Basis of Presentation and Principles of Consolidation | Basis of Presentation and Principles of Consolidation Global Brass and Copper Holdings, Inc. (“Holdings,” “GBC,” the “Company,” “we,” “us,” or “our”) is operated and managed through three reportable segments: Olin Brass, Chase Brass and A.J. Oster. These unaudited consolidated financial statements include the accounts of the Company, our wholly-owned subsidiaries, and our majority-owned subsidiaries in which we have a controlling interest. All intercompany accounts and transactions are eliminated in consolidation. The accompanying unaudited, interim consolidated financial statements include all normal recurring adjustments that are, in the opinion of management, necessary to fairly state the results for the interim periods presented. The December 31, 2017 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“US GAAP”). Certain information and disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amount of net sales and expenses during the reporting periods. Actual amounts could differ from those estimates. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. On January 1, 2018, we changed how we recognize unprocessed metal sales to toll customers as a result of the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers . The financial impacts of this change to the periods covered by this report are provided below. These interim, unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 . Recently Issued and Recently Adopted Accounting Pronouncements In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU“) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service . ASU 2018-15 provides guidance on capitalizing hosting arrangement implementation costs and recognizing and presenting the expense and payments related to capitalized implementation costs for hosting arrangements in our financial statements. The provisions of ASU 2018-15 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and the provisions are to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are in the process of evaluating the impact of adoption on our consolidated financial statements. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities . This ASU provides new guidance about the income statement classification of and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (“OCI”) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. We early adopted this guidance on May 25, 2018 upon entering into an interest rate swap agreement. The adoption of this standard did not impact our consolidated financial statements. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business , which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance became effective on January 1, 2018 for interim and annual periods. The adoption of this standard did not have a material impact on our consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , with further clarification and improvements issued in ASU 2018-10, Codification Improvements to Topic 842, Leases , and ASU 2018-11, Leases (Topic 842) Targeted Improvements , which are collectively referred to as Topic 842. The new lease guidance in Topic 842 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Topic 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease effectively finances a purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method (finance lease) or on a straight line basis over the term of the lease (operating lease). A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new lease guidance supersedes the existing guidance on accounting for leases in Leases (Topic 840). The provisions of Topic 842 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. We will adopt the new lease guidance on January 1, 2019 using the modified retrospective approach. As a result of adopting Topic 842, we will implement new processes and accounting policies. We are currently finalizing our accounting policies and determining changes needed in current processes for lease accounting and verifying the completeness of our lease population. We are in the process of evaluating our current lease portfolio. While the impact of adoption will depend on our lease portfolio as of the adoption date and our accounting policy elections, we expect to recognize right of use assets and liabilities for our operating leases in the consolidated balance sheet upon adoption. 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 Consolidated Statement of Operations (Unaudited) Three Months Ended Effects of the Adoption of ASC Topic 606 Three Months Ended Nine Months Ended Effects of the Adoption of ASC Topic 606 Nine Months Ended (in millions, except per share data) Net sales $ 378.6 $ (19.2 ) $ 359.4 $ 1,149.3 $ 4.4 $ 1,153.7 Cost of sales (334.8 ) 19.0 (315.8 ) (1,010.9 ) (4.4 ) (1,015.3 ) Gross profit 43.8 (0.2 ) 43.6 138.4 — 138.4 Selling, general and administrative expenses (19.4 ) — (19.4 ) (61.6 ) — (61.6 ) Operating income 24.4 (0.2 ) 24.2 76.8 — 76.8 Interest expense (4.4 ) — (4.4 ) (13.9 ) — (13.9 ) Loss on extinguishment of debt (0.2 ) — (0.2 ) (0.2 ) — (0.2 ) Other income (expense), net (0.6 ) — (0.6 ) 3.6 — 3.6 Income before provision for income taxes 19.2 (0.2 ) 19.0 66.3 — 66.3 Provision for income taxes (6.7 ) 0.1 (6.6 ) (20.4 ) — (20.4 ) Net income 12.5 (0.1 ) 12.4 45.9 — 45.9 Net income attributable to noncontrolling interest (0.1 ) — (0.1 ) (0.4 ) — (0.4 ) Net income attributable to Global Brass and Copper Holdings, Inc. $ 12.4 $ (0.1 ) $ 12.3 $ 45.5 $ — $ 45.5 Net income attributable to Global Brass and Copper Holdings, Inc. per common share: Basic $ 0.57 $ (0.01 ) $ 0.56 $ 2.10 $ — $ 2.10 Diluted $ 0.56 $ — $ 0.56 $ 2.06 $ — $ 2.06 Weighted average common shares outstanding: Basic 21.8 — 21.8 21.7 — 21.7 Diluted 22.1 — 22.1 22.1 — 22.1 Consolidated Statement of Comprehensive Income (Unaudited) Three Months Ended Effects of the Adoption of ASC Topic 606 Three Months Ended Nine Months Ended Effects of the Adoption of ASC Topic 606 Nine Months Ended (in millions) Net income $ 12.5 $ (0.1 ) $ 12.4 $ 45.9 $ — $ 45.9 Other comprehensive income (loss): Foreign currency translation adjustment 0.2 — 0.2 1.5 — 1.5 Income tax (expense) benefit on foreign currency translation adjustment — — — (0.2 ) — (0.2 ) Comprehensive income 12.7 (0.1 ) 12.6 47.2 — 47.2 Comprehensive (income) loss attributable to noncontrolling interest (0.2 ) — (0.2 ) (0.6 ) — (0.6 ) Comprehensive income attributable to Global Brass and Copper Holdings, Inc. $ 12.5 $ (0.1 ) $ 12.4 $ 46.6 $ — $ 46.6 Consolidated Statement of Changes in Equity (Unaudited) (in millions, except share data) Shares outstanding Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive loss Total Global Brass and Copper Holdings, Inc. stockholders’ equity Noncontrolling interest Total equity December 31, 2016 - as reported 21,633,067 $ 0.2 $ 45.0 $ 51.2 $ (1.5 ) $ (4.1 ) $ 90.8 $ 4.4 $ 95.2 Cumulative effect adjustment of ASC Topic 606 on January 1, 2017 — — — — — — — — — December 31, 2016 - as adjusted 21,633,067 0.2 45.0 51.2 (1.5 ) (4.1 ) 90.8 4.4 95.2 Nine months ended September 30, 2017 - as reported 270,725 — 7.5 41.9 (5.1 ) 1.1 45.4 0.6 46.0 Effect of the adoption of ASC Topic 606 — — — — — — — — — September 30, 2017 - as adjusted 21,903,792 $ 0.2 $ 52.5 $ 93.1 $ (6.6 ) $ (3.0 ) $ 136.2 $ 5.0 $ 141.2 December 31, 2017 - as reported 21,907,188 $ 0.2 $ 54.5 $ 97.1 $ (6.6 ) $ (2.9 ) $ 142.3 $ 4.8 $ 147.1 Cumulative effect adjustment of ASC Topic 606 on January 1, 2018 — — — 0.2 — — 0.2 — 0.2 December 31, 2017 - as adjusted 21,907,188 $ 0.2 $ 54.5 $ 97.3 $ (6.6 ) $ (2.9 ) $ 142.5 $ 4.8 $ 147.3 Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended September 30, 2017 Effects of the Adoption of Nine Months Ended September 30, 2017 (in millions) Cash flows from operating activities Net income $ 45.9 $ — $ 45.9 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Lower of cost or market adjustment to inventory (0.8 ) — (0.8 ) Unrealized (gain) loss on derivatives 1.1 — 1.1 Depreciation 13.5 — 13.5 Amortization of intangible assets 0.1 — 0.1 Amortization of debt discount and issuance costs 1.0 — 1.0 Loss on extinguishment of debt 0.2 — 0.2 Share-based compensation expense 6.3 — 6.3 Provision for bad debts, net of reductions 0.3 — 0.3 Deferred income taxes 11.7 — 11.7 Change in assets and liabilities: Accounts receivable (31.2 ) — (31.2 ) Inventories (12.5 ) — (12.5 ) Prepaid expenses and other current assets (4.1 ) 4.4 0.3 Accounts payable 8.6 — 8.6 Accrued liabilities (3.0 ) (4.4 ) (7.4 ) Income taxes, net (3.8 ) — (3.8 ) Other, net (0.4 ) — (0.4 ) Net cash provided by (used in) operating activities 32.9 — 32.9 Cash flows from investing activities Capital expenditures (18.4 ) — (18.4 ) Net cash used in investing activities (18.4 ) — (18.4 ) Cash flows from financing activities Borrowings on ABL Facility 0.6 — 0.6 Payments on ABL Facility (0.6 ) — (0.6 ) Payments of debt issuance costs (0.2 ) — (0.2 ) Proceeds from term loan, net of discount 8.7 — 8.7 Payments on term loan (11.1 ) — (11.1 ) Principal payments under capital lease obligation (0.9 ) — (0.9 ) Dividends paid (3.0 ) — (3.0 ) Proceeds from exercise of stock options 0.7 — 0.7 Share repurchases (5.1 ) — (5.1 ) Net cash used in financing activities (10.9 ) — (10.9 ) Effect of foreign currency exchange rates (0.4 ) — (0.4 ) Net increase (decrease) in cash 3.2 — 3.2 Cash and cash equivalents at beginning of period 88.2 — 88.2 Cash and cash equivalents at end of period $ 91.4 $ — $ 91.4 |