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GENERAL CABLE CORP /DE/ - 10-K/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) All of the financial information presented in this Item 7 has been adjusted to reflect the restatement of our consolidated financial statements as of December 31, 2012 and 2011 and for the fiscal years ended December 31, 2012, 2011, and 2010. Specifically, we have restated our Consolidated Balance Sheets as of December 31, 2012 and 2011 and the related Consolidated Statements of Operations and Comprehensive Income (Loss), Consolidated Statements of Changes in Total Equity and Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010. The restatement is more fully described in the "Explanatory Note" immediately preceding Part I, Item 1 and in Note 23 - Restatement of Consolidated Financial Statements which is included in "Financial Statements and Supplementary Data" in Item 8 of this 2012 Amended Annual Report on Form 10-K/A. The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand General Cable Corporation's financial position, changes in financial condition, and results of operations. MD&A is provided as a supplement to the Company's Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements ("Footnote" or "Notes") and should be read in conjunction with the Consolidated Financial Statements and Notes. Certain statements in this report including, without limitation, statements regarding future financial results and performance, plans and objectives, capital expenditures and the Company's or management's beliefs, expectations or opinions, are forward-looking statements, and as such, General Cable desires to take advantage of the "safe harbor" which is afforded such statements under the Private Securities Litigation Reform Act of 1995. The Company's forward-looking statements should be read in conjunction with the Company's comments in this report under the heading, "Disclosure Regarding Forward-Looking Statements." Actual results may differ materially from those statements as a result of factors, risks and uncertainties over which the Company has no control. For a list of these factors, risks and uncertainties, refer to Item 1A - Risk Factors. Overview The Company is a global leader in the development, design, manufacture, marketing and distribution of copper, aluminum and fiber optic wire and cable products for use in the energy, industrial, construction, specialty and communications markets. The Company additionally engages in the design, integration, and installation on a turn-key basis for products such as high and extra-high voltage terrestrial and submarine systems. The Company analyzes its worldwide operations based on three geographical segments: North America, Europe and Mediterranean, and ROW. As of December 31, 2012, the Company manufactures its product lines in 56 manufacturing facilities and sells its products worldwide through its global operations. The Company believes it has a strong market position in each of the segments in which it competes due to the Company's guiding principles discussed in Item 1 - Business. Significant Current Business Trends and Events The wire and cable industry is competitive, mature and cost driven with minimal differentiation for many product offerings among industry participants from a manufacturing or technology standpoint. In the latter part of 2010 and in 2011, the Company has benefited from a recovery in demand. However, demand and pricing levels generally remain low compared to the levels that were achieved prior to the impact of the global financial crisis and economic downturn that began in late 2007. The following are significant trends and events that occurred in 2012 that affected the Company's operating results: The Company continued and expects to continue to see volatile commodity pricing, primarily copper and aluminum, as well as other cost inputs. The Company typically passes these changes in copper and aluminum prices along to its customers, although there are timing delays of varying lengths depending upon the volatility of metal prices, the type of product, competitive conditions, 25-------------------------------------------------------------------------------- Table of Contents pricing mechanisms and particular customer arrangements. Although the general trends are detailed in Item 1 - Business - Raw Materials, there is no exact measure of the effect of the change of raw material cost inputs due to the high volume of transactions in any given period, each of which involves a number of factors in the individual pricing decisions. To help reduce this volatility, the Company has implemented various pricing mechanisms and hedges a portion of its metal purchases when there is a firm price commitment for a future delivery but does not engage in speculative metals trading. On September 25, 2012, the Company completed the issuance and sale of $600.0 million in aggregate principal amount of new senior unsecured notes (the "5.75% Senior Notes"). The Company used a portion of the proceeds of the 5.75% Senior Notes offering to call for its 7.125% Senior Fixed Rates Notes due 2017 and intends to use the balance to purchase or redeem its 0.875% Convertible Notes through a possible tender offer, purchases or payment at maturity and for other general corporate purposes, which may include other borrowings under the Revolving Credit Facility. On July 21, 2011, the Company entered into a $400 million Revolving Credit Facility, which was subsequently amended to, among other things, increase the Revolving Credit Facility to $700 million, $630 million of which may be borrowed by the U.S. borrower under the Revolving Credit Facility and $70 million of which may be borrowed by the Canadian borrower under the Revolving Credit Facility. The Revolving Credit Facility replaced the Company's prior $400 million Senior Secured Revolving Credit Facility ("Terminated Credit Facility"), which was set to mature in July 2012. The Revolving Credit Facility contains restrictions in areas consistent with the Terminated Credit Facility, including limitations on, among other things, distributions and dividends, acquisitions and investments, indebtedness, liens and affiliate transactions. In the aggregate, however, the restrictions in the Revolving Credit Facility provide the Company greater flexibility than those under the Terminated Credit Facility, and generally only apply in the event that the Company's availability under the Revolving Credit Facility falls below certain specific thresholds. In 2012, the Company continued to actively identify key trends in the industry to capitalize on expanding markets and new niche markets or exit declining or non-strategic markets in order to achieve better returns. The Company also sets aggressive performance targets for its business and intends to refocus or divest those activities which fail to meet targets or do not fit long-term strategies. In 2012 the Company acquired the North American and Chinese business of Alcan Cable, Prestolite Wire, LLC and 60% of Productora de Cables Procables S.A.S. See Note 3 - Acquisitions and Divestitures for further detail. No material acquisitions were made in the year ended December 31, 2011. The results of operations of the acquired businesses have been included in the Consolidated Financial Statements since the respective dates of the acquisition and have been determined to be individually and collectively immaterial for additional disclosure purposes. No material divestitures were made in the years ended December 31, 2012 and December 31, 2011. In addition to the factors previously mentioned, the Company is currently being affected by the following general macro-level trends: • Currency volatility and continued political uncertainty in certain markets; • Competitive price pressures in certain markets, particularly those where the Company is a new entrant; • Continued low levels of demand for a broad spectrum of products in Europe; • Worldwide underlying long-term growth trends in electric utility and infrastructure markets; • Continuing demand for natural resources, such as oil and gas, and alternative energy initiatives; • Increasing demand for further deployment of submarine power and fiber optic communication systems; and • Population growth in developing countries with growing middle classes that influences demand for wire and cable. The Company's overall financial results discussed in this section of the annual report reflect the above trends. 26-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth, for the periods indicated, consolidated statement of operations data in millions of dollars and as a percentage of net sales. Percentages may not add due to rounding. Year Ended December 31, 2012 2011 2010 Amount % Amount % Amount % Net sales $ 6,059.5 100.0 % $ 5,808.2 100.0 % $ 4,856.0 100.0 % Cost of sales 5,434.6 89.7 % 5,213.9 89.8 % 4,316.1 88.9 % Gross profit 624.9 10.3 % 594.3 10.2 % 539.9 11.1 % Selling, general and administrative expenses 425.5 7.0 % 379.7 6.5 % 332.1 6.8 % Operating income 199.4 3.3 % 214.6 3.7 % 207.8 4.3 % Other income (expense) (2.9 ) - % (31.7 ) (0.5 )% (28.1 ) (0.6 )% Interest expense, net, and loss on extinguishment of debt (109.6 ) (1.8 )% (91.5 ) (1.6 )% (71.6 ) (1.5 )% Income before income taxes 86.9 1.4 % 91.4 1.6 % 108.1 2.2 % Income tax provision (78.6 ) (1.3 )% (38.6 ) (0.7 )% (45.9 ) (0.9 )% Equity in net earnings of affiliated companies 1.7 - 2.9 - 1.4 - % Net income including noncontrolling interest 10.0 0.2 % 55.7 1.0 % 63.6 1.3 % Less: preferred stock dividends 0.3 - 0.3 - 0.3 - Less: net income attributable to noncontrolling interest 5.7 0.1 % 0.9 - 7.1 0.1 % Net income attributable to Company common shareholders $ 4.0 0.1 % $ 54.5 0.9 % $ 56.2 1.2 % Year Ended December 31, 2012 Compared with Year Ended December 31, 2011 Net Sales The following tables set forth net sales, metal-adjusted net sales and metal pounds sold by segment, in millions. For the metal-adjusted net sales results, net sales for 2011 have been adjusted to reflect the 2012 copper average price of $3.62 per pound (a $0.39 decrease compared to the prior period) and the aluminum average price of $1.02 per pound (a $0.14 decrease compared to the prior period). Metal-adjusted net sales, a non-GAAP financial measure, are provided herein in order to eliminate the effect of metal price volatility from the comparison of revenues from one period to another. The comparable GAAP financial measure is set forth below. Refer to Item 7 - MD&A - Significant Current Business Trends and Events in the previous discussion of metal price volatility. Net Sales Year Ended Dec 31, 2012 Dec 31, 2011 Amount % Amount % North America $ 2,340.2 39 % $ 2,120.2 36 % Europe and Mediterranean 1,684.2 28 % 1,737.9 30 % ROW 2,035.1 33 % 1,950.1 34 % Total net sales $ 6,059.5 100 % $ 5,808.2 100 % 27-------------------------------------------------------------------------------- Table of Contents Metal-Adjusted Net Sales Year Ended Dec 31, 2012 Dec 31, 2011 Amount % Amount % North America $ 2,340.2 39 % $ 2,023.8 37 % Europe and Mediterranean 1,684.2 28 % 1,657.0 30 % ROW 2,035.1 33 % 1,831.5 33 % Total metal-adjusted net sales $ 6,059.5 100 % $ 5,512.3 100 % Metal adjustment - 295.9 Total net sales $ 6,059.5 $ 5,808.2 Metal Pounds Sold Year Ended Dec 31, 2012 Dec 31, 2011 Pounds % Pounds % North America 432.1 38 % 317.4 33 %Europe and Mediterranean 282.0 24 % 273.8 28 % ROW 434.1 38 % 384.6 39 % Total metal pounds sold 1,148.2 100 % 975.8 100 % Net sales increased $251.3 million, or 4%, to $6,059.5 million in 2012 from 2011 and metal-adjusted net sales increased $547.2 million, or 10%, in 2012 from 2011. The increase in metal-adjusted net sales of $547.2 million reflects favorable selling price and product mix of $294.2 million, net sales of $268.8 million attributable to acquisitions, and higher sales volume of $190.9 million partially offset by unfavorable foreign currency exchange rate changes of $206.7 million. Volume, as measured by metal pounds sold, increased by 172.4 million pounds, or 18%, in 2012 compared to 2011. Metal pounds sold is provided herein as the Company believes this metric to be a consistent year over year measure of sales volume since it is not impacted by metal prices or foreign currency exchange rate changes. Metal-adjusted net sales in the North America segment increased $316.4 million, or 16%, principally due to net sales of $229.0 million attributable to acquisitions, higher sales volumes of $64.5 million and favorable selling price and product mix of $25.9 million partially offset by unfavorable foreign currency exchange rate changes of $3.0 million, principally related to the Canadian dollar. Volume, as measured by metal pounds sold, increased by 114.7 million pounds, or 36%, in 2012 compared to 2011. The increase in volume is primarily attributable to the acquisitions executed in 2012. In addition to the acquisitions made in 2012, volume improvement principally reflects increased demand for bare aluminum transmission products and specialty cables, particularly those used in natural resource extraction and transit applications. Metal-adjusted net sales in the Europe and Mediterranean segment increased $27.2 million, or 2%, in 2012 compared to 2011 due to favorable selling price and product mix of $133.6 million and higher sales volumes of $21.7 million partially offset by unfavorable foreign currency exchange rate changes of $128.1 million, primarily due to a weaker Euro relative to the U.S. dollar. Volume, as measured by metal pounds sold, increased by 8.2 million pounds, or 3%, in 2012 compared to 2011. The increase in volume is primarily attributable to the demand for utility products in France and increased exports from our Spanish facilities. Metal-adjusted net sales in the ROW segment increased $203.6 million, or 11%, due to favorable selling price and product mix of $134.0 million, higher sales volume of $105.4 million and net sales of $39.8 million attributable to acquisitions partially offset by unfavorable foreign currency exchange rate changes of $75.6 million, primarily due to the weakening of certain currencies in Central and South America relative to the U.S. dollar. Volume, as measured by metal pounds sold, increased by 49.5 million pounds, or 13%, in 2012 compared to 2011, which includes the benefit of 9.7 million pounds due to acquisitions. The increase in demand is primarily due to aerial transmission product shipments in Brazil. Cost of Sales Cost of sales increased $220.7 million, or 4%, from 2011, principally due to higher sales volumes associated with acquisitions executed in 2012. The increase in volume is offset by lower average copper and aluminum costs in 2012. As previously noted, cost of sales is raw material intensive with copper and aluminum comprising the major cost components for most of the Company's cable products. At current metal prices, material costs are approximately 85% of total product costs with copper and aluminum metal costs comprising approximately 55% of total product cost for the year ended December 31, 2012. Gross Profit 28-------------------------------------------------------------------------------- Table of Contents Gross profit increased $30.6 million, or 5% in 2012 as compared to 2011. Gross profit as a percentage of sales was 10% in 2012 and 2011. Gross profit in the fourth quarter of 2012 was significantly impacted by changes in cost estimates relating to certain submarine turnkey projects in the European segment. In total, the changes in estimates across all submarine turnkey projects resulted in a reduction to gross profit of $27.5 million, with $20.8 million of the reduction associated with one certain submarine turnkey project at the Company's German submarine power cable manufacturing facility. Equipment failure at the German facility resulted in costs, for this particular project, related to cable damage, equipment repairs and ship rental of $13.3 million. Further revision of this project's profitability, due to changes in estimates, resulted in a reduction of margin by $7.5 million. The project is approximately 40% complete as of December 31, 2012. There was no material impact to gross profit as a result of changes in estimates related to revenue recognition under the percentage of completion method in 2011 or 2010. Selling, General and Administrative Expense Selling, general and administrative expense increased $45.8 million, or 12%, in 2012 from 2011. The increase in selling, general, and administrative expense is primarily a result of $22.0 million in additional expenses associated with acquired businesses in 2012 and $9.1 million of costs related to the 2012 acquisitions and restatements. In addition, SG&A increased due to a settlement loss of $6.1 million in 2012 associated with the termination of a legacy pension plan in the United Kingdom which was allocated amongst the segments. Operating Income The following table sets forth operating income by segment, in millions of dollars. Operating Income (Loss) Year Ended Dec 31, 2012 Dec 31, 2011 Amount % Amount % North America $ 126.1 63 % $ 121.8 57 %Europe and Mediterranean (13.0 ) (6 )% 30.3 14 % ROW 86.3 43 % 62.5 29 % Total operating income $ 199.4 100 % $ 214.6 100 % The increase in operating income for the North America segment of $4.3 million was primarily attributable to increases in sales volume due to acquisitions executed in 2012, favorable market demand for bare aluminum transmission products related to aerial transmission grid projects as well as increased volume due to specialty cables. The increases to operating income were partially offset by an increase in SG&A expense for costs related to the acquisitions and to the restatements of $9.1 million in 2012. The decrease in operating income for the Europe and Mediterranean segment of $43.3 million was primarily attributable to changes in cost estimates relating to certain submarine turnkey projects of $27.5 million and continued weak demand and pricing due to the economic slowdown in many European end markets. Partially offsetting these negative impacts were the current year benefits of European targeted cost reduction efforts, which include, among other actions, personnel reductions. The increase in operating income for the ROW segment of $23.8 million was primarily attributable to strong spending in Venezuela for government led projects, increased demand and operational improvements in Thailand, increased sales in Brazil, principally related to aerial transmission projects. Other Income (Expense) Other income (expense) primarily includes foreign currency transaction gains or losses, which result from changes in exchange rates between the designated functional currency and the currency in which a transaction is denominated as well as gains and losses on derivative instruments that are not designated as cash flow hedges. During 2012 and 2011 the Company recorded a $2.9 million loss and a $31.7 million loss, respectively. For 2012, other expense was primarily attributable to $4.5 million of foreign currency transaction losses which resulted from changes in exchange rates in the various countries in which the Company operates, and $1.6 million of gains on derivative instruments which were not designated as cash flow hedges and ineffectiveness on derivatives designated as cash flow hedges. For 2011, other expense was primarily attributable to $24.4 million of foreign currency transaction losses which resulted from changes in exchange rates in the various countries in which the Company operates, and $6.1 million of losses on derivative instruments which were not designated as cash flow hedges. Interest Expense Net interest expense increased $18.1 million in 2012. Interest expense increased primarily due to fees and redemption premiums of $9.3 million associated with the call of the $200 million of the 7.125% Senior Notes. Additionally, interest expense increased due to the addition of the $600.0 million senior unsecured notes (the "5.75% Senior Notes"), issued on September 25, 2012. 29-------------------------------------------------------------------------------- Table of Contents Tax Provision The Company's effective tax rate for 2012 and 2011 was 90.4% and 42.2%, respectively. The increase in the Company's 2012 effective tax rate reflects the adverse impact of significant valuation allowances recorded against deferred tax assets, as explained further below, and nonrecurring tax charges incurred in connection with legal entity restructuring to integrate the Alcan acquisition. The Company's 2011 effective tax rate reflects the adverse impact of valuation allowances recorded against deferred tax assets in certain foreign jurisdictions, partially offset by tax benefits recognized for uncertain tax positions due to statute of limitations expirations and tax audit settlements. In the third quarter of 2012, the Company updated its 2012 forecasts and substantially completed its 2013 global business planning process, which indicated continuing weakness in its Iberian market and business. After weighing all positive and negative evidence, including the three year cumulative loss position, and factoring in prudent and feasible tax planning strategies, management judged that it was not more likely than not that a future tax benefit for the deferred tax assets of its Spanish and Portuguese business units would be realized. Tax expense of $15 million was recorded in 2012 to establish a full valuation allowance against Spanish and Portuguese deferred tax assets, of which $5.3 million related to the beginning of the year net deferred tax asset position. In the fourth quarter of 2012, a valuation allowance was also recorded against deferred tax assets in the Company's German business unit. The German business unit incurred an equipment failure in the fourth quarter that adversely impacted its ability to meet its contractual obligations for its large project work and reduced profit expectations. In addition, the German business is encountering certain other project delay/cancellation and warranty issues. After weighing all positive and negative evidence, including the three year cumulative loss position, and factoring in prudent and feasible tax planning strategies, management judged that it was not more likely than not that a future tax benefit for the deferred tax assets of its German business would be realized. Tax expense of $8.3 million was recorded in 2012 to establish a full valuation allowance against German deferred tax assets, none of which related to a beginning of the year net deferred tax asset position. A full valuation allowance was recorded in the fourth quarter of 2012 for the Company's Colombian distribution business since it was rendered redundant by the fourth quarter acquisition of Procables. The Colombian distribution business will be wound down and is expected to generate losses until the business is terminated. Tax expense of $1.1 million was recorded in 2012 to establish a full valuation allowance against the Colombian deferred tax assets, of which $0.2 million related to the beginning of the year net deferred tax asset position. The Company continuously monitors the deferred tax position of all business units to determine whether a valuation allowance should be recorded. Full valuation allowances are currently recorded against deferred tax assets in ten significant business units. The Company is closely monitoring the deferred tax asset situation in New Zealand. The New Zealand business unit has been operating at marginal profitability in recent years due to depressed economic conditions and increased competition in the local market. After weighing all positive and negative evidence and factoring in prudent and feasible tax planning strategies, management has judged that it is more likely than not that a future tax benefit for the New Zealand business's $5.8 million of net deferred tax assets will be realized. Future deterioration in the New Zealand unit's profitability could result in the need to record a valuation allowance against its deferred tax assets in a subsequent period. Preferred Stock Dividends During 2012 and 2011, the Company accrued and paid $0.3 million in dividends on its Series A preferred stock. 30-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2011 Compared with Year Ended December 31, 2010 Net Sales The following tables set forth net sales, metal-adjusted net sales and metal pounds sold by segment, in millions. For the metal-adjusted net sales results, net sales for 2010 have been adjusted to reflect the 2011 copper average price of $4.01 per pound (a $0.58 increase compared to the prior period) and the aluminum average price of $1.16 per pound (an $0.11 increase compared to the prior period). Metal-adjusted net sales, a non-GAAP financial measure, are provided herein in order to eliminate the effect of metal price volatility from the comparison of revenues from one period to another. The comparable GAAP financial measure is set forth below. Refer to Item 7 - MD&A - Significant Current Business Trends and Events in the previous discussion of metal price volatility. Net Sales Year Ended Dec 31, 2011 Dec 31, 2010 Amount % Amount % North America $ 2,120.2 36 % $ 1,785.0 37 % Europe and Mediterranean 1,737.9 30 % 1,499.0 31 % ROW 1,950.1 34 % 1,572.0 32 % Total net sales $ 5,808.2 100 % $ 4,856.0 100 % Metal-Adjusted Net Sales Year Ended Dec 31, 2011 Dec 31, 2010 Amount % Amount % North America $ 2,120.2 36 % $ 1,909.7 36 % Europe and Mediterranean 1,737.9 30 % 1,600.7 31 % ROW 1,950.1 34 % 1,722.9 33 % Total metal-adjusted net sales $ 5,808.2 100 % $ 5,233.3 100 % Metal adjustment - (377.3 ) Total net sales $ 5,808.2 $ 4,856.0 Metal Pounds Sold Year Ended Dec 31, 2011 Dec 31, 2010 Pounds % Pounds % North America 317.4 33 % 300.7 33 %Europe and Mediterranean 273.8 28 % 279.1 30 % ROW 384.6 39 % 344.3 37 % Total metal pounds sold 975.8 100 % 924.1 100 % Net sales increased $952.2 million, or 20%, to $5,808.2 million in 2011 from 2010 and metal-adjusted net sales increased $574.9 million, or 11%, in 2011 from 2010. The increase in metal-adjusted net sales of $574.9 million reflects favorable selling price and product mix of $328.0 million, favorable foreign currency exchange rate changes of $147.3 million, higher sales volume of $77.6 million, and incremental net sales of $22.0 million attributable to acquisitions. Volume, as measured by metal pounds sold, increased by 51.7 million pounds, or 6%, in 2011 compared to 2010. Metal pounds sold is provided herein as the Company believes this metric to be a consistent year over year measure of sales volume since it is not impacted by metal prices or foreign currency exchange rate changes. Metal-adjusted net sales in the North America segment increased $210.5 million, or 11%, principally due to favorable selling price and product mix of $164.8 million, higher sales volumes of $34.4 million, favorable foreign currency exchange rate changes of $7.8 million, principally related to the Canadian dollar, and incremental net sales of $3.5 million attributable to acquisitions. Volume, as measured by metal pounds sold, increased by 16.7 million pounds, or 6%, in 2011 compared to 2010. The increase in sales volume is primarily attributable to volume improvement in aerial bare transmission products as well as products primarily used in specialty applications due to increased spending in the transportation sector as well as the market for oil and gas exploration coupled with volume improvement for industrial products. 31-------------------------------------------------------------------------------- Table of Contents Metal-adjusted net sales in the Europe and Mediterranean segment increased $137.2 million, or 9%, in 2011 compared to 2010 due to favorable selling price and product mix of $88.6 million, favorable foreign currency exchange rate changes of $71.3 million, primarily due to a stronger Euro relative to the U.S. dollar, and incremental net sales attributable to the results of acquired businesses of $18.1 million partially offset by lower sales volume of $40.8 million. Volume, as measured by metal pounds sold, decreased by 5.3 million pounds, or 2%, in 2011 compared to 2010. Economic conditions in Europe remained weak, influencing demand across a broad spectrum of products and regions, particularly in the Iberia region as well as in Algeria partially offset by the Company's project related activities in Germany and France. Metal-adjusted net sales in the ROW segment increased $227.2 million, or 13%, due to higher sales volume of $84.1 million, favorable selling price and product mix of $74.5 million, and favorable foreign currency exchange rate changes of $68.2 million, primarily due to the strengthening of certain currencies in Central and South America relative to the U.S. dollar. Volume, as measured by metal pounds sold, increased by 40.3 million pounds, or 12%, in 2011 compared to 2010 which is primarily attributable to increase in demand for high-voltage aerial transmission products and low-and medium-voltage distribution cables in Brazil as well as infrastructure investment in Central America. Cost of Sales Cost of sales increased $897.8 million, or 21%, from 2010. The increase in 2011 as compared to 2010 was principally driven by the increase in volume sold of 6%, the increase in raw material costs, including a 17% increase in the average cost of copper and a 10% increase in the average cost of aluminum as well as an increase in other raw material costs, and an increase due to currency translation of 3%. As noted in Item 1 - Business the Company's products are raw material intensive with copper and aluminum comprising the major cost components for cable products. At current metal prices, material costs are approximately 85% of total product costs with copper and aluminum metal costs comprising approximately 60% of total product cost for the year ended December 31, 2011. Gross Profit Gross profit increased $54.4 million, or 10%, in 2011 from 2010. The increase in gross profit was primarily due to an increase in volume in North America and ROW and a shift in product mix and pricing in North America. Gross profit as a percentage of sales was 10% and 11% in 2011 and 2010, respectively. Despite volume and related revenue increases for the year gross profit did not increase as a percentage of sales. In the first half of the year gross profit as a percentage of sales increased due to selling prices rising faster than the average cost of metal prices which was offset in the latter part of the year due to the increased volatility and declines in metal prices. Selling, General and Administrative Expense Selling, general and administrative expense increased $47.6 million, or 14%, in 2011 from 2010. The increase in SG&A is primarily a result of incremental investment in resources related to the Company's global sales network and product technology as well as increased costs for new market penetration strategies in 2011 as compared to 2010. The increase in SG&A is also due in part to foreign currency exchange rates in 2011 as compared to 2010 in the amount of $8.7 million. SG&A as a percentage of metal-adjusted net sales was 7% and 6% for 2011 and 2010, respectively. Operating Income The following table sets forth operating income by segment, in millions of dollars. Operating Income Year Ended Dec 31, 2011 Dec 31, 2010 Amount % Amount % North America $ 121.8 57 % $ 96.9 46 % Europe and Mediterranean 30.3 14 % 36.8 18 % ROW 62.5 29 % 74.1 36 % Total operating income $ 214.6 100 % $ 207.8 100 % The increase in operating income for the North America segment of $24.9 million is primarily attributable to benefits from a shift in product mix, as well as a more favorable pricing environment due to an increase in market demand in most product lines, excluding electrical utility distribution products in 2011, as well as increased sales volume. The increases to operating income were partially offset by an increase in SG&A expenses of $11.8 million in 2011 as compared to 2010; the SG&A increases were for the reasons noted above. 32-------------------------------------------------------------------------------- Table of Contents The decrease in operating income for the Europe and Mediterranean segment of $6.5 million was primarily attributable to continued weak demand and pricing due to the economic slowdown in many European end markets, as well as an increase in SG&A expenses of $11.0 million in 2011 as compared to 2010; the SG&A increases were for the reasons noted above. Partially offsetting these negative impacts were the current year benefit of European targeted cost reduction efforts, which include, among other actions, personnel reductions which resulted in a charge of $19.5 million recorded in 2010. The decrease in operating income for the ROW segment of $11.6 million is primarily attributable to unfavorable impacts in Thailand due to the country's significant flooding in the second half of 2011, as well as unfavorable product mix and price in Thailand and Chile. The decrease in operating income was also due to an increase in SG&A expenses of $24.8 million in 2011 as compared to 2010 for the reasons noted above. Partially offsetting the decrease in operating income in 2011was the impact of increased volume in 2011 in Central America. Other Income (Expense) Other income (expense) primarily includes foreign currency transaction gains or losses, which result from changes in exchange rates between the designated functional currency and the currency in which a transaction is denominated as well as gains and losses on derivative instruments that are not designated as cash flow hedges. During 2011 and 2010 the Company recorded a $31.7 million loss and a $28.1 million loss, respectively. For 2011, other expense was primarily attributable to other expense of $24.4 million attributable to foreign currency transaction gains and losses which resulted from changes in exchange rates in the various countries in which the Company operates, primarily Africa, South America, and Mexico, and losses of $6.1 million on derivative instruments which were not designated as cash flow hedges. For 2010, other expense was primarily attributable to the $29.8 million Venezuelan currency devaluation, as well as other income of $7.7 million attributable to foreign currency transaction gains and losses of which resulted from changes in exchange rates in the various countries in which the Company operates and losses of $6.0 million on derivative instruments which were not designated as cash flow hedges. On January 8, 2010, the Venezuelan government announced the devaluation of its currency, BsF, and established a two-tier foreign exchange structure. Due to the impact of the devaluation of its currency by the Venezuelan government, the Company recorded a pre-tax charge of $29.8 million in the first quarter of 2010 related to the remeasurement of the local balance sheet on the date of the devaluation at the official non-essential rate. The functional currency of the Company's subsidiary in Venezuela is the U.S. dollar. Effective January 1, 2011, the Central Bank of Venezuela and the Ministry of Finance published an amendment to Convenio Cambiario No. 14 (the Exchange Law), whereby the official exchange rate was set at 4.30 BsF per U.S. dollar, eliminating the 2.60 BsF per U.S. dollar rate previously established for essential goods in the first quarter of 2010. Thereafter, the Company can only import copper at the 4.30 BsF per U.S. dollar rate. In the year ended December 31, 2011, the Company purchased 19.1 million pounds of copper at the 4.30 BsF per U.S. dollar rate recording no foreign currency gains or losses. In the second quarter of 2010, the Company received authorization to purchase dollars to import copper at the official exchange rate for essential goods of 2.60 BsF per U.S. dollar. In 2010, the Company recorded $16.6 million in foreign exchange gains related to transactions completed at the 2.60 BsF per U.S. dollar essential rate. Copper imports prior to the approval were imported at the parallel rate of about 6.88 BsF per U.S. dollar, which was closed on June 9, 2010. In 2010, the Company recorded $10.7 million in foreign exchange losses related to copper imports at this parallel rate. Refer to Item 7 - MD&A - Venezuelan Operations for additional detail. Interest Expense Net interest expense increased to $91.5 million in 2011 from $71.6 million in 2010. Interest expense increased primarily due to additional debt used to fund higher working capital requirements related to increased demand and higher metal costs. Also, in the third quarter of 2011, the Company expensed $1.3 million in unamortized fees and expenses related to the Terminated Credit Facility. Tax Provision The Company's effective tax rate for 2011 and 2010 was 42.2% and 42.5%, respectively. The Company's 2011 effective tax rate reflects the adverse impact of valuation allowances recorded against deferred tax assets in foreign jurisdictions, partially offset by tax benefits recognized for uncertain tax positions due to statute of limitations expirations and tax audit settlements. The Company's 2010 effective tax rate was adversely impacted by the nondeductible Venezuelan devaluation loss and valuation allowances recorded against deferred tax assets in certain foreign jurisdictions, partially offset by the recognition of tax benefits related to uncertain tax positions that were primarily due to statute of limitations expirations and tax audit settlements. Preferred Stock Dividends During 2011 and 2010, the Company accrued and paid $0.3 million in dividends on its Series A preferred stock. 33-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The Company maintains a strong cash position as evidenced by the Company's ability to generate substantial cash from operations and access to capital markets at competitive rates. Cash flows from operations as well as borrowings under our Revolving Credit Facility provide the primary source for financing operating expenses and other short term liquidity needs. As necessary the Company may supplement additional debt to fund other working capital needs, debt and interest payments, as well as discretionary investment in internal product development, acquisitions, Series A preferred stock dividends, repurchase of common stock and taxes. The overall cash position of the Company reflects the business results and a global cash management strategy that incorporates liquidity management, economic factors, and tax considerations. The Company's short term borrowings vary by period based on the Company's working capital requirements which is dependent on incremental demand for products and changes in the price of copper, aluminum, and other raw material cost inputs. At December 31, 2012, current assets exceeded current liabilities by $1,240.2 million. Based upon historical experience, the cash on its balance sheet and the expected availability of funds under its current credit facilities, the Company believes its sources of liquidity will be sufficient to enable it to meet funding requirements for working capital, capital expenditures, debt repayment, salaries and related benefits, interest, Series A preferred stock dividends and taxes for the next twelve months and foreseeable future. The Company maintains approximately $977.5 million of excess availability under its various credit facilities around the world. The Company's North American operations generally borrows and repays under our Revolving Credit Facility multiple times per week for working capital needs; borrowing on a short term basis is the most effective method to reduce interest costs based on the terms of the agreement. The Company's European operations participate in accounts payable confirming arrangements with several European financial institutions to address working capital requirements in the business. The Company negotiates payment terms with suppliers of generally 180 days in Europe and submit invoices to the financial institutions with instructions for the financial institutions to transfer funds from European operations' accounts on the due date (on day 180) for the trade payables due. At December 31, 2012, the arrangements had a maximum availability limit of the equivalent of approximately $446.9 million, of which approximately $317.6 million was drawn. The Company's ROW operations utilize short term credit facilities for working capital purposes. General Cable Corporation is a holding company with no operations of its own. All of the Company's operations are conducted, and net sales are generated, by its subsidiaries and investments. Accordingly, the Company's cash flow comes from the cash flows of its global operations. The Company's ability to use cash flow from its international operations, if necessary, has historically been adversely affected by limitations on the Company's ability to repatriate such earnings tax efficiently. As of December 31, 2012, approximately 76% of cash and cash equivalents were held outside of the U.S. by our foreign subsidiaries compared with 98% as of December 31, 2011. If these funds are needed for the Company's operations in the U.S., the Company would be required to accrue and pay U.S. taxes to repatriate these funds. However, the Company's intent is to permanently reinvest these funds outside of the U.S. and current plans do not demonstrate a need to repatriate them to fund U.S. operations. In addition, our Revolving Credit Facility provides the Company flexibility in financing operating expenses and any other short term liquidity needs of our U.S. operations. In particular, Venezuela has foreign exchange and price controls which have historically limited the Company's ability to convert bolivars to U.S. dollar and transfer funds out of Venezuela. In Venezuela, government restrictions on the transfer of cash out of the country have limited the Company's ability to repatriate cash. Approximately 23% and 21% of the consolidated cash balance as of December 31, 2012 and December 31, 2011, respectively, was held in Venezuela. The proportion of operating cash flows attributable to Venezuela in 2012 as compared to total Company operating cash flows is 18% and 43% for the years ended December 31, 2012 and 2011, respectively. Summary of Cash Flows Operating cash inflow of $272.6 million in 2012 reflects a net working capital source of $94.7 million driven principally by decreases in inventories and receivables of $105.9 million and $35.1 million, respectively. The decrease in inventory is primarily attributable to the impact of lower average metal prices during 2012 as compared to 2011. For the year ended December 31, 2012, copper prices averaged $3.62 per pound (a decrease of $0.39 per pound compared to the same period in 2011) and aluminum prices averaged $1.02 per pound (a decrease of $0.14 per pound as compared to the same period in 2011). Inventory turns remained consistent at 4.3 in 2012 and 4.4 in 2011. The decrease in accounts receivable is primarily attributable to the Company's continued focus on improvement by efficiently managing working capital. Days sales outstanding remained consistent year over year at approximately 70 days. In addition to the net working capital source of cash in the twelve fiscal months of 2012 was $177.9 million of overall net cash inflows related to net income adjusted for depreciation and amortization, amortization on restricted stock awards, foreign currency loss, loss on extinguishment of debt, deferred income tax income, excess tax deficiencies from stock based compensation, convertible debt instrument non cash interest charges, and the loss on the disposal of property. 34-------------------------------------------------------------------------------- Table of Contents Operating cash inflow of $97.8 million in 2011 reflects a net working capital use of $110.2 million driven principally by increases in inventories and receivables of $180.1 million and $53.9 million, respectively, which were partially offset by increases in accounts payable, accrued and other liabilities of $126.8 million. The increase in accounts receivable primarily reflects the increase in selling prices due to the increase in raw material costs. Days sales outstanding has remained constant year over year at about 71 days. The increase in inventory is primarily due to the increase in metal prices throughout the year. Inventory turns increased to 4.4 turns per year in 2011 as compared to 3.9 turns per year in 2010 due to the current year focus on reducing inventory levels by adjusting production. These cash outflows have been partially offset by increases in accounts payable, accrued and other liabilities which were primarily the result of incremental manufacturing activity due to an increase in demand and higher raw material cost inputs. More than offsetting this net working capital use of cash in the twelve fiscal months of 2011 was $208.0 million of overall net cash inflows related to net income adjusted for depreciation and amortization, amortization on restricted stock awards, foreign currency gains (losses), deferred income tax income, excess tax benefits from stock based compensation, convertible debt instrument non cash interest charges, and the gain on the disposal of property. Cash flow used by investing activities was $390.3 million in 2012 principally reflecting the acquisitions of Alcan Cable North America, Alcan Cable China, Procables and Prestolite of $286.5 million and capital expenditures of $108.6 million. The Company anticipates capital spending to be approximately $80 million to $100 million in 2013. Financing activities generated $289.6 million of cash inflows in 2012 as compared to cash outflows of $8.5 million in 2011. The increase is principally due to the issuance of the $600.0 million 5.75% Senior Notes partially offset by the settlement of long term debt of $217.7 million. The Company evaluates factors such as future operating cash flow requirements, other cash flow expectations, investment and financing strategic plans and the overall cost of capital to determine the appropriate levels of short and long term debt to maintain. Refer to Item 7 - MD&A - Debt and Other Contractual Obligations (section below) for details. Debt and Other Contractual Obligations The Company had outstanding debt obligations of $1,450.1 million as of December 31, 2012 and maintained approximately $977.5 million of excess availability under its various credit facilities around the world. The Company utilizes short and long term debt to address working capital needs, debt repayments, and interest as well as discretionary investments in internal product development, acquisitions, Series A preferred stock dividends, repurchase of common stock and taxes. Short-term liquidity and working capital needs are generally supported through operating cash flows. The Company maintains ratings on its public debt; therefore, the Company has and expects to continue to obtain market rates on any new borrowings. On September 25, 2012, the Company completed the issuance and sale of $600.0 million in aggregate principal amount of new senior unsecured notes (the "5.75% Senior Notes"). The 5.75% Senior Notes are jointly and severally guaranteed by each of the Company's current and future U.S. subsidiaries that is a borrower or a guarantor under the Company's Revolving Credit Facility or certain of the Company's or the guarantors' other indebtedness. The Company used the proceeds of the 5.75% Senior Notes to redeem all of its outstanding $200.0 million of 7.125% Senior Fixed Rate Notes that were to mature in April 2017. The Company intends to use the balance of the proceeds to (i) purchase or redeem its 0.875% Convertible Notes through a possible tender offer, purchases or payment at maturity, and (ii) general corporate purposes, which may include repayment of borrowings under its Revolving Credit Facility. On July 21, 2011, the Company entered into a $400 million Revolving Credit Facility, which was subsequently amended to, among other things, increase the Revolving Credit Facility to $700 million, $630 million of which may be borrowed by the U.S. borrower under the Revolving Credit Facility and $70 million of which may be borrowed by the Canadian borrower under the Revolving Credit Facility. The Revolving Credit Facility replaced the Company's prior $400 million Terminated Credit Facility, which was set to mature in July 2012. The Revolving Credit Facility contains restrictions in areas consistent with the Terminated Credit Facility, including limitations on, among other things, distributions and dividends, acquisitions and investments, indebtedness, liens and affiliate transactions. In the aggregate, however, the restrictions in the Revolving Credit Facility provide the Company greater flexibility than those under the Terminated Credit Facility, and generally only apply in the event that the Company's availability under the Revolving Credit Facility falls below certain specific thresholds. Failure to comply with any of the covenants, financial tests and ratios required by the Company's existing or future debt obligations could result in a default under those agreements and under other agreements containing cross-default provisions, as defined in the Company's Revolving Credit Facility, 0.875% Senior Convertible Notes, Subordinated Convertible Notes, Senior Floating Rate Notes, 5.75% Senior Notes and various other credit facilities maintained by the Company's restricted subsidiaries. A default would permit lenders to cease making further extensions of credit, accelerate the maturity of the debt under these agreements and foreclose upon any collateral securing that debt. Indebtedness under the Company's Revolving Credit Facility is secured by: (a) for US borrowings under the facility, a first priority security interest in substantially all of the Company's domestic assets and, (b) for Canadian borrowings, a first priority security interest in substantially all of the Company's domestic and Canadian assets. In addition, the lenders under the Company's Revolving Credit Facility have received a pledge of (i) 100% of the equity interests in substantially all of the Company's domestic subsidiaries, and (ii) 65% of the voting equity interests in and 100% of the non-voting 35-------------------------------------------------------------------------------- Table of Contents equity interests in certain of the Company's foreign subsidiaries, including the Company's Canadian subsidiaries. The Company also has incurred secured debt in connection with some of its European operations. The lenders under these European secured credit facilities also have liens on assets of certain of our European subsidiaries. As a result of these pledges and liens, if the Company fails to meet its payment or other obligations under any of its secured indebtedness, the lenders under the applicable credit agreement would be entitled to foreclose on substantially all of the Company's assets and liquidate these assets. Broadly, cross-default provisions, would permit lenders to cause such indebtedness to become due prior to its stated maturity in the event a default remains unremedied for a period of time under the terms of one or more financing agreements, a change in control or a fundamental change. As of December 31, 2012 and 2011, the Company was in compliance with all material debt covenants. The Company's defined benefit plans at December 31, 2012 and 2011 were underfunded by $163.7 million and $114.7 million, respectively. The Company recorded an after-tax loss of $21.4 million in 2012 and an after-tax loss of $15.6 million in 2011 to accumulated other comprehensive income. The Company estimates its 2013 pension expense for its defined benefit pension plans will be approximately $21.5 million and cash contributions are expected to be approximately $9.7 million. In 2012, pension expense was approximately $20.1 million and cash contributions were approximately $8.5 million. The Company anticipates being able to meet its obligations as they come due based on historical experience and the expected availability of funds under its current credit facilities. The Company's contractual obligations and commercial commitments as of December 31, 2012 (in millions of dollars) are summarized below: Payments Due by Period Less than 1 - 3 4 - 5 After 5 Contractual obligations (1,2): Total 1 Year Years Years Years Total debt (excluding capital leases) $ 1,445.9 $ 509.4 $ 156.9 $ 2.6 $ 777.0 Convertible debt at maturity (3) 283.4 20.4 - - 263.0 Capital leases 4.2 1.8 2.3 0.1 - Interest payments on Senior Floating Rate Notes 4.4 3.5 0.9 Interest payments on 0.875% Senior Convertible Notes 2.8 2.8 Interest payments on 5.75% Senior Notes 336.4 34.5 69.0 69.0 163.9 Interest payments on Subordinated Convertible Notes 240.1 19.3 38.6 38.6 143.6 Interest payments on Spanish term loans 0.6 0.5 0.1 Operating leases (4) 170.9 41.0 65.3 46.0 18.6 Purchase obligations (5) 37.7 37.7 - - - Preferred stock dividend payments 0.3 0.3 - - - Defined benefit pension obligations (6) 194.9 17.7 36.0 37.5 103.7 Postretirement benefits 5.9 0.9 1.4 1.2 2.4 Unrecognized tax benefits, including interest and penalties (7) - - - - - Total $ 2,727.5 $ 689.8 $ 370.5 $ 195.0 $ 1,472.2 (1) This table does not include interest payments on General Cable's revolving credit facilities because the future amounts are based on variable interest rates and the amount of the borrowings under the Revolving Credit Facility and Spanish Credit Facility fluctuate depending upon the Company's working capital requirements. (2) This table does not include derivative instruments as the ultimate cash outlays cannot be reasonably predicted. Refer to Note 10 - Financial Instruments and Item 7A - Quantitative and Qualitative Disclosures about Market Risk for additional information. (3) Represents the current debt discount on the Company's 0.875% Senior Convertible Notes and Subordinated Convertible Notes as a result of adopting provisions of ASC 470 - Debt. Refer to Note 2 - Summary of Significant Accounting Policies for additional information. (4) Operating lease commitments are described under "Off Balance Sheet Assets and Obligations." (5) Represents our firm purchase commitments on our forward pricing agreements as disclosed in Note 10 - Financial Instruments. (6) Defined benefit pension obligations reflect actuarially projected benefit payments which may differ from funding requirements based on local laws and regulations. (7) Unrecognized tax benefits of $85.8 million have not been reflected in the above table due to the inherent uncertainty as to the amount and timing of settlement, which is contingent upon the occurrence of possible future events, such as examinations and determinations by various tax authorities. Off Balance Sheet Assets and Obligations General Cable has entered into various leases related principally to certain administrative, manufacturing and distribution facilities and transportation equipment. Future minimum rental payments required under non-cancelable lease agreements at December 31, 2012 were as follows: 2013 - $41.0 million, 2014 - $33.5 million, 2015 - $31.8 million, 2016 - $27.4 million, 2017 - $18.6 million and thereafter $18.6 million. Rental expense recorded in income from continuing operations was $29.8 million, $20.7 million and $19.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. As of December 31, 2012, the Company had $70.5 million in letters of credit, $285.9 million in various performance bonds and $193.5 million in other guarantees. Other guarantees include bank guarantees and advance payment bonds. These letters of credit, 36-------------------------------------------------------------------------------- Table of Contents performance bonds and guarantees are periodically renewed and are generally related to risk associated with self-insurance claims, defined benefit plan obligations, contract performance, quality and other various bank and financing guarantees. Advance payment bonds are often required by customers when we obtain advance payments to secure the production of cable for long term contracts. The advance payment bonds provide the customer protection on their deposit in the event that the Company does not perform under the contract. See "Liquidity and Capital Resources" for excess availability under the Company's various credit borrowings. Environmental Matters The Company's expenditures for environmental compliance and remediation amounted to approximately $3.5 million, $3.3 million and $3.7 million in 2012, 2011 and 2010, respectively. In addition, certain of the Company's subsidiaries have been named as potentially responsible parties in proceedings that involve environmental remediation. The Company had accrued $1.9 million at December 31, 2012 for all environmental liabilities. Environmental matters are described in Item 1 - Business, Item 3 - Legal Proceedings and Note 18 - Commitments and Contingencies. While it is difficult to estimate future environmental liabilities, the Company does not currently anticipate any material adverse effect on results of operations, cash flows or financial position as a result of compliance with federal, state, local or foreign environmental laws or regulations or remediation costs. Legal Matters Refer to Note 18 - Commitments and Contingencies for review of our litigation contingencies. Critical Accounting Policies and Estimates The Company's Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. A summary of significant accounting policies is provided in Note 2 - Summary of Significant Accounting Policies. The application of these policies requires management to make estimates and judgments that affect the amounts reflected in the consolidated financial statements. Management bases its estimates and judgments on historical experience, information that is available to management about current events and actions the Company may take in the future and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The most critical judgments impacting the financial statements include those policies described below. In addition, significant estimates and judgments include allowances for accounts receivable and deferred income taxes; legal, environmental, and asbestos liabilities; inventory costing and valuation; share-based compensation; uncertain tax positions; assets and obligations related to pension and other postretirement benefits; goodwill and intangible valuations; financial instruments; and revenue recognized under the percentage-of-completion method. There can be no assurance that actual results will not differ from these estimates. Revenue Recognition The majority of the Company's revenue is recognized when goods are shipped to the customer, title and risk of loss are transferred, pricing is fixed or determinable and collectability is reasonably assured. Most revenue transactions represent sales of inventory. A provision for payment discounts, product returns, warranty and customer rebates is estimated based upon historical experience and other relevant factors and is recorded within the same period that the revenue is recognized. The Company has a portion of long-term product installation contract revenue that is recognized based on the percentage-of-completion method generally based on the cost-to-cost method if there are reasonably reliable estimates of total revenue, total cost, and the extent of progress toward completion; and there is an enforceable agreement between parties who can fulfill their contractual obligations. Management reviews contract price and cost estimates periodically as the work progresses and reflects adjustments proportionate to the percentage-of-completion to income in the period when those estimates are revised. For these contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined. Accounts Receivable The accounts receivable balance is recorded at the stated amount, less allowances for doubtful accounts, price discounts, and returns. At the time of the sale and at each quarter, the Company evaluates the accounts receivable balance to determine a best estimate for doubtful accounts, price discounts, and returns. The Company reviews general historical trends in the account, customer overdue balances, high risk accounts that have been specifically identified based on historical and current customer patterns, contractual obligations, and current economic conditions to determine an estimate for these allowances. Inventory Costing and Valuation The Company values approximately 84% of the Company's inventory using the average cost method and all remaining inventories are valued using the first-in, first-out (FIFO) method. On a quarterly basis, the Company evaluates its carrying value of inventory to determine if a lower of cost or market adjustment is required. To determine if a lower of cost or market adjustment is required the Company evaluates evidence to indicate if the cost will be recovered with an approximately normal profit upon sale in the ordinary course of business based on product groupings within the reportable segments. Metal costs, particularly copper and 37-------------------------------------------------------------------------------- Table of Contents aluminum costs, are significant to our overall costs in inventory. Factors such as technological innovations, future demand trends, pricing environment, inventory levels and turns and specific identification of inventory items, such as regulatory-related changes or changes in engineering or material, will be analyzed in the lower of cost or market and obsolete and slow moving inventory provisions. Pension Accounting General Cable provides retirement benefits through contributory and non-contributory qualified and non-qualified defined benefit pension plans covering eligible domestic and international employees as well as through defined contribution plans and other postretirement benefits. Benefits under General Cable's qualified U.S. defined benefit pension plan generally are based on years of service multiplied by a specific fixed dollar amount, and benefits under the Company's qualified non-U.S. defined benefit pension plans generally are based on years of service and a variety of other factors that can include a specific fixed dollar amount or a percentage of either current salary or average salary over a specific period of time. The amounts funded for any plan year for the qualified U.S. defined benefit pension plan are neither less than the minimum required under federal law nor more than the maximum amount deductible for federal income tax purposes. General Cable's non-qualified unfunded U.S. defined benefit pension plans include a plan that provides defined benefits to select senior management employees beyond those benefits provided by other programs. The Company's non-qualified unfunded non-U.S. defined benefit pension plans include plans that provide retirement indemnities to employees within the Company's European and Mediterranean and ROW business. Pension obligations for the non-qualified unfunded defined benefit pension plans are provided for by book reserves and are based on local practices and regulations of the respective countries. General Cable makes cash contributions for the costs of the non-qualified unfunded defined benefit pension plans as the benefits are paid. Benefit costs for the defined benefit pension plans sponsored by General Cable are determined based principally upon certain actuarial assumptions, including the discount rate and the expected long-term rate of return on plan assets. The weighted-average discount rate used to determine the net pension expense for 2012 was 4.70% for the U.S. defined benefit pension plans. The weighted-average discount rate as of December 31, 2012 that was used to determine benefit obligations was 4.10% for the U.S. defined benefit pension plans, and was determined based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency which are expected to be available during the period to maturity of the projected pension benefit obligations and based on information received from actuaries. The weighted-average discount rate used to determine the net pension cost for 2012 was 5.10% for the non-U.S. defined benefit pension plans. Non-U.S. defined benefit pension plans followed a similar evaluation process based on financial markets in those countries where General Cable provides a defined benefit pension plan, and the weighted-average discount rate used to determine benefit obligations for General Cable's non-U.S. defined benefit pension plans was 4.20% as of December 31, 2012. General Cable's expense under both U.S. and non-U.S. defined benefit pension plans is determined using the discount rate as of the beginning of the fiscal year, and therefore, 2013 expense for the defined benefit pension plans will be based on the weighted-average discount rate of 4.10% for U.S. plans and 4.20% for non-U.S. plans. The weighted-average long-term expected rate of return on assets is based on input from actuaries, including their review of historical 10-year, 20-year, and 25-year rates of inflation and real rates of return on various broad equity and bond indices in conjunction with the diversification of the asset portfolio. The Company's overall investment strategy is to diversify its investments for the qualified U.S. defined benefit pension plan based on an asset allocation assumption of 65% allocated to equity investments, with an expected real rate of return of 8%, and 35% to fixed-income investments, with an expected real rate of return of 2%, and an assumed long-term rate of inflation of 3%. Equity investments primarily include investments in large-cap and mid-cap companies primarily located in the United States. The determination of pension expense for the qualified defined benefit pension plans is based on the fair market value of assets as of the measurement date. Investment gains and losses are recognized in the measurement of assets immediately. Such gains and losses will be amortized and recognized as part of the annual benefit cost to the extent that unrecognized net gains and losses from all sources exceed 10% of the greater of the projected benefit obligation or the market value of assets. The Company evaluates its actuarial assumptions at least annually, and adjusts them as necessary. The Company uses a measurement date of December 31 for all of its defined benefit pension plans. In 2012, pension expense for the Company's defined benefit pension plans was $20.1 million. Based on a weighted-average expected rate of return on plan assets of 6.70%, a weighted-average discount rate of 5.00% and various other assumptions, the Company estimates its 2013 pension expense for its defined benefit pension plans will increase to approximately $21.5 million. A 1% decrease in the assumed discount rate would increase pension expense by approximately $4.1 million. Future pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the populations participating in the plans. In the event that actual results differ from the actuarial assumptions, the funded status of the defined benefit pension plans may change and any such change could result in a charge or credit to equity and an increase or decrease in future pension expense and cash contributions. The Company's investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk are described in further detail in Note 12 - Employee Benefit Plans. 38-------------------------------------------------------------------------------- Table of Contents Income Taxes The Company is subject to income tax in numerous United States federal, state, and foreign jurisdictions. Significant judgments and estimates are inherent in determining the Company's consolidated income tax expense, current tax payable, deferred tax assets and liabilities, and liabilities for uncertain tax positions. Future events such as changes in business conditions, tax legislation, tax audit resolutions, or foreign earnings repatriation plans could materially impact these estimates and the Company's tax position. Deferred tax assets and liabilities are determined based on the differences between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. At December 31, 2012, the Company had recorded a net deferred tax liability of $172.2 million ($38.9 million net current deferred tax asset less $211.1 million net long term deferred tax liability). The valuation of deferred tax assets is dependent on, among other things, the ability of the Company to generate a sufficient level of future taxable income. In estimating future taxable income, the Company has considered both positive and negative evidence, such as historical and forecasted results of operations, including prior losses, and has considered the implementation of prudent and feasible tax planning strategies. As of December 31, 2012, the Company recorded a valuation allowance of $77.8 million to reduce deferred tax assets to the amount judged more likely than not to be realized. The Company has and will continue to review on a quarterly basis its assumptions and tax planning strategies, and, if the amount of the estimated realizable deferred tax assets is less than the amount currently on the balance sheet, the Company will reduce its deferred tax asset, recognizing a non-cash charge against reported earnings. Likewise, if the Company determines that a valuation allowance against a deferred tax asset is no longer appropriate, the adjustment to the valuation allowance would reduce income tax expense. The Company operates in multiple jurisdictions with complex tax policies and regulations. In certain jurisdictions, the Company has taken tax positions that it believes are supportable, but which could be subject to challenge by the tax authorities. These tax positions are evaluated and liabilities for uncertain tax positions are established in accordance with the ASC 740- Income Taxes tax accounting guidance. The status of uncertain tax positions is reviewed in light of changing facts and circumstances, such as tax audits, rulings, and case law, and the related liabilities are adjusted accordingly. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line item in the consolidated balance sheet. Long-Lived Assets, Goodwill and Impairment The valuation and classification of long-lived assets and the assignment of useful depreciable and amortizable lives and salvage values involve significant judgments and the use of estimates. The testing of these long-lived assets for impairment also requires a significant amount of judgment and assumptions, particularly as it relates to identification of asset groups and the determination of fair market value. The Company periodically evaluates the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company evaluates events or changes in circumstances based on historical operating results, forecasts, general and industry trends and anticipated cash flows. Impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in earnings. The Company also continually evaluates the estimated useful lives of all long-lived assets and, when warranted, revises such estimates based on current events. Goodwill and intangible assets with indefinite useful lives are not amortized, but are reviewed at least annually for impairment. The Company completes its annual impairment test within the fourth quarter of each year. In addition, the Company evaluates the carrying value between the valuations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Events or circumstances may include, but are not limited to, a significant change in legal factors or in the business climate, adverse action or assessment by a regulator, unanticipated competition, loss of key personnel, possible sale or disposal of a reporting unit or a significant portion of a reporting unit, significant changes in financial projections or significant changes in the market capitalization. During the evaluation of impairment, the Company compares the fair value of the reporting unit to its carrying amount to determine if there is potential goodwill impairment. Our impairment testing for goodwill and indefinite-lived intangibles is performed separately. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of the goodwill. The impairment test for the Company's indefinite-lived intangible assets involves comparing the fair value of the intangibles to their carrying values. If the carrying amount of an intangible asset with an indefinite life exceeds its fair value, an impairment loss would be recognized in the amount equal to the excess. If this fair value is less than the reporting unit's carrying value, a second step is required to measure the amount of impairment, if any. If the fair value of a reporting unit exceeds its carrying value, the second step is not required. The Company's market capitalization is a consideration during the annual impairment test. The reporting unit comprising the goodwill is only a portion of the entire company. The company must apply assumptions to compare the Company's market 39-------------------------------------------------------------------------------- Table of Contents capitalization to the reporting unit being assessed. First, a portion of the market capitalization is allocated to the reporting unit. This value is then increased by a control premium. To develop the control premium assumption, management considered other recent transactions within the industry and the control premium realized in those transactions. The Company performed the first step of the goodwill impairment assessment. In Step 1 of the goodwill impairment test, the Company compared the fair value of the reporting unit, the entities purchased in the October 31, 2007 PDIC acquisition, to its carrying amount, including goodwill of $171.8 million. Based on the results of the valuation, the fair value of the reporting unit exceeded the carrying value; therefore, it was determined that no impairment existed. Step 2 was not required. To determine the fair value of the reporting unit, the Company employs an income and market-based approach with each being weighted equally. Under the income approach, the Company uses a discounted cash flow method to calculate the fair value based on the present value of estimated future cash flows. Assumptions used in the discounted cash flow method, such as forecasted operating results, expected growth rates, working capital needs, tax rates, and cost of capital, are based on the current market conditions and are consistent with internal management projections. The cost of capital rate selected is based on consideration of the risks inherent in the investment and market rates of return available from alternative investments of similar type and quality as of the valuation date. The guideline public company method is used for the market approach. The approach provides an estimate of value using multiples of earnings derived from the market values of publicly traded companies in the cable and wire industry. In addition to the selection of guideline companies, the market approach includes an analysis of the Company's financial and operating performance, risk, profitability, and growth as compared to the reporting unit. As noted, our annual impairment test for both goodwill and indefinite lived intangibles assets indicated there was no impairment. While the Company believes that the assumptions and estimates utilized in the testing are appropriate, multiples of earnings, future changes in judgments, assumptions and estimates that are used in our annual impairment testing, including discount and tax rates, future cash flow projections, or the Company's stock price, could result in significantly different estimates of fair value. For the 2012 impairment analysis, the Company used a discount rate of 12% and a residual growth rate of 5%, which is consistent with the assumptions used in 2011. The discount rate remained consistent as the business or economic fundamentals impacting the reporting unit are consistent with the prior year. The residual growth rate was consistent with the rate utilized in the 2011 impairment analysis due to consistent expected long-term GDP growth for countries in which the reporting unit operates. As noted, changes in these estimates and assumptions could materially affect the results of Step 1 of the goodwill impairment tests. For example, an increase in the discount rate or a decrease in the residual growth rate of 100 basis points would result in a decrease to the fair value of $76 million and $33 million, respectively. The fair value would still exceed the carrying value if these changes were made when employing an income and market-based approach. Overall, a decrease of 5% in the estimated fair value of any of the Company's reporting units would not result in an impairment. At December 31, 2012, the Company's market capitalization is less than the Company's net assets but consistent with the market capitalization at the goodwill impairment testing performed as of October 31, 2012; therefore, no additional impairment indicators were noted. Share-Based Compensation There are certain employees with various forms of share-based payment awards for which the Company recognizes compensation costs for these awards based on their fair values. The fair values of certain awards are estimated on the grant date using the Black-Scholes option pricing formula, which incorporates certain assumptions regarding the expected term of an award and expected stock price volatility. The Company will develop the expected term assumptions based on the vesting period and contractual term of an award, historical exercise and post-vesting cancellation experience, stock price history, plan provisions that require exercise or cancellation of awards after employees terminate, and the extent to which currently available information indicates that the future is reasonably expected to differ from past experience. The Company develops the expected volatility assumptions based on the monthly historical price data from the Company's common stock and other economic data trended into future years. After calculating the aggregate fair value of an award, the Company uses an estimated forfeiture rate to discount the amount of share-based compensation costs to be recognized in the operating results over the service period of the award. The Company develops the forfeiture assumption based on its historical pre-vesting cancellation experience. Key assumptions are described in further detail in Note 14 - Share-Based Compensation. New Accounting Standards A discussion of recently issued accounting pronouncements is described in Note 2 - Summary of Significant Accounting Policies, in Item 8 - Financial Statements and Supplementary Data of this Report, and we incorporate such discussion in this MD&A by reference and make it a part hereof. Venezuelan Operations On January 8, 2010, the Venezuelan government announced the devaluation of its currency, the BsF, and established a two-tier foreign exchange structure. The official exchange rate for essential goods (food, medicine and other essential goods) was adjusted from 2.15 BsF per U.S. dollar to 2.60 BsF per U.S. dollar. The official exchange rate for non-essential goods was adjusted from 2.15 BsF per U.S. dollar to 4.30 BsF per U.S. dollar. The Company remeasures the financial statements of its Venezuelan subsidiary 40-------------------------------------------------------------------------------- Table of Contents at the rate at which the Company expects to remit dividends, which is 4.30 BsF per U.S. dollar. Due to the impact of the devaluation of its currency by the Venezuelan government, the Company recorded a pre-tax charge of $29.8 million in the first quarter of 2010 related to the remeasurement of the local balance sheet on the date of the devaluation at the official non-essential rate. In the second quarter of 2010, the Company received authorization to purchase dollars to import copper at the official exchange rate for essential goods of 2.60 BsF per U.S. dollar. The Company recorded $16.6 million in foreign exchange gains related to transactions completed at the 2.60 BsF per U.S. dollar essential rate. Copper imports prior to the approval were imported at the parallel rate of about 6.88 BsF per U.S. dollar, which was closed on June 9, 2010. In 2010, the Company recorded $10.7 million in foreign exchange losses related to copper imports at this parallel rate. Effective January 1, 2011, the Central Bank of Venezuela and the Ministry of Finance published an amendment to Convenio Cambiario No. 14 (the Exchange Law), whereby the official exchange rate was set at 4.30 BsF per U.S. dollar, eliminating the 2.60 BsF per U.S. dollar rate previously established for essential goods in the first quarter of 2010. Thereafter, the Company can only import copper at the 4.30 BsF per U.S. dollar rate. In the year ended December 31, 2012 and December 31, 2011, the Company purchased 21.2 million pounds and 19.1 million pounds of copper at the 4.30 BsF per U.S. dollar rate recording no foreign currency gains or losses, respectively. At December 31, 2012 and 2011, the Company's total assets in Venezuela were $348.2 million and $286.4 million and total liabilities were $108.2 million and $65.9 million, respectively. At December 31, 2012 and 2011, included within total assets were BsF denominated monetary assets of $202.2 million and $138.3 million, which consisted primarily of $142.1 million and $92.9 million of cash, and $56.9 million and $42.2 million of accounts receivable, respectively. At December 31, 2012 and 2011, included within total liabilities were BsF denominated monetary liabilities of $73.2 million and $31.1 million, which consisted primarily of accounts payable and other accruals. All monetary assets and liabilities were remeasured at 4.30 BsF per U.S. dollar at December 31, 2012. Sales in Venezuela were 4% of our consolidated net sales for the year ended December 31, 2012 and 2011. Operating income in Venezuela was 29% and 20% of our consolidated operating income for the year ended December 31, 2012 and 2011, respectively. For the year ended December 31, 2012, Venezuela's sales and cost of goods sold were approximately 98% and 39% BsF denominated and approximately 2% and 61% U.S. dollar denominated, respectively. For the year ended December 31, 2011, Venezuela's sales and cost of goods sold were approximately 92% and 30% BsF denominated and approximately 8% and 70% U.S. dollar denominated, respectively. A 10% increase (decrease) in the official exchange rate would decrease (increase) Venezuela's sales and cost of goods sold on an annual basis by approximately $21.2 million and approximately ($6.0 million), respectively. During the years ended December 31, 2012 and 2011, the Company settled $83.3 million and $62.8 million of U.S. dollar denominated intercompany payables and accounts payable in Venezuela, respectively. For the year ended December 31, 2012 and December 31, 2011, all transactions were settled at the 4.30 BsF per U.S. dollar rate. For the year ended December 31, 2010, approximately 68% were settled at the essential rate of 2.60 BsF per U.S. dollar and 32% were settled at the parallel rate which averaged 6.88 BsF per U.S. dollar between January 1, 2010 and June 8, 2010, the legal period of operation. At December 31, 2012, $35.0 million of requests of U.S. dollars to settle U.S. dollar denominated liabilities remained pending with CADIVI, which we expect will be settled at the 4.30 BsF per U.S. dollar rate. Approximately $19.9 million of the requested settlements are current, $0.4 million have been pending up to 90 days, and $14.7 million have pending over 90 days. Currency exchange controls in Venezuela continue to limit our ability to remit funds from Venezuela. We do not consider the net assets of Venezuela to be integral to our ability to service our debt and operational requirements. The Venezuelan government announced the official exchange rate of its currency would be adjusted from 4.3 BsF per U.S. dollar to 6.3 BsF per U.S. dollar, effective February 13, 2013. There was no impact to the Company's 2012 results of operations or cash flows as a result of this amendment. See Note 24 - Subsequent Events for further information. 41-------------------------------------------------------------------------------- Table of Contents |