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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File Number 001-34420

One Penn Plaza

250 West 34th Street, Suite 4125

New York, NY 10119

(Address of principal executive offices, including zip code)

(212) 798-8122

(Registrant’s telephone number, including area code)

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

Title of Each Class	Name of Each Exchange on Which Registered
Common stock, $0.0001 par value	The NASDAQ Global Select Market

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

None

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  o

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

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

As of May 11, 2011, the registrant had 75,209,207 shares of common stock outstanding.

 

 

 

 

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PART I

Item 1.   Financial Statements

 

1

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GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES
Condensed Consolidated Balance Sheets
March 31, 2011 and June 30, 2010
(In thousands, except share and per share amounts)
(Unaudited)
						March 31, 2011		June 30, 2010
ASSETS
Current assets:
	Cash and cash equivalents				$	155,313		157,029
	Accounts receivable, net of allowance for doubtful accounts of $738
		and $997 at March 31, 2011 and June 30, 2010, respectively				61,761		55,907
	Inventories					101,077		87,163
	Prepaid expenses and other current assets					25,032		23,809
			Total current assets			343,183		323,908
Property, plant, and equipment, net of accumulated depreciation and amortization						227,819		219,267
Goodwill						53,406		52,025
Other intangible assets						477		477
Investments in unconsolidated affiliates						8,538		8,185
Deferred tax assets						71		71
Other assets						21,033		3,212
			Total assets		$	654,527		607,145
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	44,136		47,298
	Current portion of long-term debt					10		10,092
	Short-term debt					532		8,067
	Revolving credit agreements					12,000		-
	Accrued expenses and other current liabilities					33,504		35,832
			Total current liabilities			90,182		101,289
Long-term liabilities:
	Revolving credit agreements					34,989		16,000
	Long-term debt					-		6,920
	Deferred tax liabilities					14,311		6,645
	Other long-term liabilities					18,032		17,462
			Total liabilities			157,514		148,316
Commitments and contingencies (note 11)
Stockholders’ equity:
	Common stock, $0.0001 par value. Authorized, 150,000,000 shares;
		issued,75,183,207 and 74,421,826 shares at
		March 31, 2011 and June 30, 2010, respectively				8		7
	Additional paid-in capital					399,217		390,354
	Retained earnings					64,755		38,761
	Accumulated other comprehensive loss					(3,846)		(4,438)
	Treasury stock at cost, 282,437 and 1,000 shares at					(4)		(4)
		March 31, 2011 and June 30, 2010, respectively
			Total Globe Specialty Metals, Inc. stockholders’ equity			460,130		424,680
	Noncontrolling interest					36,883		34,149
			Total stockholders’ equity			497,013		458,829
			Total liabilities and stockholders’ equity		$	654,527		607,145
See accompanying notes to condensed consolidated financial statements.

GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES
Condensed Consolidated Income Statements
Three and nine months ended March 31, 2011 and 2010
(In thousands, except per share amounts)
(Unaudited)
							Three Months Ended					Nine Months Ended
							March 31,					March 31,
							2011		2010			2011		2010
Net sales						$	172,802		112,486		$	465,929		326,222
Cost of goods sold							121,621		99,135			361,722		267,087
Selling, general, and administrative expenses							14,396		10,008			38,920		35,873
Research and development							32		36			77		151
Restructuring charges							-		-			-		(81)
Gain on sale of business							-		-			-		(22,907)
		Operating income					36,753		3,307			65,210		46,099
Other income (expense):
	Interest income						24		4			83		205
	Interest expense, net of capitalized interest						(521)		(997)			(2,210)		(3,416)
	Foreign exchange gain (loss)						125		(64)			(251)		3,222
	Other income						94		546			644		738
		Income before provision for income taxes					36,475		2,796			63,476		46,848
Provision for income taxes							12,982		1,751			23,479		19,702
		Net income					23,493		1,045			39,997		27,146
(Income) losses attributable to noncontrolling interest, net of tax							(100)		(529)			(2,734)		346
		Net income attributable to Globe Specialty Metals, Inc.				$	23,393		516		$	37,263		27,492
Weighted average shares outstanding:
	Basic						75,078		74,320			74,922		73,239
	Diluted						76,868		75,570			76,574		74,411
Earnings per common share:
	Basic					$	0.31		0.01		$	0.50		0.38
	Diluted						0.30		0.01			0.49		0.37
Cash dividends declared per common share							-		-			0.15		-
See accompanying notes to condensed consolidated financial statements.

GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity
Nine months ended March 31, 2011
(In thousands)
(Unaudited)
							Globe Specialty Metals, Inc. Stockholders’ Equity
																Accumulated
												Additional				Other		Treasury						Total
							Common Stock					Paid-In		Retained		Comprehensive		Stock		Noncontrolling		Comprehensive		Stockholders’
							Shares			Amount		Capital		Earnings		(Loss) Income		at Cost		Interest		Income		Equity
Balance at June 30, 2010							74,422		$	7		390,354		38,761		(4,438)		(4)		34,149				458,829
Share-based compensation							4			—		3,875		—		—		—		—				3,875
Stock option exercises							757			1		4,988		—		—		—		—				4,989
Cash dividend declared							—			—		—		(11,269)		—		—		—				(11,269)
Comprehensive income:
	Foreign currency translation adjustment						—			—		—		—		578		—		—		578		578
	Pension liability adjustment (net
	of income tax expense of $8)						—			—		—		—		14		—		—		14		14
	Net income						—			—		—		37,263		—		—		2,734		39,997		39,997
		Total comprehensive income																				40,589		40,589
Balance at March 31, 2011							75,183		$	8		399,217		64,755		(3,846)		(4)		36,883		40,589		497,013
See accompanying notes to condensed consolidated financial statements.

GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 2011 and 2010
(In thousands)
(Unaudited)
								Nine Months Ended
								March 31,
								2011		2010
Cash flows from operating activities:
	Net income						$	39,997		27,146
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
			Depreciation and amortization					18,350		14,868
			Share-based compensation					3,875		4,491
			Gain on sale of business					-		(22,907)
			Deferred taxes					8,580		(74)
			Changes in operating assets and liabilities:
				Accounts receivable, net				(5,583)		(25,788)
				Inventories				(14,752)		(5,542)
				Prepaid expenses and other current assets				(2,426)		(9)
				Accounts payable				(3,246)		22,569
				Accrued expenses and other current liabilities				(2,323)		(14,009)
				Other				201		(28,401)
					Net cash provided by (used in) operating activities			42,673		(27,656)
Cash flows from investing activities:
	Capital expenditures							(26,776)		(16,432)
	Sale of businesses, net of cash disposed of $0 and $16,555, respectively							2,500		58,445
	Working capital adjustments from acquisition of businesses, net							(2,038)		-
	Other investing activities							(16,935)		(733)
					Net cash (used in) provided by investing activities			(43,249)		41,280
Cash flows from financing activities:
	Net payments of long-term debt							(17,002)		(19,750)
	Net (payments) borrowings of short-term debt							(7,535)		7,170
	Net borrowings on revolving credit agreements							30,989		22,000
	Dividend payment							(11,269)		-
	Proceeds from stock option exercises							4,989		-
	Proceeds from warrants exercised							-		1,287
	Proceeds from UPOs exercised							-		210
	Sale of noncontrolling interest							-		98,329
	Sale of common stock							-		36,456
	Other financing activities							(869)		(1,387)
					Net cash (used in) provided by financing activities			(697)		144,315
Effect of exchange rate changes on cash and cash equivalents								(443)		(28)
					Net (decrease) increase in cash and cash equivalents			(1,716)		157,911
Cash and cash equivalents at beginning of period								157,029		61,876
Cash and cash equivalents at end of period							$	155,313		219,787
Supplemental disclosures of cash flow information:
	Cash paid for interest, net of capitalized interest						$	1,685		2,198
	Cash paid for income taxes, net of refunds totaling $534 and $2,729, respectively							4,442		50,412
See accompanying notes to condensed consolidated financial statements.

GLOBE SPECIALTY METALS, INC. AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements

Three and nine months ended March 31, 2011 and 2010

(Dollars in thousands, expect per share amounts)

(Unaudited)

(1)  Organization and Business Operations

Globe Specialty Metals, Inc. and subsidiary companies (the Company, we, or our) is among the world’s largest producers of silicon metal and silicon-based alloys, important ingredients in a variety of industrial and consumer products. The Company’s customers include major silicone chemical, aluminum and steel manufacturers, auto companies and their suppliers, ductile iron foundries, manufacturers of photovoltaic solar cells and computer chips, and concrete producers.

(2)  Summary of Significant Accounting Policies

a. Basis of Presentation

In the opinion of the Company’s management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) of the results for the interim periods presented and such adjustments are of a normal, recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010. There have been no material changes to the Company’s significant accounting policies during the nine months ended March 31, 2011.

b. Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and related notes. Significant estimates and assumptions in these condensed consolidated financial statements include the valuation of inventories; the carrying amount of property, plant, and equipment; estimates of fair value associated with accounting for business combinations; goodwill and long-lived asset impairment tests; estimates of fair value of investments; income taxes and deferred tax valuation allowances; valuation of derivative instruments; the determination of the discount rate and the rate of return on plan assets for pension expense; and the determination of the fair value of share-based compensation involving assumptions about forfeiture rates, stock volatility, discount rates, and expected time to exercise. During interim periods, provision for income taxes is recognized using an estimated annual effective tax rate. Due to the inherent uncertainty involved in making estimates, actual results could differ from these estimates.

c. Revenue Recognition

Revenue is recognized in accordance with Financial Accounting Standards Board (FASB) ASC Topic 605, Revenue Recognition , when a firm sales agreement is in place, delivery has occurred and title and risks of ownership have passed to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. Shipping and other transportation costs charged to buyers are recorded in both net sales and cost of goods sold. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales. When the Company provides a combination of products and services to customers, the arrangement is evaluated under ASC Subtopic 605-25, Revenue Recognition — Multiple Element Arrangements (ASC 605.25). ASC 605.25 addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue-generating activities. If the Company cannot objectively determine the fair value of any undelivered elements under an arrangement, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

d. Recently Implemented Accounting Pronouncements

In June 2009, the FASB issued an amendment to ASC Subtopic 860-10, Transfers and Servicing . The objective of this amendment is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This amendment improves financial reporting by eliminating (1) the exceptions for qualifying special-purpose entities from the consolidation guidance and (2) the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. This amendment was adopted on July 1, 2010. This change had no effect on the Company’s financial position or results of operations.

In June 2009, the FASB issued an amendment to ASC Subtopic 810-10, Consolidation — Variable Interest Entities . The objective of this amendment is to improve financial reporting by enterprises involved with variable interest entities by eliminating the quantitative-based risks and rewards calculation and requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling interest in a variable interest entity. In addition, the amendment requires an ongoing reassessment of whether an enterprise is the primary beneficiary of a variable interest entity. This amendment was adopted on July 1, 2010. The Company is not currently involved with variable interest entities and, therefore, this change had no effect on the Company’s financial position or results of operations.

In October 2009, the FASB issued an amendment to ASC Subtopic 820-10, Fair Value Measurements and Disclosures (ASC 820). This amendment requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The amendment also clarifies existing fair value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Adoption of this amendment to ASC 820 had no impact on the Company’s financial position and results of operations.

(3)  Business Combinations, Investments, and Divestitures

Dow Corning Transactions:

On November 5, 2009, the Company sold 100% of its interest in Globe Metais Indústria e Comércio S.A. (Globe Metais) pursuant to a purchase agreement entered into on that same date by and among the Company and Dow Corning Corporation (Dow Corning). The sale of the Company’s equity interest in Globe Metais was executed in connection with the sale of a 49% membership interest in WVA Manufacturing, LLC (WVA LLC) to Dow Corning, the execution of a long-term supply agreement, and an amendment to an existing supply agreement between Dow Corning and the Company to reduce the amount required to be sold in calendar year 2010 to 20,000 metric tons of silicon metal.

Core Metals Group Holdings LLC:

On April 1, 2010, the Company purchased all of the ownership interests in Core Metals Group Holdings LLC (Core Metals). The Company engaged a third-party appraisal firm to assist in the process of determining the estimated fair value of certain assets acquired. The Company finalized the purchase price allocation for the Core Metals acquisition during the quarter ended March 31, 2011. Goodwill totaling $1,274 has been recorded and assigned to the GMI operating segment.

In December 2010, the Company completed the divestiture of its 49% ownership interest in Fluorita de Mexico, S.A. de C.V. (FDM) for $2,500. The Company acquired its ownership interest in FDM in connection with the acquisition of Core Metals. FDM operates a fluorite ore mine and fluorspar processing plant located in Mexico, an ancillary business we do not consider critical to our fundamental business strategy. There was no gain or loss associated with the sale of the 49% ownership interest in FDM as the sales price was equal to the recorded book value of this investment.

Nigerian Mining Licenses:

During the three months ended March 31, 2011, the Company made advances totaling approximately $17,000 to acquire exploration mining licenses in Nigeria to mine for manganese ore, a raw material used in the production of certain silicon and manganese based alloys. This investment is recorded in other assets and reflected in other investing activities in the condensed consolidated statement of cash flows.

(4)  Inventories

Inventories comprise the following:

At March 31, 2011, $94,411 in inventory is valued using the first-in, first-out method and $6,666 using the average cost method. At June 30, 2010, $80,435 in inventory is valued using the first-in, first-out method and $6,728 using the average cost method.

(5)  Property, Plant, and Equipment

Property, plant, and equipment, net of accumulated depreciation and amortization, comprise the following:

Depreciation expense for the three months and nine months ended March 31, 2011 was $6,366 and $18,350, of which $6,187 and $17,812 is recorded in cost of goods sold and $179 and $538 is recorded in selling, general, and administrative expenses, respectively. Depreciation expense for the three months and nine months ended March 31, 2010 was $5,055 and $14,558, of which $4,959 and $14,242 is recorded in cost of goods sold and $96 and $316 is recorded in selling, general, and administrative expenses, respectively.

Capitalized interest for the three months and nine months ended March 31, 2011 was $0 and $15, respectively. Capitalized interest for the three months and nine months ended March 31, 2010 was $70 and $368, respectively.

(6)  Goodwill and Other Intangible Assets

Goodwill and other intangible assets presented below have been allocated to the Company’s operating segments.

a. Goodwill

Changes in the carrying amount of goodwill, by reportable segment, during the nine months ended March 31, 2011 are as follows:

b. Other Intangible Assets

There were no changes in the value of the Company’s definite lived intangible assets, which are fully amortized, or indefinite lived intangible assets during the nine months ended March 31, 2011. Amortization expense of purchased intangible assets for the three months and nine months ended March 31, 2010 was $0 and $310, respectively, which is recorded in cost of goods sold.

 

   c. Annual Impairment Tests

 

The Company performed its annual goodwill and indefinite lived intangible asset impairment tests during the third quarter of fiscal year 2011. No adjustments to the carrying amount of these assets were required.

(7)  Debt

a. Short-Term Debt

Short-term debt comprises the following:

Export Financing Agreements – The Company’s Argentine subsidiary maintains various short-term export financing agreements. Generally, these arrangements are for periods ranging between seven and eleven months, and require the Company to pledge as collateral certain export receivable. There is no export financing debt outstanding at March 31, 2011 or June 30, 2010.

Other – The balance at June 30, 2010 relates primarily to $5,880 in short-term notes payable to Dow Corning for working capital loans given to WVA LLC. The notes accrued interest at 3.0% and were settled during October 2010.

b. Revolving Credit Agreements

A summary of the Company’s revolving credit agreements at March 31, 2011 is as follows:

In September 2008, the Company’s subsidiary, Globe Metallurgical, Inc. (GMI), entered into a borrowing arrangement, which included a $35,000 senior credit facility expiring in September 2013 and five-year senior term loan in an aggregate principal amount of $40,000. The senior term loan was subject to certain mandatory prepayments based on excess cash flow, as defined in the loan agreement. Further, as part of the Dow Corning transactions discussed in note 3, the Company agreed to modify certain terms of the borrowing facilities, which included a reduction of revolving credit from $35,000 to $28,000 and a $6,000 prepayment of the senior term loan, in exchange for the release of the assets of West Virginia Alloys, Inc. as a security for these borrowings.

On March 30, 2011, certain of the Company’s domestic subsidiaries (the Borrowers) entered into an agreement to amend and restate the Company’s existing senior credit facility and senior term loan. The amended and restated senior credit agreement provides for a $90,000 revolving credit facility, subject to a defined borrowing base, and matures on March 30, 2014. This facility includes a provision for the issuance of standby letters of credit and a $10,000 sublimit for swingline loans. The facility may be increased from time to time by an amount up to $10,000 in the aggregate at the Company’s election, subject to approval by the existing or additional lenders. Interest on borrowings under the credit agreement is payable, at the Company’s election, at either a base rate (the higher of the U.S. federal funds rate plus 0.50% per annum and the issuing bank’s “prime rate”) plus a margin of 1.50% per annum, or LIBOR plus a margin of 2.25% per annum. Certain commitment fees are also payable under the credit agreement. The facility is guaranteed by certain of the Borrowers’ subsidiaries, and borrowings under the credit agreement are collateralized by the Borrowers’ cash and cash equivalents, accounts receivable, and inventories, and the stock of their subsidiaries. The agreement contains certain restrictive and financial covenants, which include a maximum total debt to capitalization ratio and a minimum combined tangible net worth, as well as a minimum fixed charge coverage ratio and a maximum annual capital expenditure level, both of which are only applicable if availability under the senior credit facility is below minimum levels specified in the credit agreement. The Company was in compliance with the loan covenants at March 31, 2011.

At March 31, 2011, there was a $34,989 balance outstanding on the senior credit facility. The total commitment outstanding on this credit facility includes $440 outstanding letters of credit associated with supplier contracts and a $1,810 outstanding letter of credit associated with a power supply contract. The outstanding balances under the previous senior credit agreement and senior term loan were transferred into the new facility.

The Company classifies borrowings under the senior credit facility as long-term liabilities given our ability to renew and extend borrowings under this agreement beyond one year from the balance sheet date.

On October 1, 2010, the Company entered into a new $15,000 revolving credit facility, and utilized proceeds from borrowings under the revolving credit facility to repay the Company’s $5,880 short-term notes payable to Dow Corning. Total borrowings under this credit facility were $12,000 at March 31, 2011. Interest on advances under the revolving credit facility accrues at LIBOR plus an applicable margin percentage or, at the Company’s option, prime plus an applicable margin percentage. The credit facility is subject to certain restrictive and financial covenants, which include limits on additional debt, a maximum ratio of debt to earnings before interest, taxes, depreciation and amortization and minimum net worth. The Company was in compliance with the loan covenants at March 31, 2011.

The Company classifies borrowings under this revolving credit facility as current liabilities as the arrangement is payable in full upon the earlier of 10 business days following written demand by the lender or the agreement’s expiration on March 31, 2012.

See note 8 (Derivative Instruments) for a discussion of derivative financial instruments entered into to reduce the Company’s exposure to interest rate fluctuations on outstanding debt.

c. Long-Term Debt

Long-term debt comprises the following:

Senior Term Loan  — As discussed above, the outstanding balance on the senior term loan was transferred to the Company’s amended and restated senior credit facility in March 2011.

d. Fair Value of Debt

The recorded carrying values of our debt balances approximate fair value given our debt is at variable rates tied to market indicators or is short-term in nature.

(8)  Derivative Instruments

The Company enters into derivative instruments to hedge certain interest rate, currency, and commodity price risks. The Company does not engage in interest rate, currency, or commodity speculation, and no derivatives are held for trading purposes. All derivatives are accounted for using mark-to-market accounting. The Company believes it is not practical to designate its derivative instruments as hedging instruments as defined under ASC Subtopic 815-10, Derivatives and Hedging (ASC 815). Accordingly, the Company adjusts its derivative financial instruments to current market value through the condensed consolidated income statement based on the fair value of the agreement as of period-end. Although not designated as hedged items as defined under ASC 815, these derivative instruments serve to significantly offset the Company’s interest rate, currency, and commodity risks. Gains or losses from these transactions offset gains or losses on the assets, liabilities, or transactions being hedged. No credit loss is anticipated as the counterparties to these agreements are major financial institutions that are highly rated.

Interest Rate Risk:

   The Company is exposed to market risk from changes in interest rates on certain of its debt obligations. The Company has entered into an interest rate cap arrangement and three interest rate swap agreements to reduce our exposure to interest rate fluctuations.

In October 2008, the Company entered into an interest rate cap arrangement to cap LIBOR on a $20,000 notional amount of debt, with the notional amount decreasing by $1,053 per quarter through the interest rate cap’s expiration on June 30, 2013. Under the interest rate cap, the Company capped LIBOR at a maximum of 4.5% over the life of the agreement.

In November 2008, the Company entered into an interest rate swap agreement involving the exchange of interest obligations relating to a $13,333 notional amount of debt, with the notional amount decreasing by $702 per quarter. Under the interest rate swap, the Company receives LIBOR in exchange for a fixed interest rate of 2.85% over the life of the agreement. The agreement expires in June 2013.

In January 2009, the Company entered into a second interest rate swap agreement involving the exchange of interest obligations relating to a $12,632 notional amount of debt, with the notional amount decreasing by $702 per quarter. Under the interest rate swap, the Company receives LIBOR in exchange for a fixed interest rate of 1.66% over the life of the agreement. The agreement expires in June 2013.

In April 2009, the Company entered into a third interest rate swap agreement involving the exchange of interest obligations relating to an $11,228 notional amount of debt, with the notional amount decreasing by $702 per quarter. Under the interest rate swap, the Company receives LIBOR in exchange for a fixed interest rate of 2.05% over the life of the agreement. The agreement expires in June 2013.

Foreign Currency Risk:

The Company is exposed to market risk arising from changes in currency exchange rates as a result of its operations outside the United States, principally in Argentina and China. A portion of the Company’s net sales generated from its non-U.S. operations is denominated in currencies other than the U.S. dollar. Most of the Company’s operating costs for its non-U.S. operations are denominated in local currencies, principally the Argentine peso and the Chinese renminbi. Consequently, the translated U.S. dollar value of the Company’s non-U.S. dollar net sales, and related accounts receivable balances, and our operating costs are subject to currency exchange rate fluctuations. Derivative instruments are not used extensively to manage this risk. The Company utilized derivative financial instruments, including foreign exchange forward contracts, to manage a portion of its net foreign currency exposure to the Brazilian real, prior to the sale of Globe Metais discussed in note 3, and the Euro. No foreign currency derivative financial instruments are outstanding at March 31, 2011.

Commodity Price Risk:

The Company is exposed to price risk for certain raw materials and energy used in its production process. The raw materials and energy that the Company uses are largely commodities, subject to price volatility caused by changes in global supply and demand and governmental controls. Derivative financial instruments are not used extensively to manage the Company’s exposure to fluctuations in the cost of commodity products used in its operations. The Company attempts to reduce the impact of increases in its raw material and energy costs by negotiating long-term contracts and through the acquisition of companies or assets for the purpose of increasing its access to raw materials with favorable pricing terms.

In June 2010, the Company entered into a power hedge agreement on a 175,440 MWh notional amount of electricity, representing approximately 20% of the power required by our Niagara Falls, New York plant not supplied by the facility’s long-term power contract over the term of the hedge agreement. The notional amount decreases equally per month through the agreement’s expiration on June 30, 2012. Under the power hedge agreement, the Company fixed the power rate at $39.60 per MWh over the life of the contract. In October 2010, the Company entered into a power hedge agreement on an 87,600 MWh notional amount of electricity, also for power required at our Niagara Falls, New York plant. The notional amount decreases equally per month from the agreement’s July 1, 2012 effective date through its expiration on June 30, 2013. Under this power hedge agreement, the Company fixed the power rate at $39.95 per MWh over the life of the contract.

The effect of the Company’s derivative instruments on the condensed consolidated income statements is summarized in the following table:

The fair values of the Company’s derivative instruments at March 31, 2011 are summarized in note 15 (Fair Value Measures). The liabilities associated with the Company’s interest rate derivatives and power hedges of $344 and $144, respectively, are included in other long-term liabilities.

(9)  Pension Plans

The Company’s subsidiary, GMI, sponsors three noncontributory defined benefit pension plans covering certain domestic employees. These plans were frozen in 2003. The Company’s subsidiary, Core Metals, sponsors a noncontributory defined benefit pension plan covering certain domestic employees. This plan was closed to new participants in April 2009. The components of net periodic pension expense for the Company’s defined benefit pension plans are as follows:

The Company expects to make discretionary contributions of approximately $1,080 to the plans for the fiscal year ended June 30, 2011, of which $801 has been contributed through March 31, 2011.

(10)  Income Taxes

(11)  Commitments and Contingencies

a. Legal Contingencies

The Company is subject to various lawsuits, investigations, claims, and proceedings that arise in the normal course of business, including, but not limited to, employment, commercial, environmental, safety, and health matters, as well as claims associated with our historical acquisitions and divestitures. Although it is not presently possible to determine the outcome of these matters, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

During the nine months ended March 31, 2011, the Company made escrow deposits and received payments, which netted to $2,038, for working capital claims associated with our historical acquisitions. These amounts were accrued as of June 30, 2010.

b. Environmental Contingencies

It is the Company’s policy to accrue for costs associated with environmental assessments, remedial efforts, or other environmental liabilities when it becomes probable that a liability has been incurred and the costs can be reasonably estimated. When a liability for environmental remediation is recorded, such amounts will be recorded without giving effect to any possible future recoveries. At March 31, 2011, there are no significant liabilities recorded for environmental contingencies. With respect to the cost for ongoing environmental compliance, including maintenance and monitoring, such costs are expensed as incurred unless there is a long-term monitoring agreement with a governmental agency, in which case a liability is established at the inception of the agreement.

c. Employee Contracts

As of March 31, 2011, there are 435 employees that are covered by union agreements expiring within one year.

d. Power Commitments

On February 24, 2011, the Company entered into a hydropower contract extension agreement with the New York Power Authority. Under the terms of this commodity purchase agreement, the Company will be supplied up to a maximum of 40,000 kW of hydropower from the Niagara Power Project to operate its Niagara Falls, New York facility. The hydropower will be supplied at preferential power rates plus market-based delivery charges through September 30, 2021. Under the terms of the contract, the Company has committed to specified employment, power utilization, and capital investment levels, which, if not met, could reduce the Company’s power allocation from the Niagara Power Project.

e. Joint Development Supply Agreement

On April 24, 2008, the Company’s subsidiaries, Solsil, Inc. (Solsil) and GMI, entered into a technology license, joint development and supply agreement with BP Solar International Inc. (BP Solar) for the sale of solar grade silicon. As part of this agreement, BP Solar paid Solsil $10,000 as an advance for research and development services and facilities construction. In accordance with ASC 605.25, revenue associated with this agreement was deferred until specific contract milestone had been achieved, or research development services were successful in reducing manufacturing costs. Revenue would then would be recognized ratably as product was delivered to BP Solar, or, if research and development services were performed, but unsuccessful, deferred until contract expiration. In November 2010, the technology license, joint development and supply agreement was terminated, $9,400 in previously deferred revenue was recognized by the Company, and the Company made a $600 payment to BP Solar.

(12)  Stockholders’ Equity

   a. Common Stock

In August 2009, the Company closed on an initial public offering on the NASDAQ Global Select Market of 16,100,000 shares of its common stock at $7.00 per share. Of the shares offered, 5,600,000 new shares were offered by the Company and 10,500,000 existing shares were offered by selling stockholders (which included 2,100,000 shares sold by the selling stockholders pursuant to the exercise of the underwriters’ over-allotment option). Total proceeds of the offering to the Company were $36,456, net of underwriting discounts and commissions totaling $2,744.

b. Treasury Stock

In connection with the Company’s acquisition of approximately 81% of Solsil in February 2008, 562,867 of the 5,628,657 shares issued to the former shareholders and optionholders of Solsil were placed into escrow pending the attainment of certain milestones. In April 2008, 281,430 of these escrow shares were released based on the satisfaction of certain conditions. Upon expiration of the escrow period in February 2011, the remaining 281,437 escrow shares were returned to the Company and are now included in treasury stock at cost, which is equal to their par value.

c. Dividend

On September 16, 2010, the Company’s board of directors approved a dividend of $0.15 per common share. The dividend, totaling $11,269, was paid on October 29, 2010, to stockholders of record as of October 15, 2010.

(13)  Earnings Per Share

Basic earnings per common share are calculated based on the weighted average number of common shares outstanding during the three and nine months ended March 31, 2011 and 2010, respectively. Diluted earnings per common share assumes the exercise of stock options, the vesting of restricted stock grants, as well as the conversion of previously outstanding warrants and unit purchase options, provided in each case the effect is dilutive.

The reconciliation of the amounts used to compute basic and diluted earnings per common share for the three and nine months ended March 31, 2011 and 2010 is as follows:

Potential common shares associated with outstanding stock options totaling 100,000 and 160,000 for both the three and nine months ended March 31, 2011 and 2010, respectively, were excluded from the calculation of diluted earnings per common share because their effect would be anti-dilutive.

(14)  Share-Based Compensation

The Company’s share-based compensation program consists of the Globe Specialty Metals, Inc. 2006 Employee, Director and Consultant Stock Plan (the Stock Plan). The Stock Plan was initially approved by the Company’s stockholders on November 10, 2006, and was amended and approved by the Company’s stockholders on December 6, 2010 to increase by 1,000,000 the number of shares of common stock authorized for issuance under the Stock Plan. The Stock Plan, as amended, provides for the issuance of a maximum of 6,000,000 shares of common stock for the granting of incentive stock options, nonqualified options, stock grants, and share-based awards. Any remaining shares available for grant, but not yet granted, will be carried over and used in the following fiscal years. During the nine months ended March 31, 2011, share-based compensation awards were limited to the issuance of 7,960 nonqualified stock options, 112,274 restricted stock grants, and 4,356 common stock grants.

At March 31, 2011, there were 1,513,579 shares available for grant. 3,527,250 outstanding incentive stock options, of which 332,250 were exercised through March 31, 2011, vest and become exercisable in equal one-quarter increments every six months from the date of grant or date of modification. 810,000 option grants, of which 523,333 were exercised through March 31, 2011, vest and become exercisable in equal one-third increments on the first, second, and third anniversaries of the date of grant. 7,960 option grants and 3,696 restricted stock grants vest and become exercisable on June 30, 2011. 108,578 restricted stock grants vest and become exercisable on November 13, 2020. 21,500 option grants and 4,356 common stock grants were issued as immediately vested at the date of grant. All option grants have maximum contractual terms ranging from 5 to 10 years.

A summary of the changes in options outstanding under the Stock Plan during the nine months ended March 31, 2011 is presented below:

 

 

During the nine months ended March 31, 2011, 927,166 options vested, resulting in total vested options of 3,434,499. There are 932,211 nonvested options outstanding with a grant date fair value, as modified, of $1.78. The weighted average per share fair value of stock option grants outstanding at March 31, 2011 is $2.86.

For the three and nine months ended March 31, 2011, share-based compensation expense was $1,326 ($716 after tax) and $3,875 ($2,090 after tax), respectively. For the three and nine months ended March 31, 2010, share-based compensation expense was $1,260 ($680 after tax) and $4,491 ($2,423 after tax), respectively. The expense is reported within selling, general, and administrative expenses.

As of March 31, 2011, the Company has unearned compensation expense of $574, before income taxes, related to nonvested stock option awards. The unrecognized compensation expense is expected to be recognized over the following periods ending on June 30:

 

								2011		2012		2013		2014		2015
Share-based compensation (pretax)							$	459		113		2		—		—

 

It is the Company’s policy to issue new shares to satisfy the requirements of its share-based compensation plan. The Company does not expect to repurchase shares in the future to support its share-based compensation plan.

In addition to share-based awards issued under the Stock Plan, the Company issued 35,225 restricted stock units on January 1, 2011 under the terms of the Company’s executive bonus plans. The restricted stock units proportionally vest over three years, but are not delivered until the end of the third year. The Company will settle these awards by cash transfer, based on the Company’s stock price of the date of such transfer. For both the three and nine months ended March 31, 2011, share-based compensation expense for these restricted stock units was $65 ($35 after tax).

(15)  Fair Value Measures

ASC 820, Fair Value Measures and Disclosures , establishes a fair value hierarchy for disclosure of fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to value the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1  — Quoted prices in active markets for identical assets or liabilities.

Level 2  — Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3  — Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. For example, cash flow modeling using inputs based on management’s assumptions.

The Company does not have any assets that were required to be remeasured at fair value at March 31, 2011 or June 30, 2010. The following table summarizes the liabilities measured at fair value on a recurring basis, all of which were measured on Level 2 inputs:

Derivative liabilities relate to the interest rate cap and interest rate swap agreements, the foreign exchange forward contracts, and power hedge agreements summarized in note 8 (Derivative Instruments). Fair values are determined by independent brokers using quantitative models based on readily observable market data. See note 7 (Debt) for information regarding the fair value of our outstanding debt.

(16)  Related Party Transactions

From time to time, the Company enters into transactions in the normal course of business with related parties. Management believes that such transactions are at arm’s length and for terms that would have been obtained from unaffiliated third parties.

A current and a former member of the board of directors are affiliated with Marco International and Marco Realty. During the three and nine months ended March 31, 2011 and 2010, the Company:

•

Paid Marco Realty $0 and $51 during the three months ended March 31, 2011 and 2010, respectively, and $0 and $149 during the nine months ended March 31, 2011 and 2010, respectively, to rent office space for its corporate headquarters in New York City, New York.

•

Entered into agreements with Marco International to purchase carbon electrodes. Marco International billed $6,344 and $3,462 during the three months ended March 31, 2011 and 2010, respectively, and $16,209 and $6,485 during the nine months ended March 31, 2011 and 2010, respectively, under these agreements. At March 31, 2011 and June 30, 2010, payables to Marco International under these agreements totaled $5,049 and $8,162, respectively.

•

Entered into an agreement to sell ferrosilicon to Marco International. Net sales were $187 and $107 during the three months ended March 31, 2011 and 2010, respectively, and $511 and $373 during the nine months ended March 31, 2011 and 2010, respectively, under this agreement.

•

Entered into agreements to sell calcium silicon powder to Marco International. Net sales were $859 and $0 during the three months ended March 31, 2011 and 2010, respectively, and $3,354 and $0 during the nine months ended March 31, 2011 and 2010, respectively, under this agreement.

The Company is affiliated with Norchem, Inc. (Norchem) through its 50.0% equity interest. During the three months ended March 31, 2011 and 2010, the Company sold Norchem product valued at $1,271 and $1,219, respectively. During the nine months ended March 31, 2011 and 2010, the Company sold Norchem product valued at $4,029 and $3,218, respectively. At March 31, 2011 and June 30, 2010, receivables from Norchem totaled $620 and $747, respectively.

Prior to our purchase of a majority interest in Ningxia Yonvey Coal Industrial Co., Ltd (Yonvey), Yonvey’s predecessor had entered into a lending agreement with the remaining minority stockholder. At March 31, 2011 and June 30, 2010, $897 and $849, respectively, remained payable to Yonvey from this related party.

(17)  Operating Segments

Operating segments are based upon the Company’s management reporting structure and include the following six reportable segments:

•

GMI — a manufacturer of silicon metal and silicon-based alloys located in the United States.

•

Globe Metais — a distributor of silicon metal manufactured in Brazil. This segment includes the historical Brazilian manufacturing operations, comprised of a manufacturing plant, mining operations, and forest reserves, which were sold on November 5, 2009. Subsequent to this divestiture, Globe Metais’ net sales relate only to the fulfillment of certain retained customer contracts, which were completed as of December 31, 2010.

•

Globe Metales — a manufacturer of silicon-based alloys located in Argentina.

•

Solsil — a manufacturer of upgraded metallurgical grade silicon metal located in the United States.

•

Corporate — general corporate expenses, investments, and related investment income.

•

Other — operations that do not fit into the above reportable segments and are immaterial for purposes of separate disclosure. The operating segments include Yonvey’s electrode production operations and certain other distribution operations for the sale of silicon metal and silicon-based alloys.

Each of our reportable segments distributes its products in both its country of domicile, as well as to other international customers. The following presents the Company’s consolidated net sales by product line:

 

a. Segment Data

Summarized financial information for our reportable segments as of, and for, the three and nine months ended March 31, 2011 and 2010, is shown in the following tables: