Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________ 
FORM 10-Q
__________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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.jpg
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 1200
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, if any, every Interactive Data File required to be submitted 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 such files).  Yes x  No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 October 25, 2018, there were 22,199,385 shares of common stock outstanding.
 


Table of Contents

Global Brass and Copper Holdings, Inc.
Index
September 30, 2018
Table of Contents
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

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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
(in millions, except share and par value data)
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
101.1

 
$
59.0

Accounts receivable (net of allowance of $1.1 and $1.0 at September 30, 2018 and December 31, 2017, respectively)
199.6

 
197.8

Inventories
218.8

 
208.1

Prepaid expenses and other current assets
10.2

 
11.7

Income tax receivable
4.0

 
3.6

Total current assets
533.7

 
480.2

Property, plant and equipment
237.6

 
221.9

Less: Accumulated depreciation
(94.2
)
 
(79.0
)
Property, plant and equipment, net
143.4

 
142.9

Goodwill
4.4

 
4.5

Intangible assets, net
1.7

 
2.0

Deferred income taxes
8.6

 
16.1

Other noncurrent assets
6.8

 
6.5

Total assets
$
698.6

 
$
652.2

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Current portion of debt
$
5.0

 
$
5.0

Accounts payable
121.2

 
117.1

Accrued liabilities
30.9

 
36.0

Accrued interest
0.2

 
0.2

Income tax payable
0.6

 
0.5

Total current liabilities
157.9

 
158.8

Noncurrent portion of debt
306.3

 
309.0

Other noncurrent liabilities
38.2

 
37.1

Total liabilities
502.4

 
504.9

Commitments and Contingencies (Note 12)

 

Global Brass and Copper Holdings, Inc. stockholders’ equity:
 
 
 
Common stock - $0.01 par value; 80,000,000 shares authorized; 22,541,416 and 22,133,764 shares issued at September 30, 2018 and December 31, 2017, respectively
0.2

 
0.2

Additional paid-in capital
60.4

 
54.5

Retained earnings
144.3

 
97.3

Treasury stock - 342,031 and 226,576 shares at September 30, 2018 and December 31, 2017, respectively
(10.0
)
 
(6.6
)
Accumulated other comprehensive loss
(3.5
)
 
(2.9
)
Total Global Brass and Copper Holdings, Inc. stockholders’ equity
191.4

 
142.5

Noncontrolling interest
4.8

 
4.8

Total equity
196.2

 
147.3

Total liabilities and equity
$
698.6

 
$
652.2

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

1

Table of Contents

Global Brass and Copper Holdings, Inc.
Consolidated Statements of Operations (Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per share data)
2018
 
2017
 
2018
 
2017
Net sales
$
429.9

 
$
359.4

 
$
1,361.1

 
$
1,153.7

Cost of sales
(387.0
)
 
(315.8
)
 
(1,211.3
)
 
(1,015.3
)
Gross profit
42.9

 
43.6

 
149.8

 
138.4

Selling, general and administrative expenses
(22.0
)
 
(19.4
)
 
(68.5
)
 
(61.6
)
Operating income
20.9

 
24.2

 
81.3

 
76.8

Interest expense
(4.1
)
 
(4.4
)
 
(12.7
)
 
(13.9
)
Loss on extinguishment of debt

 
(0.2
)
 
(0.5
)
 
(0.2
)
Other (expense) income, net

 
(0.6
)
 
(1.0
)
 
3.6

Income before provision for income taxes
16.8

 
19.0

 
67.1

 
66.3

Provision for income taxes
(1.9
)
 
(6.6
)
 
(15.2
)
 
(20.4
)
Net income
14.9

 
12.4

 
51.9

 
45.9

Net income attributable to noncontrolling interest
(0.1
)
 
(0.1
)
 
(0.3
)
 
(0.4
)
Net income attributable to Global Brass and Copper Holdings, Inc.
$
14.8

 
$
12.3

 
$
51.6

 
$
45.5

Net income attributable to Global Brass and Copper Holdings, Inc. per common share:
 
 
 
 
 
 
 
Basic
$
0.67

 
$
0.56

 
$
2.35

 
$
2.10

Diluted
$
0.66

 
$
0.56

 
$
2.31

 
$
2.06

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
22.1

 
21.8

 
22.0

 
21.7

Diluted
22.4

 
22.1

 
22.3

 
22.1

Dividends declared per common share
$
0.0900

 
$
0.0600

 
$
0.2100

 
$
0.1350

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

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Table of Contents

Global Brass and Copper Holdings, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2018
 
2017
 
2018
 
2017
Net income
$
14.9

 
$
12.4

 
$
51.9

 
$
45.9

Other comprehensive income (loss):
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Net derivative gain (loss) on hedge transactions
1.2

 

 
1.0

 

Income taxes on derivative transactions
(0.4
)
 

 
(0.3
)
 

Foreign currency translation:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(0.7
)
 
0.2

 
(1.4
)
 
1.5

Income tax (expense) benefit on foreign currency translation adjustment
(0.1
)
 

 
(0.2
)
 
(0.2
)
Comprehensive income
14.9

 
12.6

 
51.0

 
47.2

Comprehensive (income) loss attributable to noncontrolling interest
0.1

 
(0.2
)
 

 
(0.6
)
Comprehensive income attributable to Global Brass and Copper Holdings, Inc.
$
15.0

 
$
12.4

 
$
51.0

 
$
46.6

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 (Unaudited)
 
(in millions, except share data)
Shares outstanding
 
Common
stock
 
Additional
paid-in
capital
 
Retained earnings
 
Treasury
stock
 
Accumulated
other
comprehensive
loss
 
Total
Global Brass
and Copper
Holdings, Inc.
stockholders’
equity
 
Noncontrolling
interest
 
Total
equity
Balance at December 31, 2016
21,633,067

 
$
0.2

 
$
45.0

 
$
51.2

 
$
(1.5
)
 
$
(4.1
)
 
$
90.8

 
$
4.4

 
$
95.2

Share-based compensation
379,771

 

 
6.3

 

 

 

 
6.3

 

 
6.3

Exercise of stock options
38,381

 

 
0.7

 

 

 

 
0.7

 

 
0.7

Share repurchases
(147,427
)
 

 

 

 
(5.1
)
 

 
(5.1
)
 

 
(5.1
)
Adoption of ASU 2016-09

 

 
0.5

 
(0.5
)
 

 

 

 

 

Dividends declared

 

 

 
(3.1
)
 

 

 
(3.1
)
 

 
(3.1
)
Net income

 

 

 
45.5

 

 

 
45.5

 
0.4

 
45.9

Other comprehensive income (loss), net of tax

 

 

 

 

 
1.1

 
1.1

 
0.2

 
1.3

Balance at September 30, 2017
21,903,792

 
$
0.2

 
$
52.5

 
$
93.1

 
$
(6.6
)
 
$
(3.0
)
 
$
136.2

 
$
5.0

 
$
141.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
21,907,188

 
$
0.2

 
$
54.5

 
$
97.3

 
$
(6.6
)
 
$
(2.9
)
 
$
142.5

 
$
4.8

 
$
147.3

Share-based compensation
326,552

 

 
4.6

 

 

 

 
4.6

 

 
4.6

Exercise of stock options
81,100

 

 
1.3

 

 

 

 
1.3

 

 
1.3

Share repurchases
(115,455
)
 

 

 

 
(3.4
)
 

 
(3.4
)
 

 
(3.4
)
Dividends declared

 

 

 
(4.6
)
 

 

 
(4.6
)
 

 
(4.6
)
Net income

 

 

 
51.6

 

 

 
51.6

 
0.3

 
51.9

Other comprehensive income (loss), net of tax

 

 

 

 

 
(0.6
)
 
(0.6
)
 
(0.3
)
 
(0.9
)
Balance at September 30, 2018
22,199,385

 
$
0.2

 
$
60.4

 
$
144.3

 
$
(10.0
)
 
$
(3.5
)
 
$
191.4

 
$
4.8

 
$
196.2

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 Cash Flows (Unaudited)
 
 
Nine Months Ended September 30,
(in millions)
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
51.9

 
$
45.9

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Lower of cost or market adjustment to inventory
0.1

 
(0.8
)
Unrealized (gain) loss on derivatives
1.3

 
1.1

Depreciation
15.6

 
13.5

Amortization of intangible assets
0.3

 
0.1

Amortization of debt discount and issuance costs
0.9

 
1.0

Loss on extinguishment of debt
0.5

 
0.2

Share-based compensation expense
4.6

 
6.3

Provision for bad debts, net of reductions
0.6

 
0.3

Deferred income taxes
7.1

 
11.7

Loss on disposal of property, plant and equipment
0.1

 

Change in assets and liabilities, net of effects of business acquisition:
 
 
 
Accounts receivable
(2.0
)
 
(31.2
)
Inventories
(10.7
)
 
(12.5
)
Prepaid expenses and other current assets
(0.1
)
 
0.3

Accounts payable
5.4

 
8.6

Accrued liabilities
(3.5
)
 
(7.4
)
Income taxes, net
(0.5
)
 
(3.8
)
Other, net
1.7

 
(0.4
)
Net cash provided by (used in) operating activities
73.3

 
32.9

Cash flows from investing activities
 
 
 
Capital expenditures
(17.4
)
 
(18.4
)
Business acquisition
(1.7
)
 

Net cash used in investing activities
(19.1
)
 
(18.4
)
Cash flows from financing activities
 
 
 
Borrowings on ABL Facility
0.7

 
0.6

Payments on ABL Facility
(0.7
)
 
(0.6
)
Payments of debt issuance costs
(0.4
)
 
(0.2
)
Proceeds from term loan, net of discount
25.4

 
8.7

Payments on term loan
(27.8
)
 
(11.1
)
Principal payments under capital lease obligation
(1.4
)
 
(0.9
)
Dividends paid
(4.7
)
 
(3.0
)
Proceeds from exercise of stock options
1.3

 
0.7

Share repurchases
(3.4
)
 
(5.1
)
Net cash used in financing activities
(11.0
)
 
(10.9
)
Effect of foreign currency exchange rates
(1.1
)
 
(0.4
)
Net increase (decrease) in cash
42.1

 
3.2

Cash and cash equivalents at beginning of period
59.0

 
88.2

Cash and cash equivalents at end of period
$
101.1

 
$
91.4

Noncash investing and financing activities
 
 
 
Purchases of property, plant and equipment not yet paid
$
3.2

 
$
1.5

Acquisition of equipment under capital lease obligation
$
0.2

 
$

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

5

Table of Contents

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,” “GBC,” the “Company,” “we,” “us,” or “our”) is operated and managed through three reportable segments: Olin Brass, Chase Brass and A.J. Oster.
These unaudited consolidated financial statements include the accounts of the Company, our wholly-owned subsidiaries, and our majority-owned subsidiaries in which we have a controlling interest. All intercompany accounts and transactions are eliminated in consolidation.
The accompanying unaudited, interim consolidated financial statements include all normal recurring adjustments that are, in the opinion of management, necessary to fairly state the results for the interim periods presented. The December 31, 2017 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 (“US GAAP”). Certain information and disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted.
The preparation of financial statements in conformity with US 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. On January 1, 2018, we changed how we recognize unprocessed metal sales to toll customers as a result of the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The financial impacts of this change to the periods covered by this report are provided below. These interim, unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Recently Issued and Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU“) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service. ASU 2018-15 provides guidance on capitalizing hosting arrangement implementation costs and recognizing and presenting the expense and payments related to capitalized implementation costs for hosting arrangements in our financial statements. The provisions of ASU 2018-15 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and the provisions are to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are in the process of evaluating the impact of adoption on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU provides new guidance about the income statement classification of and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (“OCI”) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. We early adopted this guidance on May 25, 2018 upon entering into an interest rate swap agreement. The adoption of this standard did not impact our consolidated financial statements.

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Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business, which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance became effective on January 1, 2018 for interim and annual periods. The adoption of this standard did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with further clarification and improvements issued in ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842) Targeted Improvements, which are collectively referred to as Topic 842. The new lease guidance in Topic 842 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Topic 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease effectively finances a purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method (finance lease) or on a straight line basis over the term of the lease (operating lease). A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new lease guidance supersedes the existing guidance on accounting for leases in Leases (Topic 840). The provisions of Topic 842 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted.
We will adopt the new lease guidance on January 1, 2019 using the modified retrospective approach. As a result of adopting Topic 842, we will implement new processes and accounting policies. We are currently finalizing our accounting policies and determining changes needed in current processes for lease accounting and verifying the completeness of our lease population.
We are in the process of evaluating our current lease portfolio. While the impact of adoption will depend on our lease portfolio as of the adoption date and our accounting policy elections, we expect to recognize right of use assets and liabilities for our operating leases in the consolidated balance sheet upon adoption.

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Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, using the full retrospective method. The adoption of ASC Topic 606 impacted the timing of recognition of revenue from unprocessed metal sales to toll customers. The following tables summarize the effects of adopting ASC Topic 606 on our prior period unaudited Consolidated Financial Statements:
Consolidated Balance Sheet (Unaudited)
December 31, 2017
As Reported
 
Effects of the Adoption of ASC Topic 606
 
December 31, 2017
As Adjusted
(in millions, except share data)
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
59.0

 
$

 
$
59.0

Accounts receivable (net of allowance of $1.0)
197.9

 
(0.1
)
 
197.8

Inventories
208.1

 

 
208.1

Prepaid expenses and other current assets
33.3

 
(21.6
)
 
11.7

Income tax receivable
3.6

 

 
3.6

Total current assets
501.9

 
(21.7
)
 
480.2

Property, plant and equipment, net
142.9

 

 
142.9

Goodwill
4.5

 

 
4.5

Intangible assets, net
2.0

 

 
2.0

Deferred income taxes
16.1

 

 
16.1

Other noncurrent assets
6.5

 

 
6.5

Total assets
$
673.9

 
$
(21.7
)
 
$
652.2

Liabilities and equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current portion of debt
$
5.0

 
$

 
$
5.0

Accounts payable
117.1

 

 
117.1

Accrued liabilities
57.9

 
(21.9
)
 
36.0

Accrued interest
0.2

 

 
0.2

Income tax payable
0.5

 

 
0.5

Total current liabilities
180.7

 
(21.9
)
 
158.8

Noncurrent portion of debt
309.0

 

 
309.0

Other noncurrent liabilities
37.1

 

 
37.1

Total liabilities
526.8

 
(21.9
)
 
504.9

Global Brass and Copper Holdings, Inc. stockholders’ equity:
 
 
 
 
 
Common stock - 22,133,764 shares issued
0.2

 

 
0.2

Additional paid-in capital
54.5

 

 
54.5

Retained earnings
97.1

 
0.2

 
97.3

Treasury stock - 226,576 shares
(6.6
)
 

 
(6.6
)
Accumulated other comprehensive loss
(2.9
)
 

 
(2.9
)
Total Global Brass and Copper Holdings, Inc. stockholders’ equity
142.3

 
0.2

 
142.5

Noncontrolling interest
4.8

 

 
4.8

Total equity
147.1

 
0.2

 
147.3

Total liabilities and equity
$
673.9

 
$
(21.7
)
 
$
652.2


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Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

Consolidated Statement of Operations (Unaudited)
Three Months Ended
September 30, 2017
As Reported
 
Effects of the Adoption of ASC Topic 606
 
Three Months Ended
September 30, 2017
As Adjusted
 
Nine Months Ended
September 30, 2017
As Reported
 
Effects of the Adoption of ASC Topic 606
 
Nine Months Ended
September 30, 2017
As Adjusted
(in millions, except per share data)
Net sales
$
378.6

 
$
(19.2
)
 
$
359.4

 
$
1,149.3

 
$
4.4

 
$
1,153.7

Cost of sales
(334.8
)
 
19.0

 
(315.8
)
 
(1,010.9
)
 
(4.4
)
 
(1,015.3
)
Gross profit
43.8

 
(0.2
)
 
43.6

 
138.4

 

 
138.4

Selling, general and administrative expenses
(19.4
)
 

 
(19.4
)
 
(61.6
)
 

 
(61.6
)
Operating income
24.4

 
(0.2
)
 
24.2

 
76.8

 

 
76.8

Interest expense
(4.4
)
 

 
(4.4
)
 
(13.9
)
 

 
(13.9
)
Loss on extinguishment of debt
(0.2
)
 

 
(0.2
)
 
(0.2
)
 

 
(0.2
)
Other income (expense), net
(0.6
)
 

 
(0.6
)
 
3.6

 

 
3.6

Income before provision for income taxes
19.2

 
(0.2
)
 
19.0

 
66.3

 

 
66.3

Provision for income taxes
(6.7
)
 
0.1

 
(6.6
)
 
(20.4
)
 

 
(20.4
)
Net income
12.5

 
(0.1
)
 
12.4

 
45.9

 

 
45.9

Net income attributable to noncontrolling interest
(0.1
)
 

 
(0.1
)
 
(0.4
)
 

 
(0.4
)
Net income attributable to Global Brass and Copper Holdings, Inc.
$
12.4

 
$
(0.1
)
 
$
12.3

 
$
45.5

 
$

 
$
45.5

Net income attributable to Global Brass and Copper Holdings, Inc. per common share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.57

 
$
(0.01
)
 
$
0.56

 
$
2.10

 
$

 
$
2.10

Diluted
$
0.56

 
$

 
$
0.56

 
$
2.06

 
$

 
$
2.06

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
21.8

 

 
21.8

 
21.7

 

 
21.7

Diluted
22.1

 

 
22.1

 
22.1

 

 
22.1

Consolidated Statement of Comprehensive Income (Unaudited)
Three Months Ended
September 30, 2017
As Reported
 
Effects of the Adoption of ASC Topic 606
 
Three Months Ended
September 30, 2017
As Adjusted
 
Nine Months Ended
September 30, 2017
As Reported
 
Effects of the Adoption of ASC Topic 606
 
Nine Months Ended
September 30, 2017
As Adjusted
(in millions)
Net income
$
12.5

 
$
(0.1
)
 
$
12.4

 
$
45.9

 
$

 
$
45.9

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
0.2

 

 
0.2

 
1.5

 

 
1.5

Income tax (expense) benefit on foreign currency translation adjustment

 

 

 
(0.2
)
 

 
(0.2
)
Comprehensive income
12.7

 
(0.1
)
 
12.6

 
47.2

 

 
47.2

Comprehensive (income) loss attributable to noncontrolling interest
(0.2
)
 

 
(0.2
)
 
(0.6
)
 

 
(0.6
)
Comprehensive income attributable to Global Brass and Copper Holdings, Inc.
$
12.5

 
$
(0.1
)
 
$
12.4

 
$
46.6

 
$

 
$
46.6


9

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

Consolidated Statement of Changes in Equity (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions, except share data)
Shares outstanding
 
Common
stock
 
Additional
paid-in
capital
 
Retained earnings
 
Treasury
stock
 
Accumulated
other
comprehensive
loss
 
Total
Global Brass
and Copper
Holdings, Inc.
stockholders’
equity
 
Noncontrolling
interest
 
Total
equity
December 31, 2016 - as reported
21,633,067

 
$
0.2

 
$
45.0

 
$
51.2

 
$
(1.5
)
 
$
(4.1
)
 
$
90.8

 
$
4.4

 
$
95.2

Cumulative effect adjustment of ASC Topic 606 on January 1, 2017

 

 

 

 

 

 

 

 

December 31, 2016 - as adjusted
21,633,067

 
0.2

 
45.0

 
51.2

 
(1.5
)
 
(4.1
)
 
90.8

 
4.4

 
95.2

Nine months ended September 30, 2017 - as reported
270,725

 

 
7.5

 
41.9

 
(5.1
)
 
1.1

 
45.4

 
0.6

 
46.0

Effect of the adoption of ASC Topic 606

 

 

 

 

 

 

 

 

September 30, 2017 - as adjusted
21,903,792

 
$
0.2

 
$
52.5

 
$
93.1

 
$
(6.6
)
 
$
(3.0
)
 
$
136.2

 
$
5.0

 
$
141.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017 - as reported
21,907,188

 
$
0.2

 
$
54.5

 
$
97.1

 
$
(6.6
)
 
$
(2.9
)
 
$
142.3

 
$
4.8

 
$
147.1

Cumulative effect adjustment of ASC Topic 606 on January 1, 2018

 

 

 
0.2

 

 

 
0.2

 

 
0.2

December 31, 2017 - as adjusted
21,907,188

 
$
0.2

 
$
54.5

 
$
97.3

 
$
(6.6
)
 
$
(2.9
)
 
$
142.5

 
$
4.8

 
$
147.3


10

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 2017
As Reported
 
Effects of the Adoption of
ASC Topic 606
 
Nine Months Ended September 30, 2017
As Adjusted
(in millions)
Cash flows from operating activities
 
 
 
 
 
Net income
$
45.9

 
$

 
$
45.9

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Lower of cost or market adjustment to inventory
(0.8
)
 

 
(0.8
)
Unrealized (gain) loss on derivatives
1.1

 

 
1.1

Depreciation
13.5

 

 
13.5

Amortization of intangible assets
0.1

 

 
0.1

Amortization of debt discount and issuance costs
1.0

 

 
1.0

Loss on extinguishment of debt
0.2

 

 
0.2

Share-based compensation expense
6.3

 

 
6.3

Provision for bad debts, net of reductions
0.3

 

 
0.3

Deferred income taxes
11.7

 

 
11.7

Change in assets and liabilities:
 
 
 
 
 
Accounts receivable
(31.2
)
 

 
(31.2
)
Inventories
(12.5
)
 

 
(12.5
)
Prepaid expenses and other current assets
(4.1
)
 
4.4

 
0.3

Accounts payable
8.6

 

 
8.6

Accrued liabilities
(3.0
)
 
(4.4
)
 
(7.4
)
Income taxes, net
(3.8
)
 

 
(3.8
)
Other, net
(0.4
)
 

 
(0.4
)
Net cash provided by (used in) operating activities
32.9

 

 
32.9

Cash flows from investing activities
 
 
 
 
 
Capital expenditures
(18.4
)
 

 
(18.4
)
Net cash used in investing activities
(18.4
)
 

 
(18.4
)
Cash flows from financing activities
 
 
 
 
 
Borrowings on ABL Facility
0.6

 

 
0.6

Payments on ABL Facility
(0.6
)
 

 
(0.6
)
Payments of debt issuance costs
(0.2
)
 

 
(0.2
)
Proceeds from term loan, net of discount
8.7

 

 
8.7

Payments on term loan
(11.1
)
 

 
(11.1
)
Principal payments under capital lease obligation
(0.9
)
 

 
(0.9
)
Dividends paid
(3.0
)
 

 
(3.0
)
Proceeds from exercise of stock options
0.7

 

 
0.7

Share repurchases
(5.1
)
 

 
(5.1
)
Net cash used in financing activities
(10.9
)
 

 
(10.9
)
Effect of foreign currency exchange rates
(0.4
)
 

 
(0.4
)
Net increase (decrease) in cash
3.2

 

 
3.2

Cash and cash equivalents at beginning of period
88.2

 

 
88.2

Cash and cash equivalents at end of period
$
91.4

 
$

 
$
91.4


11

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

2.
Revenue
On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, using the full retrospective method. The adoption of ASC Topic 606 impacted the timing of recognition of revenue from unprocessed metal sales to toll customers. See Note 1, “Basis of Presentation and Principles of Consolidation,” for further discussion of the adoption including the impact on our 2017 financial statements.
Revenue is measured based on the consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. Revenue is recognized when performance obligations to our customers are satisfied; generally this occurs with the transfer of control to our customers. We recognize revenue when title and risk of loss are transferred to the customer, which is generally the date the product is shipped. Estimates for rebates, returns and payment discounts are recognized in the period in which the corresponding revenue is recorded based on historical experience. Our terms of shipping are generally FOB shipping point. We elect to account for the shipping costs incurred after transfer of control to the customer as fulfillment costs.
Non-toll customers
We generate revenues primarily by procuring scrap and virgin metal, converting the metal to a finished product, and charging customers a conversion fee and metal replacement fee. Non-toll customers generally assume title and risk of loss for product upon shipment, in accordance with FOB shipping terms.
Toll Customers
We also procure scrap and virgin metal for a small number of customers and sell it to them. Title to the metal and risk of loss transfers to the customer upon sale. We then hold the metal for them on our premises together with our metal. We also sell converted finished products to these customers. We charge the customer and earn a conversion fee when we transfer control of the processed metal to the customer upon shipment, which is generally FOB shipping point. We accept their metal in place of charging a metal replacement fee.
The following table presents our revenues disaggregated by market based on the customer’s primary market or the primary market for the shipped product:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2018
 
2017
 
2018
 
2017
Building and housing
$
143.8

 
$
115.6

 
$
457.7

 
$
354.5

Automotive and transportation
84.3

 
78.5

 
262.6

 
231.7

Munitions
44.9

 
25.5

 
132.3

 
148.1

Coinage
44.4

 
35.3

 
131.1

 
107.4

Industrial machinery and equipment
35.9

 
35.1

 
113.0

 
105.2

Electronics / electrical components
36.8

 
33.2

 
113.6

 
99.7

Other
39.8

 
36.2

 
150.8

 
107.1

Net sales
$
429.9

 
$
359.4

 
$
1,361.1

 
$
1,153.7

Generally, we bill customers when product is shipped in concurrence with revenue recognition. In some instances, we receive advance payment from customers prior to shipment and revenue recognition, at which time we record a liability for the advance payment. The expected duration from time of advance payment to time of shipment is less than one year. As of September 30, 2018, we had no advance payments in Accrued Liabilities. As of December 31, 2017, we had $0.4 million of advance payments in Accrued Liabilities. There was no revenue recognized during the three months ended September 30, 2018 and 2017 that was included in Accrued Liabilities at the beginning of the quarter. Revenue recognized during the nine months ended September 30, 2018 that was included in Accrued Liabilities at the beginning of the year was $0.4 million. There was no revenue recognized during the nine months ended September 30, 2017 that was included in Accrued Liabilities at the beginning of 2017.

12

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

3.
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 including the number of additional shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include nonvested share awards and stock options for which the exercise price was less than the average market price of our outstanding common stock. 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:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per share data)
2018
 
2017
 
2018
 
2017
Numerator
 
 
 
 
 
 
 
Net income attributable to Global Brass and Copper Holdings, Inc.
$
14.8

 
$
12.3

 
$
51.6

 
$
45.5

Denominator
 
 
 
 
 
 
 
Weighted-average common shares outstanding
22.1

 
21.8

 
22.0

 
21.7

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Stock options and nonvested share awards
0.3

 
0.3

 
0.3

 
0.4

Weighted-average common shares outstanding, assuming dilution
22.4

 
22.1

 
22.3

 
22.1

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from above
0.1

 
0.2

 
0.1

 
0.2

Net income attributable to Global Brass and Copper Holdings, Inc. per common share:
 
 
 
 
 
 
 
Basic
$
0.67

 
$
0.56

 
$
2.35

 
$
2.10

Diluted
$
0.66

 
$
0.56

 
$
2.31

 
$
2.06

On July 31, 2018, our Board of Directors authorized a share repurchase program (the “2018 Share Repurchase Program”), whereby we may repurchase up to $35.0 million of our common stock on the open market through September 30, 2020. There were no shares repurchased under this program during the three months ended September 30, 2018. In addition, we frequently buy shares of our common stock from employees as an accommodation to them to satisfy their tax withholding obligations under our stock compensation plans; these transactions are not included as part of the authorization under our 2018 Share Repurchase Program.
4.
Segment Information
Our Chief Operating Decision Maker allocates resources and evaluates performance at the divisional level. As such, we have determined that we have three reportable segments: Olin Brass, Chase Brass and A.J. Oster.
Olin Brass is a leading manufacturer, fabricator, and converter of non-ferrous products, including sheet, strip, foil, tube, and fabricated products. Olin Brass also rerolls and forms other alloys such as stainless steel, carbon steel, and aluminum. Sheet and strip is generally manufactured from copper and copper-alloy scrap. Olin Brass’s products are used in five primary markets: building and housing, munitions, automotive, coinage, and electronics / electrical components.
Chase Brass is a leading manufacturer of solid brass rod in North America. Chase Brass primarily manufactures solid rod in 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 for products such as valves and fittings. Brass rod is generally manufactured from copper or copper-alloy scrap. Chase Brass produces brass rod used in production applications which can be grouped into four primary markets: building and housing, transportation, electronics / electrical components, and industrial machinery and equipment.

13

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

A.J. Oster is a processor and distributor of copper and copper-alloy sheet, strip, and foil, aluminum sheet, and coated aluminum products. A.J. Oster operates eleven strategically located service centers in the U.S., Puerto Rico, and Mexico. Each A.J. Oster service center reliably provides products at quick lead-times in small quantities. These capabilities, combined with A.J. Oster’s operations of precision slitting, hot tinning, traverse winding, cutting, and special packaging, provide value to a broad customer base. A.J. Oster’s products are used in three primary markets: building and housing, automotive, and electronics / electrical components.
Corporate includes compensation for corporate executives, corporate office and administrative salaries, and professional fees for accounting, tax and legal services. Corporate also includes interest expense and income, state and federal income taxes, certain overhead costs, share-based compensation expense, gains and losses associated with certain acquisitions and dispositions, unrealized gains and losses on hedging activities, and the elimination of intercompany sales and 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.
Adjusted EBITDA is defined as net income attributable to Global Brass and Copper Holdings, Inc., plus interest, taxes, depreciation, and amortization (“EBITDA”) adjusted to exclude the following:
unrealized gains and losses on derivative contracts in support of our balanced book approach;
unrealized gains and losses associated with derivative contracts related to energy and utility costs;
impact associated with lower of cost or market adjustments to inventory;
gains and losses due to the depletion of a last-in, first out (“LIFO”) layer of metal inventory;
share-based compensation expense;
refinancing costs;
restructuring and other business transformation charges;
inventory step-up costs related to acquisition accounting;
specified legal and professional expenses; and
certain other items.
Each of these items are excluded because our management believes they are not indicative of the ongoing performance of our core operations.

14

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

Below is a reconciliation of adjusted EBITDA of segments to income before provision for income taxes:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2018
 
2017
 
2018
 
2017
Net Sales, External Customers
 
 
 
 
 
 
 
Olin Brass
$
163.5

 
$
137.7

 
$
518.0

 
$
487.3

Chase Brass
149.0

 
144.8

 
480.1

 
439.9

A.J. Oster
117.4

 
76.9

 
363.0

 
226.5

Total net sales, external customers
$
429.9

 
$
359.4

 
$
1,361.1

 
$
1,153.7

Intersegment Net Sales
 
 
 
 
 
 
 
Olin Brass
$
22.4

 
$
17.6

 
$
66.2

 
$
61.6

Chase Brass

 

 

 
0.1

A.J. Oster

 

 
0.1

 
0.1

Total intersegment net sales
$
22.4

 
$
17.6

 
$
66.3

 
$
61.8

Adjusted EBITDA
 
 
 
 
 
 
 
Olin Brass
$
11.4

 
$
11.8

 
$
45.5

 
$
38.7

Chase Brass
16.0

 
18.3

 
53.0

 
56.6

A.J. Oster
6.3

 
3.6

 
18.1

 
10.4

Total adjusted EBITDA of operating segments
33.7

 
33.7

 
116.6

 
105.7

Corporate (a)
(4.1
)
 
(3.6
)
 
(13.4
)
 
(4.6
)
Depreciation expense
(5.3
)
 
(4.5
)
 
(15.6
)
 
(13.5
)
Amortization expense
(0.1
)
 
(0.1
)
 
(0.3
)
 
(0.1
)
Interest expense, net
(4.1
)
 
(4.2
)
 
(12.7
)
 
(13.6
)
Net income attributable to noncontrolling interest
0.1

 
0.1

 
0.3

 
0.4

Unrealized (loss) gain on derivative contracts (b)
(0.7
)
 
0.3

 
(1.3
)
 
(1.1
)
Refinancing costs (c)

 
(0.9
)
 
(1.6
)
 
(0.9
)
Specified legal / professional expenses (d)

 
(0.5
)
 

 
(0.5
)
Lower of cost or market adjustment to inventory (e)
(1.2
)
 
0.7

 
(0.1
)
 
0.8

Share-based compensation expense (f)
(1.5
)
 
(2.0
)
 
(4.6
)
 
(6.3
)
Step-up costs from acquisition accounting

 

 
(0.2
)
 

Income before provision for income taxes
$
16.8

 
$
19.0

 
$
67.1

 
$
66.3

(a)
The nine months ended September 30, 2017 includes $7.4 million of insurance proceeds recoveries relating to a production outage in 2016.
(b)
Represents unrealized gains / losses on derivative contracts.
(c)
Represents the loss on extinguishment of debt and other expenses associated with our refinancing activities.
(d)
Represents selected professional fees for accounting, tax, legal and consulting services for merger and acquisition activity.
(e)
Represents the impact of lower of cost or market adjustments to domestic metal inventory.
(f)
Represents compensation expense resulting from stock compensation awards to certain employees and our Board of Directors.

15

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

5.
Inventories
Inventories were as follows:
 
As of
(in millions)
September 30,
2018
 
December 31,
2017
Raw materials and supplies
$
36.7

 
$
23.2

Work-in-process
73.4

 
73.5

Finished goods
108.7

 
111.4

Total inventories
$
218.8

 
$
208.1

Inventories include costs attributable to direct labor and manufacturing overhead, but are primarily comprised of metal costs. The metals component of inventories that is valued on a LIFO basis comprised 67% and 65% of total inventory at September 30, 2018 and December 31, 2017, 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 and nine months ended September 30, 2018 and 2017, we recorded adjustments for certain domestic metal inventory from the fluctuations in market value of these metals. For the three and nine months ended September 30, 2018 and 2017, these adjustments increased cost of sales by $1.2 million and $0.1 million and decreased cost of sales by $0.7 million and $0.8 million, respectively.
Below is a summary of inventories valued at period-end market values compared to the as reported values:
 
As of
(in millions)
September 30,
2018
 
December 31,
2017
Market value
$
306.1

 
$
329.1

As reported
218.8

 
208.1

Excess of market over reported value
$
87.3

 
$
121.0

6.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were as follows:
 
As of
(in millions)
September 30,
2018
 
December 31,
2017
Workers’ compensation plan deposits
$
3.1

 
$
3.8

Prepaid insurance
2.4

 
1.9

Derivative contract assets
0.4

 
2.0

Other
4.3

 
4.0

Total prepaid expenses and other current assets
$
10.2

 
$
11.7


16

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

7.    Accrued Liabilities
Accrued liabilities consisted of the following:
 
As of
(in millions)
September 30,
2018
 
December 31,
2017
Compensation and benefits
$
17.2

 
$
21.1

Workers’ compensation
3.1

 
2.9

Utilities
1.9

 
2.4

Professional fees
1.8

 
1.6

Taxes
1.3

 
1.4

Derivative contract liabilities
0.1

 
0.2

Other
5.5

 
6.4

Total accrued liabilities
$
30.9

 
$
36.0

8.
Financing
Long-term debt consisted of the following:
 
As of
(in millions)
September 30,
2018
 
December 31,
2017
Term Loan B Facility
$
313.6

 
$
316.0

Deferred financing fees and discount on debt
(5.1
)
 
(5.9
)
Obligations under capital lease
2.8

 
3.9

Total debt
311.3

 
314.0

Less: Current portion of debt
(5.0
)
 
(5.0
)
Noncurrent portion of debt
$
306.3

 
$
309.0

Term Loan B Facility
On July 18, 2016, we entered into a long-term credit agreement that matures July 18, 2023 (the “Term Loan B Credit Agreement” and the loans thereunder, the “Term Loan B Facility”) and provides for borrowings of $320.0 million. We may request an increase in the aggregate term loans, at our option and under certain circumstances, of up to an additional $75.0 million or an unlimited amount so long as after giving effect to any incremental facility or incremental equivalent debt, the net senior secured leverage ratio does not exceed 2.50 to 1.00 (but the lenders, in either case, are not obligated to grant such an increase). On December 30, 2016, we began making quarterly payments of $0.8 million with the balance expected to be due at maturity.
On each of July 18, 2017 and May 29, 2018, we amended the credit agreement governing our Term Loan B Facility (“Amended Term Loan B Credit Agreement”). The most recent refinancing reduced our interest rate by an additional 75 basis points, reduced the LIBO Rate floor from 1% to 0%, and extended the maturity date through May 29, 2025. The Amended Term Loan B Credit Agreement has a soft call prepayment penalty of 1% during the six months following the refinancing date. Amounts outstanding under this facility now bear interest at a rate per annum equal to, at our option, either (1) 1.50% plus an Alternate Base Rate (as defined in the Amended Term Loan B Credit Agreement) or (2) 2.50% plus the Adjusted LIBO Rate (as defined in the Amended Term Loan B Credit Agreement).
In order to minimize the variability in cash flows caused by fluctuations in market interest rates, we entered into an interest rate swap agreement on May 25, 2018, which expires on May 31, 2023. This swap agreement fixes the LIBOR rate on $150.0 million of our floating rate LIBOR debt at 2.75%. At September 30, 2018, amounts outstanding under the Term Loan B Facility combined with our interest rate swap derivative accrued interest at a weighted average rate of 4.99%.

17

Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

The Term Loan B Credit Agreement requires mandatory prepayments based on various events and circumstances as are customary in such agreements. Since December 31, 2017, we are subject to a 50% excess cash flow sweep, subject to step-downs to 25% and 0% depending on the total net leverage ratio from time to time. We may, however, voluntarily prepay outstanding loans under the Term Loan B Facility at any time.
ABL Facility
We have an asset-based revolving loan facility (the “ABL Credit Agreement” and together with the facility thereunder, the “ABL Facility”) that matures on July 19, 2021 and provides for borrowings of up to the lesser of $200.0 million or the borrowing base, in each case less outstanding loans and letters of credit.
As of September 30, 2018, we had no borrowings outstanding under the ABL Facility and available borrowings under the ABL Facility were $195.4 million after giving effect to $4.6 million of letters of credit outstanding, which are used to provide collateral for our insurance programs. We may request an increase in the maximum commitments, at our option and under certain circumstances, of up to $200.0 million (but the lenders are not obligated to grant such an increase).
The Credit Agreements
The ABL Credit Agreement and the Term Loan B Credit Agreement (together, the “Credit Agreements”) contain various covenants consistent with debt agreements of this kind, such as restrictions on the amounts of dividends we can pay. As of September 30, 2018, we were in compliance with all of the covenants relating to the Credit Agreements.
9.
Income Taxes
The effective income tax rate, which is the provision for income taxes as a percentage of income before provision for income taxes, was 11.3% and 34.7% for the three months ended September 30, 2018 and 2017, respectively, and 22.7% and 30.8% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in the effective income tax rate for the three and nine months ended September 30, 2018 is largely driven by the 2018 income tax rate reduction as well as additional re-measurement of deferred taxes recorded during the quarter resulting from changes in methods of tax accounting reflected in our 2017 federal income tax return. The effective income tax rates for the nine months ended September 30, 2018 and 2017 also differed from the U.S. Federal statutory rate of 21% and 35%, respectively, due to state income taxes, stock compensation, utilization of tax credits, and the domestic manufacturing deduction in 2017.
On December 22, 2017, the Tax Act was signed into law. The Tax Act made broad and complex changes to the U.S. tax code which include: a lowering of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, accelerated expensing of qualified capital investments for a specific period, and a transition from a worldwide to a territorial tax system which will require companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries that is payable over eight years.
The Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
Deemed Repatriation Transition Tax: The deemed repatriation transition tax (the “Transition Tax”) is a tax on certain previously untaxed accumulated and current earnings and profits (“E&P”) of our foreign subsidiaries. We were able to reasonably estimate the Transition Tax and recorded a provisional Transition Tax obligation of $1.0 million, net of foreign tax credits, for the year ended December 31, 2017. On the basis of revised foreign tax credits and E&P computations that were completed during the reporting period, we recognized an additional measurement-period adjustment of $0.1 million to income tax expense during the period. The Transition Tax, which has now been determined to be complete, resulted in recording a total Transition Tax obligation of $1.1 million.
Re-measurement of Deferred Taxes: The Act reduces the corporate tax rate to 21%, effective January 1, 2018. We were able to reasonably estimate a decrease to our deferred tax asset of $7.0 million for the year ended December 31, 2017. On the basis of tax accounting method changes made with the filing of the 2017 tax return, we recognized an additional measurement-period adjustment of $(2.0) million during the period. The Re-measurement of Deferred Taxes, which has now been determined to be complete, resulted in recording a decrease to our deferred tax assets of $5.0 million.

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Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

Uncertain Tax Positions: The Company must assess whether any Uncertain Tax Positions should be recorded as a result of the Tax Act. The Company has completed this assessment and did not record any Uncertain Tax Positions as a result of the Tax Act.
Our accounting for the Tax Act is still ongoing for items related to our reassessment of permanently reinvested earnings, valuation allowances, and certain compensation amounts. We have not made any additional measurement-period adjustments related to these items during the nine months ended September 30, 2018. We continue to gather additional information related to the above items and we anticipate additional IRS guidance relative to the impacts of the Tax Act will be forthcoming throughout 2018.
As of both September 30, 2018 and December 31, 2017, we had $25.2 million of unrecognized tax benefits, of which $8.5 million 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 the provision for income taxes in the accompanying consolidated statements of operations. Accrued interest and penalties as of September 30, 2018 and December 31, 2017 were $2.2 million and $2.1 million, respectively. Our liability for uncertain tax positions, including accrued interest and penalties, of $27.4 million and $27.3 million at September 30, 2018 and December 31, 2017, respectively, are presented in other noncurrent liabilities in the accompanying consolidated balance sheets.
Our U.S. federal returns for the period ended December 31, 2015 and all subsequent periods remain open for audit. In addition, the majority of state returns for the period ended December 31, 2014 and all subsequent periods remain open for audit.
10.
Derivative Contracts
We maintain a risk-management strategy that uses commodity derivative contracts to minimize significant, unanticipated gains or losses arising from fluctuations in certain commodity prices.
We are also exposed to credit risk and market risk through our use of derivative contracts. 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 market prices and rates. We manage 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.
We use a cash flow hedge to minimize the variability in cash flows caused by fluctuations in market interest rates. This derivative, which is a designated cash flow hedge, is carried at fair value. The change in fair value is recorded to accumulated other comprehensive income (loss) and reclassified to current earnings if hedge accounting cannot be applied because the hedge contract is not highly effective.
We manage credit risk associated with derivative contracts by executing derivative instruments with counterparties that we believe are credit-worthy. The amount of such credit risk is limited to the fair value of the derivative contract plus the unpaid portion of amounts due to us pursuant to terms of the derivative contracts, if any. If the credit-worthiness of these counterparties deteriorates, we believe the exposure is mitigated by provisions in the derivative arrangements which allow for the legal right of offset of amounts due to us from the counterparties, if any, with any amounts payable to the counterparties.
The following tables provide a summary of our outstanding derivative contracts:
 
As of
 
September 30, 2018
 
December 31, 2017
(in millions)
Net
Notional
Amount
 
Net
Notional
Amount
Cash flow hedge:
 
 
 
Interest rate swap
$
150.0

 
$

Commodity derivative contracts:
 
 
 
Metal
1.5

 
12.8

Energy and utilities
2.4

 
3.8

Total
$
153.9

 
$
16.6


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Table of Contents

Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)

 
As of
 
September 30, 2018
 
December 31, 2017
(in millions)
Notional
Position
 
Notional
Position
Commodity derivative contracts:
 
 
 
Notional amount - long
$
42.4

 
$
46.1

Notional amount - (short)
(38.5
)
 
(29.5
)
Net long / (short)
$
3.9

 
$
16.6

The fair values of derivative contracts in the consolidated balance sheets 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 open derivative contracts, the net amounts presented in the unaudited consolidated balance sheets, and the collateral deposited with counterparties:
 
As of September 30, 2018
(in millions)
Gross Amounts of
Recognized Assets
 
Gross Amounts Offset in
Consolidated Balance
Sheet
 
Net Amounts of Assets
Presented in Consolidated
Balance Sheet
Cash flow hedge:
 
 
 
 
 
Interest rate swap
$
1.0

 
$

 
$
1.0<