10-K 1 a1231201610-k.htm 10-K Document
            



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
alerislogoa02a01a01a02a29.jpg
FORM 10-K
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2016
or
 
 
 
 
¨  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________________ to _____________________
Commission File Number: 333-185443
_________________________________________
Aleris Corporation
(Exact name of registrant as specified in its charter)
__________________________________________
Delaware
 
27-1539594
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
25825 Science Park Drive, Suite 400
Cleveland, Ohio 44122-7392
(Address of principal executive offices) (Zip code)
(216) 910-3400
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None  
______________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨    No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x     No ¨
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨    No x 
(Note: Registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 and 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required during the preceding 12 months, had it been subject to such filing requirements.)
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 x    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x    
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.
Large accelerated filer ¨    Accelerated filer¨    Non-accelerated filer x Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x
The registrant is a privately held corporation. As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public trading market for the common stock of the registrant and therefore, an aggregate market value of the registrant’s common stock is not determinable.
There were 31,989,712 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 5, 2017.
DOCUMENTS INCORPORATED BY REFERENCE: None
 



            



PART I
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 
 
Signatures
 



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PART I
ITEM 1. BUSINESS.
General
Aleris Corporation is a Delaware corporation with its principal executive offices located in Cleveland, Ohio. We are a holding company and currently conduct our business and operations through our direct wholly owned subsidiary, Aleris International, Inc. and its consolidated subsidiaries. As used in this annual report on Form 10-K, unless otherwise specified or the context otherwise requires, “Aleris,” “we,” “our,” “us,” and the “Company” refer to Aleris Corporation and its consolidated subsidiaries. Aleris International, Inc. is referred to herein as “Aleris International.”
The Company is majority owned by Oaktree Capital Management, L.P. (“Oaktree”) or its respective subsidiaries. The investment funds managed by Oaktree or its respective subsidiaries that are invested in the Company are referred to collectively as the “Oaktree Funds.”
On August 29, 2016, Aleris Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Zhongwang USA LLC (“Zhongwang USA”), Zhongwang Aluminum Corporation, a direct, wholly owned subsidiary of Zhongwang USA (“Merger Sub”), and the stockholders representative party thereto, pursuant to which Merger Sub will be merged with and into Aleris Corporation, on the terms and subject to the conditions set forth in the Merger Agreement, with Aleris Corporation as the surviving entity (the “Merger”). Upon consummation of the Merger, Aleris Corporation is expected to be a direct, wholly owned subsidiary of Zhongwang USA, which is expected to be indirectly beneficially owned by entities affiliated with Mr. Liu Zhongtian and other investors and financial institutions. Zhongwang USA has agreed to pay approximately $1.1 billion in cash, subject to adjustment, for the equity of Aleris Corporation and will assume certain of the Company’s outstanding indebtedness.
The Merger is targeted to close in the first quarter of 2017, subject to customary regulatory approvals, including the receipt of approval from the Committee on Foreign Investment in the United States (“CFIUS”), and other customary closing conditions. The Merger is not subject to a financing condition. CFIUS has identified national security concerns with the Merger. Although CFIUS has not identified at this time measures that would mitigate these concerns, it invited Aleris Corporation and Zhongwang USA to withdraw and refile their notice to obtain additional time to provide additional information, including possible mitigation. In February 2017, Aleris Corporation and Zhongwang USA withdrew their notice and intend to refile in the first quarter of 2017. There can be no assurance that the Merger will be consummated on the targeted timing or at all. The Merger Agreement may be terminated by Aleris Corporation or Zhongwang USA on or after May 29, 2017.
On March 1, 2015, we finalized the sale of our Extrusions business to Sankyo Tateyama (“Sankyo”), a Japanese building products and extrusions manufacturer. This business included substantially all of the operations and assets previously reported in our Extrusions segment.
On February 27, 2015, we finalized the sale of our North American and European recycling and specification alloys businesses to Real Industry, Inc. (formerly known as Signature Group Holdings, Inc.) and certain of its affiliates. These businesses included substantially all of the operations and assets previously reported in our Recycling and Specification Alloys North America and Recycling and Specification Alloys Europe segments. The sale included 18 production facilities in North America and six in Europe.
We have reported the recycling and specification alloys and extrusions businesses as discontinued operations for all periods presented, and reclassified the results of operations of these businesses into a single caption on the accompanying Consolidated Statements of Operations as “Income from discontinued operations, net of tax.” For additional information, see Note 17, “Discontinued Operations,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. Except as otherwise indicated, the discussion of the Company’s business and financial information throughout this annual report on Form 10-K refers to the Company’s continuing operations and the financial position and results of operations of its continuing operations, while the presentation and discussion of our cash flows for the years ended December 31, 2015, 2014, 2013 and 2012 reflect the combined cash flows from our continuing and discontinued operations.
We make available on or through our website (www.aleris.com) our reports on Forms 10-K, 10-Q and 8-K, and amendments thereto, as soon as reasonably practicable after we electronically file (or furnish, as applicable) such material with the Securities and Exchange Commission (“SEC”). The SEC maintains an internet site that contains these reports at www.sec.gov. None of the websites referenced in this annual report on Form 10-K or the information contained therein is incorporated herein by reference.
Company Overview
We are a global leader in the manufacture and sale of aluminum rolled products, with 13 production facilities located throughout North America, Europe and China. Our product portfolio ranges from the most technically demanding heat treated

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plate and sheet used in mission-critical applications to sheet produced through our low-cost continuous cast process. We possess a combination of technically advanced, flexible and low-cost manufacturing operations supported by an industry-leading research and development (“R&D”) platform. Our facilities are strategically located to service our customers globally. Our diversified customer base includes a number of industry-leading companies such as Airbus, Audi, BMW, Boeing, Bombardier, Daimler, Embraer, Ford and Volvo. Our technological and R&D capabilities allow us to produce the most technically demanding products, many of which require close collaboration and, in some cases, joint development with our customers. For the year ended December 31, 2016, we generated revenues of $2.7 billion, of which approximately 55% were derived from North America, 37% were derived from Europe and the remaining 8% were derived from the rest of the world.
Company History
Our predecessor was formed at the end of 2004 through the merger of Commonwealth Industries, Inc. and IMCO Recycling, Inc. The predecessor’s business grew through a combination of organic growth and strategic acquisitions, the most significant of which was the 2006 acquisition of the downstream aluminum business of Corus Group plc (“Corus Aluminum”). The Corus Aluminum acquisition doubled our predecessor’s size and significantly expanded both its presence in Europe and its ability to manufacture higher value-added products, including aerospace and auto body sheet (“ABS”). 
The predecessor was acquired by Texas Pacific Group (“TPG”) in December 2006 and taken private. In 2007, it sold its zinc business in order to focus on its core aluminum business. In 2009, the predecessor, along with certain of its U.S. subsidiaries, filed voluntary petitions for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. The bankruptcy filings were the result of a liquidity crisis brought on by the global recession and financial crisis. The predecessor’s ability to respond to the liquidity crisis was constrained by its highly leveraged capital structure, which at filing included $2.7 billion of debt, resulting from the 2006 leveraged buyout of the predecessor by TPG. As a result of the severe economic decline, the predecessor experienced sudden and significant value reductions across each end-use industry it served and a precipitous decline in the London Metal Exchange (“LME”) price of aluminum. These factors reduced the availability of financing under the predecessor’s revolving credit facility and required the posting of cash collateral on aluminum hedges. The predecessor sought bankruptcy protection to alleviate its liquidity constraints and restructure its operations and financial position.
The Company was formed as a Delaware corporation in 2009 to acquire the assets and operations of the predecessor upon emergence from bankruptcy, which occurred on June 1, 2010. TPG exited our business during this time and we received significant support from new equity investors, led by the Oaktree Funds, the majority owner of Aleris Corporation, as well as certain investment funds managed by affiliates of Apollo Management Holdings, L.P. (“Apollo”) and Bain Capital Credit, LP (“Bain Capital Credit” and, together with the Oaktree Funds and Apollo, the “Investors”).
Since 2010, the Company has grown through the successful combination of strategic growth initiatives involving acquisitions, such as the 2014 acquisition of Nichols Aluminum LLC (“Nichols”), and investments in our existing facilities and in China. These initiatives were targeted at broadening our product offerings and geographic presence, diversifying our end-use customer base, increasing our scale and scope, and offering a higher value-added product mix. In 2015, we sold our recycling and specification alloys and extrusions businesses in order to focus on our aluminum rolled products business.
Business Segments
We report three operating segments based on the organizational structure that we use to evaluate performance, make decisions on resource allocations and perform business reviews of financial results. The Company’s operating segments (each of which is considered a reportable segment) are North America, Europe and Asia Pacific.
In addition to these reportable segments, we disclose corporate and other unallocated amounts, including start-up costs.
See Note 15, “Segment and Geographic Information,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K for financial and geographic information about our segments.

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The following charts present the percentage of our consolidated revenue by reportable segment and by end-use for the year ended December 31, 2016:
a1231201610_chart-57154.jpga1231201610_chart-58115.jpg
North America
Our North America segment consists of nine manufacturing facilities located throughout the United States that produce rolled aluminum and coated products for the building and construction, truck trailer, automotive, consumer durables, other general industrial and distribution end-uses. Substantially all of our North America segment’s products are manufactured to specific customer requirements, using continuous cast and direct-chill technologies that provide us with significant flexibility to produce a wide range of products. Specifically, those products are integrated into, among other applications, building products, truck trailers, appliances, cars and recreational vehicles. Our facility in Lewisport, Kentucky uses a direct-chill cast process which enables us to meet more technically demanding applications. We are investing over $400 million to add ABS capabilities at our Lewisport facility (the “North America ABS Project”), of which approximately $350 million has been invested as of December 31, 2016. We are also investing in upgrades to other key non-ABS equipment at the facility, including widening the hot mill, to capture additional opportunities. With the addition of ABS shipments from Lewisport expected to begin in 2017, we expect ABS to account for a significantly higher percentage of our North America product mix. We have long term customer commitments for more than half of our ABS capacity through 2025 with fixed conversion premiums and which include significant “take or pay” obligations. In connection with the North America ABS Project, the North America segment has been incurring costs associated with start-up activities, including the design and development of new products and processes. These start-up costs have been excluded from segment Adjusted EBITDA and segment income.
We have the largest footprint of continuous cast operations in North America. Our continuous cast operations have lower capital requirements and lower operating costs compared to our direct-chill cast operations. For our continuous cast operations, scrap input typically comprises over 90% of our overall metal needs, which provides substantial benefits, including metal cost savings. For the year ended December 31, 2016, approximately 98% of our revenues were derived using a formula pricing model which allows us to pass through risks from the volatility of aluminum price changes by charging a market-based aluminum price plus a conversion fee.

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Our North America segment produces rolled aluminum products ranging from thickness (gauge) of 0.002 to 0.249 inches in widths of up to 72 inches. The following table summarizes our North America segment’s principal products, end-uses, major customers and competitors:
Principal end use/product category
Major customers
Competitors
 
• Building and construction (roofing, rainware and siding)
• Ply Gem Industries, Gentek Building Products, Euramax, American Construction Metals, Kaycan, Midwest Metals, Rollex, First American
• Jupiter Aluminum, JW Aluminum, Arconic, Novelis
• Metal distribution
• Ryerson, Thyssen-Krupp, Metals USA, Champagne Metals, Samuel & Son, Reliance
• Arconic, Novelis, Constellium, Empire, Ta-Chen, Asian-American, Metal Exchange
• Truck Trailer
• Utility Trailer, Great Dane, Hyundai Translead, Rockwell Metals
• Arconic, Novelis, Vulcan
• Automotive
• Ford, Kamtek
• Arconic, Novelis, Constellium
• Consumer durables, specialty coil and sheet (cookware, fuel tanks, ventilation, cooling and
lamp bases)
• Brunswick Boat Group, Cuprum Metales Laminados, John R Wald, ABB
• Arconic, Novelis, Noranda, Skana Aluminum, Constellium
• Converter foil, fins and tray materials
• HFA, Reynolds, D&W Fine Pack
 
• JW Aluminum, Granges, Novelis, Skana Aluminum, SAPA
Key operating and financial information for the segment is presented below:
North America
 
 
(Dollars in millions, except per ton measures,
 
For the years ended December 31,
volumes in thousands of tons)
 
2016
 
2015
 
2014
Metric tons of finished product shipped
 
486.3

 
492.8

 
482.0

Revenues
 
$
1,365.1

 
$
1,532.8

 
$
1,561.8

Segment income (1)
 
$
86.1

 
$
107.9

 
$
94.6

Segment Adjusted EBITDA (1)(2)
 
$
81.4

 
$
109.1

 
$
96.0

Total segment assets
 
$
1,180.2

 
$
882.4

 
 
(1)
Segment income and segment Adjusted EBITDA exclude start-up operating losses and expenses incurred during the start-up period. For the years ended December 31, 2016, 2015 and 2014, start-up costs were $41.5 million, $16.0 million and $3.1 million, respectively.
(2)
Segment Adjusted EBITDA is a non-GAAP financial measure. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Segments” for a definition and discussion of segment Adjusted EBITDA and a reconciliation to segment income.
Europe
Our Europe segment consists of two world-class aluminum rolling mills, one in Koblenz, Germany and the other in Duffel, Belgium, and an aluminum cast house in Germany. The segment produces aerospace plate and sheet, ABS, clad brazing sheet (clad aluminum material used for, among other applications, vehicle radiators and HVAC systems) and heat-treated plate for engineered product applications. Substantially all of our Europe segment’s products are manufactured to specific customer requirements using direct-chill ingot cast technologies that allow us to use and offer a variety of alloys and products for a number of technically demanding end-uses, which command some of the highest margins in the industry.
For over a decade, we have been a leading supplier of automotive and aerospace aluminum rolled products in Europe. The technical and quality requirements needed to participate in these end-uses create a significant barrier to entry and we believe provide us with a competitive advantage. We continue to pursue technical and manufacturing upgrades at our facilities, such as our ABS project at our Duffel, Belgium facility, completed in 2013, which we believe now supplies the widest ABS in Europe.

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Our Europe segment remelts primary ingots, internal scrap, purchased scrap and master alloys to produce rolled aluminum products ranging from thickness (gauge) of 0.00031 to 11.0 inches in widths of up to 138 inches. The following table summarizes our Europe segment’s principal products, end-uses, major customers and competitors:
Principal end use/product category
Major customers
Competitors
 
• Aerospace plate and sheet
• Airbus, Boeing, Bombardier, Dassault,
Embraer
• Arconic, AMAG, Constellium, Kaiser
• Auto body sheet (inner, outer and structural parts)
• BMW, Daimler, Renault, Volvo, VW Group
• Arconic, AMAG, Constellium, Hydro, Novelis
• Brazing clad sheet (heat exchanger materials for automotive and general industrial)
• Behr, Dana, Denso, HallaVisteon, Modine Chart
• Arconic, AMAG, Gränges, Hydro, UACJ
• Industrial plate and sheet (tooling, molding, road & rail, shipbuilding, LNG, silos, anodizing qualities for architecture, multi-layer tubing, and general industry)
• Amari Group, Amco, Euramax, Gilette, Henco, Linde, Multivac, RemiClaeys, SAG, ThyssenKrupp Materials
• Arconic, AMAG, Constellium, Hydro, Novelis, Kaiser
Key operating and financial information for the segment is presented below:
Europe
 
 
(Dollars in millions, except per ton measures,
 
For the years ended December 31,
volumes in thousands of tons)
 
2016
 
2015
 
2014
Metric tons of finished product shipped
 
326.7

 
313.6

 
301.6

Revenues
 
$
1,222.6

 
$
1,335.3

 
$
1,402.4

Segment income
 
$
149.4

 
$
131.8

 
$
147.6

Segment Adjusted EBITDA (1)
 
$
151.3

 
$
149.3

 
$
120.7

Total segment assets
 
$
645.3

 
$
632.8

 
 
(1)
Segment Adjusted EBITDA is a non-GAAP financial measure. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Segments” for a definition and discussion of segment Adjusted EBITDA and a reconciliation to segment income.
Asia Pacific
Our Asia Pacific segment consists of the Zhenjiang rolling mill that produces technically demanding and value-added plate products for the aerospace, engineering, distribution and other transportation end-uses worldwide. Substantially all of our Asia Pacific segment’s products are manufactured to specific customer requirements using direct-chill ingot cast technologies that allow us to use and offer a variety of alloys and products principally for aerospace and also for a number of other technically demanding end-uses.
The Zhenjiang rolling mill commenced operations in the first quarter of 2013 and achieved Nadcap certification, an industry standard for the production of aerospace aluminum, in 2014. Since then, the Zhenjiang rolling mill has received qualifications from several industry-leading aircraft manufacturers, including Airbus, Boeing, Bombardier and COMAC, and is the only facility in Asia capable of meeting the exacting standards of the global aerospace industry.
We expect demand for aluminum plate in Asia to grow, driven by the development and expansion of industries serving aerospace, engineering and other heavy industrial applications. In anticipation of this demand, we built the Zhenjiang rolling mill with 250,000 tons of hot mill capacity and the capability to both expand into other high growth and high value-added products, including ABS, clad brazing sheet and other technically demanding products, as well as produce additional aerospace and heat treated plate with modest incremental investment.


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The following table summarizes our Asia Pacific segment’s principal products, end-uses, major customers and competitors:
Principal end use/product category
Major customers
Competitors
 
• Aerospace plate
• Airbus, Boeing, Bombardier, AVIC, KAI, AMS
• Arconic, Constellium, Chinalco, Kaiser, AMAG
• Heat treated plate
• ThyssenKrupp, Clinton Aluminum, Hengtai
• AMAG, Kumz, Vimetco, Nanshan
• Non-heat treated plate
• Tozzhin, Kobelco Precision Parts, Linde
• SWA, NELA, Kobelco, UACJ
Key operating and financial information for the segment is presented below:
Asia Pacific
 
 
 
 
 
 
(Dollars in millions, except per ton measures,
 
For the years ended December 31,
volumes in thousands of tons)
 
2016
 
2015
 
2014
Metric tons of finished product shipped
 
22.6

 
21.8

 
12.8

Revenues
 
$
100.5

 
$
96.4

 
$
52.7

Segment income (1)
 
$
10.8

 
$

 
$

Segment Adjusted EBITDA (1) (2)
 
$
10.4

 
$

 
$

Total segment assets
 
$
358.6

 
$
395.9

 
 
(1)
Segment income and segment Adjusted EBITDA exclude start-up operating losses and expenses, as well as depreciation expense incurred during the start-up period. For the years ended December 31, 2016, 2015 and 2014, start-up costs were $0.1 million, $2.9 million and $16.6 million, respectively, and total depreciation expense for the year ended December 31, 2014 was $24.7 million.
(2)
Segment Adjusted EBITDA is non-GAAP financial measure. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Segments” for a definition and discussion of segment Adjusted EBITDA and a reconciliation to segment income.
Industry Overview
Aluminum is a widely-used, attractive industrial material. Compared to several alternative metals such as steel and copper, aluminum is lightweight, has a high strength-to-weight ratio and is resistant to corrosion. Aluminum can be recycled repeatedly without any material decline in performance or quality. The recycling of aluminum delivers energy and capital investment savings relative to both the cost of producing primary aluminum and many other competing materials. The penetration of aluminum into a wide variety of applications continues to grow. We believe several factors support fundamental long-term growth in aluminum consumption in the end-uses we serve.
The global aluminum industry consists of primary aluminum producers with bauxite mining, alumina refining and aluminum smelting capabilities; aluminum semi-fabricated products manufacturers, including aluminum casters, recyclers, extruders and flat rolled products producers; and integrated companies that are present across multiple stages of the aluminum production chain. The industry is cyclical and is affected by global economic conditions, industry competition and product development.
Primary aluminum prices are determined by worldwide forces of supply and demand and, as a result, are volatile. This volatility has a significant impact on the profitability of primary aluminum producers whose selling prices are typically based upon prevailing LME prices while their costs to manufacture are not highly correlated to LME prices. We participate in select segments of the aluminum fabricated products industry, focusing on aluminum rolled products. We do not smelt aluminum, nor do we participate in other upstream activities, including mining bauxite or refining alumina. Since the majority of our products are sold on a market-based aluminum price plus conversion fee basis, we are less exposed to aluminum price volatility.
Sales and Marketing
We sell our products to end-users and distributors, principally for use in the aerospace, automotive, building and construction, truck trailer, consumer durables, other general industrial and distribution industries. Backlog as of December 31, 2016 and 2015 was approximately $109.2 million and $112.0 million, respectively, for North America, $202.2 million and $211.5 million, respectively, for Europe, and $28.1 million and $33.1 million, respectively, for Asia Pacific.
Sales of products are made through each segment’s own sales force, which are strategically located to provide international coverage, and through a broad network of sales offices and agents in North America and major European countries, as well as in Asia and Australia. The majority of our customer sales agreements in these segments are for a term of one year or less.

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Competition
The worldwide aluminum industry is highly competitive. Aluminum competes with other materials such as steel, plastic, composite materials and glass for various applications.
We compete in the production and sale of rolled aluminum sheet and plate. In the sectors in which we compete, other industry leaders include Arconic, Constellium, Novelis, Kaiser, Hydro, JW Aluminum and Jupiter Aluminum. In addition, we compete with imported products. We compete with other rolled products suppliers on the basis of quality, price, timeliness of delivery and customer service.
Raw Materials and Supplies
A significant portion of the aluminum metal used by our North America segment is purchased aluminum scrap that is acquired from aluminum scrap dealers or brokers. We believe that this segment is one of the largest users of aluminum scrap (other than beverage can scrap) in North America. The remaining requirements of this segment are met with purchased primary metal and rolling slab, including metal produced in the U.S. and internationally.
Our Europe segment relies on a number of European smelters for primary aluminum and rolling slab. Due to a shortage of internal slab casting capacity, we contract with smelters and other third parties to provide slab that meets our specifications.
Our Asia Pacific segment relies primarily on domestic smelters for primary aluminum. A portion of the raw material used by this segment is imported in order to meet quality requirements.
Energy Supplies
Our operations are fueled by natural gas and electricity, which represent the third largest component of our cost of sales, after metal and labor costs. We purchase the majority of our natural gas and electricity on a spot-market basis. However, in an effort to acquire the most favorable energy costs, we have secured some of our natural gas and electricity at fixed price commitments. We use forward contracts and options, as well as contractual price escalators, to reduce the risks associated with our natural gas requirements.
Research and Development
Our research and development organization includes three locations in Europe, one in North America and one in Asia, with a support staff focused on new product and alloy offerings and process performance technology. Research and development expenses were $10.9 million, $11.2 million and $12.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Patents and Other Intellectual Property
We hold patents registered in the United States and other countries relating to our business. In addition to patents, we also possess other intellectual property, including trademarks, tradenames, know-how, developed technology and trade secrets. Although we believe these intellectual property rights are important to the operations of our specific businesses, we do not consider any single patent, trademark, tradename, know-how, developed technology, trade secret or any group of patents, trademarks, tradenames, know-how, developed technology or trade secrets to be material to our business as a whole.
Seasonality
Certain of our products are seasonal. Demand in the rolled products business is generally stronger in the spring and summer seasons due to higher demand in the building and construction industry. This typically results in higher operating income in our second and third quarters, followed by our first and fourth quarters.
Employees
As of December 31, 2016, we had a total of approximately 5,400 employees, which included approximately 1,800 employees engaged in administrative and supervisory activities and approximately 3,600 employees engaged in manufacturing, production and maintenance functions. In addition, collectively, approximately 63% of our U.S. employees and substantially all of our non-U.S. employees were covered by collective bargaining agreements. We believe our labor relations with employees have been satisfactory.
Environmental
Our operations are subject to federal, state, local and foreign environmental, health and safety laws and regulations, which govern, among other things, air emissions, wastewater discharges, the handling, storage, and disposal of hazardous substances and wastes, the investigation or remediation of contaminated sites and employee health and safety. These laws can impose joint and several liability for releases or threatened releases of hazardous substances upon statutorily defined parties,

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including us, regardless of fault or the lawfulness of the original activity or disposal. Given the changing nature of environmental, health and safety legal requirements, we may be required, from time to time, to incur substantial costs in order to achieve and maintain compliance with these laws and regulations. For example, we may be required to install additional pollution control equipment, make process changes, or take other environmental control measures at some of our facilities to meet future requirements.
We have been named as a potentially responsible party in certain proceedings initiated pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (“Superfund”) and similar state statutes and may be named a potentially responsible party in other similar proceedings in the future. We are performing operations and maintenance at two Superfund sites for matters arising out of past waste disposal activity associated with closed facilities. We are also under orders to perform environmental remediation by agencies in four states and one non-U.S. country at seven sites. It is not anticipated that the costs incurred in connection with the presently pending proceedings will, individually or in the aggregate, have a material adverse effect on our financial condition or results of operations. Currently, and from time to time, we are a party to notices of violation brought by governmental agencies concerning the laws governing environmental, health and safety matters, such as air emissions.
Our aggregate accrual for environmental matters was $23.8 million and $26.2 million at December 31, 2016 and 2015, respectively. Of these amounts, approximately $11.5 million and $12.8 million are indemnified at December 31, 2016 and 2015, respectively. Although the outcome of any such matters, to the extent they exceed any applicable accrual, could have a material adverse effect on our financial condition, results of operations or cash flows for the applicable period, we currently believe that any such outcome would not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
In December 2016, the Ohio Environmental Protection Agency (“OEPA”) issued a director’s final findings and orders related to a number of air pollution control notice of violations (“NOVs”) under the Ohio administrative code. The Company’s subsidiary, Aleris Rolled Products, Inc., and the OEPA mutually agreed to amicably settle and resolve all of the OEPA claims in exchange for a payment of a civil fine of $135,000. The Company did not admit any error or wrong doing as part of the settlement. The matter is fully concluded and the Company has no continuing obligations with respect to the NOVs.
In addition, we have asset retirement obligations of $4.7 million and $4.6 million for the years ended December 31, 2016 and 2015, respectively, for costs related to the future removal of asbestos and costs to remove underground storage tanks. The related asset retirement costs are capitalized as long-lived assets (asset retirement cost), and are being amortized over the remaining useful life of the related asset. See Note 2, “Summary of Significant Accounting Policies,” and Note 8, “Asset Retirement Obligations,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.
The processing of scrap generates solid waste in the form of salt cake and baghouse dust. This material is disposed of at off-site landfills. If salt cake was ever classified as a hazardous waste in the U.S., the costs to manage and dispose of it would increase, which could result in significant increased expenditures.
Financial Information About Geographic Areas
See Note 15, “Segment and Geographic Information,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.
ITEM 1A. RISK FACTORS.
Risks Related to our Business
If we fail to implement our business strategy, our financial condition and results of operations could be adversely affected.
Our future financial performance and success depend in large part on our ability to successfully implement our business strategy. We cannot assure you that we will be able to successfully implement our business strategy or be able to continue improving our operating results. In particular, we cannot assure you that we will be able to successfully execute our significant ongoing, or any future, strategic investments, achieve all operating cost savings targeted through focused productivity improvements and capacity optimization, further enhance our business and product mix, manage key commodity exposures and opportunistically pursue strategic acquisitions. Implementation of our business strategy may be impacted by factors outside of our control, including competition, commodity price fluctuations, legal and regulatory developments and general economic conditions. Any failure to successfully implement our business strategy could adversely affect our financial condition and results of operations. We may, in addition, decide to alter or discontinue certain aspects of our business strategy at any time.
Although we have undertaken and expect to continue to undertake productivity and manufacturing system and process transformation initiatives to improve performance, we cannot assure you that all of these initiatives will be completed or that any estimated cost savings from such activities will be fully realized. Even when we are able to generate new efficiencies in the short- to medium-term, we may not be able to continue to reduce costs and increase productivity over the long-term.
While the Merger is pending, we are subject to business uncertainties and contractual restrictions that could materially adversely affect our business or result in a loss of customers or employees.
The Merger Agreement includes restrictions on how we conduct our business while the Merger is pending, generally requiring us to conduct our business in the ordinary course in all material respects, as well as imposing more specific limits with respect to certain matters absent our Merger counterparty’s consent. These and other restrictions in the Merger Agreement may prevent us from responding effectively to business developments and opportunities. The pendency of the Merger may also divert our management’s attention and our other resources from ongoing business and operations. In addition, customers may have uncertainties about the Merger, and delay or defer business decisions or seek to terminate or change their relationships because of the Merger. Similarly, the Merger may materially adversely affect our ability to attract, retain or motivate

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employees. If any of these effects were to occur, it could materially and adversely impact our financial performance while the Merger is pending.
The closing of the Merger is subject to customary closing conditions as well as other uncertainties, and the Merger may not be completed.
The consummation of the Merger is subject to the satisfaction of certain closing conditions, including, but not limited to, (i) the representations and warranties of the parties being true and correct, except as permitted by the Merger Agreement, (ii) the parties’ performance in all material respects of their respective covenants and other obligations, and (iii) the expiration or termination of the applicable Hart-Scott-Rodino waiting period, the receipt of approval from CFIUS, and the receipt of certain foreign regulatory approvals. The Merger is not subject to a financing condition. CFIUS has identified national security concerns with the Merger. Although CFIUS has not identified at this time measures that would mitigate these concerns, it invited Aleris Corporation and Zhongwang USA to withdraw and refile their notice to obtain additional time to provide additional information, including possible mitigation. In February 2017, Aleris Corporation and Zhongwang USA withdrew their notice and intend to refile in the first quarter of 2017. If these conditions to the closing of the Merger are not fulfilled, then the Merger may not be consummated. Several of the closing conditions are not within our control, and it is not known whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise. If the closing conditions are not timely satisfied, or if another event occurs that delays or prevents the Merger, our business, financial condition and results of operations may be materially and adversely affected. In addition, the Merger Agreement may be terminated by Aleris Corporation or Zhongwang USA on or after May 29, 2017.
Past and future acquisitions or divestitures may not be successful, which could adversely affect our financial condition.
As part of our strategy, we may continue to pursue acquisitions or strategic alliances, which may not be completed or, if completed, may not be ultimately beneficial to us. We also consider potential divestitures of non-strategic businesses from time to time. We prudently evaluate these opportunities as potential enhancements to our existing operating platforms and continue to consider strategic alternatives on an ongoing basis, including having discussions concerning potential acquisitions, strategic alliances and divestitures that may be material.
There are numerous risks commonly encountered in business combinations, including the following:
our ability to identify appropriate acquisition targets and to negotiate acceptable terms for their acquisition;
our ability to integrate new businesses into our operations;
the availability of capital on acceptable terms to finance acquisitions;
the ability to generate the cost savings or synergies anticipated;
the inaccurate assessment of undisclosed liabilities;
increasing demands on our operational systems; and
the amortization of acquired intangible assets.
In addition, the process of integrating new businesses could cause the interruption of, or loss of momentum in, the activities of our existing businesses and the diversion of management’s attention. Any delays or difficulties encountered in connection with the integration of new businesses or divestiture of existing businesses could negatively impact our business and results of operations. Furthermore, any acquisition we may make could result in significant increases in our outstanding indebtedness and debt service requirements. The terms of our indebtedness may limit the acquisitions, strategic alliances and divestitures that we can pursue.
There are numerous risks commonly encountered in divestitures, including the following:
diversion of resources and management’s attention from the operation of our business, including providing on-going services to the divested business;
loss of key employees following such a transaction;
difficulties in the separation of operations, services, products and personnel;
retention of future liabilities as a result of contractual indemnity obligations; and
damage to our existing customer, supplier and other business relationships.
In addition, sellers typically retain certain liabilities or indemnify buyers for certain matters such as lawsuits, tax liabilities, product liability claims and environmental matters. The magnitude of any such retained liability or indemnification obligation may be difficult to quantify at the time of the transaction, may involve conditions outside our control and ultimately may be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release us from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, we may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations.

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There can be no assurance that we will realize any anticipated benefits from any such acquisition, strategic alliance or divestiture. If we do not realize any such anticipated benefits, our financial condition and results of operations could be materially adversely affected.
The cyclical nature of the metals industry, our end-uses and our customers’ industries could limit our operating flexibility, which could negatively affect our financial condition and results of operations.
The metals industry in general is cyclical in nature. It tends to reflect and be amplified by changes in general and local economic conditions. These conditions include the level of economic growth, financing availability, the availability of affordable raw materials and energy sources, employment levels, interest rates, consumer confidence and housing demand. Historically, in periods of recession or periods of minimal economic growth, metals companies have often tended to underperform other sectors. We are particularly sensitive to trends in the key end-uses we serve, which can lead to significant fluctuations in demand and pricing for our products and services.
Demand for our automotive and heat exchanger products is dependent on the production of cars, light trucks and heavy duty vehicles and trailers. The automotive industry is highly cyclical, as new vehicle demand is dependent on consumer spending and is tied closely to the strength of the overall economy. Production cuts by manufacturers may adversely affect the demand for our products. Many automotive-related manufacturers and first tier suppliers are burdened with substantial structural costs, including pension, healthcare and labor costs that have resulted in severe financial difficulty, including bankruptcy, for several of them. A worsening of these companies’ financial condition or their bankruptcy could have further serious effects on the conditions of the automotive industry, which directly affects the demand for our products. In addition, sensitivity to fuel prices and consumer preferences can influence consumer demand for vehicles that have a higher content of aluminum. The loss of business with respect to, or a lack of commercial success of, one or more particular vehicle models for which we are a significant supplier could have a materially adverse impact on our financial condition and results of operations.
We derive a portion of our revenues from products sold to the aerospace industry, which is highly cyclical and tends to decline in response to overall declines in the general economy. The commercial aerospace industry is historically driven by demand from commercial airlines for new aircraft. Demand for commercial aircraft is influenced by airline industry profitability, trends in airline passenger traffic, the state of the U.S. and global economies and numerous other factors, including the effects of terrorism. A number of major airlines have undergone bankruptcy or comparable insolvency proceedings and experienced financial strain from volatile fuel prices. Despite existing backlogs, continued financial uncertainty in the industry, inadequate liquidity of certain airline companies, production issues and delays in the launch of new aircraft programs at major aircraft manufacturers, stock variations in the supply chain, terrorist acts or the increased threat of terrorism may lead to reduced demand for new aircraft that utilize our products, which could materially adversely affect our financial condition and results of operations.
The building and construction and truck trailer industries are both seasonal, highly cyclical and dependent upon general economic conditions. For example, during recessions or periods of low growth, the building and construction and truck trailer industries typically experience major cutbacks in production, resulting in decreased demand for aluminum.
Because we generally have high fixed costs, our near-term profitability is significantly affected by decreased processing volume. Accordingly, reduced demand and pricing pressures may significantly reduce our profitability and adversely affect our financial condition. Economic downturns in regional and global economies or a prolonged recession in our principal industry end-uses have had a negative impact on our operations in the past and could have a negative impact on our future financial condition or results of operations. In addition, in recent years global economic and commodity trends have been increasingly correlated. Although we continue to seek to diversify our business on a geographic and industry end-use basis, we cannot assure you that diversification will significantly mitigate the effect of cyclical downturns.
Changes in the market price of aluminum impact the selling prices of our products and the benefit we gain from using scrap in our manufacturing process. Market prices of aluminum are dependent upon supply and demand and a variety of factors over which we have minimal or no control, including:
regional and global economic conditions;
availability and relative pricing of metal substitutes;
labor costs;
energy prices;
environmental and conservation regulations;
seasonal factors and weather; and
import and export levels and/or restrictions.
In addition, we depend upon third-party transportation providers for delivery of products to us and to our customers. Transportation disruptions or other conditions in the transportation industry, including, but not limited to, increases in fuel

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prices, disruptions in rail service, port congestion or shortages of truck drivers, could increase our costs and disrupt our operations and our ability to service our customers on a timely basis.
We may encounter increases in the cost, or limited availability, of raw materials and energy, which could cause our cost of goods sold to increase thereby reducing operating results and limiting our operating flexibility.
We require substantial amounts of raw materials and energy in our business, consisting principally of primary aluminum, aluminum scrap, alloys and other materials, and energy, including natural gas. Any substantial increases in the cost of raw materials or energy could cause our operating costs to increase and negatively affect our financial condition and results of operations.
Primary aluminum, aluminum scrap, rolling slab and alloy prices are subject to significant cyclical price fluctuations. Metallics (primary aluminum and aluminum scrap) represent the largest component of our costs of sales. We purchase aluminum primarily from aluminum producers, aluminum scrap dealers and other intermediaries. We have limited control over the price or availability of these supplies.
In particular, the availability and price of aluminum scrap and rolling slab depend on a number of factors outside our control, including general economic conditions, international demand for metallics and internal recycling activities by primary aluminum producers and other consumers of aluminum. Increased regional and global demand for aluminum scrap can have the effect of increasing the prices that we pay for these raw materials thereby increasing our cost of sales. We may not be able to adjust the selling prices for our products to recover the increases in scrap prices. If scrap prices were to increase significantly without a commensurate increase in the traded value of the primary metals, our future financial condition and results of operations could be affected by higher costs and lower profitability.
After raw material and labor costs, energy costs represent the third largest component of our cost of sales. The price of natural gas, and therefore the costs, can be particularly volatile. Price and volatility can differ by global region based on supply and demand, political issues and government regulation, among other things. As a result, our natural gas costs may fluctuate dramatically, and we may not be able to reduce the effect of higher natural gas costs on our cost of sales. If natural gas costs increase, our financial condition and results of operations may be adversely affected. Although we attempt to mitigate volatility in natural gas costs through the use of hedging and the inclusion of price escalators in certain of our long-term supply contracts, we may not be able to eliminate or reduce the effects of such cost volatility. Furthermore, in an effort to offset the effect of increasing costs, we may also limit our potential benefit from declining costs.
We may be unable to manage effectively our exposure to commodity price fluctuations, and our hedging activities may affect profitability in a changing metals price environment and subject our earnings to greater volatility from period-to-period.
Significant increases in the price of primary aluminum, aluminum scrap, alloys, hardeners, or energy would cause our cost of sales to increase significantly and, if not offset by product price increases, would negatively affect our financial condition and results of operations. We are substantial consumers of raw materials, and by far the largest input cost in producing our goods is the cost of aluminum. The cost of energy used by us is also substantial. Customers pay for our products based on the price of the aluminum contained in the products, plus a “rolling margin” or “conversion margin” fee (the “Price Margin”), or based on a fixed price. In general, we use this pricing mechanism to pass changes in the price of aluminum, and, sometimes, in the price of natural gas, through to our customers. In most end-uses and by industry convention, however, we offer our products at times on a fixed price basis as a service to the customer. This commitment to supply an aluminum-based product to a customer at a fixed price often extends months, but sometimes years, into the future. Such commitments require us to purchase raw materials in the future, exposing us to the risk that increased aluminum or natural gas prices will increase the cost of our products, thereby reducing or eliminating the Price Margin we receive when we deliver the product. These risks may be exacerbated by the failure of our customers to pay for products on a timely basis, or at all.
The overall price of primary aluminum consists of several components, including the underlying base metal component, which is typically based on quoted prices from the London Metal Exchange (LME) and the regional premium, which comprises the incremental price over the base LME component that is associated with the delivery of metal to a particular region as further described below. The LME price is typically driven by macroeconomic factors, global supply and demand of aluminum (including expectations for growth and contraction and the level of global inventories) and financial investors. Speculative trading in aluminum and the influence of hedge funds and other financial institutions participating in commodity markets have contributed to higher levels of price volatility. Furthermore, the North America and Europe segments are exposed to variability in the market price of a regional premium differential (referred to as “Midwest Premium” in the U.S. and “Rotterdam Premium” in Europe) charged by industry participants to deliver aluminum from the smelter to the manufacturing facility. This premium differential also fluctuates in relation to several conditions, including based on the supply of and demand for metal in a particular region, associated transportation costs and the extent of warehouse financing transactions, which limit the amount of physical metal flowing to consumers and increases the price differential as a result. During times of greater volatility in the premium, the variability in our earnings can also increase. In addition to impacting the price we pay for the raw materials we

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purchase, changing premium differentials impact our customers, who may delay purchases from us during times of uncertainty with respect to the premium differential or seek to purchase lower priced imported products which are not susceptible to the changes in these premium differentials. The North America and Europe segments follow a pattern of increasing or decreasing their selling prices to customers in response to changes in the Midwest Premium and the Rotterdam Premium. In addition, aluminum prices could fluctuate as a result of LME warehousing rules. In February 2015, the LME implemented rules that require LME warehouses, under certain conditions, to deliver out more aluminum than they take in. The warehousing rules, and any subsequent changes the LME may implement, could cause an increase in the supply of aluminum to enter the physical market and may cause regional delivery premiums and LME aluminum prices to fall. A sustained weak LME aluminum pricing environment or decreases in LME aluminum prices or regional premiums could have a material adverse effect on our business, financial condition, and results of operations or cash flow.
As we maintain large quantities of base inventory, significant and rapid decreases in the price of primary aluminum would reduce the realizable value of our inventory, negatively affecting our financial condition and results of operations. In addition, a drop in aluminum prices between the date of purchase and the final settlement date on derivative contracts used to mitigate the risk of price fluctuations may require us to post additional margin, which, in turn, could place a significant demand on our liquidity.
We purchase and sell LME forwards, futures and options contracts to reduce our exposure to changes in aluminum, copper and zinc prices. While exchanges have recently begun to offer derivative financial instruments to hedge premium differentials, we are only beginning to use these markets in our risk management practices. Despite the use of LME forwards, futures and options contracts, we remain exposed to the variability in prices of aluminum scrap and premium differentials. While aluminum scrap is typically priced in relation to prevailing LME prices, it may also be priced at a discount to LME aluminum (depending upon the quality of the material supplied). This discount is referred to in the industry as the “scrap spread” and fluctuates depending upon industry conditions. In addition, we purchase forwards, futures or options contracts to reduce our exposure to changes in natural gas and fuel prices and currency risks. To the extent our hedging contracts fix prices or exchange rates, if prices or exchange rates are below the fixed prices or rates established by such contracts, then our income and cash flows will be lower than they otherwise would have been.
The ability to realize the benefit of our hedging program is dependent upon factors beyond our control, such as counterparty risk as well as our customers making timely payment to us for products. In addition, at certain times, hedging options may be unavailable or not available on terms acceptable to us. In certain scenarios when market price movements result in a decline in value of our current derivatives position, our mark-to-market expense may exceed our credit line and counterparties may request the posting of cash collateral. We do not account for our forwards, futures, or options contracts as hedges of the underlying risks. As a result, unrealized gains and losses on our derivative financial instruments must be reported in our consolidated results of operations. The inclusion of such unrealized gains and losses in earnings may produce significant period to period earnings volatility that is not necessarily reflective of our underlying operating performance. See Item 7A. - “Quantitative and Qualitative Disclosures About Market Risk.”
The profitability of our operations depends, in part, on the availability of an adequate source of supplies.
The availability and price of aluminum could impact our margins and our ability to meet customer volumes. We rely on third parties for the supply of aluminum. There can be no assurance that we will be able to renew, or obtain replacements for, any of our supply arrangements on terms that are as favorable as our existing agreements or at all. In the future, we may face an increased risk of supply to meet our demand due to issues with suppliers, including their rising costs of production and their ability to sustain their business. Our inability to satisfy our future supply needs may impact our profitability and expose us to penalties as a result of contractual commitments with some of our customers.
In particular, we depend on scrap for our operations and acquire our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metals to us. In periods of low industry prices, suppliers may elect to hold scrap and wait for higher prices. In addition, the slowdown in industrial production and consumer consumption in the U.S. during the previous economic crisis reduced the supply of scrap metal available to us. Furthermore, exports of scrap out of North America and Europe can negatively impact scrap availability and scrap spreads. If an adequate supply of scrap metal is not available to us, we would be unable to use recycled metals in our products at desired volumes and our results of operations and financial condition would be materially and adversely affected.
Our operating segments also depend on external suppliers for rolling slab for certain products. The availability of rolling slab is dependent upon a number of factors, including general economic conditions, which can impact the supply of available rolling slab and LME pricing, where lower LME prices may cause certain rolling slab producers to curtail production. If rolling slab is less available, our margins could be impacted by higher premiums that we may not be able to pass along to our customers or we may not be able to meet the volume requirements of our customers, which may cause sales losses or result in damage claims from our customers. We maintain long-term contracts for certain volumes of our rolling slab requirements, for

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the remainder we depend on annual and spot purchases. If we enter into a period of persistent short supply, we could incur significant capital expenditures to internally produce 100% of our rolling slab requirements.
Our business requires substantial amounts of capital to operate; failure to maintain sufficient liquidity will have a material adverse effect on our financial condition and results of operations.
Our business requires substantial amounts of cash to operate and our liquidity and ability to access capital can be adversely affected by a number of factors, including many factors outside our control. For example, fluctuations in the LME prices for aluminum may result in increased cash costs for metal or scrap. In addition, if aluminum price movements result in a negative valuation of our current financial derivative positions, our counterparties may require posting of cash collateral. Furthermore, in an environment of falling LME prices, the borrowing base and availability under Aleris International’s asset backed multi-currency revolving credit facility (the “2015 ABL Facility”) may shrink and constrain our liquidity.
We may not be able to compete successfully in the industry end-uses we serve and aluminum may become less competitive with alternative materials, which could reduce our share of industry sales, sales volumes and selling prices.
Aluminum competes with other materials such as steel, plastic, composite materials and glass for various applications. Higher aluminum prices relative to substitute materials tend to make aluminum products less competitive with these alternative materials. The willingness of customers to accept substitutions for aluminum could reduce demand or prices for our rolled products, either of which could materially and adversely affect our business, financial condition, results of operations and cash flows.
Our aerospace and automotive customers use and continue to evaluate the further use of alternative materials to aluminum in order to reduce the weight and increase the efficiency of their products. Although trends in “light-weighting” have generally increased rates of using aluminum as a substitute for another material, the willingness of customers to accept substitutions for aluminum, or the ability of large customers to exert leverage in the marketplace to reduce the pricing for fabricated aluminum products, could adversely affect the demand for our products, and thus materially adversely affect our financial position, results of operations and cash flows.
We compete in the production and sale of rolled aluminum products with a number of other aluminum rolling mills, including large, single-purpose sheet mills, continuous casters and other multi-purpose mills, some of which are larger and have greater financial and technical resources than we do. We compete on the basis of quality, price, timeliness of delivery, technological innovation and customer service. Producers with a different cost basis may, in certain circumstances, have a competitive pricing advantage. Our competitors may be better able to withstand reductions in price or other adverse industry or economic conditions. In addition, a current or new competitor may also add or build new capacity, which could diminish our profitability by decreasing the equilibrium prices in our marketplace. Our competitive position may also be affected by industry consolidation, economies of scale in purchasing, production and sales, which accrue to the benefit of some of our competitors, exchange rate fluctuations that may make our products less competitive in relation to products of companies based in other countries and changes in regulation that have a disproportionately negative effect on us or our methods of production. In addition, technological innovation is important to our customers who require us to lead or keep pace with new innovations to address their needs, and new product offerings or new technologies in the marketplace may compete with or replace our products.
As we increase our international business, we encounter the risk that non-U.S. governments could take actions to enhance local production or local ownership at our expense. In addition, new competitors could emerge globally in emerging or transitioning markets with abundant natural resources, low-cost labor and energy, and lower environmental and other standards. This may pose a significant competitive threat to our business. Our competitive position may also be affected by exchange rate fluctuations that may make our products less competitive. Changes in regulation that have a disproportionately negative effect on us or our methods of production may also diminish our competitive advantage and industry position. In addition, technological innovation is important to our customers who require us to lead or keep pace with new innovations to address their needs. If we do not compete successfully, our share of industry sales, sales volumes and selling prices may be negatively impacted.
Additional competition could result in a reduced share of industry sales, reduced prices for our products and services, or increased expenditures, which could decrease revenues, reduce volumes or increase costs, all of which could have a negative effect on our financial condition and results of operations.
The loss of certain members of our management may have an adverse effect on our operating results.
Our success will depend, in part, on the efforts of our senior management and other key employees. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills that are critical to the operation of our business. If we lose or suffer an extended interruption in the services of one or more of our senior management or other key

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employees, our financial condition and results of operations may be negatively affected. Moreover, competition for the pool of qualified individuals may be high, and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise.
If we were to lose order volumes from any of our largest customers, our sales volumes, revenues and cash flows could be reduced.
Our business is exposed to risks related to customer concentration. Our ten largest customers were responsible for less than 32% of our consolidated revenues for the year ended December 31, 2016. No one customer accounted for more than 10% of those revenues. A loss of order volumes from, a loss of industry share by, or a significant downturn or deterioration in the business or financial condition of, any major customer could negatively affect our financial condition and results of operations by lowering sales volumes, increasing costs and lowering profitability. In addition, if we fail to successfully renew, renegotiate or re-price our long-term agreements or related arrangements with our largest customers, our results of operations, financial condition and cash flows could be materially adversely affected.
Our strategy of having dedicated facilities and arrangements with customers subjects us to the inherent risk of increased dependence on a single or a few customers with respect to these facilities. In such cases, our failure to renew such arrangements on terms as favorable as our existing contracts, the loss of such a customer, or the reduction of that customer’s business at one or more of our facilities, could negatively affect our financial condition and results of operations, and we may be unable to timely replace, or replace at all, lost order volumes. In addition, several of our customers have become involved in bankruptcy or insolvency proceedings and have defaulted on their obligations to us in recent years. Similar incidents in the future would adversely impact our financial conditions and results of operations.
Customers in our end-uses, including aerospace and automotive, may consolidate and grow in a manner that could affect their relationships with us. For example, if one of our competitors’ customers acquires any of our customers, we may lose that acquired customer’s business. Additionally, if our customers become larger and more concentrated, they could exert pricing pressure on all suppliers, including us. Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of consolidation, pricing or other methods of competition, our financial position, results of operations and cash flows may be adversely affected.
We do not have long-term contractual arrangements with a substantial number of our customers, and our sales volumes and revenues could be reduced if our customers switch their suppliers.
Approximately 65% of our consolidated revenues for the year ended December 31, 2016 were generated from customers who do not have long-term contractual arrangements with us. These customers purchase products and services from us on a purchase order basis and may choose not to continue to purchase our products and services. Any significant loss of these customers or a significant reduction in their purchase orders could have a material negative impact on our sales volume and business.
Our business requires substantial capital investments that we may be unable to fulfill, and we may be unable to timely complete our expected capital investments or may be unable to achieve the anticipated benefits of such investments.
Our operations are capital intensive. Our capital expenditures were $358.1 million, $313.6 million and $164.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. Capital expenditures over the past three years include spending related to maintenance and our strategic investments, including investments to upgrade and expand production capacity at existing facilities and the Zhenjiang rolling mill. We are currently investing over $400 million to add ABS capabilities at our rolling mill in Lewisport, Kentucky in order to meet increasing demand in North America. We are also investing in upgrades to other key non-ABS equipment at the facility, including widening the hot mill, to capture additional opportunities. We began construction in the fourth quarter of 2014 and expect to begin shipping ABS from this facility in 2017. There can be no assurance that we will be able to complete our capital expenditure projects on schedule or at all, or that we will be able to execute such projects quickly enough to respond to changing industry conditions or that we will be able to achieve the anticipated benefits of such capital expenditures. In particular, our capital expenditure projects may not result in the improvements in our business that we anticipate and the realization of any return on these projects is dependent on a number of factors, including general economic conditions and other events beyond our control, whether our assumptions in making the investment were correct and changes in the factors underlying our investment decision.
In recent periods, we have not generated sufficient cash flows from operations to fund our capital expenditure requirements. In the future, we may not generate sufficient operating cash flows and our external financing sources may not be available in an amount sufficient to enable us to make anticipated capital expenditures, service or refinance our indebtedness or fund other liquidity needs. If we are not able to reduce our high leverage and fund capital expenditures through the generation of cash flows from our business, we would have to do one or more of the following: raise additional capital through debt or

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equity issuances or both; cancel, delay or reduce current and future business initiatives; or sell properties or assets. If the cost of our capital expenditures exceed budgeted amounts, and/or the time period for completion is longer than initially anticipated, our business, financial condition and results of operations could be materially adversely affected. In addition, capital expenditure projects may require planned outages at existing facilities and/or cause production inefficiencies. Such outages, production inefficiencies and other operational difficulties have resulted, and may in the future result, in significant production downtime at facilities undergoing capital expenditure projects, which has negatively impacted, and may in the future negatively impact, our business, results of operations and financial condition. If we are unable to expand our production capacity, make upgrades or purchase new plants and equipment, we may be unable to take advantage of increased demand for our products and our financial condition and results of operations could be adversely affected by operational difficulties, higher maintenance costs, lower sales volumes due to the impact of reduced product quality, penalties for late deliveries, reputational harm and other competitive influences.
Our production capacity might not be able to meet growing end-use demand or changing industry conditions.
We may be unable to meet end-use demand due to production capacity constraints or operational challenges. Meeting such demand may require us to make substantial capital investments to repair, maintain, upgrade and expand our facilities and equipment. Notwithstanding our ongoing plans and investments to increase our capacity, we may not be able to expand our production capacity quickly enough in response to changing industry conditions, and there can be no assurance that our production capacity will be able to meet our obligations and the growing end-use demand for our products. If we are unable to adequately expand our production capacity, we may be unable to take advantage of improved industry conditions and increased demand for our products.
We may not be able to successfully develop and implement new technology initiatives.
We have invested in, and are involved with, a number of technology and process initiatives. Several technical aspects of these initiatives are still unproven and the eventual commercial outcomes cannot be assessed with any certainty. Even if we are successful with these initiatives, we may not be able to deploy them in a timely fashion or at all. Accordingly, the costs and benefits from our investments in new technologies and the consequent effects on our financial results may vary from present expectations.
Our Asia Pacific operations may require significant funding support that we may be unable to fulfill.
The Zhenjiang rolling mill began limited production in the beginning of 2013. We continued the start-up phase of that operation through 2014, growing our sales as the year progressed, and exited the start-up phase of operations in the first quarter of 2015. The mill required funding for residual capital expenditures, working capital, and principal and interest on third party debt, reaching an aggregate of $44.6 million in 2016. This funding was obtained from capital provided by us.
Significant investment in the Zhenjiang rolling mill is needed to fund our anticipated future sales growth. Working capital requirements are anticipated to be funded with cash generated from the Zhenjiang rolling mill operations and capital provided by us. We also have an RMB 410.0 million (or equivalent to approximately $59.0 million as of December 31, 2016) revolving credit facility (the “Zhenjiang Revolver”) provided by the People’s Bank of China. The Chinese government exercises significant control over economic growth in China through the allocation of resources, including imposing policies that impact particular industries or companies in different ways, so we may experience future disruptions to our access to capital in the Chinese region. In addition, we have to meet certain conditions to be able to draw on the Zhenjiang Revolver. We cannot be certain that we will be able to draw all amounts committed under the Zhenjiang Revolver in the future. We also may not generate sufficient operating cash flows and our external financing sources may not be available in an amount sufficient to enable us to fund the anticipated working capital needs of the Zhenjiang rolling mill. To the extent that funding is not available under the Zhenjiang Revolver, we may need to further increase the amount of capital necessary to fund the Zhenjiang rolling mill from our own or other sources of capital. The availability of financing, as well as future actions or policies of the Chinese government, could materially affect the funding of our working capital needs in China, which may diminish or delay our ability to produce and sell material from the Zhenjiang rolling mill.
Our business involves significant activity in Europe, and adverse conditions and disruptions in European economies could have a material adverse effect on our operations or financial performance.
A material portion of our sales are generated by customers located in Europe and the euro is the functional currency of substantially all of our European-based operations. The financial markets remain concerned about the ability of certain European countries to finance their deficits and service growing debt burdens amidst difficult economic conditions. This loss of confidence has led to rescue measures by Eurozone countries and the International Monetary Fund. Despite these measures, concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries. In addition, the actions required to be taken by those countries as a condition to

17

            



rescue packages, and by other countries to mitigate similar developments in their economies, have resulted in increased political discord within and among Eurozone countries. The interdependencies among European economies and financial institutions have also exacerbated concern regarding the stability of European financial markets generally. These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries, or, in more extreme circumstances, the possible dissolution of the euro currency entirely. Should the euro dissolve entirely, the legal and contractual consequences for holders of euro-denominated obligations would be determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related issues, could materially adversely affect the value of our euro-denominated assets and obligations. In addition, concerns over the effect of this financial crisis on financial institutions in Europe and globally could have a material adverse impact on the capital markets generally. Persistent disruptions in the European financial markets, the overall stability of the euro and the suitability of the euro as a single currency, the failure of a significant European financial institution or additional political and regulatory developments, could have a material adverse impact on our operations or financial performance.
In addition, the outcome of the United Kingdom referendum where voters elected for the United Kingdom to leave the European Union (Brexit) as well as upcoming elections in France and Germany in 2017 could have implications on economic conditions globally as a result of changes in policy direction which may in turn influence the economic outlook for the European Union and its key trading partners. There can be no assurance that the actions we have taken or may take in response to global economic conditions more generally may be sufficient to counter any continuation or recurrence of the downturn or disruptions. A significant global economic downturn or disruptions in the financial markets would have a material adverse effect on our operations or financial performance.
Our international operations expose us to certain risks inherent in doing business abroad.
We have operations in the United States, Germany, Belgium and China. We continue to explore opportunities to expand our international operations. Our international operations generally are subject to risks, including:
changes in U.S. and international governmental regulations, trade restrictions and laws, including tax laws and regulations;
compliance with U.S. and foreign anti-corruption and trade control laws, such as the Foreign Corrupt Practices Act, export controls and economic sanction programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control;
currency exchange rate fluctuations;
tariffs and other trade barriers;
the potential for nationalization of enterprises or government policies favoring local production;
interest rate fluctuations;
high rates of inflation;
currency restrictions and limitations on repatriation of profits;
differing protections for intellectual property and enforcement thereof;
differing and, in some cases, more stringent labor regulations;
divergent environmental laws and regulations; and
political, economic and social instability.
The occurrence of any of these events could cause our costs to rise, limit growth opportunities or have a negative effect on our operations and our ability to plan for future periods. In certain regions, the degree of these risks may be higher due to more volatile economic conditions, less developed and predictable legal and regulatory regimes and increased potential for various types of adverse governmental action.
The financial condition and results of operations of some of our operating entities are reported in various currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. As a result, appreciation of the U.S. dollar against these currencies may have a negative impact on reported revenues and operating profit while depreciation of the U.S. dollar against these currencies may generally have a positive effect on reported revenues and operating profit. In addition, a portion of the revenues generated by our international operations are denominated in U.S. dollars, while the majority of costs incurred are denominated in local currencies. As a result, appreciation in the U.S. dollar may have a positive impact on margins at the time of sale and on the subsequent translation of the resulting accounts receivable until collection, while depreciation of the U.S. dollar may have the opposite effect. While we engage in hedging activity to attempt to mitigate currency risk, this may not fully protect our business, financial condition or results of operations from adverse effects due to currency fluctuations.

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Current environmental liabilities as well as the cost of compliance with, and liabilities under, environmental, health and safety laws could increase our operating costs and negatively affect our financial condition and results of operations.
Our operations are subject to federal, state, local and foreign laws and regulations, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the investigation and remediation of contaminated sites and employee health and safety. Future environmental, health and safety regulations could impose stricter compliance requirements on the industries in which we operate. We could incur substantial costs in order to achieve and maintain compliance with these laws and regulations. For example, additional pollution control equipment, process changes, or other environmental control measures may be needed at some of our facilities to meet future requirements. Additionally, evolving regulatory standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on earnings and cash flows.
Financial responsibility for contaminated property can be imposed on us where current or past operations have had an environmental impact. Such liability can include the cost of investigating and remediating contaminated soil or ground water, fines and penalties sought by environmental authorities, and damages arising out of personal injury, contaminated property and other toxic tort claims, as well as lost or impaired natural resources. Certain environmental laws impose strict, and in certain circumstances joint and several, liability for certain kinds of matters, such that a person can be held liable without regard to fault for all of the costs of a matter even though others were also involved or responsible. The costs of all such matters have not been material to net income (loss) for any accounting period since January 1, 2012. However, future remedial requirements at currently or formerly owned or operated properties or adjacent areas, or at properties to which we have disposed of hazardous substances, could result in significant liabilities. We are subject to or a party to certain environmental claims and matters and there can be no assurance that those matters will be resolved favorably or that such matters will not adversely affect our business, results of operations or financial condition. See “Business-Environmental.” We have accrued costs relating to these matters that are reasonably expected to be incurred based on available information. However, it is possible that actual costs may differ, perhaps significantly, from the amounts expected or accrued. Similarly, the timing of those expenditures may occur faster than anticipated. These differences could negatively affect our financial position, results of operations and cash flows.
Changes in environmental, health and safety requirements or changes in their enforcement could materially increase our costs. For example, if salt cake, a by-product from some of our operations, were to become classified as a hazardous waste in the U.S., the costs to manage and dispose of it would increase and could result in significant increased expenditures.
New governmental regulation relating to greenhouse gas emissions may subject us to significant new costs and restrictions on our operations.
Climate change is receiving increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. There are legislative and regulatory initiatives in various jurisdictions that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to buy allowances to offset emissions of greenhouse gas. In addition, several states, including states where we have manufacturing facilities, are considering various greenhouse gas registration and reduction programs. Certain of our manufacturing facilities use significant amounts of energy, including electricity and natural gas, and certain of our facilities emit amounts of greenhouse gas above certain minimum thresholds that are likely to be affected by existing proposals. Greenhouse gas regulation could increase the price of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to or the use of natural gas, require us to purchase allowances to offset our own emissions or result in an overall increase in our costs of raw materials, any one of which could significantly increase our costs, reduce our competitiveness in a global economy or otherwise negatively affect our business, operations or financial results. While future global emission regulation appears likely, it is too early to predict how this regulation may affect our business, operations or financial results.
We could experience labor disputes and work stoppages that could disrupt our business.
Approximately 63% of our U.S. employees and substantially all of our non-U.S. employees, located primarily in Europe where union membership is common, are represented by unions or equivalent bodies and are covered by collective bargaining or similar agreements which are subject to periodic renegotiation. Although we believe that we will successfully negotiate new collective bargaining agreements when the current agreements expire, these negotiations may not prove successful, may result in a significant increase in the cost of labor, or may break down and result in the disruption or cessation of our operations.
Labor negotiations may not conclude successfully, and, in that case or any other work stoppages or labor disturbances may occur. Existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities. Any such stoppages or disturbances may have a negative impact on our financial condition and results of operations by limiting plant production, sales volumes and profitability.

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Further aluminum industry consolidation could impact our business.
The aluminum industry has experienced consolidation over the past several years, and there may be further industry consolidation in the future. Although current industry consolidation has not yet had a significant negative impact on our business, if we do not have sufficient industry end-use presence or are unable to differentiate ourselves from our competitors, we may not be able to compete successfully against other companies. If as a result of consolidation, our competitors are able to obtain more favorable terms from suppliers or otherwise take actions that could increase their competitive strengths, our competitive position and therefore our business, results of operations and financial condition may be materially adversely affected.
Our operations present significant risk of injury or death. We may be subject to claims that are not covered by or exceed our insurance.
Because of the heavy industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors, notwithstanding the safety precautions we take. Our operations are subject to regulation by various federal, state and local agencies responsible for employee health and safety, including the Occupational Safety and Health Administration, which has from time to time levied fines against us for certain isolated incidents. While we have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future. These types of incidents may not be covered by or may exceed our insurance coverage and may have a material adverse effect on our results of operations and financial condition.
We are subject to unplanned business interruptions that may materially adversely affect our business.
Our operations may be materially adversely affected by unplanned business interruptions caused by events such as explosions, fires, war or terrorism, inclement weather, natural disasters, accidents, equipment failures, information technology systems and process failures, electrical blackouts or outages, transportation interruptions and supply interruptions. Operational interruptions at one or more of our production facilities could cause substantial losses and delays in our production capacity or increase our operating costs. In addition, replacement of assets damaged by such events could be difficult or expensive, and to the extent these losses are not covered by insurance or if our insurance policies have significant deductibles, our financial position, results of operations and cash flows may be materially adversely affected by such events. Furthermore, because customers may be dependent on planned deliveries from us, customers that have to reschedule their own production due to our delivery delays may be able to pursue financial claims against us, and we may incur costs to correct such problems in addition to any liability resulting from such claims. Interruptions may also harm our reputation among actual and potential customers, potentially resulting in a loss of business.
Derivatives legislation could have an adverse impact on our ability to hedge risks associated with our business and on the cost of our hedging activities.
We use over-the-counter (“OTC”) derivatives products to hedge our metal commodity, energy and currency risks and, historically, our interest rate risk. Legislation has been adopted to increase the regulatory oversight of the OTC derivatives markets and impose restrictions on certain derivatives transactions and participants in these markets, which could affect the use of derivatives in hedging transactions. In the U.S., for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”) was signed into law on July 21, 2010. The Dodd-Frank Act includes extensive provisions regulating the derivatives market, and many of the regulations implementing the derivatives provisions have become effective and additional requirements will become effective in the future. As such, we have become and could continue to become subject to additional regulatory costs, both directly and indirectly, through increased costs of doing business with more market intermediaries that are now subject to extensive regulation pursuant to the Dodd-Frank Act. For example, derivatives dealers may seek to pass to us the cost of any increased margin, capital or other regulatory requirements that they are subject to under Dodd-Frank, which could have an adverse effect on our ability to hedge risks associated with our business and on the cost of our hedging activities. In addition, if major financial institutions are forced to operate under more restrictive capital constraints and regulations, there could be less liquidity in the derivative markets, which could have a negative effect on our ability to hedge and transact with creditworthy counterparties. As the regulatory regime is still developing and additional regulations have not been finalized or fully implemented, the ultimate costs of Dodd-Frank and similar legislation in other jurisdictions, including the European Union member states, on our business remain uncertain. However, such costs could be significant and have an adverse effect on our results of operations and financial condition. Additional regulations in the U.S. or internationally that impact the derivatives market and market participants could also add significant cost or operational constraints that might have an adverse effect on our results of operations and financial condition.

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Our pension obligations are currently underfunded. We may have to make significant cash payments to our pension plans, which would reduce the cash available for our business and have an adverse effect on our financial condition, results of operations and ability to satisfy our obligations under our indebtedness.
Our U.S. defined benefit pension plans cover certain salaried and non-salaried employees at our corporate headquarters and within our North America segment. The plan benefits are based on age, years of service and employees’ eligible compensation during employment for all employees not covered under a collective bargaining agreement and on stated amounts based on job grade and years of service prior to retirement for non-salaried employees covered under a collective bargaining agreement. Our funding policy for the U.S. defined benefit pension plans is to make annual contributions based on advice from our actuaries and the evaluation of our cash position, but not less than minimum statutory requirements. All of the minimum funding requirements of the U.S. Internal Revenue Code (“Code”) and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) for these plans have been met as of December 31, 2016, at which time, the U.S. defined benefit pension plans, in the aggregate, were underfunded (on a Generally Accepted Accounting Principles in the United States of America (“GAAP”) basis) by approximately $44.5 million. The liabilities could increase or decrease, depending on a number of factors, including future changes in benefits, investment returns, and the assumptions used to calculate the liability. The current underfunded status of the U.S. defined benefit plans requires us to notify the Pension Benefit Guaranty Corporation (“PBGC”) of certain “reportable events” (within the meaning of ERISA), including if we pay certain extraordinary dividends. Under Title IV of ERISA, the PBGC has the authority under certain circumstances or upon the occurrence of certain events to terminate an underfunded pension plan. One such circumstance is the occurrence of an event that unreasonably increases the risk of unreasonably large losses to the PBGC. We believe it is unlikely that the PBGC would terminate any of our plans, which would result in our incurring a liability to the PBGC that could be equal to the entire amount of the underfunding. However, in the event we increase our indebtedness and/or pay an extraordinary dividend, the PBGC could enter into a negotiation with us that could cause us to materially increase or accelerate our funding obligations under our U.S. defined benefit pension plans. The occurrence of either of those actions could have an adverse effect on our financial condition, results of operations and ability to satisfy our obligations under our indebtedness.
We are subject to risks relating to our information technology systems.
Our global operations are managed through numerous information technology systems. If these systems are damaged, cease to function properly or are subject to a cyber security breach, we may suffer an interruption in our ability to manage and operate the business which may have a material adverse effect on our financial condition and results of operations. Further, we are continually modifying and enhancing our information systems and technology to increase productivity and efficiency. As new systems and technologies are implemented, we could experience unanticipated difficulties resulting in unexpected costs and adverse impacts to our manufacturing and other business processes. When implemented, the information systems and technology may not provide the benefits anticipated and could add costs and complications to ongoing operations, which may have a material adverse effect on our financial condition and results of operations.
Changes in applicable domestic or foreign tax laws and regulations or disputes with taxing authorities could adversely affect our business, financial condition and profitability by increasing our tax liabilities and tax compliance costs.
The Company is subject to income taxes in the United States and various foreign jurisdictions. Changes in applicable domestic or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect the Company’s business, financial condition and profitability by increasing our tax liabilities and tax compliance costs. The Company’s future results of operations could be adversely affected by changes in its effective tax rate as a result of a change in the mix of earnings in jurisdictions with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation and rates, changes in generally accepted accounting principles and changes in the valuation of deferred tax assets and liabilities. In particular, potential corporate tax reform and tax law changes could have a substantial impact, positive or negative, on the Company’s effective tax rate, cash tax expenditures, and deferred tax assets and liabilities. For example, certain proposed tax law changes in the United States could limit or eliminate the deduction for interest expense and could result in changes to the taxation of cross-border transactions. It is unclear whether, when, how and to what extent any of these (or other) corporate tax reforms or tax law changes will be adopted.
The Merger, if consummated, will result in an ownership change of Aleris Corporation under Section 382 of the Internal Revenue Code, in which case, our ability to utilize our NOL carryforwards to offset future taxable income for U.S. federal income tax purposes may be limited, which could result in higher tax liabilities.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an ownership change is subject to a limitation on its ability to utilize its pre-ownership change net operating loss carryforwards, which we refer to as “NOL carryforwards,” to offset future taxable income for U.S. federal income tax purposes. As of December 31, 2016, Aleris Corporation and its consolidated group had U.S. federal NOL carryforwards of approximately $286.8 million. As a result of the Merger, if consummated, Aleris Corporation will undergo an ownership change that will

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subject our NOL carryforwards to an annual use limitation under Section 382 of the Code. This limitation may affect our ability to utilize our NOL carryforwards to offset future taxable income following the Merger, which could result in higher tax liabilities and could cause some portion of our NOL carryforwards to expire unused.
Our internal controls over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur.
Each quarter, our chief executive officer and chief financial officer evaluate our internal controls over financial reporting and our disclosure controls and procedures, which includes a review of the objectives, design, implementation and effect of the controls relating to the information generated for use in our financial reports. In the course of our controls evaluation, we seek to identify data errors or control problems and to confirm that appropriate corrective action, including process improvements, are being undertaken. The overall goals of these various evaluation activities are to monitor our internal controls over financial reporting and our disclosure controls and procedures and to make modifications as necessary. Our intent in this regard is that our internal controls over financial reporting and our disclosure controls and procedures will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be satisfied. These inherent limitations include the possibility that judgments in our decision-making could be faulty, and that isolated breakdowns could occur because of simple human error or mistake. We cannot provide absolute assurance that all possible control issues within our company have been detected. The design of our system of controls is based in part upon certain assumptions about the likelihood of events, and there can be no assurance that any design will succeed absolutely in achieving our stated goals. Because of the inherent limitations in any control system, misstatements could occur and not be detected. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide reliable financial reports could harm our business.
Risks Related to Our Indebtedness
Our substantial leverage and debt service obligations could adversely affect our financial condition and restrict our operating flexibility.
We have substantial consolidated debt and, as a result, significant debt service obligations. As of December 31, 2016, our total consolidated indebtedness was $1.5 billion, excluding $39.8 million of outstanding letters of credit and $250.0 million of additional 9 1/2% Senior Secured Notes (as defined below) that were issued on February 14, 2017. We also would have had the ability to borrow up to $120.7 million under the 2015 ABL Facility. Aleris Zhenjiang, which is an unrestricted subsidiary and non-guarantor under the indentures governing the $500.0 million aggregate original principal amount of 7 7/8% Senior Notes due 2020 (the “7 7/8% Senior Notes”) and the $550.0 million, together with the $250.0 million of additional notes issued on February 14, 2017, aggregate original principal amount of 9 1/2% Senior Secured Notes due 2021 (the “9 1/2% Senior Secured Notes” and, together with the 7 7/8% Senior Notes, the “Senior Notes”), had the ability to borrow up to an additional $36.9 million (on a U.S. dollar equivalent subject to exchange rate fluctuations) under the Zhenjiang Revolver. Our substantial level of debt and debt service obligations could have important consequences, including the following:
making it more difficult for us to satisfy our obligations with respect to our indebtedness, which could result in an event of default under the indentures governing the Senior Notes and the agreements governing our other indebtedness;
limiting our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements;
increasing our vulnerability to general economic downturns, competition and industry conditions, which could place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore we may be unable to take advantage of opportunities that our leverage prevents us from exploiting;
exposing our cash flows to changes in floating rates of interest such that an increase in floating rates could negatively impact our cash flows;
imposing additional restrictions on the manner in which we conduct our business under financing documents, including restrictions on our ability to pay dividends, make investments, incur additional debt and sell assets; and
reducing the availability of our cash flows to fund our working capital requirements, capital expenditures, acquisitions, investments, other debt obligations and other general corporate requirements, because we will be required to use a substantial portion of our cash flows to service debt obligations.
The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations, cash flows and ability to satisfy our obligations under our indebtedness.

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Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur substantial additional indebtedness, including secured indebtedness, in the future. In particular, we may incur additional debt to finalize the ongoing North America ABS Project and related equipment upgrades at the Lewisport, Kentucky facility. Although the credit agreement governing the 2015 ABL Facility and the indentures governing the Senior Notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and any indebtedness incurred in compliance with these restrictions could be substantial. Aleris International’s ability to borrow under the 2015 ABL Facility will remain limited by the amount of the borrowing base. In addition, the credit agreement governing the 2015 ABL Facility and the indentures governing the Senior Notes allow Aleris International to incur a significant amount of indebtedness in connection with acquisitions and a significant amount of purchase money debt. If new debt is added to our and/or our subsidiaries’ current debt levels, the related risks that we and they face would be increased.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt obligations could harm our business, financial condition and results of operations.
Our ability to satisfy our debt obligations will primarily depend upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments to satisfy our debt obligations. Included in such factors are the requirements, under certain scenarios, of our counterparties that we post cash collateral to maintain our hedging positions and the timing and costs of current and future capital expenditure projects. In addition, LME price declines, by reducing the borrowing base, could limit availability under the 2015 ABL Facility and further constrain our liquidity.
If we do not generate sufficient cash flow from operations to satisfy our debt obligations, including payments on the Senior Notes, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the condition of the capital and credit markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the credit agreement governing the 2015 ABL Facility and the indentures governing the Senior Notes, may restrict us from adopting some of these alternatives, which in turn could exacerbate the effects of any failure to generate sufficient cash flow to satisfy our debt obligations. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms.
Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations at all or on commercially reasonable terms, would have an adverse effect, which could be material, on our business, financial condition and results of operations, may restrict our current and future operations, particularly our ability to respond to business changes or to take certain actions, and would have an adverse effect on our ability to satisfy our debt service obligations in respect of the Senior Notes.
The terms of the 2015 ABL Facility and the indentures governing the Senior Notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.
The credit agreement governing the 2015 ABL Facility and the indentures governing the Senior Notes contain, and the terms of any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interests. The credit agreement governing the 2015 ABL Facility and the indentures governing the Senior Notes include covenants that, among other things, restrict the ability of Aleris International and certain of its subsidiaries’ to:
incur additional indebtedness;
pay dividends on capital stock and make other restricted payments;
make investments and acquisitions;
engage in transactions with our affiliates;
sell assets;
merge or consolidate with other entities; and
create liens.
In addition, Aleris International’s ability to borrow under the 2015 ABL Facility is limited by a borrowing base and, under certain circumstances, the 2015 ABL Facility requires Aleris International to comply with a minimum fixed charge

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coverage ratio and may require Aleris International to reduce its debt or take other actions in order to comply with this ratio. See Note 9, “Long-Term Debt,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K for further details. Moreover, the 2015 ABL Facility provides discretion to the agent bank acting on behalf of the lenders to impose additional availability and other reserves, which could materially impair the amount of borrowings that would otherwise be available to Aleris International. There can be no assurance that the agent bank will not impose such reserves or, were it to do so, that the resulting impact of this action would not materially and adversely impair our liquidity.
A breach of any of these provisions could result in a default under the 2015 ABL Facility or either of the indentures governing the Senior Notes, as the case may be, that would allow lenders or noteholders, as applicable, to declare the applicable outstanding debt immediately due and payable. If we are unable to pay those amounts because we do not have sufficient cash on hand or are unable to obtain alternative financing on acceptable terms, the lenders or noteholders, as applicable, could initiate a bankruptcy proceeding or, in the case of the 2015 ABL Facility and the 9 1/2% Senior Secured Notes, proceed against any assets that serve as collateral to secure such debt. The lenders under the 2015 ABL Facility will also have the right in these circumstances to terminate any commitments they have to provide further borrowings.
These restrictions could limit our ability to obtain future financings, make needed capital expenditures, withstand future downturns in our business or the economy in general or otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of limitations imposed on Aleris International and its subsidiaries by the restrictive covenants under the 2015 ABL Facility and the Senior Notes.
A downgrade of our ratings by a credit rating agency could impair our business, financial condition and results of operations, and our business relationships could be adversely affected.
A deterioration of our financial position or a downgrade of our credit ratings could adversely affect our financing, limit our access to the capital or credit markets or our liquidity facilities, or otherwise adversely affect our ability to obtain new financing on favorable terms or at all, result in more restrictive covenants in agreements governing the terms of any future indebtedness that we incur, or otherwise impair our business, financial condition and results of operations. Moreover, it could also increase our borrowing costs, trigger the posting of cash collateral and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. As discussed above, we enter into various forms of hedging arrangements against commodity, energy and currency risks. Financial strength and credit ratings are important to the availability and terms of these hedging and financing activities. As a result, any downgrade of our credit ratings may make it more costly for us to engage in these activities.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our production and manufacturing facilities are listed below by reportable segment.
Reportable Segment
 
Location
 
Owned / Leased
 
 
 
 
 
North America
 
Clayton, New Jersey
 
Owned
 
 
Buckhannon, West Virginia
 
Owned
 
 
Ashville, Ohio
 
Owned
 
 
Richmond, Virginia
 
Owned
 
 
Uhrichsville, Ohio
 
Owned
 
 
Lewisport, Kentucky
 
Owned
 
 
Davenport, Iowa (1)
 
Owned
 
 
Lincolnshire, Illinois
 
Owned
 
 
 
 
 
Europe
 
Duffel, Belgium
 
Owned
 
 
Koblenz, Germany
 
Owned
 
 
Voerde, Germany
 
Owned
 
 
 
 
 
Asia Pacific
 
Zhenjiang, PRC
 
Granted Land Rights
(1)Two facilities at this location.
    The following table presents the average operating rates for each of our three operating segments’ facilities for the years ended December 31, 2016, 2015 and 2014:
 
 
For the years ended December 31,
Segment
 
2016
 
2015
 
2014
North America
 
73%
 
75%
 
78%
Europe
 
90
 
90
 
90
Asia Pacific
 
78
 
89
 
37


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The Zhenjiang rolling mill, which began limited production in 2013, is located in Zhenjiang City, Jiangsu Province in China and has been granted a 50 year right to occupy the land on which the factory resides.
Our Cleveland, Ohio corporate facility houses our principal executive offices, as well as our offices for North America, and we currently lease approximately 57,419 square feet for those purposes.
We believe that our facilities are suitable and adequate for our operations.
ITEM 3. LEGAL PROCEEDINGS.
We are a party from time to time to what we believe are routine litigation and proceedings considered part of the ordinary course of our business. We believe that the outcome of such existing proceedings would not have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is privately held. There is no established public trading market for our common stock.
Holders
As of February 5, 2017, there were 179 holders of our common stock.
Dividends
We do not intend to pay any cash dividends on our common stock for the foreseeable future and instead may retain earnings, if any, for future operation and expansion and debt repayment. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant.
We depend on our subsidiaries for cash and unless we receive dividends, distributions, advances, transfers of funds or other cash payments from our subsidiaries, we will be unable to pay any cash dividends on our common stock in the future. However, none of our subsidiaries are obligated to make funds available to us for payment of dividends. Further, the 2015 ABL Facility, the indentures governing the Senior Notes and the China Loan Facility (as defined in Item 7 below) contain a number of covenants that, among other things and subject to certain exceptions, restrict the ability of our subsidiaries to pay dividends on their capital stock and make other restricted payments. See Item 7. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for further details of the 2015 ABL Facility, the Senior Notes and the China Loan Facility.
Securities Authorized for Issuance Under Equity Compensation Plans
For information on the Aleris Corporation 2010 Equity Compensation Plan, see Item 11. – “Executive Compensation – Equity compensation plan information.”
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents the selected historical financial and other operating data of the Company derived from our consolidated financial statements. The audited consolidated statements of operations, consolidated statements of comprehensive (loss) income, consolidated statements of cash flows and consolidated statements of changes in stockholders’ equity and

25

            



redeemable noncontrolling interest for the years ended December 31, 2016, 2015 and 2014 and the audited consolidated balance sheet as of December 31, 2016 and 2015 are included elsewhere in this annual report on Form 10-K. See Item 8. – “Financial Statements and Supplementary Data.”
We have reported the recycling and specification alloys and extrusions businesses as discontinued operations for all periods presented, and reclassified the results of operations of these businesses into a single caption on the accompanying Consolidated Statements of Operations as “Income from discontinued operations, net of tax.” For additional information, see Note 17, “Discontinued Operations,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. Except as otherwise indicated, the discussion of the Company’s business and financial information throughout this annual report on Form 10-K refers to the Company’s continuing operations and the financial position and results of operations of its continuing operations, while the presentation and discussion of our cash flows for the years ended December 31, 2015, 2014, 2013 and 2012 reflect the combined cash flows from our continuing and discontinued operations.
The following information should be read in conjunction with, and is qualified by reference to, our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated audited financial statements and the notes included elsewhere in this annual report on Form 10-K, as well as other financial information included in this annual report on Form 10-K.
(Dollars in millions, metric tons in thousands)
For the years ended December 31,
2016
 
2015
 
2014
 
2013
 
2012
Statement of Operations Data (a):
 
 
 
 
 
 
 
 
 
Revenues
$
2,663.9

 
$
2,917.8

 
$
2,882.4

 
$
2,520.8

 
$
2,552.3

Operating income (loss)
51.9

 
(8.3
)
 
11.7

 
26.2

 
118.9

(Loss) income from continuing operations before income taxes
(32.3
)
 
(95.0
)
 
(75.7
)
 
(77.2
)
 
64.7

Net (loss) income attributable to Aleris Corporation
(75.6
)
 
48.7

 
87.1

 
(37.1
)
 
107.5

Balance Sheet Data (at end of period) (a):
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
55.6

 
$
62.2

 
$
28.6

 
$
51.3

 
$
582.9

Total assets (b)
2,389.9

 
2,160.5

 
2,853.0

 
2,468.9

 
2,902.3

Total debt (b)
1,466.2

 
1,118.3

 
1,478.2

 
1,229.3

 
1,219.6

Redeemable noncontrolling interest

 

 
5.7

 
5.7

 
5.7

Total Aleris Corporation stockholders’ equity (c)
216.6

 
327.2

 
292.6

 
368.4

 
633.9

 
 
 
 
 
 
 
 
 
 
Other Financial Data:
 
 
 
 
 
 
 
 
 
Net cash provided (used) by:
 
 
 
 
 
 
 
 
 
Operating activities
$
12.0

 
$
119.5

 
$

 
$
31.9

 
$
152.5

Investing activities
(354.6
)
 
273.7

 
(265.3
)
 
(235.4
)
 
(411.1
)
Financing activities
338.1

 
(359.9
)
 
246.1

 
(331.6
)
 
617.2

Depreciation and amortization
104.9

 
123.8

 
157.6

 
129.5

 
84.8

Capital expenditures
(358.1
)
 
(313.6
)
 
(164.8
)
 
(238.3
)
 
(390.2
)
 
 
 
 
 
 
 
 
 
 
Other Data (a):
 
 
 
 
 
 
 
 
 
Metric tons of finished product shipped:
 
 
 
 
 
 
 
 
 
North America
486.3

 
492.8

 
482.0

 
372.3

 
395.7

Europe
326.7

 
313.6

 
301.6

 
297.7

 
282.4

Asia Pacific
22.6

 
21.8

 
12.8

 
4.8

 

Intra-entity shipments
(6.1
)
 
(5.8
)
 
(2.6
)
 
(1.5
)
 
(1.9
)
Total
829.5

 
822.4

 
793.8

 
673.3

 
676.2

(a)
As a result of the divestitures of the recycling and specification alloys and extrusions businesses, the Company has presented the results of operations and financial position of these segments as discontinued operations for all periods presented.
(b)
Total assets and total debt at December 31, 2014, 2013 and 2012 were not restated upon the adoption of Accounting Standards Update No. 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.”
(c)
We paid $313.0 million ($10.00 per share) in cash dividends to our stockholders during the year ended December 31, 2013.
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us and the industry in which we operate and beliefs and assumptions made by our management. Statements contained in this annual report that are not historical in nature are considered to be forward-looking statements. They include statements regarding the Merger, our expectations, hopes, beliefs, estimates, intentions or strategies regarding the

26

            



future. Statements regarding future costs and prices of commodities, production volumes, industry trends, anticipated cost savings, anticipated benefits from new products, facilities, acquisitions or divestitures, projected results of operations, achievement of production efficiencies, capacity expansions, future prices and demand for our products and estimated cash flows and sufficiency of cash flows to fund capital expenditures and debt obligations are forward-looking statements. The words “may,” “could,” “would,” “should,” “will,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “look forward to,” “intend” and similar expressions are intended to identify forward-looking statements.
Forward-looking statements should be read in conjunction with the cautionary statements and other important factors included in this annual report under “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which include descriptions of important factors which could cause actual results to differ materially from those contained in the forward-looking statements. Our expectations, beliefs and projections are expressed in good faith, and we believe we have a reasonable basis to make these statements through our management’s examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that our management’s expectations, beliefs or projections will result or be achieved.
Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in or implied by any forward-looking statement. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:
our ability to successfully implement our business strategy;
the success of past and future acquisitions or divestitures;
the cyclical nature of the aluminum industry, material adverse changes in the aluminum industry or our end-uses, such as global and regional supply and demand conditions for aluminum and aluminum products, and changes in our customers’ industries;
increases in the cost, or limited availability, of raw materials and energy;
our ability to enter into effective metal, energy and other commodity derivatives or arrangements with customers to manage effectively our exposure to commodity price fluctuations and changes in the pricing of metals, especially LME-based aluminum prices;
our ability to generate sufficient cash flows to fund our capital expenditure requirements and to meet our debt obligations;
competitor pricing activity, competition of aluminum with alternative materials and the general impact of competition in the industry end-uses we serve;
our ability to retain the services of certain members of our management;
the loss of order volumes from any of our largest customers;
our ability to retain customers, a substantial number of whom do not have long-term contractual arrangements with us;
our ability to fulfill our substantial capital investment requirements;
risks of investing in and conducting operations on a global basis, including political, social, economic, currency and regulatory factors;
variability in general economic conditions on a global or regional basis;
current environmental liabilities and the cost of compliance with and liabilities under health and safety laws;
labor relations (i.e., disruptions, strikes or work stoppages) and labor costs;
our internal controls over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur;
our levels of indebtedness and debt service obligations, including changes in our credit ratings, material increases in our cost of borrowing or the failure of financial institutions to fulfill their commitments to us under committed facilities;
our ability to access credit or capital markets;
the possibility that we may incur additional indebtedness in the future;
limitations on operating our business as a result of covenant restrictions under our indebtedness, and our ability to pay amounts due under the Senior Notes; and
risk related to the Merger, including the possibility that the Merger may not be consummated or that, if the Merger does close, our stockholders may not realize the anticipated benefits from the Merger.
The above list is not exhaustive. Some of these factors and additional risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from those expressed or implied in our written or oral forward-looking statements may be found under “Risk Factors” contained in this annual report.
These factors and other risk factors disclosed in this annual report and elsewhere are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in any of our forward-looking statements.

27

            



Other unknown or unpredictable factors could also harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements contained in this annual report are made only as of the date of this annual report. Except to the extent required by law, we do not undertake, and specifically decline any obligation, to update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our operations as well as the industry in which we operate. This discussion should be read in conjunction with our audited consolidated financial statements and notes and other financial information appearing elsewhere in this annual report on Form 10-K. Our discussions of our financial condition and results of operations also include various forward-looking statements about our industry, the demand for our products and services and our projected results. These statements are based on certain assumptions that we consider reasonable. For more information about these assumptions and other risks relating to our businesses and our Company, you should refer to Item 1A. – “Risk Factors.”
Basis of Presentation
The financial information included in this annual report on Form 10-K represents our consolidated financial position as of December 31, 2016 and 2015 and our consolidated results of operations and cash flows for the years ended December 31, 2016, 2015 and 2014. As discussed further below, we completed the sale of our recycling and specification alloys and extrusions businesses in 2015. Accordingly, we have reported these businesses as discontinued operations for all periods presented, and reclassified the results of operations of these businesses as discontinued operations. For additional information, see Note 17, “Discontinued Operations” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. Except as otherwise indicated, the discussion of the Company’s business and financial information throughout this MD&A refers to the Company’s continuing operations and the financial position and results of operations of its continuing operations, while the presentation and discussion of our combined cash flows reflects the cash flows of our continuing and discontinued operations.
Overview
This overview summarizes our MD&A, which includes the following sections:
Our Business – a general description of our operations, recent strategic initiatives, the aluminum industry, our critical measures of financial performance and our operating segments;
Fiscal 2016 Summary and Outlook for 2017 – a discussion of the key financial highlights for 2016, as well as material trends and uncertainties that may impact our business in the future;
Results of Operations – an analysis of our consolidated and segment operating results and production for the years presented in our consolidated financial statements;
Liquidity and Capital Resources – an analysis and discussion of our cash flows and current sources of capital;
Non-GAAP Financial Measures – an analysis and discussion of key financial performance measures, including EBITDA, Adjusted EBITDA and commercial margin, as well as reconciliations to the applicable generally accepted accounting principles in the United States of America (“GAAP”) performance measures;
Exchange Rates – a discussion of our subsidiaries’ functional currencies and the related currency translation adjustments;
Contractual Obligations – a summary of our estimated significant contractual cash obligations and other commercial commitments at December 31, 2016;
Environmental Contingencies - a summary of environmental laws and regulations that govern our operations;
Critical Accounting Policies and Estimates – a discussion of the accounting policies that require us to make estimates and judgments; and

28

            



Recently Issued Accounting Standards Updates – a discussion of the impact of any recently issued accounting standard updates that have had an impact on the presentation of our consolidated financial position, results of operations and cash flows or have not yet been adopted.
On August 29, 2016, Aleris Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Zhongwang USA LLC (“Zhongwang USA”), Zhongwang Aluminum Corporation, a direct, wholly owned subsidiary of Zhongwang USA (“Merger Sub”), and the stockholders representative party thereto, pursuant to which Merger Sub will be merged with and into Aleris Corporation, on the terms and subject to the conditions set forth in the Merger Agreement, with Aleris Corporation as the surviving entity (the “Merger”). Upon consummation of the Merger, Aleris Corporation is expected to be a direct, wholly owned subsidiary of Zhongwang USA, which is expected to be indirectly beneficially owned by entities affiliated with Mr. Liu Zhongtian and other investors and financial institutions. Zhongwang USA has agreed to pay approximately $1.1 billion in cash, subject to adjustment, for the equity of Aleris Corporation and will assume certain of the Company’s outstanding indebtedness.
The Merger is targeted to close in the first quarter of 2017, subject to customary regulatory approvals, including the receipt of approval from the Committee on Foreign Investment in the United States (“CFIUS”), and other customary closing conditions. The Merger is not subject to a financing condition. CFIUS has identified national security concerns with the Merger. Although CFIUS has not identified at this time measures that would mitigate these concerns, it invited Aleris Corporation and Zhongwang USA to withdraw and refile their notice to obtain additional time to provide additional information, including possible mitigation. In February 2017, Aleris Corporation and Zhongwang USA withdrew their notice and intend to refile in the first quarter of 2017. There can be no assurance that the Merger will be consummated on the targeted timing or at all. The Merger Agreement may be terminated by Aleris Corporation or Zhongwang USA on or after May 29, 2017.
Our Business
We are a global leader in the manufacture and sale of aluminum rolled products, with 13 production facilities located throughout North America, Europe and China. Our product portfolio ranges from the most technically demanding heat treated plate and sheet used in mission-critical applications to sheet produced through our low-cost continuous cast process. We possess a combination of technically advanced, flexible and low-cost manufacturing operations supported by an industry-leading research and development (“R&D”) platform. Our facilities are strategically located to service our customers, which include a number of the world’s largest companies in the aerospace, automotive, truck trailer and building and construction end-uses. Our technological and R&D capabilities allow us to produce the most technically demanding products, many of which require close collaboration and, in some cases, joint development with our customers.
London Metal Exchange (“LME”) aluminum prices and regional premium differentials (referred to as “Midwest Premium” in the U.S. and “Rotterdam Premium” in Europe) serve as the pricing mechanisms for both the aluminum we purchase and the products we sell. Aluminum and other metal costs represented in excess of 67% of our costs of sales for the year ended December 31, 2016. Aluminum prices are determined by worldwide forces of supply and demand, and, as a result, aluminum prices are volatile. Average LME aluminum prices per ton for the years ended December 31, 2016, 2015 and 2014 were $1,604, $1,663 and $1,866, respectively. For the full year, average LME aluminum prices per ton were approximately 4% lower than 2015. As our invoiced prices are, in most cases, established months prior to physical delivery, the impact of aluminum price changes on our revenues may not correspond to LME and regional premium price changes for the applicable period.
Our business model strives to reduce the impact of aluminum price fluctuations on our financial results and protect and stabilize our margins, principally through pass-through pricing (market-based aluminum price plus a conversion fee) and derivative financial instruments.
As a result of using LME aluminum prices and regional premium differentials to both buy our raw materials and to sell our products, we are able to pass through aluminum price changes in the majority of our commercial transactions. Consequently, while our revenues can fluctuate significantly as aluminum prices change, we would expect the impact of these price changes on our profitability to be less significant. Approximately 87% of our sales for the year ended December 31, 2016 were generated from aluminum pass-through arrangements. In addition to using LME prices and regional premiums to establish our invoice prices to customers, we use derivative financial instruments to further reduce the impacts of changing aluminum prices. Derivative financial instruments are entered into at the time fixed prices are established for aluminum purchases or sales, on a net basis, and allow us to fix the margin to be realized on our long-term contracts and on short-term contracts where selling prices are not established at the same time as the physical purchase price of aluminum. However, as we have elected not to account for our derivative financial instruments as hedges for accounting purposes, changes in the fair value of our derivative financial instruments are included in our results of operations immediately. These changes in fair value (referred to as “unrealized gains and losses”) can have a significant impact on our pre-tax income in the same way LME aluminum and

29

            



regional premium prices can have a significant impact on our revenues. In assessing the performance of our operating segments, we exclude these unrealized gains and losses, electing to include them only at the time of settlement to better match the period in which the underlying physical purchases and sales affect earnings.
Although our business model strives to reduce the impact of aluminum price fluctuations on our financial results, it cannot eliminate the impact completely. For example, at times the profitability of our North America segment is impacted by changes in scrap aluminum prices whose movement may not be correlated to movements in LME prices. Furthermore, certain segments are exposed to variability in the previously mentioned regional premium differentials charged by industry participants to deliver aluminum from the smelter to the manufacturing facility. This premium differential fluctuates in relation to several conditions, including the extent of warehouse financing transactions, which limit the amount of physical metal flowing to consumers and increases the price differential as a result. In addition to impacting the price we pay for the raw materials we purchase, our customers may be reluctant to place orders with us during times of uncertainty in the pricing of the Midwest Premium or Rotterdam Premium.
For additional information on the key factors impacting our profitability, see “– Critical Measures of Our Financial Performance” and “– Our Segments,” below.
Recent Strategic Initiatives
We are continuing to implement our previously announced project to add autobody sheet (“ABS”) capabilities at our aluminum rolling mill in Lewisport, Kentucky (the “North America ABS Project”). We are investing over $400 million to build a new wide cold mill, two continuous annealing lines and an automotive innovation center at this facility. We are also investing in upgrades to other key non-ABS equipment at the facility, including widening the hot mill, to capture additional opportunities. The investment positions us to meet significant growth in demand for ABS in North America as the automotive industry pursues broader aluminum use for the production of lighter, more fuel-efficient vehicles. We are currently a leading supplier of ABS to the European premium automotive industry, which has led the light-weighting transition to aluminum in an effort to meet tighter emissions standards.
On February 27, 2015, we finalized the sale of our North American and European recycling and specification alloys businesses to Real Industry, Inc. (formerly known as Signature Group Holdings, Inc.) and certain of its affiliates. These businesses included substantially all of the operations and assets previously reported in our Recycling and Specification Alloys North America and Recycling and Specification Alloys Europe segments. The sale included 18 production facilities in North America and six in Europe. In connection with the sale, we received $556.5 million of cash and an additional $5.0 million of cash and 25,000 shares of Real Industry, Inc.’s preferred stock that were placed in escrow to secure our indemnification obligations under the agreement. On March 1, 2015, we finalized the sale of our extrusions business to Sankyo Tateyama (“Sankyo”), a Japanese building products and extrusions manufacturer. This business included substantially all of the operations and assets previously reported in our Extrusions segment. In connection with the sale, we received €34.0 million of cash (or equivalent to $38.4 million).
We have reported the recycling and specification alloys and extrusions businesses as discontinued operations for all periods presented, and reclassified the results of operations of these businesses into a single caption on the Consolidated Statements of Operations as “(Loss) income from discontinued operations, net of tax.” Our segment disclosures exclude the previously reported Recycling and Specification Alloys North America, Recycling and Specification Alloys Europe and Extrusions reportable segments for the periods included herein.
The Aluminum Industry
Aluminum is a widely-used, attractive industrial material. Compared to several alternative metals such as steel and copper, aluminum is lightweight, has a high strength-to-weight ratio and is resistant to corrosion. Aluminum can be recycled repeatedly without any material decline in performance or quality. The recycling of aluminum delivers energy and capital investment savings relative to both the cost of producing primary aluminum and many other competing materials. The penetration of aluminum into a wide variety of applications continues to grow. We believe several factors support fundamental long-term growth in aluminum consumption in the end-uses we serve.
The global aluminum industry consists of primary aluminum producers with bauxite mining, alumina refining and aluminum smelting capabilities; aluminum semi-fabricated products manufacturers, including aluminum casters, recyclers, extruders and flat rolled products producers; and integrated companies that are present across multiple stages of the aluminum production chain. The industry is cyclical and is affected by global economic conditions, industry competition and product development.
Primary aluminum prices are determined by worldwide forces of supply and demand and, as a result, are volatile. This volatility has a significant impact on the profitability of primary aluminum producers whose selling prices are typically based

30

            



upon prevailing LME prices while their costs to manufacture are not highly correlated to LME prices. We participate in select segments of the aluminum fabricated products industry, focusing on aluminum rolled products. We do not smelt aluminum, nor do we participate in other upstream activities, including mining bauxite or refining alumina. Since the majority of our products are sold on a market-based aluminum price plus conversion fee basis, we are less exposed to aluminum price volatility.
Critical Measures of Our Financial Performance
The financial performance of our operating segments is the result of several factors, the most critical of which are as follows:
volumes;
commercial margins; and
cash conversion costs.
The financial performance of our business is determined, in part, by the volume of metric tons shipped and processed. Increased production volume will result in lower per unit costs, while higher shipped volumes will result in additional revenue and associated margins. As a significant component of our revenue is derived from aluminum prices that we generally pass through to our customers, we measure the performance of our segments based upon a percentage of commercial margin and commercial margin per ton in addition to a percentage of revenue and revenue per ton. Commercial margin removes the hedged cost of the metal we purchase and metal price lag (as defined below) from our revenue. Commercial margins capture the value-added components of our business and are impacted by factors, including rolling margins (the fee we charge to convert aluminum), product yields from our manufacturing process, the value-added mix of products sold and scrap spreads, which management are able to influence more readily than aluminum prices and, therefore, provide another basis upon which certain elements of our segments’ performance can be measured.
Although our conversion fee-based pricing model is designed to reduce the impact of changing primary aluminum prices, we remain susceptible to the impact of these changes and changes in premium differentials on our operating results. This exposure exists because we value our inventories under the first-in, first-out method, which leads to the purchase price of inventory typically impacting our cost of sales in periods subsequent to when the related sales price impacts our revenues. This lag will, generally, increase our earnings in times of rising aluminum prices and decrease our earnings in times of declining aluminum prices.
Our exposure to changing primary aluminum prices and premium differentials, both in terms of liquidity and operating results, is greater for fixed price sales contracts and other sales contracts where aluminum price changes are not able to be passed along to our customers. In addition, our operations require that a significant amount of inventory be kept on hand to meet future production requirements. This base level of inventory is also susceptible to changing primary aluminum prices and premium differentials to the extent it is not committed to fixed price sales orders.
In order to reduce these exposures, we focus on reducing working capital and offsetting future physical purchases and sales. We also utilize various derivative financial instruments designed to reduce the impact of changing primary aluminum prices on these net physical purchases and sales and on inventory for which a fixed sale price has not yet been determined. Our risk management practices reduce but do not eliminate our exposure to changing primary aluminum prices. In addition, exchanges have only recently begun to offer derivative financial instruments to hedge premium differentials. These markets are becoming more liquid and and we are beginning to utilize these markets in our risk management practices. While we have limited our exposure to unfavorable primary aluminum price changes, we have also limited our ability to benefit from favorable price changes. Further, our counterparties may require that we post cash collateral if the fair value of our derivative liabilities exceed the amount of credit granted by each counterparty, thereby reducing our liquidity. As of December 31, 2016, no cash collateral was posted. There was $5.2 million of cash collateral posted as of December 31, 2015.
We refer to the difference between the price of primary aluminum included in our revenues and the price of aluminum impacting our cost of sales, net of realized gains and losses from our hedging activities, as “metal price lag.” In order to improve consistency in the calculation of metal price lag across our segments, the North America segment implemented processes to capture the impact of regional premiums on revenues and metal costs in the first quarter of 2015. During the year ended December 31, 2015, this change increased the amount of unfavorable metal price lag reported for the North America segment by approximately $14.5 million. Subsequent to the change, the aluminum price used in the metal price lag calculation for all segments includes the regional premium. Metal price lag will, generally, increase our earnings and net income and loss attributable to Aleris Corporation before interest, taxes, depreciation and amortization and income from discontinued operations, net of tax (“EBITDA”) in times of rising primary aluminum prices and decrease our earnings and EBITDA in times of declining primary aluminum prices. We seek to reduce this impact through the use of derivative financial instruments. We exclude metal price lag from our determination of Adjusted EBITDA because it is not an indicator of the performance of our underlying operations. We also exclude the impact of metal price lag from our measurement of commercial margin to more closely align the metal prices inherent in our sales prices to those included in our cost of sales.

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In addition to rolling margins and product mix, commercial margins are impacted by the differences between changes in the prices of primary and scrap aluminum, as well as the availability of scrap aluminum, particularly in our North America segment where aluminum scrap is used more frequently than in our European and Asia Pacific operations. As we price our product using the prevailing price of primary aluminum but purchase large amounts of scrap aluminum to produce our products, we benefit when primary aluminum price increases exceed scrap price increases. Conversely, when scrap price increases exceed primary aluminum price increases, our commercial margin will be negatively impacted. The difference between the price of primary aluminum and scrap prices is referred to as the “scrap spread” and is impacted by the effectiveness of our scrap purchasing activities, the supply of scrap available and movements in the terminal commodity markets, such as the price of aluminum.
Our operations are labor intensive and also require a significant amount of energy (primarily natural gas and electricity) be consumed to melt scrap or primary aluminum and to re-heat and roll aluminum slabs into rolled products. As a result, we incur a significant amount of fixed and variable labor and overhead costs which we refer to as conversion costs. Conversion costs excluding depreciation expense, or cash conversion costs, on a per ton basis are a critical measure of the effectiveness of our operations.
Commercial margin, EBITDA and Adjusted EBITDA are non-GAAP financial measures that have limitations as analytical tools and should be considered in addition to, and not in isolation, or as a substitute for, or as superior to, our measures of financial performance prepared in accordance with GAAP. For additional information regarding non-GAAP financial measures, see “-Non-GAAP Financial Measures.”
Our Segments
We report three operating segments based on the organizational structure that we use to evaluate performance, make decisions on resource allocations and perform business reviews of financial results. The Company’s operating segments (each of which is considered a reportable segment) are North America, Europe and Asia Pacific.
In addition to analyzing our consolidated operating performance based upon revenues and Adjusted EBITDA, we measure the performance of our operating segments using segment income and loss, segment Adjusted EBITDA and commercial margin. Segment income and loss includes gross profits, segment specific realized gains and losses on derivative financial instruments, segment specific other income and expense, segment specific selling, general and administrative (“SG&A”) expenses and an allocation of certain functional SG&A expenses. Segment income and loss excludes provisions for and benefits from income taxes, restructuring items, interest, depreciation and amortization, unrealized and certain realized gains and losses on derivative financial instruments, corporate general and administrative costs, start-up costs, gains and losses on asset sales, currency exchange gains and losses on debt and certain other gains and losses. Intra-entity sales and transfers are recorded at market value. Consolidated cash, net capitalized debt costs, deferred tax assets and assets related to our headquarters offices are not allocated to the segments.
Segment Adjusted EBITDA eliminates from segment income and loss the impact of metal price lag and recording inventory and other items at fair value through purchase accounting. Commercial margin represents revenues less the hedged cost of metal, or the raw material costs included in our cost of sales, net of the impact of our hedging activities and the effects of metal price lag. Segment Adjusted EBITDA and commercial margin are non-GAAP financial measures that have limitations as analytical tools and should be considered in addition to, and not in isolation, or as a substitute for, or as superior to, our measures of financial performance prepared in accordance with GAAP. Management uses segment Adjusted EBITDA in managing and assessing the performance of our business segments and overall business and believes that segment Adjusted EBITDA provides investors and other users of our financial information with additional useful information regarding the ongoing performance of the underlying business activities of our segments, as well as comparisons between our current results and results in prior periods. Management also uses commercial margin as a performance metric and believes that it provides useful information regarding the performance of our segments because it measures the price at which we sell our aluminum products above the hedged cost of the metal and the effects of metal price lag, thereby reflecting the value-added components of our commercial activities independent of aluminum prices which we cannot control.
For additional information regarding non-GAAP financial measures, see “—Non-GAAP Financial Measures.”
North America
Our North America segment consists of nine manufacturing facilities located throughout the United States that produce rolled aluminum and coated products for the building and construction, truck trailer, automotive, consumer durables, other general industrial and distribution end-uses. Substantially all of our North America segment’s products are manufactured to specific customer requirements, using continuous cast and direct-chill technologies that provide us with significant flexibility to produce a wide range of products. Specifically, those products are integrated into, among other applications, building products, truck trailers, gutters, appliances, cars and recreational vehicles. In connection with the North America ABS Project, the

32

            



segment has been incurring costs associated with start-up activities, including the design and development of new products and processes. These start-up costs have been excluded from segment Adjusted EBITDA and segment income.
Key operating and financial information for the segment is presented below:
 
 
For the years ended December 31,
 
 
2016
 
2015
 
2014
North America
 
(dollars in millions, except per ton measures, volume in thousands of tons)
Metric tons of finished product shipped
 
486.3

 
492.8

 
482.0

 
 
 
 
 
 
 
Revenues
 
$
1,365.1

 
$
1,532.8

 
$
1,561.8

Hedged cost of metal
 
(792.3
)
 
(936.5
)

(986.0
)
(Favorable) unfavorable metal price lag
 
(4.7
)
 
1.1

 
(6.8
)
Commercial margin
 
$
568.1

 
$
597.4

 
$
569.0

Commercial margin per ton shipped
 
$
1,168.5

 
$
1,212.1

 
$
1,180.4

 
 
 
 
 
 
 
Segment income
 
$
86.1

 
$
107.9

 
$
94.6

Impact of recording inventory at fair value through purchase accounting
 

 

 
8.1

(Favorable) unfavorable metal price lag
 
(4.7
)
 
1.1

 
(6.8
)
Segment Adjusted EBITDA (1)
 
$
81.4

 
$
109.1

 
$
96.0

Segment Adjusted EBITDA per ton shipped
 
$
167.3

 
$
221.0

 
$
199.1

 
 
 
 
 
 
 
Start-up costs
 
$
41.5

 
$
16.0

 
$
3.1

 
 
 
 
 
(1)
Amounts may not foot as they represent the calculated totals based on actual amounts and not the rounded amounts presented in this table.
Europe
Our Europe segment consists of two world-class aluminum rolling mills, one in Germany and the other in Belgium, and an aluminum cast house in Germany. The segment produces aerospace plate and sheet, ABS, clad brazing sheet (clad aluminum material used for, among other applications, vehicle radiators and HVAC systems) and heat-treated plate for engineered product applications. Substantially all of our Europe segment’s products are manufactured to specific customer requirements using direct-chill ingot cast technologies that allow us to use and offer a variety of alloys and products for a number of technically demanding end-uses.
Key operating and financial information for the segment is presented below:
 
 
For the years ended December 31,
 
 
2016
 
2015
 
2014
Europe
 
(dollars in millions, except per ton measures, volume in thousands of tons)
Metric tons of finished product shipped
 
326.7

 
313.6

 
301.6

 
 
 
 
 
 
 
Revenues
 
$
1,222.6

 
$
1,335.3

 
$
1,402.4

Hedged cost of metal
 
(650.3
)
 
(783.9
)
 
(777.9
)
Unfavorable (favorable) metal price lag
 
1.9

 
17.4

 
(26.9
)
Commercial margin
 
$
574.2

 
$
568.8

 
$
597.6

Commercial margin per ton shipped
 
$
1,757.4

 
$
1,813.9

 
$
1,981.6

 
 
 
 
 
 
 
Segment income
 
$
149.4

 
$
131.8

 
$
147.6

Unfavorable (favorable) metal price lag
 
1.9

 
17.4

 
(26.9
)
Segment Adjusted EBITDA (1)
 
$
151.3

 
$
149.3

 
$
120.7

Segment Adjusted EBITDA per ton shipped
 
$
463.0

 
$
476.0

 
$
400.3

 
 
 
 
 
(1)
Amounts may not foot as they represent the calculated totals based on actual amounts and not the rounded amounts presented in this table.
Asia Pacific
Our Asia Pacific segment consists of the Zhenjiang rolling mill that produces technically demanding and value-added plate products for the aerospace, engineering, distribution and other transportation end-uses worldwide. Substantially all of our Asia Pacific segment’s products are manufactured to specific customer requirements using direct-chill ingot cast technologies that allow us to use and offer a variety of alloys and products principally for aerospace and also for a number of other technically demanding end-uses.

33

            



The Zhenjiang rolling mill commenced operations in the first quarter of 2013 and achieved Nadcap certification, an industry standard for the production of aerospace aluminum, in 2014. Since then, the Zhenjiang rolling mill has received qualifications from several industry-leading aircraft manufacturers, including Airbus, Boeing, Bombardier and COMAC.
The mill incurred start-up costs representing operating losses incurred while the mill ramped up production, as well as expenses associated with obtaining certifications to produce aerospace plate. Expenses associated with obtaining product certifications, introducing new products and organization costs continue to be considered start-up costs. These start-up costs have been excluded from segment Adjusted EBITDA and segment income.
Key operating and financial information for the segment is presented below:
 
 
For the years ended December 31,
 
 
2016
 
2015
 
2014
Asia Pacific
 
(dollars in millions, except per ton measures, volume in thousands of tons)
Metric tons of finished product shipped
 
22.6

 
21.8

 
12.8

 
 
 
 
 
 
 
Revenues
 
$
100.5

 
$
96.4

 
$
52.7

Hedged cost of metal
 
(49.4
)
 
(58.2
)
 
(52.7
)
Favorable metal price lag
 
(0.4
)
 

 

Commercial margin
 
$
50.7

 
$
38.2

 
$

Commercial margin per ton shipped
 
$
2,236.6

 
$
1,748.6

 
*

 
 
 
 
 
 
 
Segment income
 
$
10.8

 
$

 
$

Favorable metal price lag
 
(0.4
)
 

 

Segment Adjusted EBITDA (1)
 
$
10.4

 
$

 
$

Segment Adjusted EBITDA per ton shipped
 
$
459.6

 
*

 
*

 
 
 
 
 
 
 
Start-up costs
 
$
0.1

 
$
2.9

 
$
16.6

 
 
 
 
 
*
Result is not meaningful.
(1) Amounts may not foot as they represent the calculated totals based on actual amounts and not the rounded amounts presented in this table.
Fiscal 2016 Summary
Listed below are key financial highlights for the year ended December 31, 2016 as compared to 2015:
Our 2016 revenues decreased $253.9 million, or 9%, from the prior year primarily due to the lower average price of aluminum included in our invoiced prices, an unfavorable mix of products sold and the negative impact of a stronger U.S. dollar. These decreases were partially offset by improved rolling margins.
Loss from continuing operations was $72.3 million for 2016 and 2015. The tax provision (benefit) of $40.0 million and $(22.7) million in 2016 and 2015, respectively, accounted for $62.7 million of the decrease. In addition, Adjusted EBITDA decreased approximately $17.7 million, as discussed below, start-up costs, primarily related to labor and other expenses associated with the North America ABS Project, increased $24.9 million and debt extinguishment costs increased $10.5 million. These negative impacts were offset by a $49.1 million favorable change in unrealized gains and losses on derivative financial instruments, a $21.9 million favorable change in metal lag, a $17.1 million decrease in depreciation expense due to the 2015 closure of the Decatur, Alabama facility and certain assets becoming fully depreciated in 2015 and an $11.6 million decrease in interest expense due primarily to the capitalization of interest on expenditures related to the North America ABS Project;
Adjusted EBITDA decreased 8% to $205.1 million in 2016 from $222.8 million in the prior year. Unfavorable metal spreads, resulting from lower aluminum prices and reduced scrap availability, decreased Adjusted EBITDA approximately $17.0 million. In addition, unfavorable currency exchange rates decreased Adjusted EBITDA approximately $5.0 million and an unfavorable mix of products sold decreased Adjusted EBITDA approximately $3.0 million. The favorable impacts of increased global aerospace and global automotive volumes were offset by decreased volumes in North America, where production issues, planned outages and bottlenecks prevented the segment from realizing the benefits of stronger demand. These decreases were partially offset by improved rolling margins that increased Adjusted EBITDA approximately $9.0 million;
Liquidity at December 31, 2016 was approximately $176.3 million, which consisted of $120.7 million of availability under Aleris International’s 2015 ABL Facility (as defined below) plus $55.6 million of cash. During the

34

            



year, we completed the issuance of $550.0 million of 9 ½% Senior Secured Notes and the repayment of the 7 5/8% Senior Notes (each as defined below); and
Capital expenditures increased to $358.1 million in 2016 from $313.6 million in the prior year, primarily resulting from capital expenditures on the North America ABS Project.

35

            



Outlook for 2017
The following factors are anticipated to have a significant impact on our 2017 performance:
The use of aluminum to light-weight vehicles continues to increase in response to stricter fuel efficiency standards. We believe that global automotive original equipment manufacturers (“OEMs”) will continue to embrace aluminum as they redesign vehicles to meet fuel efficiency standards. We believe this increase of aluminum will continue to increase demand for our automotive products at a higher rate than the overall growth rate for light vehicle production. According to estimates by Ducker Worldwide, McKinsey and management, global ABS demand is projected to grow at a 12% Compound Annual Growth Rate (“CAGR”) through 2025. In North America, Ducker expects ABS demand to increase from 417 thousand metric tons in 2015 to 1.2 million metric tons by 2026, representing a CAGR of approximately 11%.
In 2013, we completed the construction of a new cold mill, expanding our ABS capabilities at our Duffel, Belgium facility in anticipation of increased European demand. During 2017, we expect to increase throughput and further expand our ABS capacity in Duffel through the continued implementation of Aleris Operating System (“AOS”) initiatives. In addition, we continue to invest in our North America ABS Project which will enable us to meet the anticipated demand growth for ABS in North America. We are on track to begin shipments of ABS from our Lewisport, Kentucky facility in 2017. We saw a 7% year-over-year increase in global automotive demand in 2016 and we expect continued growth in demand for our automotive products in 2017.
Demand for our aerospace products typically trends with aircraft backlog and build rates. The combined order backlog of Airbus and Boeing increased from 10,500 planes in 2013 to 12,600 planes in December 2016. We believe the significant order backlog at these key OEMs will translate into continued growth in the future, and we believe we have positioned ourselves to benefit from future expected demand. We saw an 8% increase in our aerospace shipments in 2016, primarily due to increased volumes from the Zhenjiang rolling mill. In 2017, we expect a continued increase in aerospace volumes from our Asia Pacific segment, while some softening of global demand due to industry supply chain de-stocking is expected to result in slightly lower year-over-year aerospace volumes and rolling margins in our Europe segment.
We are the largest supplier of aluminum sheet to the building and construction industry in North America. According to the National Association of Home Builders (“NAHB”), 2016 single family housing starts in the United States are projected to be 780,000 and are projected to grow to 855,000 in 2017, representing growth of approximately 10%. In addition, the NAHB estimates that total housing starts in the U.S. will increase from approximately 1,162,000 in 2016 to 1,239,000 in 2017, representing growth of approximately 7%. This potential growth in housing starts may increase demand for our products.
During 2017, we will be making the final series of upgrades to our Lewisport, Kentucky facility, including widening of the hot-mill, that will allow us to expand our product offering in the future. A prolonged outage at the facility is planned during the summer of 2017 to complete these upgrades and will have an unfavorable impact on our distribution volumes in North America.
If the recent trend of increased aluminum prices continues, 2017 scrap spreads may be favorably impacted, particularly in North America.
For 2017, we expect that segment income and Adjusted EBITDA will be higher than 2016, as improved demand for our products, as discussed above, a favorable scrap spread environment and productivity savings should more than offset the impact of the planned outage at our Lewisport facility. Segment income may also be favorably impacted by improved metal price lag, should aluminum prices remain at current levels or increase. Pre-tax income will be impacted by these factors as well as substantially higher start-up costs associated with the North America ABS Project and higher interest expense associated with the additional 9½% Senior Secured Notes issued in February 2017. While we are optimistic that recent positive demand trends will continue, our performance will be dependent upon, in part, the performance of the global economy.
We estimate that first quarter 2017 segment income and Adjusted EBITDA will be higher than the fourth quarter of 2016 due to normal seasonality. In addition, we estimate that first quarter 2017 segment income and Adjusted EBITDA will be in line with or slightly higher than the first quarter of 2016. Factors influencing anticipated first quarter 2017 performance include:
Lower volumes and a lower value-added mix of products sold:
The North America ABS Project will likely have an unfavorable impact on our North America distribution volumes;

36

            



Aerospace destocking and lower automotive volumes due to program timing; and
North America building and construction demand trends continue;
Favorable scrap spread trends as aluminum prices increase; and
The AOS is expected to drive productivity gains as operating performance improves.
Capital expenditures during the first quarter of 2017 are expected to be lower than the first quarter of 2016 and higher than the fourth quarter of 2016 as work continues on the North America ABS Project and other upgrades at our Lewisport, Kentucky facility. We expect full year capital expenditures of approximately $230.0 million to $240.0 million.
Results of Operations
Review of Consolidated Results
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Revenues for the year ended December 31, 2016 were approximately $2.7 billion compared to approximately $2.9 billion for the year ended December 31, 2015. The decrease in revenues was primarily due to the following:
the lower average price of aluminum included in our invoiced prices decreased revenues approximately $242.0 million;
an unfavorable mix of products sold decreased revenues approximately $37.0 million. The unfavorable mix resulted from decreases of 16% and 9% in North America truck trailer and distribution volumes, respectively, as well as weakness in our European aerospace business in the second half of 2016. These decreases were partially offset by a 7% increase in North America building and construction volumes, as well as increased Asia Pacific aerospace volumes. Production issues, planned outages and bottlenecks prevented the North America segment from realizing the benefits of a strong demand environment; and
the stronger U.S. dollar’s impact on the translation of renminbi and euro-based revenues decreased revenues approximately $6.0 million.
These decreases were partially offset by improved rolling margins that increased revenues approximately $9.0 million.
The following table presents the estimated impact of key factors that resulted in the 9% decrease in our consolidated revenues from 2015:
 
North America
 
Europe
 
Asia Pacific
 
Consolidated
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
(dollars in millions)
LME / aluminum pass-through
$
(139.0
)
 
(9
)%
 
$
(101.0
)
 
(8
)%
 
$
(2.0
)
 
(2
)%
 
$
(242.0
)
 
(8
)%
Commercial price
5.0

 

 
5.0

 

 
(1.0
)
 
(1
)
 
9.0

 

Volume/mix
(30.0
)
 
(2
)
 
(16.0
)
 
(1
)
 
9.0

 
9

 
(37.0
)
 
(1
)
Currency

 

 
(3.0
)
 

 
(3.0
)
 
(3
)
 
(6.0
)
 

Other
(3.7
)
 
*

 
2.3

 
*

 
1.1

 
*

 
(0.3
)
 
*

Total
$
(167.7
)
 
(11
)%
 
$
(112.7
)
 
(9
)%
 
$
4.1

 
4
 %
 
$
(276.3
)
 
(9
)%
Intra-entity revenues
 
 
 
 
 
 
 
 
 
 
 
 
22.4

 
1
 %
Total
 
 
 
 
 
 
 
 
 
 
 
 
$
(253.9
)
 
(9
)%
 
 
 
 
 
* Result is not meaningful.
Gross profit for the year ended December 31, 2016 was $287.9 million compared to $214.9 million for the year ended December 31, 2015. The increase in gross profit was primarily due to the following:
metal price lag had an estimated $78.5 million favorable impact on gross profit for the year ended December 31, 2016 when compared to the year ended December 31, 2015. This favorable impact from metal price lag excludes the realized gains and losses on metal derivative financial instruments, which are classified separately in the Consolidated Statements of Operations (see table below);
higher rolling margins increased gross profit approximately $9.0 million; and
a decrease in depreciation expense, due in part to the closure of the Decatur, Alabama facility in 2015, increased gross profit approximately $9.0 million.

37

            



These favorable impacts were partially offset by the following:
unfavorable scrap spreads, resulting from lower aluminum prices and reduced scrap availability, reduced gross profit approximately $17.0 million;
the impact of operational issues as well as inflation in employee, freight and other costs was partially offset by project specific productivity gains and lower natural gas costs, resulting in an $6.0 million decrease to gross profit; and
an unfavorable mix of products sold, partially offset by favorable cost absorption, decreased gross profit by approximately $3.0 million.
The following table presents the estimated impact of metal price lag on our Consolidated Statements of Operations for the years ended December 31, 2016 and 2015:
 
 
 
For the years ended December 31,
 
 
 
 
 
2016
 
2015
 
Change
Location in Consolidated Statements of Operations
 
 
 (dollars in millions)
Gross profit
Favorable (unfavorable) metal price lag
 
$
33.3

 
$
(45.2
)
 
$
78.5

Losses on derivative financial instruments
Realized (losses) gains on metal derivatives
 
(30.0
)
 
26.6

 
(56.6
)
 
Favorable (unfavorable) metal price lag net of realized derivative gains/losses
 
$
3.3

 
$
(18.6
)
 
$
21.9

Selling, General and Administrative Expenses
SG&A expenses were $218.5 million for the year ended December 31, 2016 compared to $203.5 million for the year ended December 31, 2015. The $15.0 million increase was primarily due to the following:
a $26.2 million increase in start-up costs primarily related to labor, consulting and other expenses associated with the North America ABS Project; and
a $2.1 million increase in stock-based compensation expense.
These increases were partially offset by the following:
a $9.9 million decrease in depreciation and amortization expense resulting from the closure and sale of certain North America segment facilities in 2015, and certain assets becoming fully depreciated in 2015; and
a $5.5 million decrease in professional fees, business development costs and other expenses, as the prior year period includes expenses associated with the sale of our recycling and specification alloys and extrusions businesses.
Gains and Losses on Derivative Financial Instruments
During the years ended December 31, 2016 and 2015, we recorded realized losses (gains) on derivative financial instruments of $31.0 million and $(23.2) million, respectively, and unrealized (gains) losses of $(18.9) million and $30.1 million, respectively. Generally, our realized gains or losses represent the cash paid or received upon settlement of our derivative financial instruments. Unrealized gains or losses reflect the change in the fair value of derivative financial instruments from the later of the end of the prior period or our entering into the derivative instrument as well as the reversal of previously recorded unrealized gains or losses for derivatives that settled during the period. Derivative financial instruments are used to reduce our exposure to fluctuations in commodity prices, including metal and natural gas prices, and currency fluctuations. See “– Critical Measures of Our Financial Performance,” above, and Item 7A. “– Quantitative and Qualitative Disclosures About Market Risk,” below, for additional information regarding our use of derivative financial instruments.
Interest Expense, Net
Net interest expense decreased $11.6 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to a $17.2 million increase in capitalized interest as a result of the capital expenditures for the North America ABS Project, partially offset by an increase in interest expense due to the issuance of the 9 ½% Senior Secured Notes in 2016 and additional borrowings under the 2015 ABL Facility in 2016.
Other Income / Expense
An unfavorable $9.1 million change in other expense (income) included a $10.5 million increase in losses on the extinguishment of debt, due primarily to the extinguishment of the 7 5/8% Senior Notes in the second quarter of 2016. In

38

            



addition, currency exchange rate changes resulted in $7.5 million of gains in the prior year compared to $0.8 million of gains in the current year, primarily related to the remeasurement of U.S. dollar working capital and intercompany debt balances in Europe. These unfavorable changes were partially offset by $8.7 million of gains related to the favorable resolution of certain vendor disputes.
Income Taxes    
The provision for income taxes was $40.0 million for the year ended December 31, 2016, compared to a benefit from income taxes of $22.7 million for the year ended December 31, 2015. The income tax provision for the year ended December 31, 2016 consisted of income tax expense of $39.5 million from international jurisdictions and income tax expense of $0.5 million in the U.S. The income tax benefit for the year ended December 31, 2015 consisted of an income tax expense of $18.9 million from international jurisdictions and an income tax benefit of $41.6 million in the U.S.
At December 31, 2016 and 2015, we had valuation allowances of $244.9 million and $218.5 million, respectively, to reduce certain deferred tax assets to amounts that are more likely than not to be realized. Of the total December 31, 2016 and 2015 valuation allowances, $72.7 million and $68.9 million, respectively, relate primarily to net operating losses and future tax deductions for pension benefits in non-U.S. tax jurisdictions, $154.5 million and $135.0 million, respectively, relate primarily to the U.S. federal effects of net operating losses and amortization and $17.7 million and $14.6 million, respectively, relate primarily to the state effects of net operating losses and amortization.
The net increase in the valuation allowance in 2016 is mainly comprised of a $22.7 million increase in the U.S. resulting from additional tax net operating losses, net reversals of other deductible temporary differences and net increases in taxable temporary differences.
Gains / Losses from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax was $3.3 million for the year ended December 31, 2016 compared to income from discontinued operations, net of tax of $121.1 million for the year ended December 31, 2015. The discontinued operations include the results of our recycling and specification alloys and extrusions businesses. The prior year period included two months of operations and the gain on sale of our divested recycling and specification alloys and extrusions businesses. The current year loss from discontinued operations includes an incremental loss on sale of $4.6 million related to our estimate of costs related to the indemnification of the buyer of the recycling and specification alloys business for certain potential future damages.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Revenues were approximately $2.9 billion for each of the years ended December 31, 2015 and 2014. The following had a favorable impact on revenues:
increased volumes and an improved mix of products sold increased revenues approximately $118.0 million. The increased volumes were primarily the result of the April 2014 acquisition of Nichols Aluminum LLC (“Nichols”). Volume and mix were also favorably impacted by an increase in demand from the automotive and aerospace industries in Europe, as well the aerospace and distribution industries served by our Asia Pacific operations. These volume increases were partially offset by a decrease in European regional commercial plate and sheet volumes resulting from competitive pressures and customer uncertainty resulting from declining regional premiums;
improved rolling margins increased revenues approximately $22.0 million; and
sales to our former recycling and specification alloys and extrusions businesses, which were eliminated in the prior year, increased $69.8 million.
These increases to revenues were offset by the following:
the stronger U.S. dollar’s impact on the translation of Euro-based revenues decreased revenues approximately $156.0 million; and
the lower average price of aluminum included in our invoiced prices decreased revenues approximately $31.0 million.

39

            



The following table presents the estimated impact of key factors that resulted in the 1% increase in our consolidated revenues from 2014:
 
North America
 
Europe
 
Asia Pacific
 
Consolidated
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
(dollars in millions)
LME / aluminum pass-through
$
(77.0
)
 
(5
)%
 
$
46.0

 
3
 %
 
$

 
 %
 
$
(31.0
)
 
(1
)%
Commercial price
17.0

 
1

 
5.0

 

 

 

 
22.0

 
1

Volume/Mix, including acquisitions
36.0

 
2

 
37.0

 
3

 
45.0

 
85

 
118.0

 
4

Currency

 

 
(155.0
)
 
(11
)
 
(1.0
)
 
(2
)
 
(156.0
)
 
(5
)
Other
(5.0
)
 
*

 
(0.1
)
 
*

 
(0.3
)
 
*
 
(5.4
)
 
*
Total
$
(29.0
)
 
(2
)%
 
$
(67.1
)
 
(5
)%
 
$
43.7

 
83
 %
 
$
(52.4
)
 
(2
)%
Intra-entity revenues
 
 
 
 
 
 
 
 
 
 
 
 
87.8

 
3

Total
 
 
 
 
 
 
 
 
 
 
 
 
$
35.4

 
1
 %
 
 
 
 
 
* Result is not meaningful.
Gross profit for the year ended December 31, 2015 was $214.9 million compared to $247.5 million for the year ended December 31, 2014. The decrease in gross profit was primarily due to the following:
metal price lag had an estimated $95.9 million unfavorable impact on gross profit for the year ended December 31, 2015 when compared to the year ended December 31, 2014. This unfavorable impact from metal price lag excludes the realized gains and losses on metal derivative financial instruments, which are classified separately in the Consolidated Statements of Operations (see table below);
unfavorable scrap spreads, resulting from lower aluminum prices and scrap availability, as well as higher prices for external slabs and hardeners, reduced gross profit $14.0 million; and
energy tax and carbon dioxide emissions credits in Europe favorably impacted the prior year by $3.8 million compared to 2015.
These unfavorable impacts were partially offset by the following:
higher rolling margins increased gross profit approximately $23.0 million;
increased volumes and a favorable mix of products sold increased gross profit approximately $17.0 million;
a stronger U.S. dollar resulted in an increase of approximately $16.0 million, as the impact on our U.S. dollar-based aerospace sales contracts in Europe was partially offset by the unfavorable impact on the translation of our Euro-based gross profit;
a $10.6 million decrease in start-up costs, which primarily represent operating losses incurred by our Asia Pacific segment while ramping up production in 2014 and expenses associated with obtaining certifications to produce aerospace plate, favorably impacted gross profit;
productivity savings and lower natural gas costs more than offset inflation in employee costs and higher pension expense, resulting in an $8.0 million increase to gross profit; and
the impact of recording the acquired assets of Nichols at fair value increased prior year cost of sales $8.1 million.
The following table presents the estimated impact of metal price lag on our Consolidated Statements of Operations for the years ended December 31, 2015 and 2014:
 
 
 
For the years ended December 31,
 
 
 
 
 
2015
 
2014
 
Change
Location in Consolidated Statements of Operations
 
 
 (dollars in millions)
Gross profit
(Unfavorable) favorable metal price lag
 
$
(45.2
)
 
$
50.7

 
$
(95.9
)
Losses on derivative financial instruments
Realized gains (losses) on metal derivatives
 
26.6

 
(17.0
)
 
43.6

 
(Unfavorable) favorable metal price lag net of realized derivative gains/losses
 
$
(18.6
)
 
$
33.7

 
$
(52.3
)

40

            



Selling, General and Administrative Expenses
SG&A expenses were $203.5 million for the year ended December 31, 2015 compared to $221.9 million for the year ended December 31, 2014. The $18.4 million decrease was primarily due to the following:
a decrease of approximately $16.0 million in professional fees and business development costs, as the prior year included professional fees paid for the purchase of Nichols and the divestitures of the recycling and specification alloys and extrusions businesses; and
a decrease of approximately $9.0 million in stock-based compensation expense primarily due to the forfeiture of unvested stock options and restricted stock units upon the departure of certain senior executives during the year.
These decreases were partially offset by increased start-up costs of $7.2 million related to labor, consulting and other expenses incurred for the North America ABS Project.
Restructuring Charges
During the year ended December 31, 2015, we recorded restructuring charges of $10.3 million, which included exit costs related to certain closed facilities as well as costs related to severance and other termination benefits associated with personnel reductions.
Gains and Losses on Derivative Financial Instruments
During the years ended December 31, 2015 and 2014, we recorded realized (gains) losses on derivative financial instruments of $(23.2) million and $16.3 million, respectively, and unrealized losses (gains) of $30.1 million and $(5.4) million, respectively. Generally, our realized gains or losses represent the cash paid or received upon settlement of our derivative financial instruments. Unrealized gains or losses reflect the change in the fair value of derivative financial instruments from the later of the end of the prior period or our entering into the derivative instrument as well as the reversal of previously recorded unrealized gains or losses for derivatives that settled during the period.
Interest Expense, Net    
Net interest expense decreased $13.3 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to the following:
interest capitalized during the period increased $6.9 million as a result of the capital expenditures for the North America ABS Project;
interest expense on the 7 5/8% Senior Notes and 7 7/8% Senior Notes (as defined below) decreased $3.0 million as a portion of these notes were purchased during the third quarter of 2015; and
interest expense on the ABL facilities decreased $2.7 million as all outstanding borrowings were repaid in the first quarter of 2015.
Income Taxes
The benefit from income taxes was $22.7 million for the year ended December 31, 2015, compared to a benefit from income taxes of $129.5 million for the year ended December 31, 2014. The income tax benefit for the year ended December 31, 2015 consisted of income tax expense of $18.9 million from international jurisdictions and an income tax benefit of $41.6 million in the U.S. The income benefit for the year ended December 31, 2014 consisted of an income tax benefit of $94.2 million from international jurisdictions and an income tax benefit of $35.3 million in the U.S.
The benefit from income taxes recorded in 2014 included:
a $110.5 million reversal of a valuation allowance resulting from a change in judgment in our Belgium tax jurisdiction;
a $106.9 million decrease resulting from net utilization of tax net operating losses in non-U.S. tax jurisdictions, additional tax net operating losses in the U.S., net reversals of taxable temporary differences and net increases in deductible temporary differences; and
a $35.5 million reversal of a valuation allowance resulting from a change in judgment in the U.S.
The change in judgment in our Belgium tax jurisdiction was based on positive evidence that supported the conclusion that it was more-likely-than-not that the net operating loss and other deferred tax assets in that jurisdiction would be realized. The following positive evidence supported the reversal of the valuation allowance during 2014:

41

            



the Duffel, Belgium facility generated significant taxable income in 2014 for the first time since our acquisition of the facility in 2006 as a result of increased production and sales subsequent to the completion of the wide auto body sheet expansion project;
anticipated strong growth in the global demand for aluminum ABS for light-weighting vehicles, increasing the demand for products produced at our Duffel, Belgium facility, is forecasted to generate taxable income in the future; and
an unlimited carry forward period of net operating losses in the jurisdiction, which comprise the majority of the deferred tax assets.
The change in judgment in the U.S. reflected the estimated taxable gain from the sale of our recycling and specification alloys business, which supported the conclusion that it was more-likely-than-not that portions of the U.S. net operating loss and state credit deferred tax assets would be realized.     
Income from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax was $121.1 million for the year ended December 31, 2015 compared to $34.2 million for the year ended December 31, 2014. The discontinued operations include the results of our recycling and specification alloys and extrusions businesses. The increase of approximately $86.9 million from the prior year was primarily due to the gain recorded on the sale of the recycling and specification alloys businesses. This increase was partially offset by the fact that income from discontinued operations for the year ended December 31, 2014 included the full year of operations for the discontinued businesses, while the 2015 results include only the two months of operations prior to disposal.

42

            



The following table presents key financial and operating data on a consolidated basis for the years ended December 31, 2016, 2015 and 2014:
 
 
For the years ended December 31,
 
 
2016
 
2015
 
2014
 
 
(in millions, except percentages)
Revenues
 
$
2,663.9

 
$
2,917.8

 
$
2,882.4

Cost of sales
 
2,376.0

 
2,702.9

 
2,634.9

Gross profit
 
287.9

 
214.9

 
247.5

Gross profit as a percentage of revenues
 
10.8
%
 
7.4
%
 
8.6
%
Selling, general and administrative expenses
 
218.5

 
203.5

 
221.9

Restructuring charges
 
1.5

 
10.3

 
2.8

Losses on derivative financial instruments
 
12.1

 
6.9

 
10.9

Other operating expense, net
 
3.9

 
2.5

 
0.2

Operating income (loss)
 
51.9

 
(8.3
)
 
11.7

Interest expense, net
 
82.5

 
94.1

 
107.4

Other expense (income), net
 
1.7

 
(7.4
)
 
(20.0
)
Loss from continuing operations before income taxes
 
(32.3
)
 
(95.0
)
 
(75.7
)
Provision for (benefit from) income taxes
 
40.0

 
(22.7
)
 
(129.5
)
(Loss) income from continuing operations
 
(72.3
)
 
(72.3
)
 
53.8

(Loss) income from discontinued operations, net of tax
 
(3.3
)
 
121.1

 
34.2

Net (loss) income
 
(75.6
)
 
48.8

 
88.0

Net income from discontinued operations attributable to noncontrolling interest
 

 
0.1

 
0.9

Net (loss) income attributable to Aleris Corporation
 
$
(75.6
)
 
$
48.7

 
$
87.1

 
 
 
 
 
 
 
Total segment income
 
$
246.3

 
$
239.7

 
$
242.2

Depreciation and amortization of continuing operations
 
(104.9
)
 
(123.8
)
 
(123.2
)
Corporate general and administrative expenses, excluding depreciation, amortization and start-up costs
 
(51.8
)
 
(48.4
)
 
(77.8
)
Restructuring charges
 
(1.5
)
 
(10.3
)
 
(2.8
)
Interest expense, net
 
(82.5
)
 
(94.1
)
 
(107.4
)
Unallocated gains (losses) on derivative financial instruments
 
19.1

 
(30.2
)
 
5.4

Unallocated currency exchange gains (losses)
 
(0.5
)
 
1.2

 
12.6

Start-up costs
 
(46.0
)
 
(21.1
)
 
(24.5
)
Loss on extinguishment of debt
 
(12.6
)
 
(2.0
)
 

Other expense, net
 
2.1

 
(6.0
)
 
(0.2
)
Loss from continuing operations before income taxes
 
$
(32.3
)
 
$
(95.0
)
 
$
(75.7
)
Review of Segment Revenues and Shipments
The following tables present revenues and metric tons of finished product shipped by segment:
 
 
For the years ended December 31,
 
 
2016
 
2015
 
2014
 
 
 (dollars in millions, metric tons in thousands)
Revenues:
 
 
 
 
 
 
North America
 
$
1,365.1

 
$
1,532.8

 
$
1,561.8

Europe
 
1,222.6

 
1,335.3

 
1,402.4

Asia Pacific
 
100.5

 
96.4

 
52.7

Intra-entity revenues
 
(24.3
)
 
(46.7
)
 
(134.5
)
Consolidated revenues
 
$
2,663.9

 
$
2,917.8

 
$
2,882.4

 
 
 
 
 
 
 
Metric tons of finished product shipped:
 
 
 
 
 
 
North America
 
486.3

 
492.8

 
482.0

Europe
 
326.7

 
313.6

 
301.6

Asia Pacific
 
22.6

 
21.8

 
12.8

Intra-entity
 
(6.1
)
 
(5.8
)
 
(2.6
)
Total metric tons of finished product shipped
 
829.5

 
822.4

 
793.8


43

            



North America Revenues
North America revenues for the year ended December 31, 2016 decreased $167.7 million compared to the year ended December 31, 2015. This decrease was primarily due to the following:
lower aluminum prices included in our invoiced prices decreased revenues approximately $139.0 million; and
lower volumes and an unfavorable mix of products sold decreased revenues approximately $30.0 million. Truck trailer volumes decreased 16% following strong demand in 2015 and distribution volumes decreased 9%. These decreases more than offset a 7% increase in building and construction volumes. Planned outages on the Lewisport hot mill related to the North America ABS Project resulted in significant production down time in the third quarter. In addition, production issues and bottlenecks prevented the segment from realizing the benefits of stronger demand.
These decreases were partially offset by improved rolling margins that increased revenues approximately $5.0 million.
North America revenues for the year ended December 31, 2015 decreased $29.0 million compared to the year ended December 31, 2014 primarily due to lower aluminum prices included in our invoiced prices, which reduced revenues approximately $77.0 million.
This decrease was partially offset by the following:
a 2% increase in shipments increased revenues approximately $36.0 million. The increased shipments related to the acquired Nichols business as well as increased demand from the automotive and truck trailer industries. These increases were partially offset by a slow start to the spring construction season and an uneven recovery of the North America housing industry; and
improved rolling margins increased revenues approximately $17.0 million.
Europe Revenues
Revenues from our Europe segment for the year ended December 31, 2016 decreased $112.7 million compared to the year ended December 31, 2015. This decrease was primarily due to the following:
lower aluminum prices included in our invoiced prices decreased revenues approximately $101.0 million;
an unfavorable mix of products sold, primarily resulting from a 1% decrease in aerospace volumes and a 6% decrease in heat exchanger volumes, decreased revenues approximately $16.0 million. Automotive volumes increased 7% and regional plate and sheet volumes increased 11%, partially offsetting the impact of the weaker aerospace and heat exchanger volumes; and
a slightly stronger U.S. dollar decreased revenues approximately $3.0 million.
These decreases were partially offset by improved rolling margins that increased revenues approximately $5.0 million.
Revenues from our Europe segment for the year ended December 31, 2015 decreased $67.1 million compared to the year ended December 31, 2014 primarily due to a stronger U.S. dollar, which decreased revenues approximately $155.0 million.
This decrease was partially offset by the following:
higher euro-based LME prices that increased the average price of aluminum included in our invoiced prices and increased revenues approximately $46.0 million;
a 4% increase in shipments of finished products and a favorable mix of products sold increased revenues approximately $37.0 million. Automotive shipments increased 15% and aerospace shipments increased 3% during the year. These increases were partially offset by lower regional plate and sheet volume, which declined as a result of competitive pressure and customer uncertainty caused by declining regional premiums, and lower third party sales of semi-finished billets as more casthouse production was used by the segment’s rolling mills; and
improved rolling margins increased revenues approximately $5.0 million.

44

            



Asia Pacific Revenues
Asia Pacific revenues for the year ended December 31, 2016 increased $4.1 million compared to the year ended December 31, 2015 as the mix of products sold continued to shift to higher value aerospace volumes, which more than offset the impacts of a temporary shut-down to upgrade and expand capacity at the facility’s horizontal heat treat (“HHT”) furnace in the first quarter of 2016 and a stronger U.S. dollar.
Asia Pacific revenues for the year ended December 31, 2015 increased $43.7 million compared to the year ended December 31, 2014 as production of and demand for commercial plate products improved and shipments of aerospace plate increased following the attainment of certifications from several OEMs in 2014.
Review of Segment Income and Gross Profit
For the years ended December 31, 2016, 2015 and 2014, segment income and our reconciliation of segment income to gross profit are presented below:
 
 
For the years ended December 31,
 
 
2016
 
2015
 
2014
 
 
 (in millions)
Segment income:
 
 
 
 
 
 
North America
 
$
86.1

 
$
107.9

 
$
94.6

Europe
 
149.4

 
131.8

 
147.6

Asia Pacific
 
10.8

 

 

Total segment income
 
246.3

 
239.7

 
242.2

Items excluded from segment income and included in gross profit:
 
 
 
 
 
 
Depreciation
 
(93.2
)
 
(102.2
)
 
(102.6
)
Start-up costs
 

 
(2.1
)
 
(12.7
)
Other
 

 
(4.4
)
 

Items included in segment income and excluded from gross profit:
 
 
 
 
 
 
Segment selling, general and administrative expenses
 
108.8

 
114.6

 
114.1

Realized (gains) losses on derivative financial instruments
 
31.2

 
(23.3
)
 
16.3

Other (income) expense, net
 
(5.2
)
 
(7.4
)
 
(9.8
)
Gross profit
 
$
287.9

 
$
214.9

 
$
247.5

North America Segment Income
North America segment income for the year ended December 31, 2016 decreased $21.8 million compared to the year ended December 31, 2015. This decrease was primarily due to the following:
unfavorable scrap spreads resulting from declining aluminum prices and the related tightening of supply decreased segment income approximately $19.0 million;
lower volumes and an unfavorable mix of products sold, partially offset by favorable cost absorption resulting from increased fourth quarter production, decreased segment income approximately $7.0 million; and
operational issues and inflation more than offset project specific productivity gains and lower natural gas prices, decreasing segment income approximately $7.0 million.
These decreases were partially offset by the following:
favorable metal price lag compared to the prior year increased segment income approximately $5.8 million; and
improved rolling margins increased segment income approximately $5.0 million.
North America segment income for the year ended December 31, 2015 increased $13.3 million compared to the year ended December 31, 2014. This increase was primarily due to the following:
improved rolling margins increased segment income approximately $17.0 million;
productivity gains driven by operational improvements at our Ashville paint line, improved scrap utilization and cost savings associated with our supply chain optimization efforts more than offset higher employee costs and pension expense, resulting in increased segment income of approximately $12.0 million; and
the impact of recording acquired assets of Nichols at fair value increased prior year cost of sales approximately $8.1 million.

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These increases were partially offset by the following:
unfavorable scrap spreads from declining aluminum prices and decreased scrap availability, partially offset by metal related synergies due to the Nichols acquisition, decreased segment income approximately $8.0 million;
unfavorable metal price lag compared to the prior year decreased segment income approximately $7.9 million; and
unfavorable cost absorption caused by lower fourth quarter production more than offset a 2% increase in volumes and decreased segment income approximately $2.0 million.
Europe Segment Income
Europe segment income for the year ended December 31, 2016 increased $17.6 million compared to the year ended December 31, 2015. This increase was primarily due to the following:
favorable metal price lag compared to the prior year increased segment income approximately $15.5 million;
improved rolling margins increased segment income approximately $6.0 million; and
productivity savings and lower natural gas costs were partially offset by inflation in employee and other conversion costs, increasing segment income approximately $3.0 million.
These increases were partially offset by the following:
an unfavorable mix of products sold, resulting from a decrease in aerospace and heat exchanger volumes, partially offset by favorable cost absorption resulting from higher fourth quarter production, decreased segment income approximately $5.0 million; and
a more stable U.S. dollar in 2016 resulted in smaller gains from the translation of working capital balances and reduced segment income by $4.0 million.
Europe segment income for the year ended December 31, 2015 decreased by $15.8 million compared to the year ended December 31, 2014. This decrease was primarily due to the following:
unfavorable metal price lag compared to the prior year decreased segment income approximately $44.3 million;
increased hardener and external slab costs as well as tighter scrap supply reduced segment income approximately $6.0 million;
higher costs associated with inflation in employee and other conversion costs, as well as costs associated with our ongoing business improvement process plans, were partially offset by productivity savings, resulting in a decrease in segment income of approximately $5.0 million; and
non-recurring energy tax and carbon dioxide emissions credits received in 2014 increased prior year segment income approximately $3.8 million.
These decreases were partially offset by the following:
favorable currency movements, resulting from the strengthening of the U.S. dollar, increased segment income approximately $27.0 million;
a 4% increase in shipments and a favorable mix of products sold, resulting from an increase in aerospace and automotive volumes, increased segment income approximately $12.0 million; and
improved rolling margins increased segment income approximately $5.0 million.
Asia Pacific Segment Income
Asia Pacific segment income for the year ended December 31, 2016 increased by $10.8 million compared to the year ended December 31, 2015. This increase was primarily due to a favorable change in the mix of products sold, including increased aerospace volume, in the current year, partially offset by the temporary shut-down of the HHT furnace.
Liquidity and Capital Resources
Summary
We ended 2016 with $55.6 million of cash and cash equivalents, compared with $62.2 million at the end of 2015. Liquidity at December 31, 2016 was $176.3 million, which consisted of $120.7 million of availability under the 2015 ABL Facility plus $55.6 million of cash. Both our borrowing base and 2015 ABL Facility utilization may fluctuate on a monthly basis.

46

            



Based on our current and anticipated levels of operations and the condition in the industries we serve, we believe that our cash on hand, cash flows from operations, availability under the 2015 ABL Facility and the proceeds from the issuance of the additional 9½% Senior Secured Notes discussed below, will enable us to meet our working capital, capital expenditures, debt service and other funding requirements for the foreseeable future. However, our ability to fund our working capital needs, debt payments and other obligations, and to comply with the covenants under our indebtedness, including borrowing base limitations under the 2015 ABL Facility, depends on our future operating performance and cash flows and many factors outside of our control, including the costs of raw materials, our ability to access the capital and credit markets, the state of the overall industry and financial and economic conditions and other factors, including those described under Item 1A. – “Risk Factors.” Any future investments, acquisitions, joint ventures or other similar transactions will likely require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.
At December 31, 2016, approximately $52.1 million of our cash and cash equivalents were held by our non-U.S. subsidiaries. The U.S. entities may temporarily borrow some foreign earnings of our non-U.S. subsidiaries in 2017, which would result in a deemed distribution. In anticipation of doing so, an additional $11.1 million income tax charge was recorded in 2016.
On April 4, 2016, Aleris International issued $550.0 million aggregate principal amount of its 9 ½% Senior Secured Notes due 2021 (together with the $250.0 million of additional notes described below, the “9 ½% Senior Secured Notes”). A substantial portion of the net proceeds from the original issuance of the 9 ½% Senior Secured Notes were used to (i) complete a cash tender offer for any and all of the outstanding $434.9 million aggregate principal amount of 7 5/8% Senior Notes due 2018 (the “7 5/8% Senior Notes”), including the payment of related fees and expenses (the “Tender Offer”), and (ii) to redeem and discharge any 7 5/8% Senior Notes that were not purchased in the Tender Offer, including the payment of related fees and expenses and any redemption premium (the “Redemption”). Each of these payments included applicable premiums and accrued interest. Following the Tender Offer and Redemption, all outstanding 7 5/8% Senior Notes were extinguished. The net cash proceeds from the original issuance of the 9 ½% Senior Secured Notes after the Tender Offer and Redemption were $90.1 million, and were used for general corporate purposes, including for working capital and capital expenditures. As a result of the Tender Offer and Redemption, a loss on the early extinguishment of debt totaling $12.6 million was recorded.
On February 14, 2017, Aleris International issued an additional $250.0 million aggregate principal amount of its 9 ½% Senior Secured Notes. The additional notes were issued under the 9 ½% Senior Secured Notes indenture (as defined below). The proceeds from the issuance of the additional notes were $263.8 million, net of underwriter fees, and we intend to use such proceeds for general corporate purposes, which may include working capital and/or capital expenditures.
The following discussion provides a summary description of the significant components of our sources of liquidity and long-term debt.
Cash Flows
The following table summarizes our net cash provided (used) by operating, investing and financing activities for the years ended December 31, 2016, 2015 and 2014. The following presentation and discussion of cash flows reflects the combined cash flows from our continuing operations and discontinued operations, as permitted by GAAP. For a summary of depreciation, capital expenditures and significant operating noncash items of discontinued operations for the years ended December 31, 2016, 2015 and 2014, see Note 17, “Discontinued Operations,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.
 
 
For the years ended December 31,
 
 
2016
 
2015
 
2014
 
 
(in millions)
Net cash provided (used) by: