Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Readers should refer to the information presented under the caption “Risk Factors” for risk factors that may affect our future performance. The following discussion and analysis of financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this report. 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 sections entitled “Risk Factors” and “Cautionary Statements Concerning Forward-Looking Statements” included elsewhere in this report.
Overview
Our Company
Global Brass and Copper Holdings, Inc. (“Holdings,” “GBC,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware on October 10, 2007. We commenced commercial operations on November 19, 2007 following the acquisition of the metals business from Olin Corporation.
We are a leading, value-added converter, fabricator, processor, and distributor of specialized non-ferrous products, including a wide range of sheet, strip, foil, rod, tube, and fabricated metal component products. While we primarily process copper and copper alloys, we also reroll and form certain other metals such as stainless steel, carbon steel, and aluminum. Using processed scrap, virgin metals, and other refined metals, we engage in metal melting and casting, rolling, drawing, extruding, welding and stamping to fabricate finished and semi-finished alloy products. Key attributes of copper and copper alloys are conductivity, corrosion resistance, strength, malleability, cosmetic appearance, and bactericidal properties.
Unlike traditional metals companies, particularly those that engage in mining, smelting, and refining activities, we are purely a metal converter, fabricator, processor, and distributor, and we do not attempt to generate profits from fluctuations in metal prices. Our financial performance is primarily driven by metal conversion economics, not by the underlying movements in the commodity price of copper and the other metals we use. Through our “balanced book” approach, we strive to match the timing, quantity, and price of our metal sales with the timing, quantity, and price of our replacement metal purchases. This practice, along with our toll processing operations and last-in, first-out (“LIFO”) inventory accounting methodology, substantially eliminates the financial impact of fluctuating metal commodity prices on our earnings and operating margins.
Our products are used in a variety of applications across diversified markets, including the building and housing, munitions, automotive, transportation, coinage, electronics / electrical components, industrial machinery and equipment, signage, and general consumer markets. We access these markets through direct mill sales, our captive distribution network, and third-party distributors. We hold the exclusive production and distribution rights in North America for a lead-free brass rod product, which we sell under the Green Dot® and Eco Brass® brand names. We believe we are the only domestic copper and brass sheet manufacturer with captive distribution and service center operations, a competitive advantage which allows us to service and access customers with a wide variety of volume and service needs.
We service nearly
4,200
customers in
28
countries across
four
continents. We employ approximately
1,900
people and operate
16
manufacturing facilities and distribution centers across the United States (“U.S.”), Puerto Rico and Mexico.
We own 80% of a value-added service center in Guangzhou, China (“Olin Luotong Metals” or “OLM”); the other 20% is owned by Chinalco Luoyang Copper Co. Ltd. (“Chinalco”). Through Olin Luotong Metals, together with our sales offices in China and Singapore, we supply our products in China and throughout Southeast Asia.
Our Operating Segments
We operate through three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster.
Our Olin Brass segment is the leading manufacturer, fabricator and converter of specialized copper and brass sheet, strip, foil, tube and fabricated components in North America. While primarily processing copper and copper alloys, the segment also rerolls and forms other metals such as stainless steel, carbon steel and aluminum. Olin Brass’s customers further process the rod into finished products that are sold into five primary markets: munitions, coinage, automotive, building and housing and electronics / electrical components. In
2018
, Olin Brass shipped approximately
15%
of its products to A.J. Oster.
Chase Brass is a leading manufacturer of brass rod in North America. Chase Brass primarily manufactures brass rod, including round and other shapes, ranging from 1/4 inch to 4 1/2 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 Brass’s customers further process the rod into finished products that are sold into four primary markets: building and housing, transportation, electronics / electrical components and industrial machinery and equipment.
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. In
2018
,
51%
of A.J. Oster’s brass and copper material requirements were supplied by our Olin Brass segment.
All three segments generate revenue from product sales and earn a premium margin over the cost of metal as a result of our metal conversion, value-added processing, and service capabilities.
Finally, we also have a Corporate entity which includes compensation for corporate executives, corporate office and administrative salaries, and professional fees for accounting, tax, and legal services. Corporate and other 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.
Formation and Acquisition of the Worldwide Metals Business of Olin Corporation
On October 10, 2007, affiliates of KPS Capital Partners, L.P. (“KPS”) formed GBC as an acquisition vehicle to acquire the worldwide metals business of Olin Corporation, which was completed on November 19, 2007. The transaction was accounted for under the purchase method of accounting.
At the time of the transaction, the fair market value of the net assets acquired exceeded the purchase price in the acquisition. This resulted in a bargain purchase, and we reduced the value of all identified intangible assets and other noncurrent assets, including the acquired property, plant and equipment, to zero in the opening balance sheet as of the acquisition date. Accordingly, our fixed assets reflect only post-acquisition capital investments, and our cost of sales and selling, general and administrative expense, depending on the nature and use of the underlying asset, includes depreciation only on capital investments made after the acquisition date.
Recent Transactions
Purchases and Redemption of Senior Secured Notes
Prior to obtaining the Term Loan B Credit Agreement and the ABL Credit Agreement in 2016 (as defined below), our debt facilities consisted of our 9.50% senior secured notes (“Senior Secured Notes”) and a former asset-based loan facility (“Former ABL Facility”).
During the year ended December 31, 2016, we purchased in the open market an aggregate of
$40.0 million
principal amount of our then existing Senior Secured Notes, for an aggregate purchase price of
$42.5 million
, plus accrued interest.
On July 18, 2016, we obtained a new Term Loan B Facility and used a portion of the proceeds to redeem the remaining
$305.3 million
principal amount outstanding of our Senior Secured Notes. As part of this refinancing and in accordance with the indenture governing the then existing Senior Secured Notes (“Indenture”), we called and terminated the notes at a redemption price of
104.75%
plus accrued interest.
We recognized a loss on the extinguishment of debt in the year ended December 31, 2016 of
$23.4 million
, which includes a premium of
$17.0 million
and the write-off of
$6.4 million
of unamortized debt issuance costs for both the Senior Secured Notes and the Former ABL Facility.
2016 Refinancing
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
(
$3.2 million
annually) with the balance expected to be due on July 18, 2023.
On
July 18, 2016, we also
entered into a credit agreement with a syndicate of lenders that matures on July 19, 2021 (the “ABL Credit Agreement” and the facility thereunder, the “ABL Facility”). The ABL Facility is an asset-based revolving loan facility that 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.
Amounts outstanding, if any, under the ABL Facility bear interest at a rate per annum equal to, at our option, either (1)
0.25%
to
0.75%
subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus an Alternate Base Rate (as defined in the ABL Credit Agreement) or (2)
1.25%
to
1.75%
subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus the Adjusted LIBO Rate (as defined in the ABL Credit Agreement). Unused amounts under the ABL Facility incur an unused line fee of
0.375%
or
0.25%
per annum (depending on the percentage of aggregate revolving exposure), payable in arrears on a quarterly basis.
2017 and 2018 Refinancings
On each of July 18, 2017 and May 29, 2018, we amended the credit agreement governing our Term Loan B Facility (the “Amended Term Loan B Credit Agreement”), and on July 18, 2017, we amended our credit agreement governing our asset-based revolving facility that matures on July 19, 2021 (the “Amended ABL Credit Agreement”). The most recent refinancing of the Term Loan B Facility reduced our interest rate spread by an additional 75 basis points, reduced the LIBO Rate floor from
1%
to
0%
, and extended the maturity date through
May 29, 2025
. Amounts outstanding under the Term Loan B 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).
Interest Rate Swap 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 LIBO Rate on
$150.0 million
of our floating rate LIBO Rate debt at
2.75%
. At
December 31, 2018
, amounts outstanding under the Term Loan B Facility combined with our interest rate swap derivative accrued interest at a weighted average rate of
5.15%
.
Acquisition
On November 1, 2017, A.J. Oster acquired certain assets and assumed certain liabilities of Unimet Metal Supply, Inc. and Alliance Service Centers, Inc. (together “Alumet”). Headquartered in Parsippany, New Jersey, Alumet is a non-ferrous metals service center that provides coated aluminum, aluminum, copper and brass sheet, and strip products to the building and housing and transportation markets through its cut to length, slitting, and coating capabilities. The acquisition of Alumet expands A.J. Oster’s geographic presence into the South and Southeast through Alumet’s facilities in Atlanta and Texas while also providing additional outlets for Alumet’s products through A.J. Oster’s facilities in Chicago and Mexico. The Alumet acquisition was part of our strategic efforts to profitably grow through acquisitions and expands our geographic presence in targeted regions, strengthens our position in the aluminum market, and enhances our position as a market leader in the non-ferrous metals distribution business.
We accounted for the Alumet acquisition as a business combination using the acquisition method in accordance with ASC 805,
Business Combinations
. The results of operations of Alumet since November 1, 2017 have been included in the Consolidated Statement of Operations. We acquired the net assets of Alumet for approximately
$41.7 million
.
Share Repurchase Program
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. We repurchased
400,000
shares of our common stock under the 2018 Share Repurchase Program during
2018
and have a remaining authorization of
$22.4 million
.
Key Business Principles Affecting Our Results of Operations
LIFO Accounting
The metals component of inventory that is valued on last-in, first-out (“LIFO”) basis comprises approximately
67%
and
65%
of total inventory at
December 31, 2018
and
2017
, respectively. The impact of LIFO accounting on our financial results may be significant with respect to period-to-period comparisons depending on the fluctuations in our inventory levels. During
2018
,
2017
and
2016
, certain domestic metal inventory quantities were reduced, resulting in a liquidation of LIFO inventory layers. The effect of this reduction increased cost of sales by
$0.1 million
,
$1.0 million
and
$1.9 million
in
2018
,
2017
and
2016
, respectively.
Metal Cost
We are a leading, value-added converter, fabricator, processor and distributor of specialized non-ferrous products in North America. We generate our profits from the conversion, manufacturing and fabrication of metal into end products, and not by taking advantage of fluctuations in the price of copper and other metals. Our business model uses various methods to substantially reduce the financial impact of fluctuations in metal prices so that our operating margins are largely unaffected by trends in metal prices. Nevertheless, fluctuations in metal prices will impact the total amount of our net sales, the cost of shrinkage loss, the impact of LIFO liquidations (as previously discussed) and our investments in working capital.
Shrinkage loss is the loss of metal that occurs naturally through the process of melting and casting metals. While the shrinkage loss rate is very low relative to the total volume of metal cast, the cost of the shrinkage loss and its impact on financial performance increases as metal prices increase.
Over the last three years, approximately
23%
of our sales volumes were made on a toll basis where our customers supply us with the metal and we charge them a processing or conversion fee to melt the metal and convert it into a finished product. For metal processed on a non-toll basis, we procure and own the metal until we melt, convert, and sell it to the customer, whereby we charge them not only a conversion fee but also a metal replacement fee. For these non-toll sales, we use our balanced book approach, discussed below, to substantially reduce the impact of metal price movements on earnings and operating margins.
Metal prices also impact our investment in working capital because our collection terms with our customers are longer than our payment terms to our suppliers. Therefore, our investments in working capital are directly correlated to fluctuations in metal prices, even if the number of pounds sold does not change.
Balanced Book
The majority of our sales volume is from non-toll customers. To substantially reduce the financial impact of metal price volatility on earnings and operating margins on these non-toll sales, we use a balanced book approach to hedge the impact of metal price fluctuations. The balanced book approach minimizes the financial impact of metal price movements in the period between date of order and date of shipment by matching a) the timing, quantity and price of the metal cost recovery component of net sales made on a non-toll basis with b) the timing, quantity and price of the replacement metal purchases. For any non-toll sale, we seek to achieve our balanced book through one of the following three mechanisms:
|
|
•
|
“Price date of shipment” terms - meaning that the metal sale price to the customer and the purchase price for replacement metal from a supplier are set on the date of shipment. At the time we receive an order from a customer on price date of shipment terms, we place an order with a vendor on price date of shipment terms to correlate the price of the replacement metal with what we will sell to the customer. Thus, the customer bears the risk of metal price changes from the date of order to the date of shipment;
|
|
|
•
|
Firm pricing - meaning that the metal sale price to the customer is fixed on the order date and a matching replacement purchase from a supplier is made at a fixed price. At the time we receive an order from a customer, we give the customer a fixed metal price, and, shortly thereafter, we place an order with a vendor at a fixed price to lock in the price of the metal to replace what we will sell to the customer. Thus, the supplier bears the risk of metal price changes from the date of order to the date of shipment;
|
|
|
•
|
Financial derivatives - meaning we use financial derivatives when one of the other two mechanisms is unavailable. In this situation, we give the customer a fixed metal price at the time we receive the order, and, shortly thereafter, we (i) place a purchase order for scrap metal with a vendor on price date of shipment terms and (ii) enter into a financial derivative transaction in the form of a forward purchase contract to lock in the price of the metal to replace what we will sell to the customer. Typically, we will net settle this derivative and use the gain or loss on the derivative transaction to offset any loss or gain from the metal purchase transaction we entered into with our scrap vendor. Thus, the derivative counterparty bears the risk of metal price changes from the date of order to the date of shipment.
|
In
2018
, approximately
50%
of our non-toll sales volumes (
39%
of our total unit shipments) were conducted with price date of shipment terms. All other non-toll unit sales volumes were conducted with firm pricing or financial derivatives.
Metal Derivatives
As discussed above, we use derivative contracts in support of our balanced book approach. These derivative contracts are not designated as hedges for accounting purposes and are recorded at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). Thus, we include the unrealized and realized gains and losses on these derivatives within cost of sales in our consolidated statements of operations.
Industry Dynamics and Demand for Our Products
Demand for our product is driven predominantly by six markets: 1) building and housing, 2) munitions, 3) automotive, 4) electronics / electrical components, 5) coinage and 6) industrial machinery and equipment.
Building and Housing
According to our estimates, we expect U.S. housing starts and U.S. existing home sales to increase
1.8%
and
2.4%
annually, respectively, from
2018
through
2021
.
Demand within this market is affected by new residential housing, existing home sales and commercial construction, all of which are significantly dependent on overall economic conditions. Particularly as it relates to Chase Brass, demand within this segment is affected by (i) increasing importation of parts that compete with those our customers manufacture from our brass rod and (ii) the offshoring of production by our customers to overseas, lower cost manufacturing environments.
In addition, the correlation between housing statistics and our sales is not entirely direct as products containing our metal are typically installed near the completion of construction. Thus, there is an inherent lag time compared to housing starts. Sales of our products to customers in the building and housing market can be also affected by factors such as housing mix (single family versus multi-family homes), unit size and unit price point as these affect the quality of components used in and the quantity of plumbing fixtures and products. Sales of our products can also be impacted by changes and trends in the composition of materials and fixtures used in construction.
Munitions
In 2014, our customers began destocking their munitions inventories and thus, Olin Brass’s munitions volumes decreased in 2015 as these efforts continued. In 2016, we saw improved volumes in this market, but again experienced a decline in munitions volumes in 2017 due to decreased demand after the 2016 U.S. Presidential election and a production outage at one of our main customer’s facilities. Volumes improved in 2018 compared to the prior year primarily due to the impact of the production outage in the prior year, but are still below 2016 levels. We expect volumes to return to a more normalized run rate in the longer run.
Automotive
The automotive market is dependent on the level of consumer spending on automobiles, which is significantly dependent on overall economic conditions, replacement needs, and the amount of electrical components contained within automobiles. According to our estimates, North American light vehicle production is expected to grow by
0.1%
annually from
2018
through
2021
.
We also believe demand for our sales to this segment has been affected by the ever increasing electronification of vehicles due to increased electrical connectors needed for computer technologies, such as navigation systems, electronic media, and wireless technologies, embedded within these vehicles. In addition, we believe demand will increase as internal combustible engines are replaced with power sourced or supplemented by battery and similar technologies.
Particularly within Olin Brass and A.J. Oster, we are implementing pricing strategies that focus on pricing our products to automotive customers: to earn a return commensurate with cost complexity required to produce them, to earn an appropriate return on the assets used to produce them, and to earn an appropriate return in relation to other competitive offerings. We believe these pricing strategies will better position us in the long-term.
Electronics / Electrical Components
Customers use our products to manufacture electronics / electrical components in a wide range of applications, from medical devices to computers to aviation components, and demand is largely correlated to general economic activity and technological developments.
Coinage
As it has done from time to time for over 40 years, Olin Brass renewed its long-term contract with the U.S. Mint in 2017 to extend the supply agreement into 2022. Demand for coinage is directly tied to consumer transactions and coinage demand has fluctuated in the last three years.
Industrial Machinery and Equipment (“IM&E”)
Sales in this market primarily lie within Chase Brass. IM&E volumes decreased in both 2015 and 2016 as compared to each previous year due to softness in the oil and gas, metals and mining, and agricultural industries, as well as competition from imported parts. IM&E volumes in
2018
and
2017
were consistent with 2016 volumes.
Industry Dynamics Affecting Growth Opportunities
Regarding demand for copper and copper-alloy sheet, strip and plate (“SSP”), there are a number of growth opportunities that could increase the demand for SSP products, including our CuVerro
®
bactericidal products. Olin Brass completed the federal and state registration processes necessary to market its CuVerro
®
materials as having bactericidal properties. It has also registered more than
30
component manufacturers to market products made with CuVerro
®
.
Legislation to replace the one-dollar paper notes with dollar coins keeps receiving attention in Congress, most recently by the reintroduction of the Unified Savings and Accountability Act (“USA Act”) in July 2015. Among other matters, the USA Act brings added focus and support to replace the one dollar note with the dollar coin. We anticipate a significant increase in the size of the coinage market if the U.S. transitions to the dollar coin and eliminates the one-dollar paper note.
Regarding demand for brass rod, some of our green products are marketed under the Eco Brass
®
tradename under an exclusive license in North America which expires
May 16, 2019
. We anticipate the expiration of this exclusive license may have a negative effect on our financial performance.
Finally, the North American market may be affected by certain factors related to the supply of brass and copper, including imported rod and finished parts made from foreign sourced rod. Therefore, competition from offshore suppliers could become more significant in the future if certain factors change. Historically these factors have included foreign trade agreements, competition, antidumping orders, foreign exchange rate fluctuations, domestic capacity and pricing levels, as well as costs in the import supply chain.
Management’s View of Performance
In addition to the results reported in accordance with accounting principles generally accepted in the United States of America, (“US GAAP”), we also report “adjusted sales,” “adjusted gross profit,” “adjusted selling, general and administrative expenses,” “adjusted EBITDA” and “adjusted diluted earnings per common share” which are non-GAAP financial measures as defined below.
Adjusted sales, adjusted gross profit, adjusted selling, general and administrative expenses, adjusted EBITDA and adjusted diluted earnings per common share may not be comparable to similarly titled measures presented by other companies and are not intended as alternatives to any other measure of performance in conformity with US GAAP.
You should therefore not place undue reliance on adjusted sales, adjusted gross profit, adjusted selling, general and administrative expenses, adjusted EBITDA, adjusted diluted earnings per common share, or any ratios calculated using them. The most comparable US GAAP-based measure for each respective non-GAAP financial measure can be found in our consolidated financial statements and the related notes thereto included elsewhere in this report.
The following discussions present an analysis of certain US GAAP and non-GAAP measures for
2018
,
2017
, and
2016
. These discussions should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Net sales by customer arrangement
The following table breaks down our revenue by the type of arrangement with the customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Non-toll revenue
|
$
|
1,709.8
|
|
|
$
|
1,503.3
|
|
|
$
|
1,332.2
|
|
Unprocessed metal sales
|
126.6
|
|
|
138.6
|
|
|
70.3
|
|
Toll processing revenue
|
16.7
|
|
|
15.9
|
|
|
12.3
|
|
Intersegment net sales elimination
|
(87.7
|
)
|
|
(79.2
|
)
|
|
(76.5
|
)
|
Net sales
|
$
|
1,765.4
|
|
|
$
|
1,578.6
|
|
|
$
|
1,338.3
|
|
Net sales and adjusted sales
Net sales is the most directly comparable US GAAP measure to adjusted sales, a non-GAAP revenue measure. We deduct the cost of our metal within cost of sales from net sales to arrive at adjusted sales. Metal cost reflects the cost of replacing metal sold to the customer, whereas adjusted sales is our internal measure of the value-added revenue generated from our operations. We use adjusted sales on a consolidated basis to monitor the revenues that are generated excluding the effects of fluctuations in commodity metal costs. We believe that adjusted sales supplements our US GAAP results because it provides 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.
Net sales is reconciled to adjusted sales as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change:
2018 vs. 2017
|
|
Change:
2017 vs. 2016
|
(in millions, except per pound values)
|
2018
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Pounds shipped (a)
|
564.6
|
|
|
507.3
|
|
|
520.8
|
|
|
57.3
|
|
|
11.3
|
%
|
|
(13.5
|
)
|
|
(2.6
|
)%
|
Net sales
|
$
|
1,765.4
|
|
|
$
|
1,578.6
|
|
|
$
|
1,338.3
|
|
|
$
|
186.8
|
|
|
11.8
|
%
|
|
$
|
240.3
|
|
|
18.0
|
%
|
Metal component of net sales
|
(1,148.8
|
)
|
|
(1,042.8
|
)
|
|
(796.0
|
)
|
|
(106.0
|
)
|
|
10.2
|
%
|
|
(246.8
|
)
|
|
31.0
|
%
|
Adjusted sales
|
$
|
616.6
|
|
|
$
|
535.8
|
|
|
$
|
542.3
|
|
|
$
|
80.8
|
|
|
15.1
|
%
|
|
$
|
(6.5
|
)
|
|
(1.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales per pound
|
$
|
3.13
|
|
|
$
|
3.11
|
|
|
$
|
2.57
|
|
|
$
|
0.02
|
|
|
0.6
|
%
|
|
$
|
0.54
|
|
|
21.0
|
%
|
less: Metal component of net sales per pound
|
2.04
|
|
|
2.05
|
|
|
1.53
|
|
|
(0.01
|
)
|
|
(0.5
|
)%
|
|
0.52
|
|
|
34.0
|
%
|
Adjusted sales per pound
|
$
|
1.09
|
|
|
$
|
1.06
|
|
|
$
|
1.04
|
|
|
$
|
0.03
|
|
|
2.8
|
%
|
|
$
|
0.02
|
|
|
1.9
|
%
|
Average copper price per pound (b)
|
$
|
2.93
|
|
|
$
|
2.80
|
|
|
$
|
2.20
|
|
|
$
|
0.13
|
|
|
4.6
|
%
|
|
$
|
0.60
|
|
|
27.3
|
%
|
(a)
Amounts exclude the quantity of unprocessed metal sold.
(b)
Copper prices reported by the Commodity Exchange (“COMEX”).
2018
compared to
2017
Net sales
increased
by
$186.8 million
, or
11.8%
, primarily due to our Alumet acquisition (
$120.8 million
), a
$41.3 million
increase
in the cost of replacement metal stemming from increased metal prices, increased volumes (
$14.5 million
), and benefits from changes in sales mix and pricing (
$10.2 million
). Adjusted sales
increased
by
$80.8 million
, or
15.1%
, primarily due to our acquisition of Alumet (
$56.1 million
), other organic volume increases, and favorable metal mix and metal sourcing.
2017
compared to
2016
Net sales
increased
by
$240.3 million
, or
18.0%
, primarily as the result of a
$246.8 million
increase
in the metal cost recovery component stemming from increased metal prices and greater sales of unprocessed metals (combined
$263.3 million
) and the Alumet acquisition, partially offset by decreased volumes (
$52.6 million
). Adjusted sales
decreased
by
$6.5 million
due to lower demand, largely in the munitions market, partially offset by an increase from Alumet.
Gross profit and adjusted gross profit
Gross profit is the most directly comparable US GAAP measure to adjusted gross profit. Adjusted gross profit is defined as gross profit less items excluded from the calculation of adjusted EBITDA, as detailed in the following table. We believe that adjusted gross profit supplements our US GAAP results to provide a more complete understanding of the results of our business as it provides period-to-period comparisons of our core operations that are more consistent and more easily understood.
Gross profit is reconciled to adjusted gross profit as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Amount change:
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
|
2018 vs. 2017
|
|
2017 vs. 2016
|
Total gross profit
|
$
|
186.7
|
|
|
$
|
184.2
|
|
|
$
|
181.7
|
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
Unrealized (gain) loss on derivative contracts
|
2.8
|
|
|
0.8
|
|
|
(3.1
|
)
|
|
2.0
|
|
|
3.9
|
|
LIFO liquidation loss (gain)
|
0.1
|
|
|
1.0
|
|
|
1.9
|
|
|
(0.9
|
)
|
|
(0.9
|
)
|
Lower of cost or market adjustment to inventory
|
2.9
|
|
|
(3.6
|
)
|
|
(1.7
|
)
|
|
6.5
|
|
|
(1.9
|
)
|
Share-based compensation expense
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
Restructuring and other business transformation charges
|
—
|
|
|
0.2
|
|
|
—
|
|
|
(0.2
|
)
|
|
0.2
|
|
Inventory step-up costs from acquisition accounting
|
0.2
|
|
|
0.3
|
|
|
—
|
|
|
(0.1
|
)
|
|
0.3
|
|
Depreciation expense
|
17.1
|
|
|
15.0
|
|
|
12.9
|
|
|
2.1
|
|
|
2.1
|
|
Adjusted gross profit
|
$
|
210.1
|
|
|
$
|
197.9
|
|
|
$
|
191.7
|
|
|
$
|
12.2
|
|
|
$
|
6.2
|
|
2018
compared to
2017
Gross profit
increased
by
$2.5 million
(
1.4%
) due to an increase in adjusted gross profit, partially offset by an unfavorable lower of cost or market adjustment to inventory (
$6.5 million
), increased depreciation expense (
$2.1 million
), and an unfavorable unrealized (gain) loss on derivative contracts (
$2.0 million
). Adjusted gross profit
increased
by
$12.2 million
(
6.2%
) primarily due to the combination of the following:
|
|
•
|
the addition of Alumet (
$14.5 million
);
|
|
|
•
|
$7.8 million
improvement from our metal pricing, sourcing, and blending initiatives;
|
|
|
•
|
the fact that 2017 includes $1.5 million more of costs associated with transitioning to a health savings account (“HSA”), increased cost of sales due to the reduction of inventories at Olin Brass and additional costs from the implementation of A.J. Oster’s fully integrated Enterprise Resource Planning (“ERP”) system;
|
|
|
•
|
the absence of a $3.5 million benefit recognized in the prior year resulting from the recovery of insurance proceeds related to our 2016 production outage;
|
|
|
•
|
increased conversion costs of
$1.8 million
stemming from operational inefficiencies that negatively impacted yields and productivity;
|
|
|
•
|
increased shrinkage costs as a result of higher metal prices; and
|
|
|
•
|
$0.4 million of expenses related to an environmental incident at an Olin Brass facility.
|
2017
compared to
2016
Gross profit
increased
by
$2.5 million
, or
1.4%
, and benefited from a
$1.9 million
reduction in lower of cost or market charges, a
$0.9 million
favorable LIFO liquidation loss, and an increase in adjusted gross profit, partially offset by increased depreciation expense and unfavorable fluctuations in unrealized gains/losses on derivative contracts. Adjusted gross profit
increased
by
$6.2 million
(
3.2%
) due to the net result of four main factors; decreased volumes, the 2016 production outages at Olin Brass, increased shrinkage costs, and a few specific decisions discussed below.
Volumes have decreased most significantly in our munitions market due to both depletion of inventory levels throughout the channel following the 2016 Presidential election and a production outage at one of our larger customers. Our building and housing volumes, excluding Alumet, suffered as our customers lost pieces of their business. Volumes decreased in our stamping and automotive markets due to underlying demand. In addition, volumes at A.J. Oster earlier in the year were hampered by the implementation of a new Enterprise Resource Planning (“ERP”) system, which later led to customer service issues at one of our facilities.
In the second quarter of 2016, Olin Brass suffered a production outage for which we recorded, in 2017,
$7.4 million
of proceeds (
$3.5 million
recorded as a reduction to cost of sales) from insurance policies we collected relating to this outage. In 2016, we also incurred increased production expenses to toll process inventory to meet customer needs during the outage. These costs were not incurred again in 2017.
As metal prices, especially copper, have increased, the cost of shrinkage, which is a normal part of production, has increased, unfavorably impacting the comparison of gross profit to the prior year amounts.
In 2017, we also made certain specific decisions which increased costs and negatively impacted our gross profit by $1.8 million as compared to 2016. These relate to transitioning to a health savings account (“HSA”) medical program for our employees, reducing inventory levels at Olin Brass to generate increased cash flow without commensurate reductions in production overhead costs, and launching a fully integrated ERP system at A.J. Oster which led to increased consulting, freight, and other expenses.
Selling, general and administrative expenses and adjusted selling, general and administrative expenses
Selling, general and administrative expenses are the most directly comparable US GAAP measure to adjusted selling, general and administrative expenses. Adjusted selling, general and administrative expenses is defined as selling, general and administrative expenses less items excluded from the calculation of adjusted EBITDA. We believe that adjusted selling, general and administrative expenses supplement our US GAAP results and provides a more complete understanding of the results of our business as it provides period-to-period comparisons of our core operations that are more consistent and more easily understood.
Selling, general and administrative expenses is reconciled to adjusted selling, general and administrative expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Amount change:
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
|
2018 vs. 2017
|
|
2017 vs. 2016
|
Total selling, general and administrative expenses
|
$
|
92.7
|
|
|
$
|
83.8
|
|
|
$
|
82.8
|
|
|
$
|
8.9
|
|
|
$
|
1.0
|
|
Specified legal / professional expenses
|
(0.4
|
)
|
|
(1.3
|
)
|
|
(1.2
|
)
|
|
0.9
|
|
|
(0.1
|
)
|
Share-based compensation expense
|
(6.4
|
)
|
|
(8.2
|
)
|
|
(6.9
|
)
|
|
1.8
|
|
|
(1.3
|
)
|
Restructuring and other business transformation charges
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
0.2
|
|
|
(0.2
|
)
|
Depreciation and amortization expense
|
(4.4
|
)
|
|
(3.6
|
)
|
|
(2.0
|
)
|
|
(0.8
|
)
|
|
(1.6
|
)
|
Adjusted selling, general and administrative expenses
|
$
|
81.5
|
|
|
$
|
70.5
|
|
|
$
|
72.7
|
|
|
$
|
11.0
|
|
|
$
|
(2.2
|
)
|
2018
compared to
2017
Selling, general and administrative expenses
increased
by
$8.9 million
(
10.6%
) primarily due to an increase in adjusted selling, general and administrative expenses, partially offset by reduced expenses for share-based compensation awards and specified legal / professional services. Adjusted selling, general and administrative expenses
increased
$11.0 million
due to the Alumet acquisition (
$8.7 million
), an increase in employee and employee related costs, and $0.3 million of costs incurred related to an environmental incident at an Olin Brass facility, partially offset by the fact that the prior year includes $0.9 million more of expenses associated with transitioning to the HSA medical plan and consulting fees associated with the implementation of A.J. Oster’s ERP system.
2017
compared to
2016
Selling, general and administrative expenses
increased
by
$1.0 million
(
1.2%
) and were unfavorably impacted by an increase in depreciation and share-based compensation expense and favorably impacted by the change in adjusted selling, general and administrative expenses which
decreased
by
$2.2 million
(
3.0%
). Adjusted selling, general and administrative expenses declined primarily due to lower outside services (
$3.6 million
) and lower employee and employee related costs (
$2.0 million
) largely relating to incentive compensation, partially offset by the combined costs of approximately $1.1 million associated with transitioning to the HSA medical plan and consulting fees associated with the implementation of A.J. Oster’s ERP system. We have made significant progress in reducing professional fees for accounting, tax, legal and consulting services incurred in our early years as a public company and thus, in 2017, these costs are no longer an adjustment for purposes of calculating adjusted selling, general and administrative expenses. Specified legal / professional expenses in 2017 and after represent accounting, tax, legal, and consulting services related to merger and acquisition activity.
Net income and adjusted EBITDA
Net income attributable to Global Brass and Copper Holdings, Inc. is the most directly comparable US GAAP measure to 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 LIFO layer of metal inventory;
|
|
|
•
|
share-based compensation expense;
|
|
|
•
|
restructuring and other business transformation charges;
|
|
|
•
|
inventory step-up costs related to acquisition accounting;
|
|
|
•
|
specified legal and professional expenses; and
|
We believe adjusted EBITDA represents a meaningful presentation of the financial performance of our core operations, because it provides period-to-period comparisons that are more consistent and more easily understood. We also believe it is an important supplemental measure that is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
Adjusted EBITDA is the key metric used by our Chief Operating Decision Maker to evaluate the segment performance in a way that we believe reflects our core operating performance, and in turn, incentivizes members of management and certain employees. For example, we use 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.
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 US GAAP. We compensate for these limitations by using adjusted EBITDA along with other comparative tools, together with US GAAP measurements, to assist in the evaluation of operating performance. Such US GAAP measurements include operating income and net income.
Net income attributable to Global Brass and Copper Holdings, Inc. is reconciled to adjusted EBITDA as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Amount change:
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
|
2018 vs. 2017
|
|
2017 vs. 2016
|
Net income attributable to Global Brass and Copper Holdings, Inc.
|
$
|
58.2
|
|
|
$
|
51.1
|
|
|
$
|
32.2
|
|
|
$
|
7.1
|
|
|
$
|
18.9
|
|
Interest expense, net
|
16.8
|
|
|
17.6
|
|
|
26.2
|
|
|
(0.8
|
)
|
|
(8.6
|
)
|
Provision for income taxes
|
17.3
|
|
|
33.9
|
|
|
16.7
|
|
|
(16.6
|
)
|
|
17.2
|
|
Depreciation expense
|
21.1
|
|
|
18.5
|
|
|
14.8
|
|
|
2.6
|
|
|
3.7
|
|
Amortization expense
|
0.4
|
|
|
0.1
|
|
|
0.1
|
|
|
0.3
|
|
|
—
|
|
Unrealized (gain) loss on derivative contracts
|
2.8
|
|
|
0.8
|
|
|
(3.1
|
)
|
|
2.0
|
|
|
3.9
|
|
LIFO liquidation loss (gain)
|
0.1
|
|
|
1.0
|
|
|
1.9
|
|
|
(0.9
|
)
|
|
(0.9
|
)
|
Refinancing costs
|
1.6
|
|
|
0.9
|
|
|
23.4
|
|
|
0.7
|
|
|
(22.5
|
)
|
Specified legal / professional expenses (a)
|
0.4
|
|
|
1.3
|
|
|
1.2
|
|
|
(0.9
|
)
|
|
0.1
|
|
Lower of cost or market adjustment to inventory
|
2.9
|
|
|
(3.6
|
)
|
|
(1.7
|
)
|
|
6.5
|
|
|
(1.9
|
)
|
Share-based compensation expense
|
6.7
|
|
|
8.2
|
|
|
6.9
|
|
|
(1.5
|
)
|
|
1.3
|
|
Restructuring and other business transformation charges (b)
|
—
|
|
|
0.4
|
|
|
—
|
|
|
(0.4
|
)
|
|
0.4
|
|
Inventory step-up costs from acquisition accounting
|
0.2
|
|
|
0.3
|
|
|
—
|
|
|
(0.1
|
)
|
|
0.3
|
|
Adjusted EBITDA
|
$
|
128.5
|
|
|
$
|
130.5
|
|
|
$
|
118.6
|
|
|
$
|
(2.0
|
)
|
|
$
|
11.9
|
|
|
|
(a)
|
Represents selected professional fees for accounting, tax, legal, and consulting services for merger and acquisition activity or incurred as a public company that exceed our expected long-term requirements.
|
|
|
(b)
|
Restructuring and other business transformation charges in
2017
represent severance charges at Olin Brass.
|
2018
compared to
2017
Net income attributable to Global Brass and Copper Holdings, Inc.
increased
by
$7.1 million
, or
13.9%
, mainly due to the combination of the following:
|
|
•
|
a decrease in tax expense of
$16.6 million
;
|
|
|
•
|
$7.8 million
improvement from our metal pricing, sourcing, and blending initiatives;
|
|
|
•
|
the Alumet acquisition (
$4.7 million
);
|
|
|
•
|
$2.4 million more of expenses recorded in the prior year for unusual costs associated with our transition to an HSA medical plan, increased cost of sales due to inventory reductions at Olin Brass, and costs incurred at A.J. Oster related to its ERP implementation;
|
|
|
•
|
favorable share based compensation expense of
$1.5 million
;
|
|
|
•
|
favorable specified legal / professional expenses of
$0.9 million
;
|
|
|
•
|
a favorable change in our LIFO liquidation loss (gain) of
$0.9 million
;
|
|
|
•
|
the absence of a
$7.4 million
benefit recorded in the prior year related to the recovery of insurance proceeds associated with our 2016 production outage;
|
|
|
•
|
an unfavorable change in our lower of cost or market adjustment to inventory of
$6.5 million
;
|
|
|
•
|
an unfavorable increase in employee and employee related costs;
|
|
|
•
|
an increase in depreciation expense of
$2.6 million
;
|
|
|
•
|
an unfavorable unrealized (gain) loss on derivative contracts of
$2.0 million
;
|
|
|
•
|
increased conversion costs of
$1.8 million
stemming from operational inefficiencies that negatively impacted yields and productivity;
|
|
|
•
|
increased shrinkage costs as a result of higher metal prices; and
|
|
|
•
|
costs incurred of $0.7 million associated with an environmental incident at an Olin Brass facility.
|
Adjusted EBITDA
decreased
by
$2.0 million
, or
1.5%
, primarily due to the combination of the following:
|
|
•
|
$7.4 million
of income related to insurance proceeds recorded in 2017 related to our 2016 production outage;
|
|
|
•
|
increased employee and employee related costs;
|
|
|
•
|
increased conversion costs of
$1.8 million
stemming from operational inefficiencies that negatively impacted yields and productivity;
|
|
|
•
|
increased shrinkage costs as a result of higher metal prices;
|
|
|
•
|
$0.7 million of costs associated with an environmental incident at an Olin Brass facility;
|
|
|
•
|
$7.8 million
improvement from our metal pricing, sourcing, and blending initiatives;
|
|
|
•
|
the Alumet acquisition (
$5.9 million
); and
|
|
|
•
|
$2.4 million more of unusual costs in the prior year, as mentioned above.
|
2017
compared to
2016
Net income attributable to Global Brass and Copper Holdings, Inc.
increased
by
$18.9 million
, or
58.7%
, mainly due to the decrease in refinancing costs and interest expense, as well as the $7.4 million of income resulting from the recovery of insurance proceeds, and the fact that the prior year includes the impact of the Olin Brass production outage. These favorable fluctuations were partially offset by unfavorable fluctuations in the provision for income taxes, unrealized gains / losses on derivative contracts and depreciation expense.
Adjusted EBITDA
increased
$11.9 million
, or
10.0%
, primarily due to $7.4 million of income resulting from an insurance recovery and the absence of costs related to the Olin Brass 2016 production outage, partially offset by the costs in 2017 related to transitioning to an HSA medical plan and the A.J. Oster ERP implementation. The negative effect of reduced volumes was partially offset by favorable customer pricing and reduced employee and related compensation costs, mostly related to incentive compensation.
Diluted earnings per common share and adjusted diluted earnings per common share
Diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share is the most directly comparable US GAAP measure to adjusted diluted earnings per common share. Diluted income per common share
increased
by
$0.30
in
2018
and
increased
by
$0.82
in
2017
as compared to the previous year for each, for the same reasons driving the fluctuations in net income. Our weighted average diluted common shares outstanding
increased
0.9%
in
2018
and
2.3%
in
2017
due to the issuance and vesting of share based compensation awards partially offset by the repurchase of
400,000
shares of our common stock in
2018
under the 2018 Share Repurchase Program. The
increase
in weighted average diluted common shares outstanding
decreased
diluted net income per common share by
$0.02
in
2018
and
$0.06
in
2017
.
Adjusted diluted earnings per common share is defined as diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share adjusted to remove the per share impact of the add backs to EBITDA in calculating adjusted EBITDA. Adjusted diluted earnings per common share increased by
$0.66
in
2018
and
$0.10
in
2017
as compared to the previous year for each for the same reasons driving the fluctuations in adjusted EBITDA. Additionally, the increase in adjusted diluted earnings per share in
2018
included favorable fluctuations in the provision for income taxes and interest expense, net, while the
2017
increase included a favorable fluctuation in interest expense, net, offset by an unfavorable fluctuation in the provision for income taxes. The
increase
in weighted average diluted common shares outstanding
decreased
our adjusted diluted earnings per common share by
$0.02
in
2018
and
$0.05
in
2017
.
We believe adjusted diluted earnings per common share represents a meaningful presentation of the financial performance of our consolidated results because it provides period-to-period comparisons that are more consistent, and more easily understood, and thus is more useful to and is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
Adjusted diluted earnings per share is a key metric used to evaluate our performance, and in turn, incentivize members of management and certain employees.
Diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share is reconciled to adjusted diluted earnings per common share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Amount change:
|
|
2018
|
|
2017
|
|
2016
|
|
2018 vs. 2017
|
|
2017 vs. 2016
|
Diluted net income attributable to Global Brass and
Copper Holdings, Inc. per common share
|
$
|
2.61
|
|
|
$
|
2.31
|
|
|
$
|
1.49
|
|
|
$
|
0.30
|
|
|
$
|
0.82
|
|
Unrealized (gain) loss on derivative contracts
|
0.13
|
|
|
0.03
|
|
|
(0.15
|
)
|
|
0.10
|
|
|
0.18
|
|
Refinancing costs
|
0.07
|
|
|
0.04
|
|
|
1.08
|
|
|
0.03
|
|
|
(1.04
|
)
|
Specified legal / professional expenses
|
0.02
|
|
|
0.06
|
|
|
0.06
|
|
|
(0.04
|
)
|
|
—
|
|
Lower of cost or market adjustment to inventory
|
0.13
|
|
|
(0.16
|
)
|
|
(0.08
|
)
|
|
0.29
|
|
|
(0.08
|
)
|
LIFO liquidation loss (gain)
|
—
|
|
|
0.04
|
|
|
0.09
|
|
|
(0.04
|
)
|
|
(0.05
|
)
|
Share-based compensation expense
|
0.30
|
|
|
0.37
|
|
|
0.32
|
|
|
(0.07
|
)
|
|
0.05
|
|
Restructuring and other business transformation charges
|
—
|
|
|
0.02
|
|
|
—
|
|
|
(0.02
|
)
|
|
0.02
|
|
Inventory step-up costs from acquisition accounting
|
0.01
|
|
|
0.01
|
|
|
—
|
|
|
—
|
|
|
0.01
|
|
Tax impact on above adjustments (a)
|
(0.15
|
)
|
|
(0.26
|
)
|
|
(0.45
|
)
|
|
0.11
|
|
|
0.19
|
|
Adjusted diluted earnings per common share
|
$
|
3.12
|
|
|
$
|
2.46
|
|
|
$
|
2.36
|
|
|
$
|
0.66
|
|
|
$
|
0.10
|
|
(a) Calculated based on our effective tax rate plus specific tax items related to share-based compensation expense, including tax benefits related to the vesting of share awards and option exercises.
Results of Operations
Consolidated Results of Operations for the
Year Ended December 31, 2018
, Compared to the
Year Ended December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Change:
2018 vs. 2017
|
(in millions)
|
2018
|
|
% of Net
Sales
|
|
2017
|
|
% of Net
Sales
|
|
Amount
|
|
Percent
|
Net sales
|
$
|
1,765.4
|
|
|
100.0
|
%
|
|
$
|
1,578.6
|
|
|
100.0
|
%
|
|
$
|
186.8
|
|
|
11.8
|
%
|
Cost of sales
|
(1,578.7
|
)
|
|
89.4
|
%
|
|
(1,394.4
|
)
|
|
88.3
|
%
|
|
(184.3
|
)
|
|
13.2
|
%
|
Gross profit
|
186.7
|
|
|
10.6
|
%
|
|
184.2
|
|
|
11.7
|
%
|
|
2.5
|
|
|
1.4
|
%
|
Selling, general and administrative expenses
|
(92.7
|
)
|
|
5.3
|
%
|
|
(83.8
|
)
|
|
5.3
|
%
|
|
(8.9
|
)
|
|
10.6
|
%
|
Operating income
|
94.0
|
|
|
5.3
|
%
|
|
100.4
|
|
|
6.4
|
%
|
|
(6.4
|
)
|
|
(6.4
|
)%
|
Interest expense, net
|
(16.8
|
)
|
|
1.0
|
%
|
|
(17.6
|
)
|
|
1.1
|
%
|
|
0.8
|
|
|
(4.5
|
)%
|
Loss on extinguishment of debt
|
(0.5
|
)
|
|
—
|
%
|
|
(0.2
|
)
|
|
—
|
%
|
|
(0.3
|
)
|
|
150.0
|
%
|
Other income (expense), net
|
(0.8
|
)
|
|
—
|
%
|
|
3.0
|
|
|
0.2
|
%
|
|
(3.8
|
)
|
|
(126.7
|
)%
|
Income before provision for income taxes
|
75.9
|
|
|
4.3
|
%
|
|
85.6
|
|
|
5.5
|
%
|
|
(9.7
|
)
|
|
(11.3
|
)%
|
Provision for income taxes
|
(17.3
|
)
|
|
1.0
|
%
|
|
(33.9
|
)
|
|
2.2
|
%
|
|
16.6
|
|
|
(49.0
|
)%
|
Net income
|
58.6
|
|
|
3.3
|
%
|
|
51.7
|
|
|
3.3
|
%
|
|
6.9
|
|
|
13.3
|
%
|
Net income attributable to noncontrolling interest
|
(0.4
|
)
|
|
—
|
%
|
|
(0.6
|
)
|
|
—
|
%
|
|
0.2
|
|
|
(33.3
|
)%
|
Net income attributable to Global Brass and Copper Holdings, Inc.
|
$
|
58.2
|
|
|
3.3
|
%
|
|
$
|
51.1
|
|
|
3.3
|
%
|
|
$
|
7.1
|
|
|
13.9
|
%
|
Adjusted EBITDA (a)
|
$
|
128.5
|
|
|
7.3
|
%
|
|
$
|
130.5
|
|
|
8.3
|
%
|
|
$
|
(2.0
|
)
|
|
(1.5
|
)%
|
(a)
See “
Management’s View of Performance
—
Net income and adjusted EBITDA
.”
The following discussions present an analysis of our results of operations for
2018
as compared to
2017
. See “
Management’s View of Performance
” for discussions of net sales, adjusted sales, gross profit, adjusted gross profit, selling, general and administrative expenses, adjusted selling, general and administrative expenses, net income attributable to Global Brass and Copper Holdings, Inc., adjusted EBITDA, diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share and adjusted diluted earnings per common share. These discussions should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Interest expense, net
Interest expense, net decreased by
$0.8 million
primarily due to increased interest income in
2018
. Our average interest rate on our debt principal remained constant at
5.0%
.
The following table summarizes the components of interest expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Amount change:
|
(in millions)
|
2018
|
|
2017
|
|
2018 vs. 2017
|
Interest on principal
|
$
|
16.1
|
|
|
$
|
16.1
|
|
|
$
|
—
|
|
Amortization of debt discount and issuance costs
|
1.2
|
|
|
1.3
|
|
|
(0.1
|
)
|
Capitalized interest
|
(0.1
|
)
|
|
(0.1
|
)
|
|
—
|
|
Other borrowing costs (a)
|
0.8
|
|
|
0.8
|
|
|
—
|
|
Interest income
|
(1.2
|
)
|
|
(0.5
|
)
|
|
(0.7
|
)
|
Total interest expense, net
|
$
|
16.8
|
|
|
$
|
17.6
|
|
|
$
|
(0.8
|
)
|
(a)
Includes fees related to letters of credit and unused line of credit fees.
Other income (expense), net
Other income (expense), net was unfavorable by
$3.8 million
, due primarily to the
$7.4 million
recovery of insurance proceeds related to the temporary Olin Brass production outage in 2016, of which
$3.9 million
was recorded as other income in 2017. For additional information regarding these insurance recoveries, see
Note 15
, “
Commitments and Contingencies
.”
Provision for income taxes
The provision for income taxes
decreased
by
$16.6 million
, or
49.0%
, due to a decrease in the statutory tax rate and changes in tax accounting methods reflected in our 2017 federal income tax return. The effective income tax rate, which is the provision for income taxes as a percentage of income before provision for income taxes, was
22.8%
and
39.6%
for
2018
and
2017
, respectively. The decrease to the effective tax rate is driven by the lowering of the 2018 U.S. federal corporate income tax rate under the Tax Cuts and Jobs Act (the “2017 Tax Act”) as well as changes in methods of tax accounting that the IRS approved in 2018 and that we reflected in our 2017 federal income tax return. The effective tax rate for
2018
differs from the statutory rate of 21% primarily due to decreased deductions for state income taxes and the above mentioned tax accounting method changes.
For
2017
, the effective tax rate differed from the statutory rate of 35% primarily due to the enactment of the 2017 Tax Act. The 2017 Tax Act made broad and complex changes to the U.S. tax code, which resulted in an increase in the provision for income taxes in 2017 of
$7.3 million
, an 860 basis point increase in our effective tax rate. This was partially offset by the adoption of ASU 2016-09 on January 1, 2017. As a result of adopting the new standard, we recorded a
$2.7 million
tax benefit related to the vesting of share awards and option exercises during 2017, reducing the effective tax rate by 321 basis points. For
2018
, the benefit generated by ASU 2016-09 was offset by the new IRS code Section 162(m) rules passed under tax reform.
Segment Results of Operations
Segment Results of Operations for the
Year Ended December 31, 2018
, Compared to the
Year Ended December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change:
2018 vs. 2017
|
(in millions)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Pounds shipped (a)
|
|
|
|
|
|
|
|
Olin Brass
|
255.9
|
|
|
245.5
|
|
|
10.4
|
|
|
4.2
|
%
|
Chase Brass
|
212.4
|
|
|
218.5
|
|
|
(6.1
|
)
|
|
(2.8
|
)%
|
A.J. Oster
|
134.7
|
|
|
81.0
|
|
|
53.7
|
|
|
66.3
|
%
|
Corporate and other (b)
|
(38.4
|
)
|
|
(37.7
|
)
|
|
(0.7
|
)
|
|
(1.9
|
)%
|
Total
|
564.6
|
|
|
507.3
|
|
|
57.3
|
|
|
11.3
|
%
|
Net sales
|
|
|
|
|
|
|
|
Olin Brass
|
$
|
767.3
|
|
|
$
|
743.1
|
|
|
$
|
24.2
|
|
|
3.3
|
%
|
Chase Brass
|
612.1
|
|
|
591.1
|
|
|
21.0
|
|
|
3.6
|
%
|
A.J. Oster
|
473.7
|
|
|
323.6
|
|
|
150.1
|
|
|
46.4
|
%
|
Corporate and other (b)
|
(87.7
|
)
|
|
(79.2
|
)
|
|
(8.5
|
)
|
|
(10.7
|
)%
|
Total
|
$
|
1,765.4
|
|
|
$
|
1,578.6
|
|
|
$
|
186.8
|
|
|
11.8
|
%
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
Olin Brass
|
$
|
57.2
|
|
|
$
|
51.2
|
|
|
$
|
6.0
|
|
|
11.7
|
%
|
Chase Brass
|
66.3
|
|
|
73.2
|
|
|
(6.9
|
)
|
|
(9.4
|
)%
|
A.J. Oster
|
23.1
|
|
|
14.8
|
|
|
8.3
|
|
|
56.1
|
%
|
Total adjusted EBITDA of operating segments
|
146.6
|
|
|
139.2
|
|
|
7.4
|
|
|
5.3
|
%
|
Corporate and other (c)
|
(18.1
|
)
|
|
(8.7
|
)
|
|
(9.4
|
)
|
|
108.0
|
%
|
Total consolidated adjusted EBITDA
|
$
|
128.5
|
|
|
$
|
130.5
|
|
|
$
|
(2.0
|
)
|
|
(1.5
|
)%
|
(a)
Amounts exclude the sales of unprocessed metal.
(b)
Amounts represent intercompany eliminations.
(c)
Includes a
$7.4 million
recovery of insurance proceeds in 2017 relating to a production outage in 2016.
See
Note 5
, “
Segment Information
,” of our consolidated financial statements, which are included elsewhere in this report, for a reconciliation of adjusted EBITDA of segments to income before provision for income taxes and equity income.
The following discussions present an analysis of our results by segment for
2018
as compared to
2017
. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Olin Brass
Net sales
increased
by
$24.2 million
primarily due to increased commodity prices (
$13.0 million
) and volumes (
$27.1 million
), partially offset by decreased sales of unprocessed metal (
$15.9 million
). Adjusted sales
increased
by (
$15.9 million
) due to increased volumes (
$12.4 million
) and favorable scrap spreads, better metal margins, and improved raw material sourcing. Volumes increased in the munitions and coinage markets.
Adjusted EBITDA
increased
by
$6.0 million
due to increased volumes (
$4.6 million
) and favorable scrap prices, better metal margins, and improved raw material sourcing. These were partially offset by unfavorable production costs, increased employee and employee related expenses, and
$0.7 million
of costs incurred related to an environmental incident at an Olin Brass facility
Chase Brass
Net sales
increased
by
$21.0 million
due to increased commodity prices (
$36.4 million
) and unprocessed metals sales (
$0.8 million
), partially offset by decreased volumes (
$16.2 million
). Volumes decreased in the building and housing and industrial machinery and equipment markets due to underlying demand from our customers who are seeing increased competition from parts imported into the U.S. and who are outsourcing production overseas.
Adjusted EBITDA
decreased
by
$6.9 million
predominantly due to decreased volumes (
$2.6 million
) and unfavorable production costs as a result of operational inefficiencies, partially offset by better metal margins and improved raw material sourcing.
A.J. Oster
We experienced fluctuations in our performance due to both base operations and the acquisition of Alumet as shown in the following table, which reflects increases or decreases for each category for
2018
over prior year amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Base
|
|
Acquisition
|
|
Total
|
Pounds shipped
|
3.8
|
|
|
49.9
|
|
|
53.7
|
|
Net sales
|
$
|
29.3
|
|
|
$
|
120.8
|
|
|
$
|
150.1
|
|
Adjusted EBITDA
|
$
|
2.5
|
|
|
$
|
5.8
|
|
|
$
|
8.3
|
|
Regarding base operations, net sales
increased
by
$29.3 million
due to increased commodity prices (
$13.5 million
) and increased volumes (
$15.8 million
). Volumes increased in the automotive and electronics / electrical components markets as compared to
2017
when we had experienced difficulties stemming from our implementation of a new ERP system.
Adjusted EBITDA from base operations
increased
by
$2.5 million
due to favorable product mix and selling prices, increased volumes, and more costs incurred in the prior year associated with transitioning to the HSA medical plan and consulting fees associated with the implementation of a new ERP system, partially offset by unfavorable employee and employee related costs.
Results of Operations
Consolidated Results of Operations for the Year Ended
December 31, 2017
, Compared to the Year Ended
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Change:
2017 vs. 2016
|
(in millions)
|
2017
|
|
% of Net Sales
|
|
2016
|
|
% of Net Sales
|
|
Amount
|
|
Percent
|
Net sales
|
$
|
1,578.6
|
|
|
100.0
|
%
|
|
$
|
1,338.3
|
|
|
100.0
|
%
|
|
$
|
240.3
|
|
|
18.0
|
%
|
Cost of sales
|
(1,394.4
|
)
|
|
88.3
|
%
|
|
(1,156.6
|
)
|
|
86.4
|
%
|
|
(237.8
|
)
|
|
20.6
|
%
|
Gross profit
|
184.2
|
|
|
11.7
|
%
|
|
181.7
|
|
|
13.6
|
%
|
|
2.5
|
|
|
1.4
|
%
|
Selling, general and administrative expenses
|
(83.8
|
)
|
|
5.3
|
%
|
|
(82.8
|
)
|
|
6.2
|
%
|
|
(1.0
|
)
|
|
1.2
|
%
|
Operating income
|
100.4
|
|
|
6.4
|
%
|
|
98.9
|
|
|
7.4
|
%
|
|
1.5
|
|
|
1.5
|
%
|
Interest expense, net
|
(17.6
|
)
|
|
1.1
|
%
|
|
(26.2
|
)
|
|
2.0
|
%
|
|
8.6
|
|
|
(32.8
|
)%
|
Loss on extinguishment of debt
|
(0.2
|
)
|
|
—
|
%
|
|
(23.4
|
)
|
|
1.7
|
%
|
|
23.2
|
|
|
(99.1
|
)%
|
Other income (expense), net
|
3.0
|
|
|
0.2
|
%
|
|
0.2
|
|
|
—
|
%
|
|
2.8
|
|
|
N/M
|
|
Income before provision for income taxes
|
85.6
|
|
|
5.5
|
%
|
|
49.5
|
|
|
3.7
|
%
|
|
36.1
|
|
|
72.9
|
%
|
Provision for income taxes
|
(33.9
|
)
|
|
2.2
|
%
|
|
(16.7
|
)
|
|
1.2
|
%
|
|
(17.2
|
)
|
|
103.0
|
%
|
Net income
|
51.7
|
|
|
3.3
|
%
|
|
32.8
|
|
|
2.5
|
%
|
|
18.9
|
|
|
57.6
|
%
|
Net income attributable to noncontrolling interest
|
(0.6
|
)
|
|
—
|
%
|
|
(0.6
|
)
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Net income attributable to Global Brass and Copper Holdings, Inc.
|
$
|
51.1
|
|
|
3.3
|
%
|
|
$
|
32.2
|
|
|
2.5
|
%
|
|
$
|
18.9
|
|
|
58.7
|
%
|
Adjusted EBITDA (a)
|
$
|
130.5
|
|
|
8.3
|
%
|
|
$
|
118.6
|
|
|
8.9
|
%
|
|
$
|
11.9
|
|
|
10.0
|
%
|
(a) See “
Management’s View of Performance
—
Net income and adjusted EBITDA
.”
N/M - not meaningful
The following discussions present an analysis of our results of operations for
2017
as compared to
2016
. See “
Management’s View of Performance
” for discussions of net sales, adjusted sales, gross profit, adjusted gross profit, selling, general and administrative expenses, adjusted selling, general and administrative expenses, net income attributable to Global Brass and Copper Holdings, Inc., adjusted EBITDA, diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share and adjusted diluted earnings per common share. These discussions should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Interest expense, net
Interest expense, net decreased by
$8.6 million
primarily due to lower average interest rates resulting from our July 2016 and July 2017 refinancings. Our average rate on our debt principal decreased from
7.5%
to
5.0%
. In addition, in 2017, we began investing our cash balances in marketable securities to generate interest income.
The following table summarizes the components of interest expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Amount change:
|
(in millions)
|
2017
|
|
2016
|
|
2017 vs. 2016
|
Interest on principal
|
$
|
16.1
|
|
|
$
|
24.4
|
|
|
$
|
(8.3
|
)
|
Amortization of debt issuance costs
|
1.3
|
|
|
2.0
|
|
|
(0.7
|
)
|
Capitalized interest
|
(0.1
|
)
|
|
(1.1
|
)
|
|
1.0
|
|
Other borrowing costs (a)
|
0.8
|
|
|
0.9
|
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
—
|
|
|
(0.5
|
)
|
Total interest expense, net
|
$
|
17.6
|
|
|
$
|
26.2
|
|
|
$
|
(8.6
|
)
|
(a)
Includes fees related to letters of credit and unused line of credit fees.
Loss on extinguishment of debt
In 2017, we amended our ABL facility and Term Loan B debt agreement, which resulted in an expense of
$0.2 million
related to the write-off of unamortized debt issuance costs. In 2016, we bought back and redeemed all of our Senior Secured Notes for an aggregate purchase price of
$362.3 million
, plus accrued interest. As a result of these purchases, we recognized a loss on the extinguishment of debt of
$23.4 million
, which includes a premium of
$17.0 million
and the write-off of
$6.4 million
of unamortized debt issuance costs related to both the Senior Secured Notes and the former asset-based loan facility.
Other income (expense), net
Other income (expense), net increased favorably by
$2.8 million
, due primarily to the
$7.4 million
recovery of insurance proceeds related to the temporary Olin Brass production outage in 2016, of which
$3.9 million
was recorded as other income in 2017. For additional information regarding these insurance recoveries, see
Note 15
, “
Commitments and Contingencies
.”
Provision for income taxes
The provision for income taxes
increased
by
$17.2 million
, or
103.0%
, due primarily to an increase in income before provision for income taxes, the components of which are discussed elsewhere in this report. The effective tax rate
increased
from
33.7%
to
39.6%
for the following reasons:
|
|
•
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act makes broad and complex changes to the U.S. tax code, which resulted in an increase in the provision for income taxes in 2017 of
$7.3 million
, an 860 basis point increase in our effective tax rate;
|
|
|
•
|
We adopted a new accounting standard covering stock compensation in 2017 as mandated by the Securities Exchange Commission. As a result of adopting the new standard, we recorded a
$2.7 million
tax benefit related to the vesting of share awards and option exercises during 2017, reducing the effective tax rate by 321 basis points;
|
|
|
•
|
The prior year effective tax rate benefited from the release of our valuation allowance recorded against our foreign tax credits, resulting in a one-time reduction in income tax expense of approximately $1.0 million or 198 basis points.
|
Segment Results of Operations
Segment Results of Operations for the Year Ended
December 31, 2017
, Compared to the Year Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Change:
2017 vs. 2016
|
(in millions)
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Pounds shipped (a)
|
|
|
|
|
|
|
|
Olin Brass
|
245.5
|
|
|
260.5
|
|
|
(15.0
|
)
|
|
(5.8
|
)%
|
Chase Brass
|
218.5
|
|
|
222.7
|
|
|
(4.2
|
)
|
|
(1.9
|
)%
|
A.J. Oster
|
81.0
|
|
|
75.6
|
|
|
5.4
|
|
|
7.1
|
%
|
Corporate and other (b)
|
(37.7
|
)
|
|
(38.0
|
)
|
|
0.3
|
|
|
0.8
|
%
|
Total
|
507.3
|
|
|
520.8
|
|
|
(13.5
|
)
|
|
(2.6
|
)%
|
Net Sales
|
|
|
|
|
|
|
|
Olin Brass
|
$
|
743.1
|
|
|
$
|
629.4
|
|
|
$
|
113.7
|
|
|
18.1
|
%
|
Chase Brass
|
591.1
|
|
|
502.7
|
|
|
88.4
|
|
|
17.6
|
%
|
A.J. Oster
|
323.6
|
|
|
282.7
|
|
|
40.9
|
|
|
14.5
|
%
|
Corporate and other (b)
|
(79.2
|
)
|
|
(76.5
|
)
|
|
(2.7
|
)
|
|
(3.5
|
)%
|
Total
|
$
|
1,578.6
|
|
|
$
|
1,338.3
|
|
|
$
|
240.3
|
|
|
18.0
|
%
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
Olin Brass
|
$
|
51.2
|
|
|
$
|
49.9
|
|
|
$
|
1.3
|
|
|
2.6
|
%
|
Chase Brass
|
73.2
|
|
|
68.0
|
|
|
5.2
|
|
|
7.6
|
%
|
A.J. Oster
|
14.8
|
|
|
18.4
|
|
|
(3.6
|
)
|
|
(19.6
|
)%
|
Total adjusted EBITDA of operating segments
|
139.2
|
|
|
136.3
|
|
|
2.9
|
|
|
2.1
|
%
|
Corporate and other (c)
|
(8.7
|
)
|
|
(17.7
|
)
|
|
9.0
|
|
|
(50.8
|
)%
|
Total consolidated adjusted EBITDA
|
$
|
130.5
|
|
|
$
|
118.6
|
|
|
$
|
11.9
|
|
|
10.0
|
%
|
(a)
Amounts exclude quantity of unprocessed metal sold.
(b)
Amounts represent intercompany eliminations.
(c)
Includes a
$7.4 million
recovery of insurance proceeds in 2017 relating to a production outage in 2016.
See
Note 5
, “
Segment Information
,” of our consolidated financial statements, which are included elsewhere in this report, for a reconciliation of adjusted EBITDA of segments to income before provision for income taxes and equity income.
The following discussions present an analysis of our results by segment for
2017
as compared to
2016
. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Olin Brass
Net sales
increased
by
$113.7 million
primarily as a result of an increase in the metal cost recovery component (
$131.0 million
) stemming from increased metal prices along with increased sales of unprocessed metal (
$145.7 million
), partially offset by decreased volumes (
$32.5 million
). Adjusted sales
decreased
by
$17.3 million
due to decreased volumes (
$17.8 million
). Volumes decreased in the munitions market due to decreased demand and a production outage at a significant munitions customer’s facilities.
Adjusted EBITDA increased by
$1.3 million
, primarily due to the combination of the following:
|
|
•
|
improved productivity, especially taking into account the impact of the 2016 production outage at Olin Brass;
|
|
|
•
|
reduced selling, general and administrative expenses stemming from less consulting expenses in 2017 than were incurred in 2016 given the software upgrades undertaken at that time;
|
|
|
•
|
increased benefit costs associated with transitioning to a HSA medical plan; and
|
|
|
•
|
increased cost of goods sold due to a reduction in inventories.
|
Chase Brass
Net sales
increased
by
$88.4 million
as increased prices (
$98.0 million
) were partially offset by decreased volumes (
$9.6 million
). Volumes decreased in the building and housing, distributor and transportation markets due to underlying demand from our customers.
Adjusted EBITDA
increased
by
$5.2 million
as increased pricing on metal conversion activities were partially offset by decreased volumes and increased costs of conversion activities.
A.J. Oster
We experienced fluctuations in our performance due to both base operations and the acquisition of Alumet as shown in the following table, which reflects increases or decreases for each category for
2017
over prior year amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Base
|
|
Acquisition
|
|
Total
|
Pounds shipped
|
(2.9
|
)
|
|
8.3
|
|
|
5.4
|
|
Net sales
|
$
|
21.9
|
|
|
$
|
19.0
|
|
|
$
|
40.9
|
|
Adjusted EBITDA
|
$
|
(4.7
|
)
|
|
$
|
1.1
|
|
|
$
|
(3.6
|
)
|
On November 1, 2017, we completed the Alumet acquisition and the activity in the above table shows the impact of this acquisition on our performance. Note that the volume impact occurred mostly in the building and housing market due to their sales of signage and roofing products.
Regarding our base activity, volumes decreased predominately in the automotive, stamping, distribution and building and housing markets, partially offset by increased volumes in the electronics / electrical components market due to underlying demand. In addition, volumes earlier in the year were hampered by the implementation of a new ERP system, which later led to a customer service issue at one of our facilities. Remediation of the customer service issue at the facility is underway and yielding improvement.
Regarding base operations, net sales increased by
$21.9 million
due to the combination of increased metal prices (
$33.3 million
) and lower volumes (
$10.9 million
). Adjusted EBITDA decreased by
$4.7 million
due to the impact of decreased volumes, unfavorable conversion costs, and costs incurred early in 2017 as a result of transitioning to an HSA medical plan for our employees and implementing a new ERP system.
Changes in Financial Condition
The following discussions present an analysis of fluctuations in certain asset, liability and equity components of our consolidated balance sheet as of
December 31, 2018
as compared to the amounts as of
December 31, 2017
. These discussions should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Cash and cash equivalents
increased
by
$66.5 million
. The financial impacts of this change to the periods covered by this report are provided in the consolidated statements of cash flows in our consolidated financial statements included elsewhere in this report.
Accounts receivable
decreased
by
$32.2 million
mostly due to decreased metal prices and the timing of toll sales.
Treasury stock
increased
by
$16.0 million
due to the repurchase of
$12.6 million
of our common stock on the open market under our share repurchase program and the purchase of
$3.4 million
of common stock from employees to satisfy tax withholding obligations under our stock compensation plans.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary uses of cash are to fund working capital, operating expenses, service our debt, make capital expenditures, facilitate stock compensation awards, pay dividends, repurchase our own stock, and execute strategic acquisitions. Historically, our primary sources of short-term liquidity and long-term liquidity have been cash flow from operations and borrowings under our ABL Facility.
At
December 31, 2018
,
$9.1 million
of our
$125.5 million
of cash and cash equivalents was held by our foreign subsidiaries. We believe cash held by our foreign subsidiaries provides these operations with the necessary liquidity to meet future obligations and allows them to reinvest in their operations. We do not expect restrictions on repatriation of cash held outside of the United States for domestic purposes to have a material effect on our overall liquidity, financial condition, or the results of operations for the foreseeable future.
On each of July 18, 2017 and May 29, 2018, we amended the credit agreement governing our Term Loan B Facility that matures on
May 29, 2025
(the “Amended Term Loan B Credit Agreement”), and on July 18, 2017, we amended our credit agreement governing our asset-based revolving facility that matures on July 19, 2021 (the “Amended ABL Credit Agreement,” together, the “Credit Agreements”), as further discussed in
Note 10
, “
Financing
.” The Credit Agreements contain various customary covenants that limit or prohibit our ability, among other things, to (i) incur or guarantee additional indebtedness; (ii) pay certain dividends on our capital stock or redeem, repurchase, retire or make distributions in respect of our capital stock or subordinated indebtedness or make certain other restricted payments; (iii) make certain loans, acquisitions, capital expenditures or investments; (iv) sell certain assets, including stock of our subsidiaries; (v) enter into certain sale and leaseback transactions; (vi) create or incur certain liens; (vii) consolidate, merge, sell, transfer or otherwise dispose of all or substantially all of our assets; (viii) enter into certain transactions with our affiliates; and (ix) engage in certain business activities.
We do not believe that the limitations imposed by the terms of our debt agreements have any significant impact on our liquidity, financial condition or results of operations. We believe that these resources will be sufficient to meet our working capital, debt service, dividend obligations and capital investment obligations for the foreseeable future, including costs that we may incur in connection with our growth strategy.
On July 31, 2018, our Board of Directors authorized a share repurchase program (the “2018 Share Repurchase Program”), authorizing us to repurchase up to
$35.0 million
of our common stock on the open market through September 30, 2020. We repurchased
400,000
shares of our common stock under the 2018 Share Repurchase Program during
2018
. In addition to the 2018 Share Repurchase Program, 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.
Capital improvements and replacement costs account for the majority of our capital expenditures, which we expect to be relatively in line with our historical spend over the foreseeable future.
Cash Flows
The following table presents the summary components of net cash provided by (used in) operating, investing and financing activities for the periods indicated. The following discussion presents an analysis of cash flows for each of the years ended
December 31, 2018
,
December 31, 2017
and
December 31, 2016
and should be read in conjunction with our consolidated statements of cash flows in our consolidated financial statements included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Analysis
|
Year Ended December 31,
|
|
Change
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
|
2018 vs. 2017
|
|
2017 vs. 2016
|
Net cash provided by operating activities
|
$
|
122.1
|
|
|
$
|
49.2
|
|
|
$
|
96.0
|
|
|
$
|
72.9
|
|
|
$
|
(46.8
|
)
|
Net cash used in investing activities
|
$
|
(27.8
|
)
|
|
$
|
(64.6
|
)
|
|
$
|
(34.3
|
)
|
|
$
|
36.8
|
|
|
$
|
(30.3
|
)
|
Net cash used in financing activities
|
$
|
(26.8
|
)
|
|
$
|
(13.8
|
)
|
|
$
|
(56.5
|
)
|
|
$
|
(13.0
|
)
|
|
$
|
42.7
|
|
Cash flows from operating activities
In
2018
, net cash provided by operating activities increased by
$72.9 million
versus the prior year as changes in working capital resulted in decreased cash outflows in
2018
as compared to
2017
. Accounts receivable, inventory, and accounts payable accounted for
$57.4 million
of the
$72.9 million
improvement in cash flows and benefited by approximately
$16.5 million
due to metal prices. Accounts receivable were also favorably impacted by the timing of toll sales and customer payments. Cash from operations also benefited from increased net income.
In
2017
, net cash provided by operating activities decreased by
$46.8 million
versus the prior year as increased investments in working capital resulted in increased cash outflows in
2017
. Net accounts receivable, accounts receivable less accounts payable, resulted in an estimated
$34.4 million
increase in cash outflows due to increased metal prices and the timing of vendor payments. Inventory resulted in an estimated
$22.7 million
increase in cash outflows due to increased inventory quantities as a result of timing of inventory purchases, partially offset by improved inventory turns. Increased net income and other adjustments thereto partially offset these unfavorable fluctuations.
Cash flows from investing activities
Net cash used in investing activities in
2018
decreased due to cash outflows in 2017 related to the Alumet acquisition completed on November 1, 2017. We made
$0.4 million
,
$2.3 million
and
$9.6 million
of capital expenditures in each of
2018
,
2017
, and
2016
, respectively, on technology investments related to our new consolidation software system and upgraded ERP systems.
Cash flows from financing activities
Net cash used in financing activities increased by
$13.0 million
primarily due to a
$10.9 million
increase in cash outflows for share repurchases. Our Board of Directors authorized our 2018 Share Repurchase Program on July 31, 2018 and we repurchased
400,000
under this program in
2018
. Additionally, cash outflows increased by
$2.3 million
due to an increase in our quarterly cash dividend from $0.06 per share to $0.09 per share on August 2, 2018.
Outstanding Indebtedness
Through July 18, 2016, our debt facilities consisted of Senior Secured Notes and a former ABL Facility. During the year ended December 31, 2016, we purchased in the open market an aggregate of
$40.0 million
principal amount of our then existing Senior Secured Notes, for an aggregate purchase price of
$42.5 million
, plus accrued interest.
On July 18, 2016, we obtained a new Term Loan B Facility and used a portion of the proceeds to redeem the remaining
$305.3 million
principal amount outstanding of our Senior Secured Notes. As part of this refinancing and in accordance with the indenture governing the then existing Senior Secured Notes (“Indenture”), we called and terminated the notes at a redemption price of
104.75%
plus accrued interest.
We recognized a loss on the extinguishment of debt in the year ended December 31, 2016 of
$23.4 million
, which includes a premium of
$17.0 million
and the write-off of
$6.4 million
of unamortized debt issuance costs for both the Senior Secured Notes and the former ABL Facility.
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). O
n 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 (the “Amended Term Loan B Credit Agreement”). The most recent refinancing reduced our interest rate spread by an additional 75 basis points, reduced the LIBO Rate floor from
1%
to
0%
, and extended the maturity date through
May 29, 2025
. 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
December 31, 2018
, amounts outstanding under the Term Loan B Facility combined with our interest rate swap derivative accrued interest at a weighted average rate of
5.15%
.
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 that 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. Maturing on July 19, 2021
, we
entered into this credit agreement with a syndicate of lenders on July 18, 2016 (the “ABL Credit Agreement” and the facility thereunder, the “ABL Facility”) when we refinanced out of the already existing asset-based lending facility.
As of
December 31, 2018
, 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).
Amounts outstanding, if any, under the ABL Facility bear interest at a rate per annum equal to, at our option, either (1)
0.25%
to
0.75%
subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus an Alternate Base Rate (as defined in the ABL Credit Agreement) or (2)
1.25%
to
1.75%
subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus the Adjusted LIBO Rate (as defined in the ABL Credit Agreement). Unused amounts under the ABL Facility incur an unused line fee of
0.375%
or
0.25%
per annum (depending on the percentage of aggregate revolving exposure), payable in arrears on a quarterly basis.
The ABL Credit Agreement requires us to prepay or cash collateralize the applicable portion of any outstanding revolving loans under circumstances as are customary in agreements of this type. However, we may voluntarily repay and reborrow outstanding loans under the ABL Facility at any time without a premium or penalty, other than customary “breakage” costs with respect to loans made utilizing the Adjusted LIBO Rate (as defined in the ABL Credit Agreement).
The ABL Credit Agreement also contains a financial covenant requiring us to maintain a fixed charge coverage ratio that is tested whenever excess availability, as defined in the ABL Credit Agreement, falls below the greater of
$20.0 million
or
10%
of our potential borrowings. The “fixed charge coverage ratio” requires us to maintain a ratio of “Consolidated Adjusted EBITDA” to the amount of our “fixed charges” (for all terms, as defined in the ABL Credit Agreement) for the twelve consecutive months prior to the date on which the ratio is tested equal to or greater than
1.0
to
1.0
.
The Credit Agreements
The ABL Credit Agreement and the Term Loan B Credit Agreement (together, the “Credit Agreements”) contain various other covenants consistent with debt agreements of this kind, such as restrictions on the amounts of dividends we can pay.
A violation of covenants under either of the Credit Agreements may result in default in that agreement or a cross-default in the other agreement, as applicable. Upon the occurrence of an event of default under one or both of the Credit Agreements, the requisite lenders could elect to declare all amounts of such indebtedness outstanding immediately due and payable and terminate any commitments to extend further credit.
If we are unable to repay those amounts, the lenders under the applicable Credit Agreement may proceed against the collateral granted to them to secure such indebtedness. Substantially all of our assets are pledged as collateral under the Credit Agreements. The ABL Facility is secured by a senior-priority interest in our cash, accounts receivable and inventory (which secure the Term Loan B Facility on a junior-priority basis) and the Term Loan B is secured by a senior-priority security interest in the remaining pledged assets (most significant of which is our fixed assets), which secure the ABL Facility on a junior-priority basis. If the lenders accelerate the repayment of borrowings, such acceleration could have a material adverse effect on our business, financial condition, results of operations or cash flows. Furthermore, cross-default provisions in the Credit Agreements provide that any default under the Credit Agreements or other significant debt agreements could trigger a cross-default under the Credit Agreements, as applicable.
As of
December 31, 2018
, we were in compliance with all of the covenants relating to the Credit Agreements.
Contractual Obligations
The following table illustrates our contractual commitments as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Beyond
|
|
Total
|
Term Loan B—Principal (a)
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
|
$
|
296.8
|
|
|
$
|
312.8
|
|
Term Loan B—Interest (b)
|
|
16.1
|
|
|
15.9
|
|
|
15.7
|
|
|
15.6
|
|
|
15.2
|
|
|
21.0
|
|
|
99.5
|
|
Capital Lease Obligation (c)
|
|
1.5
|
|
|
0.5
|
|
|
0.3
|
|
|
0.3
|
|
|
0.1
|
|
|
0.1
|
|
|
2.8
|
|
Purchase Obligations
|
|
181.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
181.5
|
|
IAM National Pension Fund
|
|
3.8
|
|
|
3.9
|
|
|
4.0
|
|
|
3.5
|
|
|
—
|
|
|
—
|
|
|
15.2
|
|
Leases
|
|
3.2
|
|
|
2.1
|
|
|
1.5
|
|
|
0.6
|
|
|
0.3
|
|
|
0.2
|
|
|
7.9
|
|
Total
|
|
$
|
209.3
|
|
|
$
|
25.6
|
|
|
$
|
24.7
|
|
|
$
|
23.2
|
|
|
$
|
18.8
|
|
|
$
|
318.1
|
|
|
$
|
619.7
|
|
|
|
(a)
|
Represents quarterly payments required in connection with the Term Loan B Facility. As discussed in “Liquidity and Capital Resources—
Outstanding Indebtedness
,” we are also subject to excess cash flow sweep payments depending on the total net leverage ratio from time to time; however, it is not practicable to estimate these payments.
|
|
|
(b)
|
Assumes that interest will be paid on the Term Loan B Facility at the
December 31, 2018
weighted average interest rate through the maturity of the interest rate swap agreement on
May 31, 2023
and the
December 31, 2018
prevailing Term Loan B interest rate from the maturity of the interest rate swap agreement through maturity of the Term Loan B Facility on
May 29, 2025
. Future interest rates may change and actual interest payments could differ from those disclosed in the table above.
|
|
|
(c)
|
Represents principal and interest portion of capital lease obligation.
|
We are obligated to make future payments under various contracts such as debt agreements, lease agreements and collective bargaining agreements. Operating lease obligations are payment obligations under leases classified as operating leases. Most leases are for a period of three years but some last up to five years and are primarily for vehicles and equipment used in our manufacturing and distribution operations. Our purchase obligations are agreements to purchase goods or services that are enforceable and legally binding on us (i.e. non-cancelable) that specify all significant terms, including fixed or minimum quantities, fixed or variable prices and the approximate timing of the transaction. Purchase obligations include the pricing of anticipated metal purchases using contractual metal prices, or where pricing is dependent on prevailing COMEX or London Metal Exchange (“LME”) prices at the time of delivery, market metal prices as of
December 31, 2018
, as well as energy and utility prices. As a result of the variability in the pricing of many of our metal purchasing obligations, actual amounts may vary from the amounts shown above.
We participate in a multi-employer pension plan under the collective bargaining agreement that covers the East Alton, Illinois operations of our Olin Brass segment and the Alliance, Ohio operations of our A.J. Oster segment. These collective bargaining agreements obligate us to contribute to the union’s pension plan at a rate per eligible hour per covered employee as specified in the agreement. The contributions to the multi-employer plan are a function of employment levels and eligible work hours. As a result, actual amounts may vary from the amounts shown above.
The ABL Facility bears interest at variable rates, and the outstanding amounts under the ABL Facility will vary from time to time, so estimating future interest and principal payments under the ABL Facility is not practicable. The ABL Facility matures on July 19, 2021.
At
December 31, 2018
, we had a noncurrent liability for workers’ compensation of
$9.4 million
, but as we are unable to reasonably estimate the ultimate timing of settlement, it is not practical to present annual payment information.
At
December 31, 2018
, we had a liability for uncertain tax positions, including interest and penalties, of
$26.4 million
, but as we are unable to reasonably estimate the ultimate amount or timing of settlement or other resolution, it is not practical to present annual payment information.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, sales, expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with US GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and various disclosures. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of this process forms the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We review our estimates and judgments on a regular, ongoing basis. Actual results may differ from these estimates due to changes in circumstances and conditions.
The following accounting policies and estimates are considered critical in light of the potentially material impact that the estimates, judgments and uncertainties affecting the application of these policies might have on our reported financial information.
Our accounting policies are more fully described in
Note 2
, “
Summary of Significant Accounting Policies
,” to our consolidated financial statements included elsewhere in this report. 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 in
Note 2
, “
Summary of Significant Accounting Policies
,” to our consolidated financial statements included elsewhere in this report.
Revenue Recognition
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. We recognize revenue upon transfer of control to our customers, 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.
Inventories
Inventories include costs attributable to direct labor and manufacturing overhead but are primarily comprised of material costs. The metals component of inventories that is valued on a LIFO basis comprised approximately
67%
and
65%
of total inventory at
December 31, 2018
and
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. Elements of cost in finished goods inventory in addition to the cost of material include depreciation, amortization, utilities, consumable production supplies, maintenance, production wages and transportation costs.
Inventories are stated at the lower of cost or market. The market price of metals used in production and related scrap is subject to volatility. During periods when open-market prices decline below net book value, we may need to record a provision to reduce the carrying value of our inventory. We analyze the carrying value of inventory for impairment if circumstances indicate impairment may have occurred. If an impairment occurs, the amount of impairment loss is determined by measuring the excess of the carrying value of inventory over the net realizable value of inventory.
We record an estimate for slow moving and obsolete inventory based upon product knowledge, physical inventory observation, estimated future demand, market conditions and an aging analysis of the inventory on hand. Our policy is to evaluate all inventories including raw material, work-in-process and finished goods. Inventory in excess of our estimated usage requirements is written down to its estimated net realizable value.
Purchase Accounting
Determining the fair value of certain assets, liabilities and subsidiaries assumed in a business combination is judgmental in nature and often involves the use of significant estimates and assumptions. Some of the more significant estimates and assumptions used in valuing our acquisition of the worldwide metals business of Olin Corporation in 2007 and our acquisition of the tradename, customer relationships, non-compete agreements and leasehold interests of Alumet in November 2017 included projected future cash flows and discount rates reflecting the risk inherent in future cash flows.
We recognize goodwill related to acquisitions when the purchase price exceeds the fair value of net assets. For the acquisition of the worldwide metals business of Olin Corporation, the estimated fair value of the net assets exceeded the purchase price, thus creating negative goodwill under then current GAAP guidance. As such, noncurrent assets were assigned no value in the acquisition from Olin Corporation.
Uncertain Tax Positions
We evaluate the recognition and measurement of uncertain tax positions based on applicable tax law, regulations, case law, administrative rulings and pronouncements and the facts and circumstances surrounding the tax position. Changes in our estimates related to the recognition and measurement of the amount recorded for uncertain tax positions could result in significant changes in our provision for (benefit from) income taxes, which could be material to our consolidated statements of operations.
Derivative Contracts
We measure the fair value of our derivative contract positions under the provisions of ASC 820, which 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.
|
In accordance with ASC 820, we determine the fair value of derivative contracts using Level 2 inputs. As of
December 31, 2018
, we did not hold assets or liabilities requiring a Level 3 measurement, and there were no transfers between the hierarchy levels during
2018
or
2017
. We include the fair value of our interest rate swap agreement and commodity derivative contracts as assets or liabilities in our consolidated balance sheet.
We use hedge accounting for our interest rate swap agreement that we entered into in May 2018. We do not use hedge accounting for our commodity derivative contracts. For our interest rate swap agreement, the change in fair value is recorded to accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. For our commodity derivative contracts, all gains and losses are recorded as cost of sales in the consolidated statements of operations as these contracts are marked to market each period.
Recently Issued and Recently Adopted Accounting Pronouncements
For information on recently issued and recently adopted accounting pronouncements, see
Note 2
, “
Summary of Significant Accounting Policies
,” to the consolidated financial statements, which are included elsewhere in this report.
Inflation and Seasonality
We experience effects of inflation on input costs, such as wages, medical benefits, natural gas, electricity, plating and other key inputs. We may not be able to offset fully the impact of inflation on these input costs or energy costs through price increases, productivity improvements or cost reduction programs.
There is a slight decrease in our net sales in each fourth quarter as a result of a decrease in demand due to customer shutdowns for the holidays and year-end maintenance of plants and inventory by customers. We also typically experience slight working capital increases in the first quarter as operations start up again and as we prepare for increased sales to our building and housing customers, who typically have increased seasonal needs in the first half of the year. We do not foresee these seasonality trends to change materially.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Global Brass and Copper Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Global Brass and Copper Holdings, Inc. and its subsidiaries as of December 31, 2018 and December 31, 2017 and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes for each of the three years in the period ended December 31, 2018 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its
operations and its
cash flows for each of the three years in the period ended December 31, 2018
in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated
financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
|
/s/ PricewaterhouseCoopers LLP
|
Chicago, IL
|
February 28, 2019
|
We have served as the Company’s auditor since 2008.
Global Brass and Copper Holdings, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
As of
|
(in millions, except share and par value data)
|
December 31,
2018
|
|
December 31,
2017
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
125.5
|
|
|
$
|
59.0
|
|
Accounts receivable (net of allowance of $1.3 and $1.0 at December 31, 2018 and December 31, 2017, respectively)
|
165.6
|
|
|
197.8
|
|
Inventories
|
218.2
|
|
|
208.1
|
|
Prepaid expenses and other current assets
|
8.5
|
|
|
11.7
|
|
Income tax receivable
|
2.8
|
|
|
3.6
|
|
Total current assets
|
520.6
|
|
|
480.2
|
|
Property, plant and equipment, net
|
147.8
|
|
|
142.9
|
|
Goodwill
|
4.4
|
|
|
4.5
|
|
Intangible assets, net
|
1.6
|
|
|
2.0
|
|
Deferred income taxes
|
11.3
|
|
|
16.1
|
|
Other noncurrent assets
|
5.3
|
|
|
6.5
|
|
Total assets
|
$
|
691.0
|
|
|
$
|
652.2
|
|
Liabilities and equity
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of debt
|
$
|
4.6
|
|
|
$
|
5.0
|
|
Accounts payable
|
114.1
|
|
|
117.1
|
|
Accrued liabilities
|
40.2
|
|
|
36.0
|
|
Accrued interest
|
0.1
|
|
|
0.2
|
|
Income tax payable
|
—
|
|
|
0.5
|
|
Total current liabilities
|
159.0
|
|
|
158.8
|
|
Noncurrent portion of debt
|
305.7
|
|
|
309.0
|
|
Other noncurrent liabilities
|
38.5
|
|
|
37.1
|
|
Total liabilities
|
503.2
|
|
|
504.9
|
|
Commitments and contingencies (Note 15)
|
|
|
|
Global Brass and Copper Holdings, Inc. stockholders’ equity:
|
|
|
|
Common stock - $0.01 par value; 80,000,000 shares authorized; 22,541,310 and 22,133,764 shares issued at December 31, 2018 and December 31, 2017, respectively
|
0.2
|
|
|
0.2
|
|
Additional paid-in capital
|
62.5
|
|
|
54.5
|
|
Retained earnings
|
148.8
|
|
|
97.3
|
|
Treasury stock - 743,057 and 226,576 shares at December 31, 2018 and December 31, 2017, respectively
|
(22.6
|
)
|
|
(6.6
|
)
|
Accumulated other comprehensive loss
|
(6.1
|
)
|
|
(2.9
|
)
|
Total Global Brass and Copper Holdings, Inc. stockholders’ equity
|
182.8
|
|
|
142.5
|
|
Noncontrolling interest
|
5.0
|
|
|
4.8
|
|
Total equity
|
187.8
|
|
|
147.3
|
|
Total liabilities and equity
|
$
|
691.0
|
|
|
$
|
652.2
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Global Brass and Copper Holdings, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
(in millions, except per share data)
|
2018
|
|
2017
|
|
2016
|
Net sales
|
$
|
1,765.4
|
|
|
$
|
1,578.6
|
|
|
$
|
1,338.3
|
|
Cost of sales
|
(1,578.7
|
)
|
|
(1,394.4
|
)
|
|
(1,156.6
|
)
|
Gross profit
|
186.7
|
|
|
184.2
|
|
|
181.7
|
|
Selling, general and administrative expenses
|
(92.7
|
)
|
|
(83.8
|
)
|
|
(82.8
|
)
|
Operating income
|
94.0
|
|
|
100.4
|
|
|
98.9
|
|
Interest expense, net
|
(16.8
|
)
|
|
(17.6
|
)
|
|
(26.2
|
)
|
Loss on extinguishment of debt
|
(0.5
|
)
|
|
(0.2
|
)
|
|
(23.4
|
)
|
Other income (expense), net
|
(0.8
|
)
|
|
3.0
|
|
|
0.2
|
|
Income before provision for income taxes
|
75.9
|
|
|
85.6
|
|
|
49.5
|
|
Provision for income taxes
|
(17.3
|
)
|
|
(33.9
|
)
|
|
(16.7
|
)
|
Net income
|
58.6
|
|
|
51.7
|
|
|
32.8
|
|
Net income attributable to noncontrolling interest
|
(0.4
|
)
|
|
(0.6
|
)
|
|
(0.6
|
)
|
Net income attributable to Global Brass and Copper Holdings, Inc.
|
$
|
58.2
|
|
|
$
|
51.1
|
|
|
$
|
32.2
|
|
Net income attributable to Global Brass and Copper Holdings, Inc. per common share:
|
|
|
|
|
|
Basic
|
$
|
2.66
|
|
|
$
|
2.35
|
|
|
$
|
1.50
|
|
Diluted
|
$
|
2.61
|
|
|
$
|
2.31
|
|
|
$
|
1.49
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
21.9
|
|
|
21.7
|
|
|
21.4
|
|
Diluted
|
22.3
|
|
|
22.1
|
|
|
21.6
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Global Brass and Copper Holdings, Inc.
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Net income
|
$
|
58.6
|
|
|
$
|
51.7
|
|
|
$
|
32.8
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
Net derivative gain (loss) on hedge transactions
|
(2.0
|
)
|
|
—
|
|
|
—
|
|
Income taxes on derivative transactions
|
0.5
|
|
|
—
|
|
|
—
|
|
Foreign currency translation:
|
|
|
|
|
|
Foreign currency translation adjustment
|
(1.8
|
)
|
|
1.4
|
|
|
(2.8
|
)
|
Income tax (expense) benefit on foreign currency translation adjustment
|
(0.1
|
)
|
|
—
|
|
|
0.7
|
|
Comprehensive income
|
55.2
|
|
|
53.1
|
|
|
30.7
|
|
Comprehensive income attributable to noncontrolling interest
|
(0.2
|
)
|
|
(0.8
|
)
|
|
(0.3
|
)
|
Comprehensive income attributable to Global Brass and Copper Holdings, Inc.
|
$
|
55.0
|
|
|
$
|
52.3
|
|
|
$
|
30.4
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Global Brass and Copper Holdings, Inc.
Consolidated Statements of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2015
|
21,507,154
|
|
|
$
|
0.2
|
|
|
$
|
36.9
|
|
|
$
|
22.3
|
|
|
$
|
(0.7
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
56.4
|
|
|
$
|
4.3
|
|
|
$
|
60.7
|
|
Share-based compensation
|
117,267
|
|
|
—
|
|
|
6.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.9
|
|
|
—
|
|
|
6.9
|
|
Exercise of stock options
|
41,066
|
|
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Share repurchases
|
(32,420
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
Excess tax benefit on share-based compensation
|
—
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Dividends declared ($0.15 per common share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.3
|
)
|
|
—
|
|
|
—
|
|
|
(3.3
|
)
|
|
—
|
|
|
(3.3
|
)
|
Distribution to noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
32.2
|
|
|
—
|
|
|
—
|
|
|
32.2
|
|
|
0.6
|
|
|
32.8
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
|
(1.8
|
)
|
|
(0.3
|
)
|
|
(2.1
|
)
|
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
|
383,167
|
|
|
—
|
|
|
8.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8.2
|
|
|
—
|
|
|
8.2
|
|
Exercise of stock options
|
38,381
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
0.8
|
|
Share repurchases
|
(147,427
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.1
|
)
|
|
—
|
|
|
(5.1
|
)
|
|
—
|
|
|
(5.1
|
)
|
Adoption of ASU 2016-09
|
—
|
|
|
—
|
|
|
0.5
|
|
|
(0.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends declared ($0.195 per common share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
(4.5
|
)
|
Distribution to noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Net income
|
|
|
|
|
|
|
—
|
|
|
51.1
|
|
|
|
|
|
—
|
|
|
51.1
|
|
|
0.6
|
|
|
51.7
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.2
|
|
|
1.2
|
|
|
0.2
|
|
|
1.4
|
|
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
|
326,446
|
|
|
—
|
|
|
6.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.7
|
|
|
—
|
|
|
6.7
|
|
Exercise of stock options
|
81,100
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
1.3
|
|
Share repurchases
|
(516,481
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16.0
|
)
|
|
—
|
|
|
(16.0
|
)
|
|
—
|
|
|
(16.0
|
)
|
Dividends declared ($0.30 per common share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.7
|
)
|
|
—
|
|
|
—
|
|
|
(6.7
|
)
|
|
—
|
|
|
(6.7
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
58.2
|
|
|
—
|
|
|
—
|
|
|
58.2
|
|
|
0.4
|
|
|
58.6
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
(3.2
|
)
|
|
(0.2
|
)
|
|
(3.4
|
)
|
Balance at December 31, 2018
|
21,798,253
|
|
|
$
|
0.2
|
|
|
$
|
62.5
|
|
|
$
|
148.8
|
|
|
$
|
(22.6
|
)
|
|
$
|
(6.1
|
)
|
|
$
|
182.8
|
|
|
$
|
5.0
|
|
|
$
|
187.8
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Global Brass and Copper Holdings, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
$
|
58.6
|
|
|
$
|
51.7
|
|
|
$
|
32.8
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Lower of cost or market adjustment to inventory
|
2.9
|
|
|
(3.6
|
)
|
|
(1.7
|
)
|
Unrealized (gain) loss on derivatives
|
2.8
|
|
|
0.8
|
|
|
(3.1
|
)
|
Depreciation
|
21.1
|
|
|
18.5
|
|
|
14.8
|
|
Amortization of intangible assets
|
0.4
|
|
|
0.1
|
|
|
0.1
|
|
Amortization of debt discount and issuance costs
|
1.2
|
|
|
1.3
|
|
|
2.0
|
|
Loss on extinguishment of debt
|
0.5
|
|
|
0.2
|
|
|
23.4
|
|
Uncertain tax positions
|
—
|
|
|
2.1
|
|
|
—
|
|
Share-based compensation expense
|
6.7
|
|
|
8.2
|
|
|
6.9
|
|
Provision for bad debts, net of reductions
|
0.8
|
|
|
0.1
|
|
|
(0.3
|
)
|
Deferred income taxes
|
5.3
|
|
|
18.0
|
|
|
4.7
|
|
Loss on disposal of property, plant and equipment
|
0.3
|
|
|
—
|
|
|
0.1
|
|
Change in assets and liabilities, net of effects of business acquisition:
|
|
|
|
|
|
Accounts receivable
|
31.6
|
|
|
(49.8
|
)
|
|
(15.0
|
)
|
Inventories
|
(13.3
|
)
|
|
(9.7
|
)
|
|
13.0
|
|
Prepaid expenses and other current assets
|
1.0
|
|
|
2.6
|
|
|
2.5
|
|
Accounts payable
|
(1.5
|
)
|
|
18.9
|
|
|
18.5
|
|
Accrued liabilities
|
3.5
|
|
|
(10.1
|
)
|
|
0.9
|
|
Accrued interest
|
(0.1
|
)
|
|
—
|
|
|
(2.8
|
)
|
Income taxes, net
|
0.1
|
|
|
0.9
|
|
|
(1.2
|
)
|
Other, net
|
0.2
|
|
|
(1.0
|
)
|
|
0.4
|
|
Net cash provided by (used in) operating activities
|
122.1
|
|
|
49.2
|
|
|
96.0
|
|
Cash flows from investing activities
|
|
|
|
|
|
Capital expenditures
|
(26.2
|
)
|
|
(24.7
|
)
|
|
(34.4
|
)
|
Business acquisition
|
(1.7
|
)
|
|
(40.0
|
)
|
|
—
|
|
Proceeds from sale of property, plant and equipment
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Net cash used in investing activities
|
(27.8
|
)
|
|
(64.6
|
)
|
|
(34.3
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Borrowings on ABL Facility
|
0.9
|
|
|
0.8
|
|
|
1.2
|
|
Payments on ABL Facility
|
(0.9
|
)
|
|
(0.8
|
)
|
|
(1.2
|
)
|
Retirement of Senior Secured Notes
|
—
|
|
|
—
|
|
|
(345.3
|
)
|
Premium payment on extinguishment of debt
|
—
|
|
|
—
|
|
|
(17.0
|
)
|
Payments of debt issuance costs
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(5.4
|
)
|
Proceeds from term loan, net of discount
|
25.4
|
|
|
8.7
|
|
|
316.8
|
|
Payments on term loan
|
(28.6
|
)
|
|
(11.9
|
)
|
|
(0.8
|
)
|
Principal payments under capital lease obligation
|
(1.8
|
)
|
|
(1.3
|
)
|
|
(1.1
|
)
|
Dividends paid
|
(6.7
|
)
|
|
(4.4
|
)
|
|
(3.2
|
)
|
Distribution to noncontrolling interest owner
|
—
|
|
|
(0.4
|
)
|
|
(0.2
|
)
|
Proceeds from exercise of stock options
|
1.3
|
|
|
0.8
|
|
|
0.5
|
|
Share repurchases
|
(16.0
|
)
|
|
(5.1
|
)
|
|
(0.8
|
)
|
Net cash used in financing activities
|
(26.8
|
)
|
|
(13.8
|
)
|
|
(56.5
|
)
|
Effect of foreign currency exchange rates
|
(1.0
|
)
|
|
—
|
|
|
(0.5
|
)
|
Net increase (decrease) in cash
|
66.5
|
|
|
(29.2
|
)
|
|
4.7
|
|
Cash and cash equivalents at beginning of period
|
59.0
|
|
|
88.2
|
|
|
83.5
|
|
Cash and cash equivalents at end of period
|
$
|
125.5
|
|
|
$
|
59.0
|
|
|
$
|
88.2
|
|
Noncash investing and financing activities
|
|
|
|
|
|
Purchases of property, plant and equipment not yet paid
|
$
|
4.4
|
|
|
$
|
5.0
|
|
|
$
|
4.1
|
|
Acquisition of equipment under capital lease obligation
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest, net of amount capitalized
|
$
|
16.9
|
|
|
$
|
16.8
|
|
|
$
|
27.0
|
|
Income taxes, net of refunds
|
$
|
12.4
|
|
|
$
|
12.6
|
|
|
$
|
13.3
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
1. Organization and Formation of the Company
Global Brass and Copper Holdings, Inc. (“Holdings,” “GBC,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware, on October 10, 2007. Holdings commenced commercial operations on November 19, 2007 with the acquisition of the metals business from Olin Corporation. On May 23, 2013, we completed our initial public offering on the New York Stock Exchange and our shares of common stock began trading under the ticker symbol “BRSS.”
We are a leading, value-added converter, fabricator, processor and distributor of specialized non-ferrous products in North America. We operate through
three
distinct, reportable segments: GBC Metals, LLC (“Olin Brass”), Chase Brass and Copper Company, LLC (“Chase Brass”) and A.J. Oster, LLC (“A.J. Oster”). We also have a Corporate entity which includes certain administrative costs and expenses and the elimination of intercompany balances.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, our wholly-owned subsidiaries and our majority-owned subsidiaries, in which we hold a controlling interest. All intercompany accounts and transactions are eliminated in consolidation. We use the equity method to account for investments in affiliated companies that are
20%
to
50%
owned where we do not hold a controlling voting interest and do not direct the matters that most significantly impact the investee’s operations.
We own an
80%
interest in Olin Luotong (GZ) Corporation (“Olin Luotong Metals” or “OLM”), based in China, and Olin Luotong Metals’ financial information is consolidated herein, with the net results attributable to the
20%
noncontrolling interest reflected in the accompanying consolidated financial statements.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires us 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 us to make estimates and assumptions that affect the reported amount of net sales and expenses during the reporting period. Actual amounts could differ from those estimates.
Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of our cash equivalents at
December 31, 2018
approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists of trade receivables for amounts billed to customers for products sold and other receivables. The determination of collectability of our accounts receivable requires us to make frequent judgments and estimates in order to determine the appropriate allowance needed for doubtful accounts. In circumstances where we are aware of a customer’s inability to meet its financial obligations (e.g., bankruptcy filings or substantial down-grading of credit ratings), we record an allowance for bad debts equal to the amount we believe is not collectible. For all other customers, we recognize allowances for bad debts based on historical collection experience. If circumstances change (e.g., greater than expected defaults or an unexpected material change in a major customer’s ability to meet its financial obligations), the estimate of the allowance could change by a material amount. Accounts are written off once deemed to be uncollectible.
Inventories
Inventories include costs attributable to direct labor and manufacturing overhead but are primarily comprised of metal costs. The metals component of inventory is valued on a last-in, first-out (“LIFO”) basis, and comprised approximately
67%
and
65%
of total inventory at
December 31, 2018
and
2017
, respectively. All other inventory components, including the direct labor and manufacturing overhead components and certain non-U.S. inventories, are valued on a first-in, first-out (“FIFO”) basis. In addition to the cost of material, finished goods inventory includes costs for depreciation, utilities, consumable production supplies, maintenance, production wages and transportation.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
Inventories are valued at the lower of cost or market. The market price of metals used in production and related scrap is subject to volatility. We evaluate the need to record adjustments to inventory values on a regular basis. During periods when open market prices decline below carrying value, we record a provision to reduce the carrying value of inventory. Additionally, we record an estimate for slow moving and obsolete inventory based upon product knowledge, physical inventory observation, future demand, market conditions and an aging analysis of the inventory on hand. Our policy is to include all types of inventory, including raw material, work-in-process, finished goods, and spare parts, in the evaluation of slow moving and obsolete reserves. Inventory in excess of estimated usage requirements is written down to its estimated net realizable value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. We depreciate property, plant and equipment, which includes assets under capital leases, using the straight-line method based on the estimated useful lives of the assets as they are placed into service. Property, plant and equipment are generally depreciated over their useful lives as detailed in the notes to the accompanying consolidated financial statements. Depreciation expense is recorded in cost of sales or selling, general and administrative costs depending on the nature and use of the underlying asset.
Expenditures for repairs and maintenance are expensed as incurred. Expenditures which improve an asset or extend its estimated useful life are capitalized. Interest costs related to the construction of qualifying assets are capitalized as part of the construction costs. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the accompanying consolidated statements of operations.
We review property, plant and equipment for impairment when a change in events or circumstances indicates that the carrying value of the assets may not be recoverable. We determine the fair value of our asset group through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals.
Acquisitions and Goodwill
All acquisitions are accounted for using the acquisition method as prescribed by ASC 805,
Business Combinations
. The purchase price paid is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill.
Goodwill is not amortized but is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. We perform our annual goodwill impairment test as of October 31 and monitor for interim triggering events on an ongoing basis.
We utilized the qualitative goodwill evaluation model for our annual goodwill impairment test conducted as of October 31,
2018
. Based on the results of that qualitative assessment, we believe it was more likely than not that the fair value of the reporting units exceeded their carrying values as of October 31,
2018
, indicating
no
impairment of goodwill.
Intangible Assets
We record finite-lived intangible assets at fair value under the purchase method of accounting and amortize them over their useful lives using the straight-line method. We record amortization expense related to intangible assets in selling, general and administrative expenses. We review identifiable finite-lived intangible assets for impairment whenever events or circumstances indicate that their carrying values may not be recoverable. We do not have any indefinite-lived intangible assets as of
December 31, 2018
or
2017
. Accumulated amortization on intangible assets was
$1.8 million
and
$1.4 million
as of
December 31, 2018
and
2017
, respectively.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
We expect to incur amortization expense related to intangible assets in subsequent years as follows:
|
|
|
|
|
|
(in millions)
|
|
|
Year
|
|
Amortization
|
2019
|
|
$
|
0.4
|
|
2020
|
|
0.2
|
|
2021
|
|
0.1
|
|
2022
|
|
0.1
|
|
2023
|
|
0.1
|
|
Thereafter
|
|
0.7
|
|
|
|
$
|
1.6
|
|
Deferred Financing Fees
We amortize deferred financing fees incurred in connection with the issuance of debt as non-cash interest expense over the terms of the debt agreements. We present unamortized balances of deferred financing fees incurred in connection with the issuance of our long-term debt facilities in the noncurrent portion of debt in our consolidated balance sheets and amortize them using the effective interest method over the term of the debt facility. We present the unamortized balances of deferred financing fees incurred in connection with the issuance of our asset based loan facility in other noncurrent assets in our consolidated balance sheets and amortize them on a straight-line basis over the term of the facility.
Derivative Contracts
Our operating activities expose us to a variety of market risks, including risks related to fluctuations in commodity prices, energy costs, foreign currency exchange rates, and interest rates. We monitor and manage these financial exposures as an integral part of our overall risk-management program. We do not enter into derivative contracts for speculation purposes where the objective is to generate profits. We use hedge accounting for our interest rate swap agreement that we entered into in May 2018. We did not apply hedge accounting to our commodity derivative contracts in
2018
,
2017
or
2016
. We include the fair value of our interest rate swap agreement and commodity derivative contracts as assets or liabilities in our consolidated balance sheet. For our interest rate swap agreement, the change in fair value is recorded to accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. For our commodity derivative contracts, we recognize all amounts paid and received and changes in fair value of the derivative contracts, including unrealized gains and losses, as adjustments to income in the accompanying consolidated statements of operations.
Treasury Stock
On July 31, 2018, our Board of Directors authorized a share repurchase program (the “2018 Share Repurchase Program”), authorizing us to repurchase up to
$35.0 million
of our common stock on the open market through September 30, 2020. We repurchased
400,000
shares of our common stock under the 2018 Share Repurchase Program during
2018
. In addition to the 2018 Share Repurchase Program, 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. Both the repurchased shares and shares bought from our employees are reflected at cost within treasury stock in the consolidated balance sheets.
Share-Based Compensation
We have one share-based compensation plan, which is described in
Note 16
, “
Share-based Compensation
.” Pursuant to this plan, we have granted non-qualified options, restricted stock and performance-based shares to certain employees and members of our management and our Board of Directors. See
Note 16
, “
Share-based Compensation
” for further detail.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
Revenue Recognition
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. We recognize revenue upon transfer of control to our customers, which is generally the date the product is shipped. See
Note 3
, “
Revenue
” for further detail.
Estimates for rebates, returns and payment discounts are recognized in the period in which the corresponding revenue is recorded based on contractual values or historical experience. Such rebates were not material for
2018
,
2017
, or
2016
.
Shipping and Freight
Billings to customers for shipping costs are included in net sales and the cost of shipping product to those customers is reflected in cost of sales in the accompanying consolidated statements of operations. We elect to account for the shipping costs incurred after transfer of control to the customer as fulfillment costs.
Provision for Income Taxes
We use the asset and liability approach to record our provision for income taxes. We measure our current and deferred income taxes payable by applying the provisions of enacted tax laws. Deferred income taxes are provided for temporary differences between the income tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. We record a valuation allowance to reduce deferred tax assets when we determine it is “more likely than not” that some portion or all of the deferred tax assets will not be realized.
Foreign Currency Translation
We translate the financial statements of our foreign subsidiaries into United States dollars in accordance with ASC 830,
Foreign Currency Matters
. The functional currency of our foreign subsidiaries is the local currency. We translate the consolidated statements of operations of our foreign operations at weighted-average exchange rates for the periods. We translate their assets and liabilities at period-end exchange rates and equity transactions at historical rates. Gains and losses resulting from the translation adjustment are reported as a component of other comprehensive income (loss). We record the income tax effect of currency translation adjustments related to foreign subsidiaries and joint ventures that are not considered indefinitely reinvested as a component of deferred taxes with an offset to other comprehensive income (loss).
Concentrations of Credit Risk and Certain Other Exposures
We sell and distribute our products to a wide range of companies primarily in the building and housing, munitions, automotive, transportation, coinage, electronics / electrical components and industrial machinery and equipment markets. We perform ongoing credit evaluations of our customers and generally do not require collateral. There was
no
customer that represented
10%
or more of consolidated net sales in
2018
,
2017
, or
2016
.
We use various strategies to minimize the impact of changes in the commodity metal prices between the date of order from a customer and the date of sale to a customer. Generally, we price a forward replacement purchase of an equivalent amount of copper and other metals under flexible pricing arrangements with our suppliers at the same time that we determine the forward selling price of finished products to our customers. We have various sources of raw materials and are not materially dependent on any one supplier.
As of
December 31, 2018
, approximately
54%
of our employees at various sites were members of unions. Generally, our various agreements with unions in the United States have contractual terms which range from
3
to
5
years. Since our establishment in November 2007, we have not experienced any work stoppages at any of our facilities.
We are required to make contributions to the IAM National Pension Plan (“IAM Plan”), a multi-employer pension plan that covers certain of our union employees. Our obligations may be impacted by the plan’s funded status, investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions. In addition, if a participating employer becomes insolvent and ceases to contribute to a multiemployer plan, the unfunded obligation of the plan will be borne by the remaining participating employers. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur withdrawal liability to the plan. Given the facts that the IAM Plan is
92%
funded, many other participating employers are much larger than us, and the large number of participating employers in the plan, we do not view this to be a significant risk.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
Self-Insurance Programs
We are self-insured up to a retention amount for workers’ compensation claims and benefits paid under employee health care programs. Accruals for employee health care liabilities are primarily based on the estimated, undiscounted cost of claims, which includes claims incurred but not yet reported to us. We estimate liabilities for workers’ compensation benefits and related expenses for claims, in part, by considering historical claims experience and undiscounted claims estimates provided by insurance carriers, third-party administrators, and actuaries. Our accruals for self-insurance liabilities are sufficient to cover outstanding claims, including those incurred but not yet reported to us as of the estimation date.
Environmental Reserves and Environmental Expenses
We recognize an environmental liability when it is probable the liability exists and the amount is reasonably estimable. We estimate the duration and extent of our remediation obligations based upon internal analyses of clean-up costs, ongoing monitoring costs and estimated legal fees, communications with regulatory agencies and changes in environmental law. If we were to determine that our estimates of the duration or extent of environmental obligations were no longer accurate, we would adjust our environmental liabilities accordingly in the period that such determination is made. We do not discount estimated future expenditures for environmental remediation to their present value. Accrued environmental liabilities are not reduced by potential insurance reimbursements.
Environmental expenses that relate to ongoing operations are included as a component of cost of sales in the accompanying consolidated statement of operations.
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.
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.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation
(Topic 718)
(“ASU 2016-09”). ASU 2016-09 simplifies various aspects of the accounting for share-based payment transactions, including income tax consequences, presentation of awards as either equity or liabilities, presentation in the statement of cash flows and accounting for forfeitures. The provisions of ASU 2016-09 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2016. As allowed under the new guidance, we have elected to change our accounting policy to now recognize forfeitures as they occur. As of January 1, 2017, the date we adopted this ASU, the
$0.5 million
cumulative effect of that change in accounting policy resulted in a decrease to retained earnings and increase to additional paid-in capital. Additionally, ASU 2016-09 eliminates the requirement to report excess tax benefits and certain tax deficiencies related to share-based payment transactions in additional paid-in capital. In accordance with the new standard and prospectively since the date we adopted this ASU, we are recording excess tax benefits and tax deficiencies as an income tax benefit or provision in the consolidated statements of operations. The guidance also requires excess tax benefits to be reported as operating activities in the statement of cash flows rather than as a financing activity. We have elected to retrospectively adjust the cash flow classification, resulting in an increase of
$0.7 million
in cash from operating activities for the year ended
December 31, 2016
with a corresponding decrease to cash from financing activities during this period.
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. The impact of adoption will depend on our lease portfolio as of the adoption date and our accounting policy elections. For our operating leases, we expect to recognize approximately
$7 million
of operating lease right of use assets and approximately
$7 million
of operating lease liabilities in the consolidated balance sheet upon adoption.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
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
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations (Unaudited)
|
Year Ended
December 31, 2017
As Reported
|
|
Effects of the Adoption of ASC Topic 606
|
|
Year Ended
December 31, 2017
As Adjusted
|
|
Year Ended
December 31, 2016
As Reported
|
|
Effects of the Adoption of ASC Topic 606
|
|
Year Ended
December 31, 2016
As Adjusted
|
(in millions, except per share data)
|
Net sales
|
$
|
1,560.8
|
|
|
$
|
17.8
|
|
|
$
|
1,578.6
|
|
|
$
|
1,338.5
|
|
|
$
|
(0.2
|
)
|
|
$
|
1,338.3
|
|
Cost of sales
|
(1,376.8
|
)
|
|
(17.6
|
)
|
|
(1,394.4
|
)
|
|
(1,156.9
|
)
|
|
0.3
|
|
|
(1,156.6
|
)
|
Gross profit
|
184.0
|
|
|
0.2
|
|
|
184.2
|
|
|
181.6
|
|
|
0.1
|
|
|
181.7
|
|
Selling, general and administrative expenses
|
(83.8
|
)
|
|
—
|
|
|
(83.8
|
)
|
|
(82.8
|
)
|
|
—
|
|
|
(82.8
|
)
|
Operating income
|
100.2
|
|
|
0.2
|
|
|
100.4
|
|
|
98.8
|
|
|
0.1
|
|
|
98.9
|
|
Interest expense
|
(17.6
|
)
|
|
—
|
|
|
(17.6
|
)
|
|
(26.2
|
)
|
|
—
|
|
|
(26.2
|
)
|
Loss on extinguishment of debt
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
(23.4
|
)
|
|
—
|
|
|
(23.4
|
)
|
Other income (expense), net
|
3.0
|
|
|
—
|
|
|
3.0
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Income before provision for income taxes
|
85.4
|
|
|
0.2
|
|
|
85.6
|
|
|
49.4
|
|
|
0.1
|
|
|
49.5
|
|
Provision for income taxes
|
(33.9
|
)
|
|
—
|
|
|
(33.9
|
)
|
|
(16.6
|
)
|
|
(0.1
|
)
|
|
(16.7
|
)
|
Net income
|
51.5
|
|
|
0.2
|
|
|
51.7
|
|
|
32.8
|
|
|
—
|
|
|
32.8
|
|
Net income attributable to noncontrolling interest
|
(0.6
|
)
|
|
—
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
—
|
|
|
(0.6
|
)
|
Net income attributable to Global Brass and Copper Holdings, Inc.
|
$
|
50.9
|
|
|
$
|
0.2
|
|
|
$
|
51.1
|
|
|
$
|
32.2
|
|
|
$
|
—
|
|
|
$
|
32.2
|
|
Net income attributable to Global Brass and Copper Holdings, Inc. per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.35
|
|
|
$
|
—
|
|
|
$
|
2.35
|
|
|
$
|
1.50
|
|
|
$
|
—
|
|
|
$
|
1.50
|
|
Diluted
|
$
|
2.30
|
|
|
$
|
0.01
|
|
|
$
|
2.31
|
|
|
$
|
1.49
|
|
|
$
|
—
|
|
|
$
|
1.49
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
21.7
|
|
|
—
|
|
|
21.7
|
|
|
21.4
|
|
|
—
|
|
|
21.4
|
|
Diluted
|
22.1
|
|
|
—
|
|
|
22.1
|
|
|
21.6
|
|
|
—
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income (Unaudited)
|
Year Ended
December 31, 2017
As Reported
|
|
Effects of the Adoption of ASC Topic 606
|
|
Year Ended
December 31, 2017
As Adjusted
|
|
Year Ended
December 31, 2016
As Reported
|
|
Effects of the Adoption of ASC Topic 606
|
|
Year Ended
December 31, 2016
As Adjusted
|
(in millions)
|
Net income
|
$
|
51.5
|
|
|
$
|
0.2
|
|
|
$
|
51.7
|
|
|
$
|
32.8
|
|
|
$
|
—
|
|
|
$
|
32.8
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
1.4
|
|
|
—
|
|
|
1.4
|
|
|
(2.8
|
)
|
|
—
|
|
|
(2.8
|
)
|
Income tax (expense) benefit on foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Comprehensive income
|
52.9
|
|
|
0.2
|
|
|
53.1
|
|
|
30.7
|
|
|
—
|
|
|
30.7
|
|
Comprehensive income attributable to noncontrolling interest
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
Comprehensive income attributable to Global Brass and Copper Holdings, Inc.
|
$
|
52.1
|
|
|
$
|
0.2
|
|
|
$
|
52.3
|
|
|
$
|
30.4
|
|
|
$
|
—
|
|
|
$
|
30.4
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015 - as reported
|
21,507,154
|
|
|
$
|
0.2
|
|
|
$
|
36.9
|
|
|
$
|
22.3
|
|
|
$
|
(0.7
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
56.4
|
|
|
$
|
4.3
|
|
|
$
|
60.7
|
|
Cumulative effect adjustment of ASC Topic 606 on January 1, 2016
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2015 - as adjusted
|
21,507,154
|
|
|
0.2
|
|
|
36.9
|
|
|
22.3
|
|
|
(0.7
|
)
|
|
(2.3
|
)
|
|
56.4
|
|
|
4.3
|
|
|
60.7
|
|
Year ended December 31, 2016 - as reported
|
125,913
|
|
|
—
|
|
|
8.1
|
|
|
28.9
|
|
|
(0.8
|
)
|
|
(1.8
|
)
|
|
34.4
|
|
|
0.1
|
|
|
34.5
|
|
Effect of the adoption of ASC Topic 606
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2016 - as adjusted
|
21,633,067
|
|
|
0.2
|
|
|
45.0
|
|
|
51.2
|
|
|
(1.5
|
)
|
|
(4.1
|
)
|
|
90.8
|
|
|
4.4
|
|
|
95.2
|
|
Year ended December 31, 2017 - as reported
|
274,121
|
|
|
—
|
|
|
9.5
|
|
|
45.9
|
|
|
(5.1
|
)
|
|
1.2
|
|
|
51.5
|
|
|
0.4
|
|
|
51.9
|
|
Effect of the adoption of ASC Topic 606
|
—
|
|
|
—
|
|
|
—
|
|
|
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
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows (Unaudited)
|
Year Ended
December 31, 2017
As Reported
|
|
Effects of the Adoption of ASC Topic 606
|
|
Year Ended
December 31, 2017
As Adjusted
|
|
Year Ended
December 31, 2016
As Reported
|
|
Effects of the Adoption of ASC Topic 606
|
|
Year Ended
December 31, 2016
As Adjusted
|
(in millions)
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
51.5
|
|
|
$
|
0.2
|
|
|
$
|
51.7
|
|
|
$
|
32.8
|
|
|
$
|
—
|
|
|
$
|
32.8
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Lower of cost or market adjustment to inventory
|
(3.6
|
)
|
|
—
|
|
|
(3.6
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
(1.7
|
)
|
Unrealized (gain) loss on derivatives
|
0.8
|
|
|
—
|
|
|
0.8
|
|
|
(3.1
|
)
|
|
—
|
|
|
(3.1
|
)
|
Depreciation
|
18.5
|
|
|
—
|
|
|
18.5
|
|
|
14.8
|
|
|
—
|
|
|
14.8
|
|
Amortization of intangible assets
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Amortization of debt discount and issuance costs
|
1.3
|
|
|
—
|
|
|
1.3
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Loss on extinguishment of debt
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
23.4
|
|
|
—
|
|
|
23.4
|
|
Uncertain tax positions
|
2.1
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share-based compensation expense
|
8.2
|
|
|
—
|
|
|
8.2
|
|
|
6.9
|
|
|
—
|
|
|
6.9
|
|
Provision for bad debts, net of reductions
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
Deferred income taxes
|
18.0
|
|
|
—
|
|
|
18.0
|
|
|
4.6
|
|
|
0.1
|
|
|
4.7
|
|
Loss on disposal of property, plant and equipment
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
(49.8
|
)
|
|
—
|
|
|
(49.8
|
)
|
|
(15.0
|
)
|
|
—
|
|
|
(15.0
|
)
|
Inventories
|
(9.7
|
)
|
|
—
|
|
|
(9.7
|
)
|
|
13.0
|
|
|
—
|
|
|
13.0
|
|
Prepaid expenses and other current assets
|
(15.0
|
)
|
|
17.6
|
|
|
2.6
|
|
|
2.8
|
|
|
(0.3
|
)
|
|
2.5
|
|
Accounts payable
|
18.9
|
|
|
—
|
|
|
18.9
|
|
|
18.5
|
|
|
—
|
|
|
18.5
|
|
Accrued liabilities
|
7.7
|
|
|
(17.8
|
)
|
|
(10.1
|
)
|
|
0.7
|
|
|
0.2
|
|
|
0.9
|
|
Accrued interest
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.8
|
)
|
|
—
|
|
|
(2.8
|
)
|
Income taxes, net
|
0.9
|
|
|
—
|
|
|
0.9
|
|
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
Other, net
|
(1.0
|
)
|
|
—
|
|
|
(1.0
|
)
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
Net cash provided by (used in) operating activities
|
49.2
|
|
|
—
|
|
|
49.2
|
|
|
96.0
|
|
|
—
|
|
|
96.0
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(24.7
|
)
|
|
—
|
|
|
(24.7
|
)
|
|
(34.4
|
)
|
|
—
|
|
|
(34.4
|
)
|
Business acquisition
|
(40.0
|
)
|
|
—
|
|
|
(40.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Proceeds from sale of property, plant and equipment
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Net cash used in investing activities
|
(64.6
|
)
|
|
—
|
|
|
(64.6
|
)
|
|
(34.3
|
)
|
|
—
|
|
|
(34.3
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on ABL Facility
|
0.8
|
|
|
—
|
|
|
0.8
|
|
|
1.2
|
|
|
—
|
|
|
1.2
|
|
Payments on ABL Facility
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
Retirement of Senior Secured Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
(345.3
|
)
|
|
—
|
|
|
(345.3
|
)
|
Premium payment on extinguishment of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
(17.0
|
)
|
|
—
|
|
|
(17.0
|
)
|
Payments of debt issuance costs
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
(5.4
|
)
|
|
—
|
|
|
(5.4
|
)
|
Proceeds from term loan, net of discount
|
8.7
|
|
|
—
|
|
|
8.7
|
|
|
316.8
|
|
|
—
|
|
|
316.8
|
|
Payments on term loan
|
(11.9
|
)
|
|
—
|
|
|
(11.9
|
)
|
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
Principal payments under capital lease obligation
|
(1.3
|
)
|
|
—
|
|
|
(1.3
|
)
|
|
(1.1
|
)
|
|
—
|
|
|
(1.1
|
)
|
Dividends paid
|
(4.4
|
)
|
|
—
|
|
|
(4.4
|
)
|
|
(3.2
|
)
|
|
—
|
|
|
(3.2
|
)
|
Distribution to noncontrolling interest owner
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
Proceeds from exercise of stock options
|
0.8
|
|
|
—
|
|
|
0.8
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Share repurchases
|
(5.1
|
)
|
|
—
|
|
|
(5.1
|
)
|
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
Net cash used in financing activities
|
(13.8
|
)
|
|
—
|
|
|
(13.8
|
)
|
|
(56.5
|
)
|
|
—
|
|
|
(56.5
|
)
|
Effect of foreign currency exchange rates
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
(0.5
|
)
|
Net increase (decrease) in cash
|
(29.2
|
)
|
|
—
|
|
|
(29.2
|
)
|
|
4.7
|
|
|
—
|
|
|
4.7
|
|
Cash and cash equivalents at beginning of period
|
88.2
|
|
|
—
|
|
|
88.2
|
|
|
83.5
|
|
|
—
|
|
|
83.5
|
|
Cash and cash equivalents at end of period
|
$
|
59.0
|
|
|
$
|
—
|
|
|
$
|
59.0
|
|
|
$
|
88.2
|
|
|
$
|
—
|
|
|
$
|
88.2
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
3. 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 2
, “
Summary of Significant Accounting Policies
,” for further discussion of the adoption including the impact on our
2017
and
2016
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. We recognize revenue upon transfer of control to our customers, 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 contractual values or 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Building and housing
|
$
|
585.8
|
|
|
$
|
494.0
|
|
|
$
|
413.3
|
|
Automotive and transportation
|
339.1
|
|
|
309.4
|
|
|
274.1
|
|
Munitions
|
185.0
|
|
|
190.3
|
|
|
142.3
|
|
Coinage
|
168.3
|
|
|
155.6
|
|
|
131.6
|
|
Industrial machinery and equipment
|
146.4
|
|
|
140.3
|
|
|
118.2
|
|
Electronics / electrical components
|
146.0
|
|
|
135.5
|
|
|
126.4
|
|
Other
|
194.8
|
|
|
153.5
|
|
|
132.4
|
|
Net sales
|
$
|
1,765.4
|
|
|
$
|
1,578.6
|
|
|
$
|
1,338.3
|
|
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
December 31, 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. Revenue recognized in
2018
that was included in Accrued Liabilities at the beginning of the year was
$0.4 million
. There was
no
revenue recognized in
2017
or
2016
that was included in Accrued Liabilities at the beginning of the year.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
4. Earnings Per Share
We compute basic earnings per share using the weighted-average number of common shares outstanding and diluted earnings per share using 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 nonvested share awards and stock options for which the exercise price was less than the average market price of our outstanding common stock. We include nonvested performance-based share awards 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions, except per share data)
|
2018
|
|
2017
|
|
2016
|
Numerator
|
|
|
|
|
|
Net income attributable to Global Brass and Copper Holdings, Inc.
|
$
|
58.2
|
|
|
$
|
51.1
|
|
|
$
|
32.2
|
|
Denominator
|
|
|
|
|
|
Weighted-average common shares outstanding
|
21.9
|
|
|
21.7
|
|
|
21.4
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
Stock options and nonvested share awards
|
0.4
|
|
|
0.4
|
|
|
0.2
|
|
Weighted-average common shares outstanding, assuming dilution
|
22.3
|
|
|
22.1
|
|
|
21.6
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from above
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Net income attributable to Global Brass and Copper Holdings, Inc. per common share:
|
|
|
|
|
|
Basic
|
$
|
2.66
|
|
|
$
|
2.35
|
|
|
$
|
1.50
|
|
Diluted
|
$
|
2.61
|
|
|
$
|
2.31
|
|
|
$
|
1.49
|
|
5. 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 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.
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.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
The Chief Operating Decision Maker evaluates segment 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 LIFO layer of metal inventory;
|
|
|
•
|
share-based compensation expense;
|
|
|
•
|
restructuring and other business transformation charges;
|
|
|
•
|
inventory step-up costs related to acquisition accounting;
|
|
|
•
|
specified legal and professional expenses; and
|
Each of these items are excluded because our management believes they are not indicative of the ongoing performance of our core operations.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
Below is a reconciliation of adjusted EBITDA of operating segments to income before provision for income taxes and equity income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Net Sales, External Customers
|
|
|
|
|
|
Olin Brass
|
$
|
679.8
|
|
|
$
|
664.1
|
|
|
$
|
553.9
|
|
Chase Brass
|
612.1
|
|
|
591.0
|
|
|
501.7
|
|
A.J. Oster
|
473.5
|
|
|
323.5
|
|
|
282.7
|
|
Total net sales, external customers
|
$
|
1,765.4
|
|
|
$
|
1,578.6
|
|
|
$
|
1,338.3
|
|
Intersegment Net Sales
|
|
|
|
|
|
Olin Brass
|
$
|
87.5
|
|
|
$
|
79.0
|
|
|
$
|
75.5
|
|
Chase Brass
|
—
|
|
|
0.1
|
|
|
1.0
|
|
A.J. Oster
|
0.2
|
|
|
0.1
|
|
|
—
|
|
Total intersegment net sales
|
$
|
87.7
|
|
|
$
|
79.2
|
|
|
$
|
76.5
|
|
Adjusted EBITDA
|
|
|
|
|
|
Olin Brass
|
$
|
57.2
|
|
|
$
|
51.2
|
|
|
$
|
49.9
|
|
Chase Brass
|
66.3
|
|
|
73.2
|
|
|
68.0
|
|
A.J. Oster
|
23.1
|
|
|
14.8
|
|
|
18.4
|
|
Total adjusted EBITDA of operating segments
|
146.6
|
|
|
139.2
|
|
|
136.3
|
|
Corporate (a)
|
(18.1
|
)
|
|
(8.7
|
)
|
|
(17.7
|
)
|
Depreciation expense
|
(21.1
|
)
|
|
(18.5
|
)
|
|
(14.8
|
)
|
Amortization of intangible assets
|
(0.4
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Interest expense, net
|
(16.8
|
)
|
|
(17.6
|
)
|
|
(26.2
|
)
|
Net income attributable to noncontrolling interest
|
0.4
|
|
|
0.6
|
|
|
0.6
|
|
Unrealized gain (loss) on derivative contracts (b)
|
(2.8
|
)
|
|
(0.8
|
)
|
|
3.1
|
|
LIFO liquidation (loss) gain (c)
|
(0.1
|
)
|
|
(1.0
|
)
|
|
(1.9
|
)
|
Refinancing costs (d)
|
(1.6
|
)
|
|
(0.9
|
)
|
|
(23.4
|
)
|
Specified legal / professional expenses (e)
|
(0.4
|
)
|
|
(1.3
|
)
|
|
(1.2
|
)
|
Lower of cost or market adjustment to inventory (f)
|
(2.9
|
)
|
|
3.6
|
|
|
1.7
|
|
Share-based compensation expense (g)
|
(6.7
|
)
|
|
(8.2
|
)
|
|
(6.9
|
)
|
Restructuring and other business transformation charges (h)
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
Inventory step-up costs from acquisition accounting
|
(0.2
|
)
|
|
(0.3
|
)
|
|
—
|
|
Income before provision for income taxes
|
$
|
75.9
|
|
|
$
|
85.6
|
|
|
$
|
49.5
|
|
|
|
(a)
|
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)
|
Calculated based on the difference between the base year LIFO carrying value and the metal prices prevailing in the market at the time of inventory depletion.
|
|
|
(d)
|
Represents the loss on extinguishment of debt and other expenses associated with our refinancing activities.
|
|
|
(e)
|
Represents selected professional fees for accounting, tax, legal, and consulting services for merger and acquisition activity or incurred as a public company that exceed our expected long-term requirements.
|
|
|
(f)
|
Represents the impact of lower of cost or market adjustments to domestic metal inventory. This impact is included in the Corporate entity results.
|
|
|
(g)
|
Represents compensation expense resulting from stock compensation awards to certain employees and our Board of Directors.
|
|
|
(h)
|
Restructuring and other business transformation charges in
2017
represent severance charges at Olin Brass.
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Depreciation and amortization
|
|
|
|
|
|
Olin Brass
|
$
|
11.4
|
|
|
$
|
10.8
|
|
|
$
|
9.2
|
|
Chase Brass
|
6.2
|
|
|
5.7
|
|
|
4.9
|
|
A.J. Oster
|
3.8
|
|
|
2.0
|
|
|
0.5
|
|
Corporate
|
0.1
|
|
|
0.1
|
|
|
0.3
|
|
Total depreciation and amortization
|
$
|
21.5
|
|
|
$
|
18.6
|
|
|
$
|
14.9
|
|
|
|
|
|
|
|
LIFO liquidation (loss)/gain
|
|
|
|
|
|
Olin Brass
|
$
|
(0.2
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(1.6
|
)
|
Chase Brass
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
A.J. Oster
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Corporate
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Total LIFO liquidation (loss)/gain
|
$
|
(0.1
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(1.9
|
)
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
Olin Brass
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
A.J. Oster
|
0.1
|
|
|
—
|
|
|
—
|
|
Corporate
|
16.6
|
|
|
17.3
|
|
|
25.9
|
|
Total interest expense, net
|
$
|
16.8
|
|
|
$
|
17.6
|
|
|
$
|
26.2
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
Olin Brass
|
$
|
12.3
|
|
|
$
|
13.5
|
|
|
$
|
15.1
|
|
Chase Brass
|
9.2
|
|
|
6.7
|
|
|
10.0
|
|
A.J. Oster
|
3.6
|
|
|
4.3
|
|
|
9.3
|
|
Corporate
|
1.1
|
|
|
0.2
|
|
|
—
|
|
Total capital expenditures
|
$
|
26.2
|
|
|
$
|
24.7
|
|
|
$
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2018
|
|
2017
|
Total Assets
|
|
|
|
Olin Brass
|
$
|
242.0
|
|
|
$
|
263.2
|
|
Chase Brass
|
134.4
|
|
|
142.9
|
|
A.J. Oster
|
178.3
|
|
|
171.9
|
|
Corporate
|
136.3
|
|
|
74.2
|
|
Total assets
|
$
|
691.0
|
|
|
$
|
652.2
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
Summarized geographic information is shown in the following table. Net sales are attributed to individual countries based on the location from which the products are shipped.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Net sales:
|
|
|
|
|
|
United States
|
$
|
1,680.6
|
|
|
$
|
1,489.8
|
|
|
$
|
1,261.4
|
|
Asia Pacific
|
40.7
|
|
|
44.0
|
|
|
37.1
|
|
Mexico
|
44.1
|
|
|
44.8
|
|
|
39.8
|
|
Total net sales
|
$
|
1,765.4
|
|
|
$
|
1,578.6
|
|
|
$
|
1,338.3
|
|
Substantially all long-lived assets are maintained in the United States.
There was
no
customer that represented
10%
or more of consolidated net sales in
2018
,
2017
, or
2016
.
6. Inventories
Inventories were as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2018
|
|
2017
|
Raw materials and supplies
|
$
|
31.9
|
|
|
$
|
23.2
|
|
Work-in-process
|
72.9
|
|
|
73.5
|
|
Finished goods
|
113.4
|
|
|
111.4
|
|
Total inventories
|
$
|
218.2
|
|
|
$
|
208.1
|
|
We recorded adjustments for certain domestic, non-copper metal inventory during
2018
,
2017
and
2016
resulting from the fluctuations in market value of these metals. These adjustments increased cost of sales by
$2.9 million
in
2018
and decreased cost of sales by
$3.6 million
and
$1.7 million
in
2017
and
2016
, respectively.
During
2018
,
2017
and
2016
, we reduced the quantity of certain domestic metal inventory, resulting in a liquidation of LIFO inventory layers. These reductions increased cost of sales by
$0.1 million
,
$1.0 million
and
$1.9 million
in
2018
,
2017
and
2016
, respectively.
Below is a summary of inventories valued at period-end market values compared to the as reported values.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2018
|
|
2017
|
Market value
|
$
|
296.5
|
|
|
$
|
329.1
|
|
As reported
|
218.2
|
|
|
208.1
|
|
Excess of market over reported value
|
$
|
78.3
|
|
|
$
|
121.0
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2018
|
|
2017
|
Workers’ compensation plan deposits
|
$
|
2.9
|
|
|
$
|
3.8
|
|
Prepaid insurance
|
1.6
|
|
|
1.9
|
|
Derivative contract assets
|
—
|
|
|
2.0
|
|
Other
|
4.0
|
|
|
4.0
|
|
Total prepaid expenses and other current assets
|
$
|
8.5
|
|
|
$
|
11.7
|
|
8. Property, Plant and Equipment
Property, plant and equipment balances, including assets under capital lease, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Useful Life
(in years)
|
(in millions)
|
2018
|
|
2017
|
|
Land improvements
|
$
|
4.4
|
|
|
$
|
3.6
|
|
|
12 - 20
|
Buildings and building improvements
|
32.6
|
|
|
29.9
|
|
|
20 - 50
|
Machinery and equipment
|
195.2
|
|
|
175.3
|
|
|
3 - 12
|
Leasehold improvements
|
2.1
|
|
|
1.7
|
|
|
|
Construction-in-process
|
11.3
|
|
|
11.4
|
|
|
|
Gross property, plant and equipment
|
245.6
|
|
|
221.9
|
|
|
|
Accumulated depreciation
|
(97.8
|
)
|
|
(79.0
|
)
|
|
|
Property, plant and equipment, net
|
$
|
147.8
|
|
|
$
|
142.9
|
|
|
|
Leasehold improvements are amortized over the lesser of their useful lives or the remaining lease term.
We capitalized interest relating to the construction of long-term assets in the amount of
$0.1 million
in
2018
,
$0.1 million
in
2017
and
$1.1 million
in
2016
.
As of
December 31, 2018
, assets recorded under capital lease obligations totaled
$8.1 million
and related accumulated depreciation totaled
$6.0 million
. As of
December 31, 2017
, assets recorded under capital lease obligations totaled
$7.6 million
and related accumulated depreciation totaled
$4.3 million
. Interest recorded on capital lease obligations is included in interest expense in the accompanying consolidated statements of operations.
9. Accrued Liabilities
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2018
|
|
2017
|
Compensation and benefits
|
$
|
23.4
|
|
|
$
|
21.1
|
|
Workers’ compensation
|
2.7
|
|
|
2.9
|
|
Utilities
|
2.7
|
|
|
2.4
|
|
Professional fees
|
1.8
|
|
|
1.6
|
|
Taxes
|
1.2
|
|
|
1.4
|
|
Derivative contract liabilities
|
0.9
|
|
|
0.2
|
|
Other
|
7.5
|
|
|
6.4
|
|
Total accrued liabilities
|
$
|
40.2
|
|
|
$
|
36.0
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
10. Financing
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2018
|
|
2017
|
Term Loan B Facility
|
$
|
312.8
|
|
|
$
|
316.0
|
|
Deferred financing fees and discount on debt
|
(5.1
|
)
|
|
(5.9
|
)
|
Obligations under capital lease
|
2.6
|
|
|
3.9
|
|
Total debt
|
310.3
|
|
|
314.0
|
|
Current portion of debt
|
(4.6
|
)
|
|
(5.0
|
)
|
Noncurrent portion of debt
|
$
|
305.7
|
|
|
$
|
309.0
|
|
Through July 18, 2016, our debt facilities consisted of Senior Secured Notes and a former ABL Facility. During the year ended December 31, 2016, we purchased in the open market an aggregate of
$40.0 million
principal amount of our then existing Senior Secured Notes, for an aggregate purchase price of
$42.5 million
, plus accrued interest.
On July 18, 2016, we obtained a new Term Loan B Facility and used a portion of the proceeds to redeem the remaining
$305.3 million
principal amount outstanding of our Senior Secured Notes. As part of this refinancing and in accordance with the indenture governing the then existing Senior Secured Notes (“Indenture”), we called and terminated the notes at a redemption price of
104.75%
plus accrued interest.
We recognized a loss on the extinguishment of debt in the year ended December 31, 2016 of
$23.4 million
, which includes a premium of
$17.0 million
and the write-off of
$6.4 million
of unamortized debt issuance costs for both the Senior Secured Notes and the former ABL Facility.
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). O
n 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 (the “Amended Term Loan B Credit Agreement”). The most recent refinancing reduced our interest rate spread by an additional 75 basis points, reduced the LIBO Rate floor from
1%
to
0%
, and extended the maturity date through
May 29, 2025
. 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
December 31, 2018
, amounts outstanding under the Term Loan B Facility combined with our interest rate swap derivative accrued interest at a weighted average rate of
5.15%
.
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
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
ABL Facility
We have an asset-based revolving loan facility that 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. Maturing on
July 19, 2021
, we
entered into this credit agreement with a syndicate of lenders on July 18, 2016 (the “ABL Credit Agreement” and the facility thereunder, the “ABL Facility”) when we refinanced out of the already existing asset-based lending facility.
As of
December 31, 2018
, 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).
Amounts outstanding, if any, under the ABL Facility bear interest at a rate per annum equal to, at our option, either (1)
0.25%
to
0.75%
subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus an Alternate Base Rate (as defined in the ABL Credit Agreement) or (2)
1.25%
to
1.75%
subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus the Adjusted LIBO Rate (as defined in the ABL Credit Agreement). Unused amounts under the ABL Facility incur an unused line fee of
0.375%
or
0.25%
per annum (depending on the percentage of aggregate revolving exposure), payable in arrears on a quarterly basis.
The ABL Credit Agreement requires us to prepay or cash collateralize the applicable portion of any outstanding revolving loans under circumstances as are customary in agreements of this type. However, we may voluntarily repay and reborrow outstanding loans under the ABL Facility at any time without a premium or penalty, other than customary “breakage” costs with respect to loans made utilizing the Adjusted LIBO Rate (as defined in the ABL Credit Agreement).
The ABL Credit Agreement also contains a financial covenant requiring us to maintain a fixed charge coverage ratio that is tested whenever excess availability, as defined in the ABL Credit Agreement, falls below the greater of
$20.0 million
or
10%
of our potential borrowings. The “fixed charge coverage ratio” requires us to maintain a ratio of “Consolidated Adjusted EBITDA” to the amount of our “fixed charges” (for all terms, as defined in the ABL Credit Agreement) for the twelve consecutive months prior to the date on which the ratio is tested equal to or greater than
1.0
to
1.0
.
The Credit Agreements
The ABL Credit Agreement and the Term Loan B Credit Agreement (together, the “Credit Agreements”) contain various other covenants consistent with debt agreements of this kind, such as restrictions on the amounts of dividends we can pay.
A violation of covenants under either of the Credit Agreements may result in default in that agreement or a cross-default in the other agreement, as applicable. Upon the occurrence of an event of default under one or both of the Credit Agreements, the requisite lenders could elect to declare all amounts of such indebtedness outstanding immediately due and payable and terminate any commitments to extend further credit.
If we are unable to repay those amounts, the lenders under the applicable Credit Agreement may proceed against the collateral granted to them to secure such indebtedness. Substantially all of our assets are pledged as collateral under the Credit Agreements. The ABL Facility is secured by a senior-priority interest in our cash, accounts receivable and inventory (which secure the Term Loan B Facility on a junior-priority basis) and the Term Loan B is secured by a senior-priority security interest in the remaining pledged assets (most significant of which is our fixed assets), which secure the ABL Facility on a junior-priority basis. If the lenders accelerate the repayment of borrowings, such acceleration could have a material adverse effect on our business, financial condition, results of operations or cash flows. Furthermore, cross-default provisions in the Credit Agreements provide that any default under the Credit Agreements or other significant debt agreements could trigger a cross-default under the Credit Agreements, as applicable.
As of
December 31, 2018
, we were in compliance with all of the covenants relating to the Credit Agreements.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
Capital Lease Obligations
Future minimum capital lease payments at
December 31, 2018
are as follows:
|
|
|
|
|
(in millions)
|
|
2019
|
$
|
1.5
|
|
2020
|
0.5
|
|
2021
|
0.3
|
|
2022
|
0.3
|
|
2023
|
0.1
|
|
Thereafter
|
0.1
|
|
Total
|
$
|
2.8
|
|
Amount representing interest
|
(0.2
|
)
|
Present value of minimum lease payments
|
$
|
2.6
|
|
Current portion of capital lease obligations
|
(1.4
|
)
|
Noncurrent portion of capital lease obligations
|
$
|
1.2
|
|
11. Income Taxes
Income before provision for income taxes and equity income is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Domestic
|
$
|
69.6
|
|
|
$
|
77.4
|
|
|
$
|
40.8
|
|
Foreign
|
6.3
|
|
|
8.2
|
|
|
8.7
|
|
Total
|
$
|
75.9
|
|
|
$
|
85.6
|
|
|
$
|
49.5
|
|
The provision for income taxes is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Current tax provision
|
|
|
|
|
|
U.S. federal
|
$
|
7.0
|
|
|
$
|
11.2
|
|
|
$
|
8.0
|
|
State and local
|
3.3
|
|
|
1.8
|
|
|
1.2
|
|
Foreign
|
1.7
|
|
|
2.9
|
|
|
2.8
|
|
Total current
|
12.0
|
|
|
15.9
|
|
|
12.0
|
|
Deferred tax provision
|
|
|
|
|
|
U.S. federal
|
3.9
|
|
|
16.7
|
|
|
4.1
|
|
State and local
|
1.3
|
|
|
1.6
|
|
|
0.8
|
|
Foreign
|
0.1
|
|
|
(0.3
|
)
|
|
(0.2
|
)
|
Total deferred
|
5.3
|
|
|
18.0
|
|
|
4.7
|
|
Total provision
|
$
|
17.3
|
|
|
$
|
33.9
|
|
|
$
|
16.7
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
The effective income tax rate 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:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Statutory provision rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Permanent differences and other items
|
|
|
|
|
|
State tax provision
|
4.3
|
%
|
|
2.6
|
%
|
|
2.4
|
%
|
Section 199 manufacturing credit
|
—
|
%
|
|
(2.6
|
)%
|
|
(2.0
|
)%
|
Incremental tax effects of foreign earnings
|
0.7
|
%
|
|
(0.4
|
)%
|
|
(0.2
|
)%
|
Valuation allowance
|
(0.8
|
)%
|
|
—
|
%
|
|
(2.0
|
)%
|
Stock compensation
|
0.4
|
%
|
|
(3.2
|
)%
|
|
—
|
%
|
Tax reform adjustment
|
—
|
%
|
|
8.6
|
%
|
|
—
|
%
|
Return-to-provision adjustment
|
(2.5
|
)%
|
|
0.6
|
%
|
|
0.3
|
%
|
Other
|
(0.3
|
)%
|
|
(1.0
|
)%
|
|
0.2
|
%
|
Effective income tax rate
|
22.8
|
%
|
|
39.6
|
%
|
|
33.7
|
%
|
Deferred tax assets and liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2018
|
|
2017
|
Deferred tax assets
|
|
|
|
Inventory
|
$
|
26.2
|
|
|
$
|
27.9
|
|
Accounts receivable
|
1.0
|
|
|
1.4
|
|
UNICAP adjustment
|
2.0
|
|
|
1.9
|
|
Derivative contracts
|
1.5
|
|
|
0.3
|
|
Other
|
4.3
|
|
|
5.0
|
|
Valuation allowance
|
—
|
|
|
(0.6
|
)
|
Total deferred tax assets, net of valuation allowance
|
$
|
35.0
|
|
|
$
|
35.9
|
|
Deferred tax liabilities
|
|
|
|
Fixed assets and intangibles
|
$
|
21.0
|
|
|
$
|
16.8
|
|
Accruals and other reserves
|
0.2
|
|
|
0.2
|
|
Investments in foreign entities
|
1.5
|
|
|
1.3
|
|
Financing fees
|
1.0
|
|
|
1.5
|
|
Total deferred tax liabilities
|
23.7
|
|
|
19.8
|
|
Net deferred tax asset
|
$
|
11.3
|
|
|
$
|
16.1
|
|
At
December 31, 2018
and
2017
, our deferred tax assets include
$15.7 million
and
$16.5 million
, respectively, related to the impact of the purchase price allocations to LIFO inventories for tax purposes on the bargain purchase gain on the original asset acquisition from Olin Corporation on November 19, 2007.
At
December 31, 2018
, we had a foreign tax credit carryforward of
$0.8 million
which can be utilized through
2027
.
Deferred tax assets are recorded for the estimated future benefit of foreign tax credits and other temporary differences to the extent we believe these assets will be realized. A valuation allowance is recorded when we cannot reach the conclusion that it is more likely than not that the deferred tax assets will be realized. In
2017
, we established a valuation allowance against our foreign tax credits of
$0.6 million
. In
2018
, we released the
$0.6 million
valuation allowance on foreign tax credits based on new regulations and future projections.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
We have established a deferred tax liability for foreign withholding and U.S. state income taxes of
$1.5 million
on earnings of foreign consolidated subsidiaries expected to be repatriated. We consider any excess of the amount for financial reporting over the tax basis of our investment in our foreign subsidiaries to be indefinitely reinvested. At this time, the determination of deferred tax liabilities on this amount is not practicable.
Uncertain Tax Positions
We are subject to income taxation in several jurisdictions around the world. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, we believe we have adequately reserved for any potential tax exposures at
December 31, 2018
. Our U.S. federal returns for the period ended December 31, 2015 and all subsequent periods remain open for audit. The majority of state returns for the period ended December 31, 2014 and all subsequent periods remain open for audit.
At
December 31, 2018
and
2017
, we had
$23.9 million
and
$25.2 million
, respectively, of unrecognized tax benefits, of which
$8.2 million
and
$8.5 million
, respectively, 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. There was
$2.5 million
and
$2.1 million
of accrued interest and penalties as of
December 31, 2018
and
2017
, respectively. Our liability for uncertain tax positions, including accrued interest and penalties, of
$26.4 million
and
$27.3 million
at
December 31, 2018
and
2017
, respectively, are presented in other noncurrent liabilities in the accompanying consolidated balance sheets.
A reconciliation of the summary of activity of our uncertain tax positions is summarized as follows:
|
|
|
|
|
(in millions)
|
|
Balance at January 1, 2017
|
$
|
25.2
|
|
Additions for tax positions related to prior years
|
—
|
|
Reductions for tax positions related to prior years
|
—
|
|
Reductions due to tax settlements
|
—
|
|
Reductions due to tax statute of limitations
|
—
|
|
Balance at December 31, 2017
|
$
|
25.2
|
|
Additions for tax positions related to prior years
|
—
|
|
Reductions for tax positions related to prior years
|
(1.3
|
)
|
Reductions due to tax settlements
|
—
|
|
Reductions due to tax statute of limitations
|
—
|
|
Balance at December 31, 2018
|
$
|
23.9
|
|
2017 Tax Act
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 including, but not limited to: (1) lowering of the U.S. federal corporate income tax rate from
35.0%
to
21.0%
effective January 1, 2018, (2) accelerated expensing of qualified capital investments for a specific period, and (3) 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. We utilized the approach outlined in SAB 118 to record provisional estimates for the Deemed Repatriation Transition Tax (the “Transition Tax”) in 2017.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
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
. After further analysis, we recognized an additional measurement-period adjustment of
$0.1 million
during
2018
, resulting in a total Transition Tax obligation of
$1.1 million
.
The Act reduced the corporate tax rate to
21.0%
, 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 return-to-provision adjustment of
$(2.0) million
during
2018
, resulting in a decrease to our deferred tax assets of
$5.0 million
.
We must assess whether any Uncertain Tax Positions should be recorded as a result of the Tax Act. We have completed this assessment and did not record any Uncertain Tax Positions as a result of the Tax Act.
The Act also included changes to the foreign tax credit regulations, including the addition of new tax credit buckets for general, foreign branch, and Global Intangible Low Taxed Income (GILTI) tax credits. This included an opportunity to allocate past credit carry-forwards specifically to the foreign branch bucket. Based on the new regulations and future projections, we were able to release the valuation allowance of
$0.6 million
that was recorded on the books at
December 31, 2017
.
Beginning January 1, 2018, the Tax Reform Act amended certain aspects of Section 162(m) (Section 162(m) generally disallows a tax deduction for annual compensation paid to “covered employees” in excess of $1.0 million) including eliminating an exception to the deduction limited for “qualified performance-based compensation.” The deductibility of executive compensation, which has now been determined to be complete, resulted in recording an additional tax expense of
$0.7 million
.
We consider current earnings and the amount of previously taxed income (PTI), related to the deemed repatriated transition tax mentioned above, to not be permanently reinvested. As such, we have recorded a deferred tax liability for future taxes associated with a repatriation of those funds. Any outside basis difference related to our foreign investment above the PTI is treated as permanently reinvested.
The Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5,
Accounting for Global Intangible Low-Taxed Income
, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
We believe that our accounting for the income tax effects of the Act is complete as of
December 31, 2018
.
12. Employee Defined Contribution Plans and Multi-Employer Pension Plans
We have a retirement savings plan (the “401k Plan”) for all of our domestic subsidiaries under section 401(k) of the Internal Revenue Code that covers all U.S. salaried and most hourly employees. Participants may elect to defer a percentage of their compensation to the 401k Plan, subject to aggregate limits required by the Internal Revenue Code. The 401k Plan provides for discretionary matching contributions under certain circumstances, for employees based on location, pay status and membership in a collective bargaining unit. In addition, we provide a retirement contribution to certain employees based on location and age. We contributed
$9.1 million
,
$8.7 million
and
$8.5 million
to the 401k Plan in
2018
,
2017
and
2016
, respectively, which is recorded as compensation expense in the year incurred.
Bargaining unit employees in East Alton, IL and Alliance, OH participate in the IAM Pension Plan. The IAM Pension Plan is a multi-employer pension plan with negotiated fixed company costs per employee hour worked. The risks of participating in these multi-employer plans are different from single-employer plans, as we can be subject to additional risks if other employers do not meet their obligations. In addition, if a participating employer becomes insolvent and ceases to contribute to a multiemployer plan, the unfunded obligation of the plan will be borne by the remaining participating employers. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur withdrawal liability to the plan. Given the facts that the IAM Pension Plan is
92%
funded, many other participating employers are much larger than us, and the large number of participating employers in the plan, we do not view this to be a significant risk.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
We recorded expense for contributions to the IAM Pension Plan of
$3.3 million
,
$3.4 million
and
$3.5 million
in
2018
,
2017
and
2016
, respectively, which are included in cost of sales in the accompanying consolidated statements of operations. Our participation in the IAM Pension Plan for the annual period ended
December 31, 2018
, is outlined in the table below. There have been no significant changes that affect the comparability of
2018
and
2017
contributions. The IAM Pension Plan’s year-end is December 31 and the plan reported
$434.8 million
and
$413.7 million
in employers’ contributions for
2017
and
2016
, respectively.
|
|
|
|
Pension Fund
|
|
IAM National Pension Fund
|
EIN/ Pension Plan Number
|
|
51-6031295 / 002
|
Pension Protection Act Zone Status (2018 and 2017)*
|
|
Green Zone
|
FIP/RP Status Pending/Implemented
|
|
No
|
Company Contributions (FY 2018)
|
|
$3.3 million
|
Company Contributions (FY 2017)
|
|
$3.3 million
|
Surcharge Imposed
|
|
No
|
Expiration Date of Collective-Bargaining Agreement
|
|
November 6, 2022
|
* Plans in the green zone are at least 80 percent funded.
As of the date of this filing, Forms 5500 were not available for the plan year ended in
2018
.
13. 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.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
The following tables provide a summary of our outstanding derivative contracts:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
(in millions)
|
Net Notional Amount
|
|
Net Notional Amount
|
Cash flow hedge:
|
|
|
|
Interest rate swap
|
$
|
150.0
|
|
|
$
|
—
|
|
Commodity and energy derivative contracts:
|
|
|
|
Metal
|
27.9
|
|
|
12.8
|
|
Energy and utilities
|
3.0
|
|
|
3.8
|
|
Total
|
$
|
180.9
|
|
|
$
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
(in millions)
|
Notional Position
|
|
Notional Position
|
Commodity and energy derivative contracts:
|
|
|
|
Notional amount - long
|
$
|
67.4
|
|
|
$
|
46.1
|
|
Notional amount - (short)
|
(36.5
|
)
|
|
(29.5
|
)
|
Net long / (short)
|
$
|
30.9
|
|
|
$
|
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 consolidated balance sheets, and the collateral deposited with counterparties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
(in millions)
|
Gross Amounts of
Recognized Assets
|
|
Gross Amounts Offset in
Consolidated Balance
Sheet
|
|
Net Amounts of Assets
Presented in Consolidated
Balance Sheet
|
Commodity and energy derivative contracts:
|
|
|
|
|
|
Metal
|
$
|
3.3
|
|
|
$
|
(3.3
|
)
|
|
$
|
—
|
|
Energy and utilities
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
Collateral on deposit
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
Total
|
$
|
3.5
|
|
|
$
|
(3.5
|
)
|
|
$
|
—
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
(in millions)
|
Gross Amounts of
Recognized Liabilities
|
|
Gross Amounts Offset in
Consolidated Balance
Sheet
|
|
Net Amounts of Liabilities
Presented in Consolidated
Balance Sheet
|
Cash flow hedge:
|
|
|
|
|
|
Interest rate swap
|
$
|
2.0
|
|
|
$
|
—
|
|
|
$
|
2.0
|
|
Commodity and energy derivative contracts:
|
|
|
|
|
|
Metal
|
4.2
|
|
|
(3.4
|
)
|
|
0.8
|
|
Energy and utilities
|
0.3
|
|
|
(0.1
|
)
|
|
0.2
|
|
Total
|
$
|
6.5
|
|
|
$
|
(3.5
|
)
|
|
$
|
3.0
|
|
Consolidated balance sheet location:
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
$
|
0.9
|
|
Other noncurrent liabilities
|
|
|
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
(in millions)
|
Gross Amounts of
Recognized Assets
|
|
Gross Amounts Offset in
Consolidated Balance
Sheet
|
|
Net Amounts of Assets
Presented in Consolidated
Balance Sheet
|
Commodity and energy derivative contracts:
|
|
|
|
|
|
Metal
|
$
|
5.3
|
|
|
$
|
(3.2
|
)
|
|
$
|
2.1
|
|
Energy and utilities
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
5.3
|
|
|
$
|
(3.2
|
)
|
|
$
|
2.1
|
|
Consolidated balance sheet location:
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
$
|
2.0
|
|
Other noncurrent assets
|
|
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
(in millions)
|
Gross Amounts of
Recognized Liabilities
|
|
Gross Amounts Offset in
Consolidated Balance
Sheet
|
|
Net Amounts of Liabilities
Presented in Consolidated
Balance Sheet
|
Commodity and energy derivative contracts:
|
|
|
|
|
|
Metal
|
$
|
3.3
|
|
|
$
|
(3.2
|
)
|
|
$
|
0.1
|
|
Energy and utilities
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Total
|
$
|
3.6
|
|
|
$
|
(3.2
|
)
|
|
$
|
0.4
|
|
Consolidated balance sheet location:
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
$
|
0.2
|
|
Other noncurrent liabilities
|
|
|
|
|
$
|
0.2
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
The following table summarizes the effects of derivative contracts in the consolidated statements of comprehensive income and the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Cash flow hedge gains (losses) in other comprehensive income (loss) for:
|
|
|
|
|
|
Interest rate swap
|
$
|
(2.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity and energy derivative contracts (gains) losses in cost of sales for:
|
|
|
|
|
|
Metal
|
$
|
0.3
|
|
|
$
|
(4.0
|
)
|
|
$
|
(3.6
|
)
|
Energy and utilities
|
(0.2
|
)
|
|
0.6
|
|
|
(0.1
|
)
|
Total commodity derivative contract (gains) losses in cost of sales
|
$
|
0.1
|
|
|
$
|
(3.4
|
)
|
|
$
|
(3.7
|
)
|
As of
December 31, 2018
, we reported
$1.5 million
of cash flow hedge
losses
, net of tax, in accumulated other comprehensive income (loss) on the consolidated balance sheet. There were
no
cash flow hedge gains or losses reported in accumulated other comprehensive income (loss) on the consolidated balance sheet as of
December 31, 2017
.
14. Fair Value Measurements
ASC 820 specifies a fair value framework and 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.
|
As of
December 31, 2018
and
December 31, 2017
, the fair value of our commodity derivative contracts was a net
liability
of
$1.0 million
and a net
asset
of
$1.7 million
, respectively. In accordance with ASC 820, our commodity derivative contracts are considered Level 2 fair value measurements as they 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 our derivative commodity contracts have a set term of
24
months or less.
As of
December 31, 2018
, the fair value of our interest rate swap was a
liability
of
$2.0 million
. The interest rate swap is measured using a valuation model with observable inputs from active markets and is a Level 2 fair value measurement.
We neither hold assets or liabilities requiring a Level 3 measurement nor have we had any transfers between the hierarchy levels during
2018
or
2017
.
For purposes of financial reporting, we have determined that the carrying value of cash, accounts receivable, accounts payable, and accrued expenses approximates fair value due to their short term nature. As of
December 31, 2018
and
December 31, 2017
, the fair value of our money market funds, which are presented in cash and cash equivalents, was
$58.7 million
and
$17.1 million
, respectively. These cash equivalents are valued using quoted market prices at the respective balance sheet dates and are Level 1 fair value measurements.
Additionally, given the revolving nature and the variable interest rates, we have determined that the carrying value of the ABL Facility also approximates fair value. As of
December 31, 2018
, the fair value of our Term Loan B Facility approximated
$304.2 million
compared to a carrying value of
$312.8 million
. As of
December 31, 2017
, the fair value of our Term Loan B Facility approximated
$318.7 million
compared to a carrying value of
$316.0 million
. The fair value of the Term Loan B Facility was based upon quotes from financial institutions (Level 2 in the fair value hierarchy as defined by ASC 820).
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
15. Commitments and Contingencies
Environmental Considerations
We are 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 we believe we are in material compliance with all of the various regulations applicable to our business, there can be no assurance that requirements will not change in the future or that we will not incur significant costs to comply with such requirements. We employ 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. We expense 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. We determine our liability on a location by location basis and record a liability at the time it is deemed probable and can be reasonably estimated. We are currently not aware of any environmental matters which may have a material impact on our financial position, results of operations, or liquidity.
On November 19, 2007 (the date of inception of GBC), we 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 related to environmental conditions at such facilities, and has been participating in remedial actions at certain other properties as well. If Olin Corporation were to stop its environmental remedial activities at our properties, we could be required to assume responsibility for these activities, the cost of which could be material.
Although we are not currently subject to any material claims with respect to clean-up or remediation under CERCLA or similar laws for contamination at our leased or owned properties or at any off-site location, it is possible that we may be in the future. For example, in January 2018, Olin Brass experienced a leak of mineral oil at its Waterbury, Connecticut facility. Our personnel, the Waterbury fire department, the U.S. EPA, the Connecticut DEEP, and remediation contractors responded immediately. We incurred approximately
$0.7 million
of expenses in 2018 associated with this incident. Although we reached a final settlement with the U.S. EPA which resulted in a
$6,000
fine, we remain in discussions with the Connecticut DEEP regarding ongoing remediation activity. We do not believe this incident will materially affect our long-term financial stability or cash flow.
Insurance Recoveries
In May 2016, Olin Brass’ East Alton facility temporarily reduced production due to an equipment failure impacting an intermediate segment of the production process. The disruption resulted in a temporary reduction in customer shipments and in Olin Brass securing support via toll processing from other strip industry participants.
We sustained losses from this event. The equipment remained out of service for several weeks and resumed production in mid-June 2016. We are insured for property and business interruption losses related to these events subject to a deductible of up to
$2.5 million
per incident. We filed a claim with our insurance carrier to recover these losses. In 2017, we recorded total recoveries of
$7.4 million
related to the claim as a reduction to cost of goods sold of
$3.5 million
and an increase to other income of
$3.9 million
. All proceeds from the insurance recoveries were received as of December 31, 2017.
Legal Considerations
We are party to various legal proceedings arising in the ordinary course of business. We believe that none of our legal proceedings are individually material or that the aggregate exposure of all of our legal proceedings, including those that are probable and those that are only reasonably possible, is material to our financial condition, results of operations or cash flows.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
Operating Leases
We have operating leases covering certain facilities and equipment under non-cancelable lease agreements. As of
December 31, 2018
, future minimum lease payments under non-cancelable leases in effect are as follows:
|
|
|
|
|
(in millions)
|
Payment
|
2019
|
$
|
3.2
|
|
2020
|
2.1
|
|
2021
|
1.5
|
|
2022
|
0.6
|
|
2023
|
0.3
|
|
Thereafter
|
0.2
|
|
Total minimum lease payments
|
$
|
7.9
|
|
Rental expense under all operating leases was approximately
$4.5 million
,
$3.3 million
and
$3.2 million
in
2018
,
2017
, and
2016
, respectively, and is recorded in the accompanying consolidated statements of operations as cost of sales or selling, general and administrative costs depending on the nature and use of the underlying asset being leased.
16. Share-based Compensation
The Global Brass and Copper Holdings, Inc. 2013 Omnibus Equity Incentive Plan (“2013 Plan”) was adopted by the Board of Directors and approved by shareholders on April 10, 2013, and further amended and restated effective May 26, 2016. The 2013 Plan provides for an aggregate of
3,361,053
shares of our common stock to be available for awards in the form of options, restricted stock, restricted stock units, performance-based shares and other equity-based awards. Pursuant to the 2013 Plan, in
2018
,
2017
, and
2016
, we granted restricted stock and performance-based shares to certain employees and members of our management and our Board of Directors, and in
2017
and
2016
we granted non-qualified options to certain employees. At
December 31, 2018
,
1,580,918
shares were available for future grant.
We will satisfy the requirement for common stock for share-based payments by issuing shares out of authorized but unissued common stock or treasury stock.
Stock Options
Stock options are granted to certain employees with exercise prices equal to no less than the fair market value of common stock on the date of the grant. Stock options generally vest in
three
equal installments on the anniversary of the date of grant and have a maximum term of
10
years. We use the straight-line attribution method to recognize expense for all stock options. Stock options are generally subject to immediate forfeiture if employment terminates prior to vesting, except under certain conditions, in which case the options expire no more than
90
days after the date of such termination. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted-average inputs for the option pricing model:
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Expected volatility
|
36
|
%
|
|
41
|
%
|
Risk-free interest rate
|
2.2
|
%
|
|
1.6
|
%
|
Dividend yield
|
0.4
|
%
|
|
0.6
|
%
|
Expected term
|
6.0 years
|
|
|
6.0 years
|
|
Because we have only been a public company since May 2013, there is limited historical data on the volatility of our common stock. As a result, the expected volatility of the
2017
option grants was estimated based on the average volatility of the common stock of a group of our publicly traded peers and Company specific information. The expected volatility of the
2016
option grants was estimated based on the average volatility of the common stock of a group of our publicly traded peers. There were no options granted in
2018
.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
The risk-free interest rate assumption in the Black-Scholes option-pricing model is based upon the U.S. Treasury Strips available with maturity period consistent with the expected term assumption. The dividend yield assumption is based on our expectation of dividend payouts.
Because we have only very limited historical information concerning stock option exercise behavior by our employees and such information is not readily available from a peer group of companies, we estimated the expected term using the “simplified” method permitted by Staff Accounting Bulletin Topic 14 issued by the SEC.
A summary of the stock option activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price of Shares
|
|
Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
(in millions)
|
Outstanding at December 31, 2015
|
|
374,685
|
|
|
$
|
13.90
|
|
|
8.5
|
|
$
|
2.8
|
|
Granted
|
|
140,740
|
|
|
26.99
|
|
|
|
|
|
Exercised
|
|
(41,066
|
)
|
|
12.92
|
|
|
|
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
474,359
|
|
|
$
|
17.87
|
|
|
8.1
|
|
$
|
7.8
|
|
Granted
|
|
92,879
|
|
|
33.93
|
|
|
|
|
|
Exercised
|
|
(38,381
|
)
|
|
19.51
|
|
|
|
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
528,857
|
|
|
$
|
20.57
|
|
|
7.4
|
|
$
|
6.7
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(81,100
|
)
|
|
17.09
|
|
|
|
|
|
Forfeited or expired
|
|
(19,374
|
)
|
|
31.25
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
428,383
|
|
|
$
|
20.74
|
|
|
6.4
|
|
$
|
2.8
|
|
Options exercisable at December 31, 2018
|
|
341,993
|
|
|
$
|
18.11
|
|
|
6.1
|
|
$
|
2.8
|
|
The weighted-average grant date fair value of stock options granted during
2017
and
2016
was
$12.38
and
$10.53
, respectively. The total intrinsic value of stock options exercised in
2018
,
2017
and
2016
was
$1.4 million
,
$0.7 million
and
$0.7 million
, respectively.
As of
December 31, 2018
, we had
$0.3 million
of total unrecognized compensation expense related to stock option grants that will be recognized over the weighted average period of
1.0
year.
Restricted Stock
Restricted stock is granted to certain employees and non-employee directors. The cost of these awards is determined using the market price of our common stock on the date of grant. Restricted stock shares granted represent newly issued shares and have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. Restricted stock awards granted to employees vest over periods ranging from
one
to
three
years after the grant date, and awards granted to non-employee directors generally vest
one
year following the grant date. Management uses the straight-line attribution method to recognize expense for all restricted stock awards. The awards are generally subject to forfeiture if employment terminates prior to vesting, except under certain conditions. The cash dividends on restricted stock shares are forfeitable, and payments of cash dividends on restricted stock shares are withheld until the shares vest. Compensation is recognized over the period during which the employees and non-employee directors provide the requisite service to the Company.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
A summary of restricted stock activity under the 2013 Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date Fair
Value
|
Nonvested restricted stock - December 31, 2015
|
|
203,258
|
|
|
$
|
14.53
|
|
Granted
|
|
119,601
|
|
|
27.00
|
|
Vested
|
|
(118,097
|
)
|
|
16.05
|
|
Forfeited
|
|
(7,438
|
)
|
|
17.59
|
|
Nonvested restricted stock - December 31, 2016
|
|
197,324
|
|
|
$
|
21.06
|
|
Granted
|
|
96,724
|
|
|
33.11
|
|
Vested
|
|
(117,852
|
)
|
|
21.47
|
|
Forfeited
|
|
(5,416
|
)
|
|
26.29
|
|
Nonvested restricted stock - December 31, 2017
|
|
170,780
|
|
|
$
|
27.43
|
|
Granted
|
|
122,978
|
|
|
29.70
|
|
Vested
|
|
(125,410
|
)
|
|
25.88
|
|
Forfeited
|
|
(17,871
|
)
|
|
30.22
|
|
Nonvested restricted stock - December 31, 2018
|
|
150,477
|
|
|
$
|
30.25
|
|
The total fair value of restricted stock that vested during
2018
,
2017
and
2016
was
$3.7 million
,
$3.9 million
and
$2.9 million
, respectively.
At
December 31, 2018
, total unrecognized compensation cost related to nonvested restricted stock was
$2.4 million
and is expected to be recognized over a weighted average period of
1.5
years.
Performance Shares
Performance share awards are granted to certain employees and provide for the issuance of common stock if specified Company performance targets and market conditions are achieved. The number of common shares issued is dependent upon vesting and actual performance of the Company relative to the established targets.
The fair value of performance share awards granted is determined based on the market price of our common stock on the date of grant. Additionally, the awards include a market condition that must also be achieved in order to earn more than the performance shares granted; therefore, the fair value of any shares earned in excess of
100%
was determined on the date of grant using a Monte Carlo simulation model. The expected volatility is based on the historical volatility of our stock price movements over the two years prior to the grant date. The risk-free interest rate is based on the U.S. Treasury Strips as of the grant date with a term measured to the end of the performance period. Specific to the estimated
2018
,
2017
, and
2016
performance shares earned in excess of
100%
, the fair value and weighted-average inputs used were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Grant date fair value
|
$
|
29.25
|
|
|
$
|
33.92
|
|
|
$
|
20.05
|
|
Expected volatility
|
35
|
%
|
|
34
|
%
|
|
30
|
%
|
Risk-free interest rate
|
2.1
|
%
|
|
1.1
|
%
|
|
0.9
|
%
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The amount of compensation expense recognized for performance shares reflects our assessment of the probability that performance targets will be achieved. If the performance conditions of the performance awards are met, the performance shares granted in
2018
,
2017
, and
2016
will vest in
two
equal installments on the second and third anniversaries of the grant date. Performance shares that have not vested are generally subject to forfeiture if employment terminates, except under certain conditions. Cash dividends accrue on performance shares once the performance conditions have been met, but the dividends are forfeitable if the performance shares do not vest. We recognize compensation expense related to performance share grants using the graded-vesting method over the vesting periods.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
A summary of the performance share award activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date Fair
Value
|
Nonvested performance shares - December 31, 2015
|
|
218,840
|
|
|
$
|
13.67
|
|
Granted (a)
|
|
146,916
|
|
|
26.97
|
|
Earned (b)
|
|
205,833
|
|
|
5.54
|
|
Vested
|
|
(5,104
|
)
|
|
11.00
|
|
Unearned or forfeited
|
|
(10,072
|
)
|
|
16.58
|
|
Nonvested performance shares - December 31, 2016
|
|
556,413
|
|
|
$
|
14.15
|
|
Granted (a)
|
|
98,518
|
|
|
33.92
|
|
Earned (b)
|
|
65,017
|
|
|
10.03
|
|
Vested
|
|
(291,859
|
)
|
|
9.88
|
|
Unearned or forfeited
|
|
(12,719
|
)
|
|
28.05
|
|
Nonvested performance shares - December 31, 2017
|
|
415,370
|
|
|
$
|
20.76
|
|
Granted (a)
|
|
152,261
|
|
|
29.25
|
|
Earned
|
|
—
|
|
|
—
|
|
Vested
|
|
(221,339
|
)
|
|
14.78
|
|
Unearned or forfeited
|
|
(82,793
|
)
|
|
30.80
|
|
Nonvested performance shares - December 31, 2018
|
|
263,499
|
|
|
$
|
27.54
|
|
(a) Reflected at target levels.
(b) Includes shares earned in excess of target from prior year grant.
The total fair value of performance shares that vested during
2018
,
2017
and
2016
was
$6.6 million
,
$9.9 million
and
$0.1 million
, respectively.
At
December 31, 2018
, total unrecognized compensation cost related to the performance share awards granted of approximately
$4.1 million
is expected to be recognized over a weighted average period of
1.4
years.
Share-Based Compensation Expense
The following table summarizes share-based compensation expense, reported as a component of selling, general, and administrative expense, related to our stock options, restricted stock and performance share awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Stock options
|
$
|
0.5
|
|
|
$
|
1.2
|
|
|
$
|
1.3
|
|
Restricted stock
|
3.2
|
|
|
3.0
|
|
|
2.4
|
|
Performance shares
|
3.0
|
|
|
4.0
|
|
|
3.2
|
|
Total pre-tax share-based compensation expense
|
$
|
6.7
|
|
|
$
|
8.2
|
|
|
$
|
6.9
|
|
Net tax benefit related to share-based compensation expense
|
$
|
1.2
|
|
|
$
|
3.2
|
|
|
$
|
2.6
|
|
Tax benefits realized from the exercise of stock options and the vesting of restricted stock and performance shares were
$2.9 million
,
$5.8 million
and
$1.6 million
in
2018
,
2017
and
2016
, respectively.
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
17. Acquisition
On
November 1, 2017
, our A.J. Oster subsidiary acquired certain assets and assumed certain liabilities of Alumet. Headquartered in Parsippany, New Jersey, Alumet is a non-ferrous metals service center that provides coated aluminum, aluminum, copper and brass sheet, and strip products to the building and housing and automotive markets through its cut to length, slitting, and coating capabilities. The acquisition of Alumet expands A.J. Oster’s geographic presence into the South and Southeast through Alumet’s facilities in Atlanta and Texas while also providing additional outlets for Alumet’s products through A.J. Oster’s facilities in Chicago and Mexico. The Alumet acquisition was part of our strategic efforts to profitably grow through acquisitions and expands our geographic presence in targeted regions, strengthens our position in the aluminum market, and enhances our position in the non-ferrous metals distribution business.
We accounted for the Alumet acquisition as a business combination using the acquisition method in accordance with ASC 805,
Business Combinations
. The results of operations of Alumet have been included in the Consolidated Statement of Operations since November 1, 2017. Alumet net sales and net income from acquisition date on November 1, 2017 through December 31, 2017 were
$19.0 million
and
$0.5 million
, respectively.
We acquired certain assets and liabilities of Alumet for approximately
$41.7 million
. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
(in millions)
|
|
|
Purchase price to allocate
|
|
$
|
41.7
|
|
|
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
Accounts receivable
|
|
$
|
16.9
|
|
Inventories
|
|
30.7
|
|
Prepaid expenses and other current assets
|
|
0.3
|
|
Property, plant and equipment
|
|
5.7
|
|
Intangible assets
|
|
1.7
|
|
Other noncurrent assets
|
|
0.1
|
|
Accounts payable
|
|
(8.0
|
)
|
Accrued liabilities
|
|
(4.0
|
)
|
Capital lease liability
|
|
(1.7
|
)
|
Total fair value of assets acquired and liabilities assumed
|
|
$
|
41.7
|
|
|
|
|
Goodwill
|
|
$
|
—
|
|
The
$1.7 million
of acquired intangible assets consists of customer relationships of
$1.0 million
(
15
-year useful life), trade name of
$0.3 million
(
15
-year useful life), non-compete agreements of
$0.2 million
(
2
-year useful life), and leasehold interests of $
0.2 million
(
2.5
-year useful life).
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
Pro Forma Information
The following unaudited pro forma results of operations reflect the
November 1, 2017
Alumet acquisition as if it had occurred on January 1, 2016. The pro forma information is not necessarily indicative of the results that actually would have occurred, nor does it indicate future operating results.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions, except per share data)
|
2017
|
|
2016
|
Net sales:
|
|
|
|
As reported
|
$
|
1,578.6
|
|
|
$
|
1,338.3
|
|
Pro forma
|
1,709.7
|
|
|
1,466.4
|
|
Net income attributable to Global Brass and Copper Holdings, Inc.:
|
|
|
|
As reported
|
$
|
51.1
|
|
|
$
|
32.2
|
|
Pro forma
|
55.5
|
|
|
37.2
|
|
Net income attributable to Global Brass and Copper Holdings, Inc. per common share - Basic:
|
|
|
|
As reported
|
$
|
2.35
|
|
|
$
|
1.50
|
|
Pro forma
|
$
|
2.55
|
|
|
$
|
1.74
|
|
Net income attributable to Global Brass and Copper Holdings, Inc. per common share - Diluted:
|
|
|
|
As reported
|
$
|
2.31
|
|
|
$
|
1.49
|
|
Pro forma
|
$
|
2.51
|
|
|
$
|
1.72
|
|
|
|
Global Brass and Copper Holdings, Inc.
Notes to Consolidated Financial Statements
|
18. Quarterly Financial Information
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
(in millions, except per share data)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Net sales
|
$
|
471.8
|
|
|
$
|
459.4
|
|
|
$
|
429.9
|
|
|
$
|
404.3
|
|
|
Gross profit
|
49.0
|
|
(a)
|
57.9
|
|
(a)
|
42.9
|
|
(a)
|
36.9
|
|
(a)
|
Income before provision for income taxes
|
21.2
|
|
|
29.1
|
|
(b)
|
16.8
|
|
|
8.8
|
|
|
Net income
|
15.9
|
|
|
21.1
|
|
|
14.9
|
|
|
6.7
|
|
|
Net income attributable to Global Brass and Copper Holdings, Inc.
|
15.8
|
|
|
21.0
|
|
|
14.8
|
|
|
6.6
|
|
|
Net income attributable to Global Brass and Copper Holdings, Inc. per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.72
|
|
|
$
|
0.95
|
|
|
$
|
0.67
|
|
|
$
|
0.30
|
|
|
Diluted
|
$
|
0.71
|
|
|
$
|
0.94
|
|
|
$
|
0.66
|
|
|
$
|
0.29
|
|
|
|
2017
|
|
(in millions, except per share data)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Net sales
|
$
|
419.5
|
|
|
$
|
374.8
|
|
|
$
|
359.4
|
|
|
$
|
424.9
|
|
|
Gross profit
|
50.6
|
|
(c)
|
44.2
|
|
(c)
|
43.6
|
|
(c)
|
45.8
|
|
(c)
|
Income before provision for income taxes
|
22.7
|
|
|
24.6
|
|
|
19.0
|
|
(d)
|
19.3
|
|
|
Net income
|
17.7
|
|
|
15.8
|
|
|
12.4
|
|
|
5.8
|
|
|
Net income attributable to Global Brass and Copper Holdings, Inc.
|
17.5
|
|
|
15.7
|
|
|
12.3
|
|
|
5.6
|
|
|
Net income attributable to Global Brass and Copper Holdings, Inc. per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.81
|
|
|
$
|
0.72
|
|
|
$
|
0.56
|
|
|
$
|
0.26
|
|
|
Diluted
|
$
|
0.79
|
|
|
$
|
0.71
|
|
|
$
|
0.56
|
|
|
$
|
0.25
|
|
|
|
|
(a)
|
Includes lower of cost or market adjustments for certain domestic, non-copper metal inventory, which increased gross profit by
$0.9 million
and
$0.2 million
in the first and second quarters, respectively, and decreased gross profit by
$1.2 million
and
$2.8 million
in the third and fourth quarters, respectively. Includes
$0.1 million
loss from liquidation of LIFO inventory layers in the fourth quarter.
|
|
|
(b)
|
Includes
$0.5 million
loss from extinguishment of debt in the second quarter.
|
|
|
(c)
|
Includes lower of cost or market adjustments for certain domestic, non-copper metal inventory, which increased gross profit by
$0.8 million
,
$0.7 million
, and
$2.8 million
in the first, third, and fourth quarters, respectively, and decreased gross profit by
$0.7 million
in the second quarter. Includes
$1.0 million
loss from liquidation of LIFO inventory layers in the fourth quarter.
|
|
|
(d)
|
Includes
$0.2 million
loss from extinguishment of debt in the third quarter.
|
Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not equal the total for the year.