Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2019

or

For the transition period from                      to

Commission File No. 001-35938

GLOBAL BRASS AND COPPER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

(847) 240-4700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

On April 25, 2019, there were 21,952,777 shares of common stock outstanding.

Global Brass and Copper Holdings, Inc.

Index

March 31, 2019

Table of Contents

Global Brass and Copper Holdings, Inc. (“Holdings,” “GBC,” the “Company,” “we,” “us,” or “our”) is operated and managed through three reportable segments: Olin Brass, Chase Brass, and A.J. Oster.

These unaudited consolidated financial statements include the accounts of the Company, our wholly-owned subsidiaries, and our majority-owned subsidiaries in which we have a controlling interest. All intercompany accounts and transactions are eliminated in consolidation.

The accompanying unaudited, interim consolidated financial statements include all normal recurring adjustments that are, in the opinion of management, necessary to fairly state the results for the interim periods presented. The December 31, 2018 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“US GAAP”). Certain information and disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted.

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

Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. On January 1, 2019, we changed how we recognize operating leases as a result of the adoption of Accounting Standards Codification (“ASC”) Topic 842, Leases. See Note 2, "Leases," for further detail. These interim, unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The provisions of ASU 2016-13 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are in the process of assessing the impact of the new standard on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by requiring lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with a term of greater than 12 months.

We adopted the guidance in Topic 842 as of January 1, 2019, using the modified retrospective approach. Under this approach, the guidance is applied to existing leases as of the adoption date with a cumulative-effect adjustment at adoption and no adjustment to prior comparative periods. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carry forward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification, and (3) initial direct costs. Additionally, we implemented new processes and policies to ensure proper preparation of financial information upon adoption. The adoption of Topic 842 impacted our consolidated balance sheets, but did not impact our consolidated statements of operations or cash flows. The most significant change was the recognition of right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. Upon adoption, we recorded $7.1 million of right-of-use assets and $7.4 million of lease liabilities for operating leases. We did not have any cumulative-effect adjustments to record upon adoption.

We lease certain warehouse facilities, manufacturing facilities, office space, equipment, and vehicles. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

We determine if an arrangement is a lease at inception. For lease arrangements, we recognize right-of-use assets and lease liabilities on the balance sheet. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. On our consolidated balance sheets, operating lease right-of-use assets are included in Other noncurrent assets and finance lease right-of-use assets are included in Property, plant and equipment, net.

Right-of-use assets and lease liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. Some of our leases include renewal options that are exercisable at our sole discretion. Our lease terms include the renewal option period when it is reasonably certain that we will exercise that option. As the implicit rate for most of our operating leases is not readily determinable, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. For finance leases, we use the implicit rate in the lease in determining the present value of lease payments. Right-of-use assets also include any lease payments made and exclude lease incentives. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components. We elected the option to not separate lease and non-lease components for all of our leases. Our lease agreements do not contain any significant variable lease payments, residual value guarantees, or restrictive covenants.

Supplemental balance sheet information related to leases was as follows:

(a) Operating and finance lease assets are recorded net of accumulated amortization of $0.6 million and $6.4 million, respectively, as of March 31, 2019.

The following table sets forth the components of lease expense:

(a) Includes short-term lease expense and sublease income, which are not material.

Supplemental cash flow information related to leases was as follows:

The following table sets for the weighted-average remaining lease terms and discount rates:

Maturities of lease liabilities are as follows:

Future minimum lease payments for operating and finance leases as of December 31, 2018 were as follows:

The following table presents our revenue disaggregated by market based on the customer's primary market or the primary market for the shipped product:

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

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

On July 31, 2018, our Board of Directors authorized a share repurchase program (the “2018 Share Repurchase Program”), whereby we may repurchase up to $35.0 million of our common stock on the open market through September 30, 2020. There were no shares repurchased under this program during the three months ended March 31, 2019. Since inception of the 2018 Share Repurchase Program through March 31, 2019, we have repurchased 400,000 shares for $12.6 million and have a remaining authorization of $22.4 million as of March 31, 2019. In addition, we frequently buy shares of our common stock from employees as an accommodation to them to satisfy their tax withholding obligations under our stock compensation plans.

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. While primarily a processor of copper and copper alloys, 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 sold primarily to customers in building and housing, munitions, automotive, coinage, and electronics / electrical components.

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

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 sold primarily to customers in building and housing, automotive, and electronics / electrical components industries.

Corporate includes compensation for corporate executives, corporate office and administrative salaries, and professional fees for accounting, tax and legal services. Corporate also includes interest expense and income, state and federal income taxes, certain overhead costs, share-based compensation expense, gains and losses associated with certain acquisitions and dispositions, unrealized gains and losses on hedging activities, and the elimination of intercompany sales and balances.

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

Adjusted EBITDA is defined as net income attributable to Global Brass and Copper Holdings, Inc., plus interest, taxes, depreciation, and amortization (“EBITDA”) adjusted to exclude the following:

Each of these items are excluded because our management believes they are not indicative of the ongoing performance of our core operations.

Below is a reconciliation of adjusted EBITDA of segments to income before provision for income taxes:

Inventories were as follows:

Inventories include costs attributable to direct labor and manufacturing overhead, but are primarily comprised of metal costs. The metals component of inventories that is valued on a LIFO basis comprised 63% and 67% of total inventory at March 31, 2019 and December 31, 2018, respectively. Other manufactured inventories, including the direct labor and manufacturing overhead components and certain non-U.S. inventories, are valued on a first-in, first-out (“FIFO”) basis.

During the three months ended March 31, 2019 and 2018, we recorded adjustments for certain domestic metal inventory from the fluctuations in market value of these metals. For the three months ended March 31, 2019 and 2018, these adjustments decreased cost of sales by $2.8 million and $0.9 million, respectively.

Below is a summary of inventories valued at period-end market values compared to the as reported values:

Prepaid expenses and other current assets were as follows:

Accrued liabilities consisted of the following:

Long-term debt consisted of the following:

Term Loan B Facility

At March 31, 2019, we had $312.0 million outstanding under our long-term credit facility that matures on May 29, 2025 (the “Term Loan B Credit Agreement” and together with the facility thereunder, the “Term Loan B Facility”). Amounts outstanding under this facility 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 Term Loan B Credit Agreement) or (2) 2.50% plus the Adjusted LIBO Rate (as defined in the 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 March 31, 2019, amounts outstanding under the Term Loan B Facility combined with our interest rate swap derivative accrued interest at a weighted average rate of 5.12%.

The Term Loan B Credit Agreement requires mandatory prepayments based on various events and circumstances as are customary in such agreements. 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.

In connection with the Term Loan B Facility, we are required to make quarterly payments of $0.8 million with the balance expected to be due at maturity.

ABL Facility

We have an asset-based revolving loan facility (the “ABL Credit Agreement” and together with the facility thereunder, the “ABL Facility”) that matures on July 19, 2021 and provides for borrowings of up to the lesser of $200.0 million or the borrowing base, in each case less outstanding loans and letters of credit.

As of March 31, 2019, we had no borrowings outstanding under the ABL Facility and available borrowings under the facility were $195.4 million after giving effect to $4.6 million of letters of credit outstanding, which are used to provide collateral for our insurance programs. We may request an increase in the maximum commitments, at our option and under certain circumstances, of up to $200.0 million (but the lenders are not obligated to grant such an increase).

The Credit Agreements

The ABL Credit Agreement and the Term Loan B Credit Agreement (together, the “Credit Agreements”) contain various covenants consistent with debt agreements of this kind, such as restrictions on the amounts of dividends we can pay. As of March 31, 2019, we were in compliance with all of the covenants relating to the Credit Agreements.

The components of accumulated other comprehensive income (loss) attributable to Global Brass and Copper Holdings, Inc., net of tax, were as follows:

The effective income tax rate, which is the provision for income taxes as a percentage of income before provision for income taxes, was 27.1% and 25.0% for the three months ended March 31, 2019 and 2018, respectively. The increase in the effective income tax rate for the three months ended March 31, 2019 is largely driven by increased tax expense on stock compensation due to a reduction of shares vesting in 2019 and a reduction of the difference between the stock price at grant date and vesting date. The effective income tax rates for the three months ended March 31, 2019 and 2018 also differed from the U.S. Federal statutory rate of 21%, due to state income taxes, stock compensation, and the utilization of tax credits.

As of March 31, 2019, and December 31, 2018, we had $23.9 million of unrecognized tax benefits, of which $8.2 million would impact the effective tax rate, if recognized. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the provision for income taxes in the accompanying consolidated statements of operations. Accrued interest and penalties as of March 31, 2019 and December 31, 2018 were $2.8 million and $2.5 million, respectively. Our liability for uncertain tax positions, including accrued interest and penalties, of $26.7 million and $26.4 million at March 31, 2019 and December 31, 2018, respectively, are presented in other noncurrent liabilities in the accompanying consolidated balance sheets.

Our U.S. federal returns for the period ended December 31, 2015 and all subsequent periods remain open for audit. In addition, the majority of state returns for the period ended December 31, 2014 and all subsequent periods remain open for audit.

We maintain a risk-management strategy that uses commodity derivative contracts to minimize significant, unanticipated gains or losses arising from fluctuations in certain commodity prices.

We are also exposed to credit risk and market risk through our use of derivative contracts. Credit risk is the risk that the counterparty might fail to fulfill its performance obligations under the terms of the derivative contract. Market risk is the risk that the value of a derivative instrument might be adversely affected by a change in market prices and rates. We manage the market risk associated with derivative contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

We use a cash flow hedge to minimize the variability in cash flows caused by fluctuations in market interest rates. This derivative, which is a designated cash flow hedge, is carried at fair value. The change in fair value is recorded to accumulated other comprehensive income (loss) and reclassified to current earnings if hedge accounting cannot be applied because the hedge contract is not highly effective.

We manage credit risk associated with derivative contracts by executing derivative instruments with counterparties that we believe are credit-worthy. The amount of such credit risk is limited to the fair value of the derivative contract plus the unpaid portion of amounts due to us pursuant to terms of the derivative contracts, if any. If the credit-worthiness of these counterparties deteriorates, we believe the exposure is mitigated by provisions in the derivative arrangements which allow for the legal right of offset of amounts due to us from the counterparties, if any, with any amounts payable to the counterparties.

The following tables provide a summary of our outstanding derivative contracts:

The fair values of derivative contracts in the consolidated balance sheets include the impact of netting derivative assets and liabilities when a legally enforceable master netting arrangement exists. The following tables summarize the gross amounts of open derivative contracts, the net amounts presented in the unaudited consolidated balance sheets, and the collateral deposited with counterparties:

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

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:

As of March 31, 2019 and December 31, 2018, the fair value of our commodity and energy derivative contracts was a net asset of $1.9 million and a net liability of $1.0 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 March 31, 2019 and December 31, 2018, the fair value of our interest rate swap was a liability of $3.6 million and $2.0 million, respectively. 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 2019 or 2018.

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 March 31, 2019 and December 31, 2018, the fair value of our money market funds, which are presented in cash and cash equivalents, was $64.1 million and $58.7 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 March 31, 2019, the fair value of our Term Loan B Facility approximated $310.4 million compared to a carrying value of $312.0 million. 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. The fair values of the Term Loan B Facility were based upon quotes from financial institutions (Level 2 in the fair value hierarchy as defined by ASC 820).

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 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 us 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 during the three months ended March 31, 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 flows.

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.

On April 9, 2019, we entered into a definitive merger agreement with Wieland-Werke AG (the “Merger Agreement”), a nearly 200-year-old, family-owned global technology and service company in the brass and copper industry. Per the Merger Agreement, Wieland will acquire all of the outstanding shares of GBC in an all-cash transaction. GBC shareholders will receive $44.00 per share in cash. The merger is expected to close in the second half of 2019. For additional details, please refer to the Merger Agreement, which is attached as Exhibit 2.1 to our Current Report on Form 8-K filed on April 11, 2019.

The obligation of the parties to complete the merger is subject to customary closing conditions, including, among others: