —          0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 18.7      $ 19.1      $ 36.6      $ 2.0      $ (57.7   $ 18.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Condensed Consolidating Statement of Operations  
    Six Months Ended June 30, 2013  
(in millions)   Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

  $ —        $ —        $ 872.1      $ 48.5      $ (14.1   $ 906.5   

Cost of sales

    —          0.1        777.1        44.8        (14.1     807.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    —          (0.1     95.0        3.7        —          98.6   

Selling, general and administrative expenses

    5.1        28.9        37.1        1.4        —          72.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (5.1     (29.0     57.9        2.3        —          26.1   

Interest expense

    —          19.9        —          —          —          19.9   

Other (income) expense, net

    —          0.2        (0.1     0.1        —          0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (5.1     (49.1     58.0        2.2        —          6.0   

Provision for (benefit from) income taxes

    (2.0     (10.0     23.7        0.8        —          12.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income

    (3.1     (39.1     34.3        1.4        —          (6.5

Equity income, net of tax

    (2.6     36.5        2.2        —          (35.2     0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    (5.7     (2.6     36.5        1.4        (35.2     (5.6

Less: Net income (loss) attributable to noncontrolling interest

    —          —          —          0.1        —          0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (5.7   $ (2.6   $ 36.5      $ 1.3      $ (35.2   $ (5.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

     Condensed Consolidating Statement of Comprehensive Income  
     Three Months Ended June 30, 2014  
(in millions)    Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 9.0      $ 9.2      $ 17.4      $ 0.8      $ (27.3   $ 9.1   

Foreign currency translation adjustment, net of tax

     —          —          0.1        —          (0.1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     9.0        9.2        17.5        0.8        (27.4     9.1   

Less: Comprehensive income attributable to noncontrolling interest

     —          —          —          0.1        —          0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 9.0      $ 9.2      $ 17.5      $ 0.7      $ (27.4   $ 9.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Net income (loss)

   $ (17.1   $ (14.2   $ 15.4      $ 0.2      $ (1.4   $ (17.1

Foreign currency translation adjustment, net of tax

     (0.6     (0.6     (0.8     (0.2     1.7        (0.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (17.7     (14.8     14.6        —          0.3        (17.6

Less: Comprehensive income attributable to noncontrolling interest

     —          —          —          0.1        —          0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (17.7   $ (14.8   $ 14.6      $ (0.1   $ 0.3      $ (17.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

     Condensed Consolidating Statement of Comprehensive Income  
     Six Months Ended June 30, 2014  
(in millions)    Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 18.7      $ 19.1      $ 36.6      $ 2.2      $ (57.7   $ 18.9   

Foreign currency translation adjustment, net of tax

     (0.1     (0.1     (0.1     (0.2     0.4        (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     18.6        19.0        36.5        2.0        (57.3     18.8   

Less: Comprehensive income attributable to noncontrolling interest

     —          —          —          0.2        —          0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 18.6      $ 19.0      $ 36.5      $ 1.8      $ (57.3   $ 18.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Condensed Consolidating Statement of Comprehensive Income (Loss)  
     Six Months Ended June 30, 2013  
     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (5.7   $ (2.6   $ 36.5      $ 1.4      $ (35.2   $ (5.6

Foreign currency translation adjustment, net of tax

     (1.0     (1.0     (1.5     0.2        2.4        (0.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (6.7     (3.6     35.0        1.6        (32.8     (6.5

Less: Comprehensive income attributable to noncontrolling interest

     —          —          —          0.2        —          0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (6.7   $ (3.6   $ 35.0      $ 1.4      $ (32.8   $ (6.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

    Condensed Consolidating Statement of Cash Flows  
    Six Months Ended June 30, 2014  
(in millions)   Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities

           

Net cash provided by (used in) operating activities

  $ 1.7      $ 2.1      $ 10.7      $ 1.4      $ (4.3   $ 11.6   

Cash flows from investing activities

           

Capital expenditures

    —          (0.1     (12.1     (0.1     —          (12.3

Proceeds from sale of property, plant and equipment

    —          —          0.1        —          —          0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —          (0.1     (12.0     (0.1     —          (12.2

Cash flows from financing activities

           

Borrowings on ABL Facility

    —          174.2        —          —          —          174.2   

Payments on ABL Facility

    —          (163.2     —          —          —          (163.2

Dividends paid

    (1.6     (1.6     —          —          1.6        (1.6

Proceeds from exercise of stock options

    0.1        —          —          —          —          0.1   

Excess tax benefit from share-based compensation

    0.2        —          —          —          —          0.2   

Repurchase of shares to satisfy employee minimum tax withholdings

    (0.4     —          —          —          —          (0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (1.7     9.4        —          —          1.6        9.3   

Effect of foreign currency exchange rates

    —          —          —          (0.1     —          (0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

    —          11.4        (1.3     1.2        (2.7     8.6   

Cash at beginning of period

    —          3.3        3.9        3.6        —          10.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

  $ —        $ 14.7      $ 2.6      $ 4.8      $ (2.7   $ 19.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Global Brass and Copper Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

    Condensed Consolidating Statement of Cash Flows  
    Six Months Ended June 30, 2013  
(in millions)   Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities

           

Net cash provided by (used in) operating activities

  $ —        $ (20.4   $ 8.1      $ 1.0      $ (6.6   $ (17.9

Cash flows from investing activities

           

Capital expenditures

    —          —          (8.3     —          —          (8.3

Payable to / receivable from subsidiaries

    (4.9     4.9        —          —          —          —     

Proceeds from sale of property, plant and equipment

    —          —          0.2        —          —          0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (4.9     4.9        (8.1     —          —          (8.1

Cash flows from financing activities

           

Borrowings on ABL Facility

    —          229.8        —          —          —          229.8   

Payments on ABL Facility

    —          (188.3     —          —          —          (188.3

Distribution to stockholder

    —          —          —          (2.0     2.0        —     

Net payments (amounts due) from stockholder

    4.9        —          —          —          —          4.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    4.9        41.5        —          (2.0     2.0        46.4   

Effect of foreign currency exchange rates

    —          —          —          (0.3     —          (0.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

    —          26.0        —          (1.3     (4.6     20.1   

Cash at beginning of period

    —          8.5        —          5.5        (0.1     13.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

  $ —        $ 34.5      $ —        $ 4.2      $ (4.7   $ 34.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 19, 2014, and subsequent Reports 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, but are not limited to:

 

    the impact of our substantial indebtedness, including the effect of our ability to borrow money, fund working capital and operations and make new investments;

 

    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;

 

    the impact of a loss in customer volume or demand or a shift by customers of their manufacturing or sourcing offshore;

 

    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;

 

    operational factors affecting the ongoing commercial operations of our facilities resulting from inclement weather conditions;

 

    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;

 

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    government regulations relating to our products and services, including new legislation relating to derivatives and the elimination of the dollar bill and EPA regulations regarding the registration and marketing of anti-microbial copper products;

 

    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;

 

    our ability to successfully execute acquisitions and joint ventures;

 

    workplace safety issues;

 

    our ability to retain key employees;

 

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

 

    rising employee medical costs;

 

    environmental costs and our exposure to environmental claims;

 

    our exposure to product liability claims;

 

    our ability to successfully manage litigation;

 

    our ability to maintain cost-effective insurance policies;

 

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

 

    our limited experience managing and operating as an SEC reporting 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 Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2013. 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 Quarterly Report on Form 10-Q.

Overview

Our Business

Global Brass and Copper Holdings, Inc. (“Holdings” or the “Company,” “we,” “us,” or “our”) 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. Holdings, through GBC, is operated and managed through three reportable segments: GBC Metals, LLC (“Olin Brass”), Chase Brass and Copper Company, LLC (“Chase”) and A.J. Oster, LLC (“Oster”). We also have a Corporate and Other segment, which includes certain administrative costs and expenses that management has not allocated to our operating segments and the elimination of intercompany balances.

We are 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, welding 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: (1) sheet, strip, foil, tube and plate and (2) 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 to substantially reduce the financial impact of metal price volatility on our earnings and operating margins.

For a discussion of Key Factors Affecting our Results of Operations, including the balanced book approach, refer to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2014.

 

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Recent Transactions

Additional Follow-on Public Offering

On February 3, 2014 the Company completed an additional follow-on public offering (“Additional Follow-on Public Offering”) of 7,310,000 shares of its common stock, including 910,000 shares of common stock sold in connection with the full exercise of the option to purchase additional shares granted to the underwriters. Halkos Holdings, LLC (“Halkos”), the beneficial owner of approximately 34.4% of the Company prior to the Additional Follow-on Public Offering, sold all of its shares and received all of the net proceeds from the offering as the sole selling stockholder. After giving effect to the Additional Follow-on Public Offering, Halkos no longer owns any of our outstanding common stock.

In 2013, the Company completed two public offerings, as described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2014.

Non-GAAP Measures

In addition to the results reported in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we have provided information regarding “Adjusted EBITDA” and “Adjusted sales”, each of which is defined below.

Adjusted EBITDA

Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization (“EBITDA”) 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 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 profits interest compensation expense related to payments made to certain members of our management by Halkos, share-based compensation expense, loss on extinguishment of debt, non-cash income accretion related to Dowa-Olin Metal Corporation (“Dowa Joint Venture”), management fees paid to affiliates of KPS Capital Partners, L.P. (“KPS”), restructuring and other business transformation charges, specified legal and professional expenses and certain other items.

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

We present 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 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, 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 Adjusted EBITDA, namely “EBITDA” and “Adjusted EBITDA”, are defined and used in the agreements governing our asset-based revolving loan facility (the “ABL Facility”) and our 9.50% Senior Secured Notes due 2019 (the “Senior Secured Notes”) to determine compliance with various financial covenants and tests.

 

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Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations include that Adjusted EBITDA:

 

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

 

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

 

    does 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;

 

    eliminates depreciation and amortization in the calculation of Adjusted EBITDA, however the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and Adjusted EBITDA does not reflect any costs of such replacements or improvements;

 

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

 

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

 

    may be calculated by other companies in our industry differently from the way we do, limiting its usefulness as a comparative measure.

 

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We compensate for these limitations by using Adjusted EBITDA along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. Such U.S. 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 Adjusted EBITDA.

Adjusted EBITDA is not intended as an alternative to net income (loss) as an indicator of our operating performance, as an alternative to any other measure of performance in conformity with U.S. GAAP or as an alternative to cash flow provided by (used in) operating activities as a measure of liquidity. You should therefore not place undue reliance on Adjusted EBITDA or ratios calculated using Adjusted EBITDA. Our U.S. GAAP-based measures can be found in our unaudited 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 U.S. 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. We believe that adjusted sales supplements our U.S. 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 U.S. GAAP.

 

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Results of Operations

Consolidated Results of Operations for the Three Months Ended June 30, 2014, Compared to the Three Months Ended June 30, 2013.

 

     Three Months Ended     Change:  
     June 30,     2014 vs. 2013  
(in millions)    2014      % of Net Sales     2013     % of Net Sales     Amount     Percent  

Net sales

   $ 440.5         100.0   $ 461.5        100.0   $ (21.0     (4.6 %) 

Cost of sales

     396.3         90.0     409.8        88.8     (13.5     (3.3 %) 
  

 

 

      

 

 

     

 

 

   

Gross profit

     44.2         10.0     51.7        11.2     (7.5     (14.5 %) 

Selling, general and administrative expenses (a)

     19.9         4.5     52.8        11.4     (32.9     (62.3 %) 
  

 

 

      

 

 

     

 

 

   

Operating income (loss)

     24.3         5.5     (1.1     (0.2 %)      25.4        N/M   

Interest expense

     9.8         2.2     10.0        2.2     (0.2     (2.0 %) 

Other expense, net

     0.1         0.0     —          0.0     0.1        N/A   
  

 

 

      

 

 

     

 

 

   

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

     14.4         3.3     (11.1     (2.4 %)      25.5        (229.7 %) 

Provision for income taxes

     5.5         1.2     6.5        1.4     (1.0     (15.4 %) 
  

 

 

      

 

 

     

 

 

   

Income (loss) before equity income

     8.9         2.0     (17.6     (3.8 %)      26.5        (150.6 %) 

Equity income, net of tax

     0.2         0.0     0.5        0.1     (0.3     (60.0 %) 
  

 

 

      

 

 

     

 

 

   

Net income (loss)

     9.1         2.1     (17.1     (3.7 %)      26.2        (153.2 %) 

Less: Net income attributable to noncontrolling interest

     0.1         0.0     —          0.0     0.1        N/A   
  

 

 

      

 

 

     

 

 

   

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

   $ 9.0         2.0   $ (17.1     (3.7 %)    $ 26.1        (152.6 %) 
  

 

 

      

 

 

     

 

 

   

Adjusted EBITDA

   $ 29.6         6.7   $ 36.3        7.9   $ (6.7     (18.5 %) 

 

N/M—Not meaningful

N/A—Not applicable

(a) Amounts include non-cash profits interest compensation expense of $0 and $29.3 million for the three months ended June 30, 2014 and 2013, respectively.

Net sales

Net sales decreased by $21.0 million, or 4.6%, from $461.5 million for the three months ended June 30, 2013 to $440.5 million for the three months ended June 30, 2014. Net sales decreased by $10.1 million due to lower volume, $4.9 million due to a decrease in the sales of unprocessed metals, $5.0 million due to lower metal prices and by $1.0 million resulting from the net effect of increases in average selling prices and the shift in product mix in the three months ended June 30, 2014 as compared to the same period in 2013. 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 decreased by 3.6 million pounds, or 2.6%, from 138.4 million pounds for the three months ended June 30, 2013 to 134.8 million pounds for the three months ended June 30, 2014. The decrease in volume was primarily attributable to lower demand in the electronics/electrical components end market resulting primarily from a customer sourcing their finished products offshore, which negatively impacted demand for brass rod in this end market. Additionally, the decrease in volume was due to lower demand in the building and housing end market as a consequence of customer inventory adjustments resulting from the inclement weather during the first quarter of 2014. The decline in volume was also impacted by lower shipments to the munitions end market resulting from operational issues which adversely impacted production at Olin Brass. The decrease in volume was partially offset by higher demand in the transportation and coinage end markets.

 

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The metal cost recovery component of net sales decreased by $16.3 million, or 5.1%, from $319.2 million for the three months ended June 30, 2013 to $302.9 million for the three months ended June 30, 2014.

Lower metal prices decreased the cost recovery component of net sales by $5.0 million. Lower volume and sales of unprocessed metal decreased the metal cost recovery component of net sales by $6.4 million and $4.9 million, respectively, in the three months ended June 30, 2014 as compared to the same period in 2013.

Adjusted sales

Adjusted sales, which is the excess of net sales over the metal cost recovery component of net sales, decreased by $4.7 million, or 3.3%, from $142.3 million for the three months ended June 30, 2013 to $137.6 million for the three months ended June 30, 2014. Lower volume decreased adjusted sales by $3.7 million. Additionally, adjusted sales decreased by $1.0 million resulting from the net effect of increases in average selling prices and the shift in product mix. Adjusted sales per pound declined slightly in the three months ended June 30, 2014 compared to the same period in 2013, which was the net effect of increases in average selling prices and the shift in product mix.

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
June 30,
     Change:  
        2014 vs. 2013  
(in millions, except per pound values)    2014      2013      Amount     Percent  

Pounds shipped (a)

     134.8         138.4         (3.6     (2.6 %) 

Net sales

   $ 440.5       $ 461.5       $ (21.0     (4.6 %) 

Metal component of net sales

     302.9         319.2         (16.3     (5.1 %) 
  

 

 

    

 

 

    

 

 

   

Adjusted sales

   $ 137.6       $ 142.3       $ (4.7     (3.3 %) 
  

 

 

    

 

 

    

 

 

   

$ per pound shipped

          

Net sales per pound

   $ 3.27       $ 3.33       $ (0.06     (1.8 %) 

Metal component of net sales per pound

     2.25         2.31         (0.06     (2.6 %) 
  

 

 

    

 

 

    

 

 

   

Adjusted sales per pound

   $ 1.02       $ 1.02       $ —          0.0
  

 

 

    

 

 

    

 

 

   

Average copper price per pound reported by COMEX (b)

   $ 3.10       $ 3.25       $ (0.15     (4.6 %) 

 

(a) Amounts exclude quantity of unprocessed metal sold.
(b) Copper prices from the Commodity Exchange (“COMEX”)

Gross profit

Gross profit decreased by $7.5 million, or 14.5%, from $51.7 million for the three months ended June 30, 2013 to $44.2 million for the three months ended June 30, 2014. Gross profit per pound shipped decreased from $0.37 for the three months ended June 30, 2013 as compared to $0.33 for the three months ended June 30, 2014.

 

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Gross profit for the three months ended June 30, 2014 included a loss of $0.2 million related to net unrealized losses on derivative contracts and a $0.1 million non-cash charge related to a lower of cost or market adjustment for the write down of inventory. Gross profit for the three months ended June 30, 2013 included a loss of $0.1 million related to net unrealized losses 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 Adjusted EBITDA. See “—Non-GAAP Measures—Adjusted EBITDA”.

Depreciation expense included in gross profit increased from $1.8 million for the three months ended June 30, 2013 to $2.4 million for the three months ended June 30, 2014. The increase is attributable to an increase in our depreciable asset base from June 30, 2013 to June 30, 2014.

Several other factors decreased gross profit by $7.0 million in the three months ended June 30, 2014 as compared to the same period in 2013. The decrease was due to higher manufacturing conversion costs of $4.1 million, primarily due to operational issues which adversely impacted product flow and yield at Olin Brass. Additionally, gross profit decreased by $1.4 million due to lower volume, $1.0 million resulting from the net effect of increases in average selling prices and the shift in product mix and $0.5 million due to higher shrinkage costs resulting from lower yields.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $32.9 million, or 62.3%, from $52.8 million for the three months ended June 30, 2013 to $19.9 million for the three months ended June 30, 2014.

Non-cash compensation charges for vested profits interest shares included in selling, general and administrative expenses were $8.9 million for the three months ended June 30, 2013. Additionally, during the three months ended June 30, 2013, Halkos modified the Halkos Holdings, LLC Executive Equity Incentive Plan (“Halkos Equity Plan”) to eliminate its right to acquire all or a portion of non-voting membership interests to select members of the Company’s management (entitled “Class B Shares”) for less than fair market value under certain conditions. The Class B Shares were profits interests in Halkos. This modification to the Halkos Equity Plan triggered the recognition of $20.4 million of incremental non-cash compensation expense during the three months ended June 30, 2013.

During the three months ended June 30, 2013, in connection with our May 2013 initial public offering of 8,050,000 shares of common stock (the “IPO”), the Company terminated its Management Services Agreement with affiliates of KPS Funds prior to the expiration of the initial term and was 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. The Company paid affiliates of KPS Funds $4.5 million related to the Company’s early termination and all unpaid management advisory fees and recorded the charges in selling, general and administrative expenses.

We incurred professional fees for accounting, tax, legal and consulting services related to costs incurred as a publicly traded company of $0.9 million during the three months ended June 30, 2014. We incurred professional fees for accounting, tax, legal and consulting services related to IPO efforts, our registered “A/B exchange offer” with respect to our Senior Secured Notes (“Exchange Offer”) and public company readiness efforts of $0.7 million during the three months ended June 30, 2013. Additionally, for the three months ended June 30, 2014 and 2013, we recognized $1.3 million and $0.2 million, respectively, in share-based compensation resulting from the grant of non-qualified stock options, restricted stock and performance-based shares to certain employees, members of our management and our Board of Directors.

 

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Depreciation expense included in selling, general and administrative expenses increased from $0.2 million for the three months ended June 30, 2013 to $0.6 million for the three months ended June 30, 2014. The increase is attributable to an increase in our depreciable asset base from June 30, 2013 to June 30, 2014.

Other offsetting factors contributed $0.8 million to the decrease in selling, general and administrative expenses in the three months ended June 30, 2014 as compared to the same period in 2013. Salaries, benefits and incentive compensation decreased by $1.0 million, partially offset by an increase in other miscellaneous selling, general and administrative expenses of $0.2 million.

Interest expense

Interest expense decreased from $10.0 million for the three months ended June 30, 2014 to $9.8 million for the three months ended June 30, 2014. The decrease was primarily due to lower average borrowings on our debt facilities of $382.5 million in 2014 as compared to $385.8 million in 2013. Interest rates remained constant compared to the same period in the prior year (a weighted average of 9.3% per annum during the second quarter 2014 and second quarter 2013).

The following table summarizes the components of interest expense:

 

     Three Months Ended  
     June 30,  
(in millions)    2014     2013  

Interest on principal

   $ 9.0      $ 9.1   

Amortization of debt issuance costs

     0.7        0.6   

Capitalized interest

     (0.1     —     

Other borrowing costs (a)

     0.2        0.3   
  

 

 

   

 

 

 

Interest expense

   $ 9.8      $ 10.0   
  

 

 

   

 

 

 

 

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

Provision for income taxes

The provision for income taxes was $5.5 million for the three months ended June 30, 2014 compared to $6.5 million for the three months ended June 30, 2013. The change in the provision for income taxes was due to lower taxable income in the three months ended June 30, 2014 as compared with the three months ended June 30, 2013. The $29.3 million of non-cash compensation charges for vested profits interest shares recorded in the three months ended June 30, 2013 is non-deductible for tax purposes.

 

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The following table summarizes the effective income tax rate components:

 

     Three Months Ended  
     June 30,  
     2014     2013  

Statutory provision rate

     35.0     35.0

Permanent differences and other items

    

State tax provision

     3.2     (5.4 %) 

Section 199 manufacturing credit

     (3.3 %)      5.0

Return to provision adjustments

     0.1     0.7

Non-deductible non-cash compensation

     —          (92.0 %) 

Other

     3.2     (1.9 %) 
  

 

 

   

 

 

 

Effective income tax rate

     38.2     (58.6 %) 
  

 

 

   

 

 

 

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

Net income (loss) attributable to Global Brass and Copper Holdings, Inc. increased from a loss of $17.1 million for the three months ended June 30, 2013 to income of $9.0 million for the three months ended June 30, 2014 mainly due to a decrease in non-cash compensation expense, management fees and other selling, general and administrative expenses, partially offset by a decrease in gross profit, which are described above.

Adjusted EBITDA

Adjusted EBITDA decreased by $6.7 million, or 18.5%, from $36.3 million for the three months ended June 30, 2013 to $29.6 million for the three months ended June 30, 2014. The decrease was due to higher manufacturing conversion costs of $4.1 million, primarily due to operational issues which adversely impacted product flow and yield at Olin Brass, lower volume of $1.4 million, higher shrinkage costs of $0.5 million, the net effect of increases in average selling prices and the shift in product mix of $1.0 million and higher other expenses of $0.5 million. Partially offsetting this was a decline of $0.8 million in other selling, general and administrative expenses.

 

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Below is a reconciliation of net income (loss) attributable to Global Brass and Copper Holdings, Inc. to Adjusted EBITDA:

 

     Three Months Ended
June 30,
 
(in millions)    2014     2013  

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

   $ 9.0      $ (17.1

Interest expense

     9.8        10.0   

Provision for income taxes

     5.5        6.5   

Depreciation expense

     3.0        2.0   

Amortization expense

     —          —     

Unrealized loss on derivative contracts (a)

     0.2        0.1   

Non-cash accretion of income of Dowa Joint Venture (b)

     (0.2     (0.2

Non-cash Halkos profits interest compensation expense (c)

     —          29.3   

Management fees (d)

     —          4.5   

Specified legal/professional expenses (e)

     0.9        0.7   

Lower of cost or market adjustment to inventory (f)

     0.1        0.3   

Share-based compensation expense (g)

     1.3        0.2   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 29.6      $ 36.3   
  

 

 

   

 

 

 

 

(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 Dowa Joint Venture. This adjustment represents the accretion of equity in our Dowa Joint Venture 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 4 to our unaudited consolidated financial statements, which are included elsewhere in this report.
(c) The 2013 amount includes $20.4 million that represents incremental non-cash compensation as a result of the modification made to the Halkos Equity Plan to eliminate Halkos’ right to acquire all or a portion of the Class B Shares for less than fair market value upon certain conditions. The 2013 amount also includes $8.9 million that represents dividend payments made by Halkos to members of our management that resulted in a non-cash compensation charge in connection with the IPO that occurred in May 2013.
(d) The 2013 amount represents an early termination fee equal to the value of the advisory fee that would have otherwise been payable to affiliates of KPS through the end of the agreement.
(e) Specified legal/professional expenses for the three months ended June 30, 2014 includes $0.9 million of professional fees for accounting, tax, legal and consulting services related to costs incurred as a publicly traded company. Specified legal/professional expenses for the three months ended June 30, 2013 includes $0.7 million of professional fees for accounting, tax, legal and consulting services related to the IPO, the Exchange Offer, public company readiness efforts and certain regulatory and compliance matters.
(f) Represents non-cash lower of cost or market charges for the write down of inventory recorded during the three months ended June 30, 2014 and 2013.
(g) Represents share-based compensation expense resulting from the grant of non-qualified stock options, restricted stock and performance-based shares to certain employees, 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 June 30, 2014, Compared to the Three Months Ended June 30, 2013.

 

     Three Months Ended     Change  
(in millions)    June 30,     2014 vs. 2013  
   2014     2013     Amount     Percent  

Pounds shipped (a)

        

Olin Brass

     72.2        73.8        (1.6     (2.2 %) 

Chase

     56.8        58.1        (1.3     (2.2 %) 

Oster

     16.6        17.1        (0.5     (2.9 %) 

Corporate and Other (b)

     (10.8     (10.6     (0.2     1.9
  

 

 

   

 

 

   

 

 

   

Total

     134.8        138.4        (3.6     (2.6 %) 
  

 

 

   

 

 

   

 

 

   

Net Sales

        

Olin Brass

   $ 227.4      $ 230.7      $ (3.3     (1.4 %) 

Chase

     152.7        164.7        (12.0     (7.3 %) 

Oster

     74.9        80.3        (5.4     (6.7 %) 

Corporate and Other (b)

     (14.5     (14.2     (0.3     2.1
  

 

 

   

 

 

   

 

 

   

Total

   $ 440.5      $ 461.5      $ (21.0     (4.6 %) 
  

 

 

   

 

 

   

 

 

   

Adjusted EBITDA

        

Olin Brass

   $ 10.0      $ 16.2      $ (6.2     (38.3 %) 

Chase

     17.7        18.9        (1.2     (6.3 %) 

Oster

     4.0        4.4        (0.4     (9.1 %) 
  

 

 

   

 

 

   

 

 

   

Total for operating segments

   $ 31.7      $ 39.5      $ (7.8     (19.7 %) 
  

 

 

   

 

 

   

 

 

   

 

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

See note 13 of our unaudited consolidated financial statements, which are included elsewhere in this report, for a reconciliation of Adjusted EBITDA of segments to income (loss) before provision for income taxes and equity income.

Olin Brass

Olin Brass net sales decreased by $3.3 million, or 1.4%, from $230.7 million for the three months ended June 30, 2013 to $227.4 million for the three months ended June 30, 2014. The decrease was due to lower volume, a shift in product mix, lower metal prices and a decrease in the sales of unprocessed metal, partially offset by higher average selling prices, including increases in sales prices to Oster (which are eliminated in our consolidated results).

Higher average selling prices, partially offset by a shift in product mix, lower metal prices and a decrease in the sales of unprocessed metal, increased net sales by $0.6 million for the three months ended June 30, 2014 as compared to the same period in 2013.

Volume decreased by 1.6 million pounds, or 2.2%, from 73.8 million pounds for the three months ended June 30, 2013 to 72.2 million pounds for the three months ended June 30, 2014. The decrease in volume, which contributed $3.9 million to the decrease in net sales, was the result of lower demand in the electronics/electrical components end market. The decline in volume was also impacted by lower shipments to the munitions end market resulting from operational issues which adversely impacted production at Olin Brass. The decrease in volume was partially offset by increased demand in the coinage end market.

 

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Adjusted EBITDA of Olin Brass decreased by $6.2 million, from $16.2 million for the three months ended June 30, 2013 to $10.0 million for the three months ended June 30, 2014. The decrease was due primarily to higher manufacturing conversion costs due to operational issues which adversely impacted product flow and yield at Olin Brass, lower volume, product mix and higher shrinkage costs. Partially offsetting the decrease were higher average selling prices and a decrease in other selling, general and administrative expenses.

Chase

Chase net sales decreased by $12.0 million, or 7.3%, from $164.7 million for the three months ended June 30, 2013 to $152.7 million for the three months ended June 30, 2014. The decrease was due primarily to lower volume and lower metal prices.

Lower metal prices for the three months ended June 30, 2014, contributed $8.3 million to the decrease in net sales as compared to the same period in 2013.

Volume decreased by 1.3 million pounds, or 2.2%, from 58.1 million pounds for the three months ended June 30, 2013 to 56.8 million pounds for the three months ended June 30, 2014. The decrease in volume, which contributed $3.7 million to the decrease in net sales, was partially attributable to lower demand in the electronics/electrical components end market resulting primarily from a customer sourcing their finished products offshore, which negatively impacted demand for brass rod in this end market. Additionally, the decrease was due to lower demand in the building and housing end market as a consequence of customer inventory adjustments resulting from the inclement weather during the first quarter of 2014. The decrease in volume was partially offset by higher demand in the transportation end market.

Adjusted EBITDA of Chase decreased by $1.2 million, from $18.9 million for the three months ended June 30, 2013 to $17.7 million for the three months ended June 30, 2014. The decrease was due primarily to lower volume and higher shrinkage costs.

Oster

Oster net sales decreased by $5.4 million, or 6.7%, from $80.3 million for the three months ended June 30, 2013 to $74.9 million for the three months ended June 30, 2014. The decrease was due primarily to lower volume, a shift in product mix and lower metal prices, partially offset by higher average selling prices in the three months ended June 30, 2014 compared to the same period in 2013.

A shift in product mix and lower metal prices, partially offset by higher average selling prices for the three months ended June 30, 2014 contributed $3.2 million to the decrease in net sales as compared to the same period in 2013.

Volume decreased by 0.5 million pounds, or 2.9%, from 17.1 million pounds for the three months ended June 30, 2013 to 16.6 million pounds for the three months ended June 30, 2014. The decrease in volume, which contributed $2.2 million to the decrease in net sales, was primarily the result of lower demand in the electronics/electrical components end market.

Adjusted EBITDA of Oster decreased by $0.4 million, from $4.4 million for the three months ended June 30, 2013 to $4.0 million for the three months ended June 30, 2014. The decrease was due primarily to higher prices on purchases from Olin Brass, which resulted in higher conversion costs (which are eliminated in our consolidated results), lower volume and product mix. Partially offsetting the decrease were higher average selling prices.

 

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Results of Operations

Consolidated Results of Operations for the Six Months Ended June 30, 2014, Compared to the Six Months Ended June 30, 2013.

 

     Six Months Ended
June 30,
    Change:  
       2014 vs. 2013  
(in millions)    2014      % of Net Sales     2013     % of Net Sales     Amount     Percent  

Net sales

   $ 884.3         100.0   $ 906.5        100.0   $ (22.2     (2.4 %) 

Cost of sales

     796.5         90.1     807.9        89.1     (11.4     (1.4 %) 
  

 

 

      

 

 

     

 

 

   

Gross profit

     87.8         9.9     98.6        10.9     (10.8     (11.0 %) 

Selling, general and administrative expenses (a)

     38.7         4.4     72.5        8.0     (33.8     (46.6 %) 
  

 

 

      

 

 

     

 

 

   

Operating income

     49.1         5.6     26.1        2.9     23.0        88.1

Interest expense

     19.7         2.2     19.9        2.2     (0.2     (1.0 %) 

Other expense, net

     0.2         0.0     0.2        0.0     —          0.0
  

 

 

      

 

 

     

 

 

   

Income before provision for income taxes and equity income

     29.2         3.3     6.0        0.7     23.2        386.7

Provision for income taxes

     10.8         1.2     12.5        1.4     (1.7     (13.6 %) 
  

 

 

      

 

 

     

 

 

   

Income (loss) before equity income

     18.4         2.1     (6.5     (0.7 %)      24.9        (383.1 %) 

Equity income, net of tax

     0.5         0.1     0.9        0.1     (0.4     (44.4 %) 
  

 

 

      

 

 

     

 

 

   

Net income (loss)

     18.9         2.1     (5.6     (0.6 %)      24.5        (437.5 %) 

Less: Net income attributable to noncontrolling interest

     0.2         0.0     0.1        0.0     0.1        100.0
  

 

 

      

 

 

     

 

 

   

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

   $ 18.7         2.1   $ (5.7     (0.6 %)    $ 24.4        (428.1 %) 
  

 

 

      

 

 

     

 

 

   

Adjusted EBITDA

   $ 58.3         6.6   $ 66.4        7.3   $ (8.1     (12.2 %) 

 

(a) Amounts include non-cash profits interest compensation expense of $0 and $29.3 million for the six months ended June 30, 2014 and 2013, respectively.

Net sales

Net sales decreased by $22.2 million, or 2.4%, from $906.5 million for the six months ended June 30, 2013 to $884.3 million for the six months ended June 30, 2014. Net sales decreased by $29.3 million due to lower metal prices, $3.3 million due to lower volume and by $2.1 million resulting from the net effect of increases in average selling prices and the shift in product mix in the six months ended June 30, 2014 as compared to the same period in 2013. An increase in the sales of unprocessed metals partially offset the decrease in net sales by $12.5 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 decreased by 0.9 million pounds, or 0.3%, from 269.9 million pounds for the six months ended June 30, 2013 to 269.0 million pounds for the six months ended June 30, 2014. The decrease in volume was primarily attributable to lower demand in the electronics/electrical components end market resulting primarily from a customer sourcing their finished products offshore, which negatively impacted demand for brass rod in this end market. The decrease in volume was partially offset by higher demand in the transportation, automotive and coinage end markets. Additionally, while volume increased in the building and housing end market in the six months ended June 30, 2014 as compared to the same period of 2013, demand was dampened by customer inventory adjustments in the second quarter of 2014 stemming from the inclement weather during the first quarter of 2014.

 

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The metal cost recovery component of net sales decreased by $19.1 million, or 3.1%, from $624.6 million for the six months ended June 30, 2013 to $605.5 million for the six months e