10-K 1 brss-12312017x10k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________ 
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, 2017
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 No. 001-35938
__________________________________________________________
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GLOBAL BRASS AND COPPER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________ 
Delaware
 
06-1826563
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
475 N. Martingale Road Suite 1050
Schaumburg, IL
 
60173
(Address of principal executive offices)
 
(Zip Code)
(847) 240-4700
(Registrant’s telephone number, including area code)
__________________________________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
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  ¨    No  ý
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  ý    No  ¨
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  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.  ý
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
x
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $653.0 million (based upon the closing price per share of the registrant’s common stock on the New York Stock Exchange on that date).
On February 16, 2018, there were 21,998,188 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2017, are incorporated by reference in Part III of this Form 10-K.
 




Table of Contents
  
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Item 15.
Item 16.


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PART I
Item 1. Business.
Our Company
Global Brass and Copper Holdings, Inc. (“Holdings,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware on October 10, 2007. We commenced commercial operations on November 19, 2007 following the acquisition of the metals business from Olin Corporation. The majority of our operations are managed through three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster.
We are a leading value-added converter, fabricator, processor and distributor of specialized non-ferrous products, including a wide range of sheet, strip, foil, rod, tube and fabricated metal component products. While we primarily process copper and copper alloys, we also reroll and form certain other metals such as stainless steel, carbon steel and aluminum. Using processed scrap, virgin metals and other refined metals, we engage in metal melting and casting, rolling, drawing, extruding, welding and stamping to fabricate finished and semi-finished alloy products. Key attributes of copper and copper alloys are conductivity, corrosion resistance, strength, malleability, cosmetic appearance and bactericidal properties.
Unlike traditional metals companies, particularly those that engage in mining, smelting and refining activities, we are purely a metal converter, fabricator, processor and distributor, and we do not attempt to generate profits from fluctuations in metal prices. Our financial performance is primarily driven by metal conversion economics, not by the underlying movements in the price of copper and the other metals we use. Through our “balanced book” approach (as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Principles Affecting Our Results of Operations —Balanced Book”), we strive to match the timing, quantity and price of our metal sales with the timing, quantity and price of our replacement metal purchases. This practice, along with our toll processing operations and last-in, first-out (“LIFO”) inventory accounting methodology, substantially reduces the financial impact of metal price movements on our earnings and operating margins.
Our products are used in a variety of applications across diversified markets, including the building and housing, munitions, automotive, transportation, coinage, electronics / electrical components, industrial machinery and equipment, signage, and general consumer markets. We access these markets through direct mill sales, our captive distribution network and third-party distributors. We hold the exclusive production and distribution rights in North America for a lead-free brass rod product, which we sell under the Green Dot® and Eco Brass® brand names. We believe we are the only domestic copper and brass sheet manufacturer with captive distribution and service center operations, a competitive advantage that allows us to service and access customers with a wide variety of volume and service needs.
We service nearly 4,500 customers in 28 countries across four continents. We employ approximately 1,900 people and operate 16 manufacturing facilities and distribution centers across the United States (“U.S.”), Puerto Rico and Mexico.
We own 80% of a value-added service center in Guangzhou, China (“Olin Luotong Metals” or “OLM”); the other 20% is owned by Chinalco Luoyang Copper Co. Ltd. (“Chinalco”). Through Olin Luotong Metals, together with our sales offices in China and Singapore, we supply our products in China and throughout Asia.

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The following charts show the percentage of our shipments by segment, as well as the primary markets for our products and the percentage of shipments. Pounds shipped by market represent management’s estimate of the markets in which our customers participate. Additionally, pounds shipped by market reflect our allocation of Chase Brass shipments to distributors, job shops and forging shops. See Item 1, “Business—Chase Brass.”
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Segments Overview
We have three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster.
 
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Activities
 Leading manufacturer, fabricator and converter
 Leading manufacturer and supplier
 Leading processor and distributor
Products
● Specialized copper and brass sheet, strip, foil, tube, and fabricated products
● Brass rod, including environmentally friendly alloys
● Primarily copper, brass, and aluminum sheet, strip and coated products
Key Markets
 Building and Housing
 Building and Housing
 Building and Housing
 
 Automotive
 Transportation
 Automotive
 
 Electronics / Electrical Components
 Electronics / Electrical Components
 Electronics / Electrical Components
 
Munitions
 Industrial Machinery and Equipment
 
 
Coinage
 
 

All of our segments sell to the building and housing market. While demand within this market is affected by new residential housing, existing home sales and commercial construction, all of which are seasonal and dependent on overall economic conditions, the correlation between housing statistics and our sales is not entirely direct. Our key products are typically installed near the completion of construction, meaning there is an inherent lag time compared to housing starts, and sales of our building and housing products can be affected by factors such as housing mix (unit size, unit price point and the mix of multi-family versus single-family construction). Sales of our products can also be impacted by changes in the composition of materials and fixtures used in construction as well as import and export dynamics.
Further information about our business segments and the geographic areas of our operations can be found in “Note 4, Segment Information.”
Olin Brass
In addition to manufacturing, fabricating and converting specialized copper and brass sheet, strip, foil, tube and fabricated products, Olin Brass also rerolls and forms other alloys such as stainless steel, carbon steel and aluminum. Sheet and strip is generally manufactured from copper and copper-alloy scrap.
Olin Brass manufactures its wide variety of products through four sites in North America. It is not uncommon for Olin Brass to produce 50 different alloys, approximately 30% of which could be high performance alloys (“HPAs”).
Olin Brass’s integrated brass mill in East Alton, Illinois is its main operating facility, which melts metal and produces strip products that are either sold directly to external customers, sold to its affiliate, A.J. Oster, or shipped to Olin Brass’s downstream operations for further value-added processing. Olin Brass’s downstream operations include:
a stamping operation located in East Alton;
a rolling mill in Waterbury, Connecticut with rolling, annealing, leveling, plating and slitting capabilities for various products (“Somers Thin Strip”), including stainless steel thin strip;
a manufacturing facility in Bryan, Ohio specializing in products sold in the automotive and electronics / electrical components markets; and
a manufacturing facility in Cuba, Missouri that produces high frequency welded copper-alloy tube for heat transfer, utility, decorative, automotive and plumbing applications.
Olin Brass’s products are sold to original equipment manufacturers (“OEMs”), other external customers, distributors / rerollers or to its affiliate, A.J. Oster. In 2017, approximately 19% of Olin Brass’s products were shipped to distribution customers, which includes its affiliate A.J. Oster. In 2017, approximately 17% of Olin Brass’s domestic copper-based shipments were to A.J. Oster.

3


The following chart shows the primary markets for Olin Brass’s products and the percentage of shipments.
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(1)
Shipments to A.J. Oster are reflected in the supply chain market and are eliminated in consolidation.
Munitions Market
Olin Brass manufactures products utilized in both the military and commercial munitions markets, such as strip and cups, that are used to produce shot shells, bullet jackets, centerfire, rimfire and small caliber military munitions.
Customers in this market include major munitions producers in the U.S., including those producing small caliber ammunition for the U.S. military. Demand within this market is affected by the U.S. government’s security policies and troop size, as well as consumer demand for firearms and munitions. While munitions demand is predominantly domestic, occasional opportunities arise to supply U.S. alliance partners with these products.
Coinage Market
Olin Brass supplies strip for use in the production of coins (no pennies) primarily for the United States Mint, for which we are a key supplier contracted into 2022. We have been a highly regarded supplier to the United States Mint for over 40 years as our long-term contracts have historically been renewed at termination.
The demand within this market is affected by the level of activities in retail transactions, the use of vending machines, and the trends affecting forms of payment.
Automotive Market
Olin Brass manufactures both strip and fabricated products used as electronic and electrical connectors for use in automobiles. These products are made with HPAs, suitable for applications requiring high reliability, high temperature and low insertion force. For example, these electrical connectors, along with lead frames manufactured by us, are used in junction boxes, wiring harnesses, ignition and battery systems, lighting and media systems within vehicles.
Customers in this market include primary automotive connector suppliers in the U.S. Historically the business in this market remained largely regional in the U.S. Demand within this market is affected by the level of consumer spending on automobiles, which is significantly dependent on overall economic conditions and the amount of electrical components contained within automobiles.

4


Building and Housing Market
Olin Brass manufactures a variety of strip, welded tube and stamped parts used in commercial and residential buildings, such as faucets, locksets, decorative door hardware and hinges, which require workability, corrosion resistance and attractive appearance. Olin Brass also manufactures strip for products requiring high electrical conductivity, such as plug outlets, switches, lamp shells, other wiring devices, industrial controls, circuit breakers and switchgears. These products are generally manufactured with copper and copper-alloy sheet and strip, both HPAs and standard alloys, as well as copper-alloy welded tube.
Customers in this market are OEMs producing building and housing products. Olin Brass also supplies building and housing products in China through Olin Luotong Metals.
Electronics / Electrical Components Market
Olin Brass manufactures strip used in integrated circuit sockets for circuit boards, electrical connectors for laptop computers and similar devices, consumer electronics and appliances, and foils for flexible circuit applications. The strip manufactured in this market is high in HPA content and is sold directly to end-use customers and distributors.
Customers in this market are primarily electronics manufacturers that operate globally. A portion of these customers is serviced through A.J. Oster, and the remainder is supplied directly by Olin Brass, with its Somers Thin Strip facility providing the foil products on a global scale.
Demand within this market is affected by consumer spending on electronics, which may fluctuate significantly as a result of economic conditions.
International

The Olin Brass segment exported 19.1 million pounds into markets that primarily serve the building and housing, automotive and electronics / electrical components markets.
Asia
Included within our Olin Brass business, our Asian operations provide service, distribution and sales activities to meet the growing demand for copper alloys in that region. These activities are conducted through two of our subsidiaries, Olin Luotong Metals (“OLM”) in China and GBC Metals Asia Pacific PTE (“GMAP”) in Singapore. These operations source materials from Olin Brass, as well as other copper and brass mills, such as Chinalco and DOWA Metaltech Co. LTD (“Dowa Metaltech”). In 2017, these Asian operations generated $44.0 million of net sales, or 6% of the Olin Brass segment’s net sales. On a pounds basis, our Asian operations sold 9.9 million pounds (4% of the Olin Brass segment’s sales) of product into Asia through OLM and GMAP, primarily into key electronics markets.
Others
The remainder of Olin Brass’s international sales are primarily to Mexico, Canada and European countries and were 9.2 million pounds (4% of the Olin Brass segment’s sales) in 2017.
Chase Brass
Chase Brass primarily manufactures solid brass rod, in round, hexagonal and other shapes, ranging from 1/4 inch to 4 1/2 inches in diameter. Brass rod is generally manufactured from copper or copper-alloy scrap and all of Chase Brass’s rod is manufactured at its Montpelier, Ohio facility. Chase Brass customers machine, bore out, or otherwise process the rod for various applications used in a variety of markets. Brass rod is primarily used for forged and machined products, such as valves and fittings. Key attributes of brass rod include its machinability, corrosion resistance and moderate strength.
Chase Brass has been able to capitalize on opportunities arising from regulation limiting lead content in potable water plumbing fixtures. Our green product portfolio, including Eco Brass®, has grown significantly over the past few years as customers switch from leaded to non or low-leaded products in certain applications.

5


The following chart shows the primary markets for Chase Brass’s products and our estimates of the percentage of shipments for each. We believe that substantially all of the electronics / electrical components shipments below are associated with the building and housing and transportation markets.
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Building and Housing Market
Chase Brass manufactures brass rod for use in faucets, valves and fittings used in residential and commercial construction.
Chase Brass produces a number of low-lead and lead-free products, or “green portfolio” products, which comply with certain state and federal laws that became effective in January 2014. This legislation defines the allowed level of lead content in products used in plumbing and drinking water applications. Chase Brass’s Green Dot® rod, Eco Brass® rod and Eco Brass® ingot products are part of the green portfolio, and Chase Brass is the exclusive licensee of the intellectual property rights for their production, sale and distribution in North America. Chase Brass also manufactures other non-patented green portfolio products. Green portfolio products accounted for approximately 20% of pounds shipped by Chase Brass in 2017.
Industrial Machinery and Equipment Market
Chase Brass manufactures brass rod which is further machined into industrial valves and fittings. Demand within this market is affected by capital spending levels, U.S. gross domestic product (“GDP”) growth and industrial production growth in the U.S.
Customers in this market include various major diversified manufacturers and a variety of screw machine companies supporting OEMs.
Transportation Market
Chase Brass manufactures brass rod for applications in heavy trucks and automobiles. Specific applications include heavy truck braking systems, tire valves, temperature sensors and various truck and automotive fittings. Demand within this market is affected by levels of transportation activity, levels of maintenance capital spending by transportation companies and the level of commercial truck fleet replacement activity, all of which are affected significantly by overall economic conditions. Customers in this market include major OEMs in the transport industry and customers who support domestic automotive production.

6


Electronics / Electrical Components Market
Chase Brass manufactures brass rod used for telecommunication applications, including products such as coaxial connectors and traps and filters for cable television, as well as larger connectors supporting the cell tower industry. Demand within this market is affected by consumer spending, new home construction, and technologies affecting communication devices and methods, such as wi-fi. Customers within this market include major manufacturers of specialty products for use in home and commercial construction, both of which are very dependent on overall economic conditions. We believe a significant portion of shipments in this market segment are directly associated with the building and housing market and transportation markets.
International
Chase Brass primarily supplies products within North America, and generated $46.8 million in net sales (8% of the Chase Brass segment’s net sales) to Canada and Mexico in 2017. Sales to Canada and Mexico were 23.9 million pounds (11% of the Chase Brass segment’s sales) in 2017.
A.J. Oster
A.J. Oster has historically been a processor and distributor of primarily copper and copper-alloy sheet, strip, and foil. However, with the acquisition of the Alumet business on November 1, 2017, A.J. Oster significantly expanded its product portfolio into aluminum sheet and coated aluminum products. The acquisition also deepened its presence in the signage (aluminum) and roofing (copper and copper-alloy) markets within the building and housing industry. A.J. Oster historically operated six strategically located service centers in the U.S., Puerto Rico, and Mexico and, with the Alumet acquisition, added five more service centers, including those in the South and Southeast where A.J. Oster had no presence.
Key A.J. Oster competitive advantages are: short lead-times with high reliability, high level of service, small-quantity deliveries, high quality metal, and a broad alloy breadth offering, including HPAs from Olin Brass. These capabilities, combined with A.J. Oster’s operations of precision slitting, hot tinning, traverse winding, cutting, coating, and special packaging, provide value to a broad customer base.
In 2017, Olin Brass provided A.J. Oster with 54% of its copper-based products. Aurubis AG (“Aurubis”) is A.J. Oster’s second largest supplier after Olin Brass, supplying approximately 26% of A.J. Oster’s copper-based products in 2017. Many of the coils purchased from Olin Brass and Aurubis are full-width and require slitting.

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The following chart shows the primary markets for A.J. Oster’s products and the percentage of shipments for each.
 
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Building and Housing Market
A.J. Oster distributes copper-alloy strip and aluminum foil used for products in commercial and residential applications. The primary applications are electrical, hardware, signage, and roofing.
Electrical products are primarily for wiring devices. Other electrical applications include switchgears, switches, controls and circuit breakers. Several of our customers for these products are in Puerto Rico or Mexico. A.J. Oster’s capabilities are well-suited for these geographic locations and the stringent service requirements of the electrical market because A.J. Oster is able to provide customers with high-quality metals, in less-than-truckload quantities, and can deliver products shortly after receiving orders.
Hardware products include products such as faucets, window trim, locksets, hinges and kick plates.
A.J. Oster provides aluminum coated products into the signage industry for a wide variety of government and commercial purposes.
With the Alumet acquisition, A.J. Oster now provides copper and copper-alloy sheet and strip product into the architectural roofing industry for both commercial and residential buildings.
Automotive Market
A.J. Oster distributes copper-alloy strip and aluminum foil used in automobiles. Primary customer products are electrical connectors, automotive trim and heat exchangers.
A.J. Oster’s subsidiary in Queretaro, Mexico is strategically and geographically well-positioned to take advantage of the growing number of second-tier automobile component suppliers in Mexico.
Demand within this market is affected by the level of consumer spending on automobiles, which is significantly dependent on overall economic conditions.

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Electronics / Electrical Components Market
A.J. Oster distributes copper-alloy strip used for electrical connectors in computers, consumer electronics and automobiles.
The demand within this market is affected by consumer spending and trends in electronics, which may fluctuate significantly as a result of economic conditions.
International
A.J. Oster operates a service center in central Mexico. The facility is located in Queretaro in the center of Mexico’s industrial triangle marked by Mexico City, Monterey and Guadalajara and is easily accessible by highway connections to the U.S.
Automotive sub-suppliers that consume copper-alloy strip are now locating facilities in central Mexico in order to support primary automotive manufacturing.
Net sales from A.J. Oster Mexico were $44.8 million during 2017 (14% of A.J. Oster segment’s net sales). Pounds shipped from A.J. Oster Mexico were 9.8 million and comprised 12% of the A.J. Oster segment’s sales.
Raw Materials and Supply
We manufacture our products from scrap metal (both internally generated and externally sourced) or virgin raw materials. During 2017, 92% of our metal came from scrap metal, and the remainder came from virgin raw materials.
We purchase virgin raw materials, including copper cathode, at a premium on the London Metal Exchange (“LME”) or Commodities Exchange (“COMEX”) or directly from key dealers that support producers around the world. Although virgin raw materials are more expensive compared to scrap, we use them to ensure quality production of certain alloys, especially HPAs.
Customers
Our customer base is broadly diversified across North America geographies and our end markets, as previously discussed. In 2017, we sold approximately 14,000 different stock keeping units (“SKUs”) to nearly 4,500 customers.
Also in 2017, net sales from our foreign entities were $88.8 million, or 6% of our net sales. We have long-term relationships with our customers, many of which are secured through short-term contracts. Our relationships with many of our significant customers have lasted more than 30 years.
All three of our operating segments had customers to whom sales activity constituted more than 10% of net sales during 2017. Olin Brass generated 23% of its total net sales from one customer and 14% of its total net sales from another customer. A.J. Oster generated 18% of its total net sales from one customer. Chase Brass generated 21% of its total net sales from one customer. On a consolidated basis, we did not generate more than 10% of our net sales from any one customer in 2017.
Competition
We compete with other companies on price, service, quality, breadth, and availability of product. We believe we have been able to compete effectively because of our high levels of service, breadth of product offering, knowledgeable and trained sales force, modern equipment, proximity to customers, and economies of scale.
The North American market for brass and copper strip and sheet and brass rod consists of a few large participants and a few smaller competitors for Olin Brass and Chase Brass. A.J. Oster’s competition consists of a number of smaller competitors. Our international competitors are based principally in Europe (for Olin Brass and A.J. Oster) and Asia (for Chase Brass).

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Our largest competitors in each of the markets in which we operate are the following:
 
Aurubis and PMX Industries, Inc.: manufacturers of copper and copper-alloys in the form of strip, sheet and plate (Olin Brass competitor);
ThyssenKrupp Materials NA, Copper and Brass Sales Division: processor and distributor of copper, brass, stainless and aluminum products; Wieland Metals, Inc.: re-roll mill and service center for copper and copper-alloy strip (A.J. Oster competitor); and
Mueller Industries, Inc.: manufacturer of brass rod (Chase Brass competitor).
We use data published by independent industry associations and management estimates to determine our market share. Using this information, in 2017, we estimate our market share as follows:
Olin Brass accounted for 30% of North American shipments (including shipments to A.J. Oster) of copper and brass alloys in the form of sheet, strip and plate;
A.J. Oster accounted for 36% of North American shipments of copper and brass, sheet and strip products from distribution centers and rerolling facilities; and
Chase Brass accounted for 53% of North American shipments of brass rod, not including imports.
Corporate
Our Corporate expenditures include compensation for corporate executives and officers, corporate office and administrative salaries, and professional fees for accounting, tax and legal services. Corporate also includes interest expense, state and federal income taxes, overhead costs that management has not allocated to the operating segments, share-based compensation expense, gains and losses associated with certain acquisitions and dispositions and the elimination of intercompany sales and balances.
Government Regulation and Environmental Matters
Bactericidal Products
Through its membership in and the stewardship program of the Copper Development Association Inc. (“CDA”), Olin Brass has completed the required Federal Environmental Protection Agency (“EPA”) and applicable state registration processes that allow it to market its CuVerro® products with certain approved bactericidal claims. Laboratory testing has shown that bactericidal copper touch surfaces made with CuVerro® kill more than 99.9% of bacteria within two hours. We believe that Olin Brass’s copper-based CuVerro® materials are in compliance, in all material respects, with EPA standards for products recognized by the EPA as having bactericidal properties.
Even though the marketing of copper products as bactericidal started in 2008, the manufacturers of such products are still in the process of determining what specific bactericidal claims may be made in compliance with the EPA’s and Federal Insecticide, Fungicide and Rodenticide Act’s (“FIFRA”) requirements. Therefore, there remains some uncertainty when determining whether a particular marketing approach is consistent with the EPA registration requirements. The stewardship program required under the EPA registration is an industry-wide activity, and the actions of other CDA members could jeopardize the marketing of all bactericidal copper products registered through the CDA (including CuVerro®).
Environmental
Our operations are subject to a number of federal, state and local laws and regulations relating to the protection of the environment and to workplace health and safety. In particular, our operations are subject to extensive federal, state and local laws and regulations governing the creation, transportation, use, release and disposal of wastes, air and water emissions, the storage and handling of hazardous substances, environmental protection, remediation, workplace exposure and other matters. Hazardous materials used in and activities undertaken by our operations include general commercial lubricants, cleaning solvents, cutting oils, air emissions from paints and coatings, storage of hazardous materials, and utilization of septic systems.
We believe that we are in substantial compliance with all applicable environmental, workplace health, and safety laws and do not currently anticipate that we will be required to expend any substantial amounts in the foreseeable future in order to meet such requirements. We have a number of properties located in or near heavy industrial or light industrial use areas; accordingly, these properties may have been contaminated by pollutants which may have migrated from neighboring facilities or have been released by prior occupants for which we may become liable under various laws and regulations. Some of our properties have been affected by releases of cutting oils and similar materials and we are investigating and

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remediating such known contamination pursuant to applicable environmental laws. The costs of these clean-ups have not been material in the past.
In January 2018, one of our Olin Brass operations experienced a leak of mineral oil at its Waterbury, Connecticut facility. Our personnel, the Waterbury fire department, the US EPA, the Connecticut DEEP, and remediation contractors responded immediately. While remediation efforts continue, we do not believe, at this time, this incident will materially affect our long-term financial stability or cash flows.
Pursuant to the agreement, dated November 19, 2007, by which we purchased our current operating locations from Olin Corporation, Olin Corporation agreed to retain responsibility for a wide range of liabilities under environmental laws arising out of existing contamination on our properties, and agreed to indemnify us without limitation with respect to these liabilities. Specifically, Olin Corporation retained responsibility for:
 
compliance with all obligations to perform investigations and remedial action required under the Connecticut Real Property Transfer Act at properties in Connecticut;
pending corrective action / compliance obligations under the Federal Resource Conservation and Recovery Act for certain areas of concern at our East Alton, Illinois facility; and
all obligations under environmental laws arising out of 24 additional specifically identified areas of concern on various of our properties.
Olin Corporation also retained complete responsibility for all liabilities arising out of then pending governmental inquiries relating to environmental matters; for “any liability or obligation in connection with a facility of the Business to the extent related to pre-Closing human exposure to Hazardous Materials, including asbestos-containing materials”; and for “any liability or obligation in connection with the off-site transportation or disposal of Hazardous Materials arising out of any pre-Closing operations of the Business.”
Since 2007, Olin Corporation has continued to perform environmental remedial actions on our properties, including the East Alton, Illinois and Waterbury, Connecticut properties, and continues to work closely with us to address matters covered by the indemnity. Because of the Olin Corporation indemnity, we have not been required to engage in any significant environmental cleanup activity on our properties and do not currently have any material reserves established to address environmental remedial requirements.
Employees
The following table shows the composition of our workforce by operating segment and Corporate as of December 31, 2017. 
 
 
Employees
 
% of Total
Olin Brass
 
1,163

 
60
%
A.J. Oster
 
422

 
22
%
Chase Brass
 
319

 
17
%
Corporate
 
22

 
1
%
Total
 
1,926

 
100
%
As of December 31, 2017, 1,074, or approximately 56%, of our employees at various sites were members of unions. We have generally maintained good relationships with all unions and employees, which has been an important aspect of our ability to be competitive in our industry. Generally, our various agreements with unions in the United States have contractual terms which range from 1 to 5 years.
Historically, we have succeeded in negotiating new collective bargaining agreements without a strike and we have not experienced any work stoppages at any of our facilities. Our union agreement governing a substantial portion of our employees at Olin Brass was renewed in 2017 and will not expire until 2022. We believe we will continue to be able to renew the outstanding collective bargaining agreements upon acceptable terms.

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Research and Development
Our staff of scientists in metallurgy and electrochemistry intends to continue to invest in research and development to develop new products and expand our value-added services to meet our customers’ needs.
Our research and development expenditures were not material in any of the last three years.
Risk Management and Insurance
The primary risks in our operations are personal injury, property damage, transportation, criminal acts, risks associated with international operations, directors’ and officers’ liability and general commercial liabilities. We are insured against general commercial liabilities (including business interruption), workers’ compensation liabilities, automobile accidents (including injury to employees and physical damage of goods and property and employer liabilities), directors’ and officers’ liability, crime, foreign risks, environmental liability, ocean cargo liability and flood through insurance policies provided by various insurance companies up to amounts we consider sufficient to protect against losses due to claims associated with these risks.
Safety
Consistent with other strategic initiatives, we strive to achieve a ‘Best in Class’ performance status for employee safety. A number of our locations participate in the Occupational Safety and Health Administration (“OSHA”) sponsored Voluntary Protection Program, or VPP. The Safety Excellence / VPP initiative shifts the safety paradigm to an aggressive proactive approach that stresses strong employee participation and collaboration, management accountability, employee training and hazard elimination as core foundational elements. In 2016, our A.J. Oster facility in Yorba Linda, California was recognized as a VPP Star site. This recognition reflects the facility’s achievement in the development, implementation and continuous improvement of their safety and health management system resulting in injury and illness rates that are below the national averages for the industry.
Patents, Trademarks and Other Intellectual Property Rights
Chase Brass has exclusive intellectual property licenses, the longest of which extends to 2027, to produce and sell Eco Brass® rod and ingot in North America, granted by Mitsubishi Shindoh Company, Ltd., the Japanese company that owns the relevant intellectual property rights. The most popular versions of Eco Brass® are protected through May 2019. We have sublicensed our rights to three sublicensees, none of which is currently a competitor of any of our subsidiaries or segments. These sublicensing arrangements are valid until the expiration of the relevant patents in North America.
We license certain intellectual property from companies in Germany, Japan and China.
We own a number of other U.S. and foreign patents, trademarks and licenses relating to certain of our products and processes. We actively protect our proprietary rights by the use of trademark, copyright, and patent registrations. Additionally, we license the marks OLIN BRASS and OLIN METALS for metal products from Olin Corporation. These licenses continue unless we breach the license agreement. We also license stylized versions of these marks from Olin Corporation and the license to the stylized version includes an annual termination option by either party.
We license the intellectual property rights related to certain proprietary alloy systems to other major brass mills around the world, including Dowa Metaltech.
Government Contract
The United States Mint is and has been a significant customer of Olin Brass since 1969. We have a contractual arrangement to supply nickel and brass coinage strip to multiple United States Mint facilities. We renewed this contract in 2017 and expect to renew again when it expires in 2022. However, the United States Mint can terminate our contract in whole or in part when it is in the best interest of the United States Mint to do so and any damages payable to us by the United States Mint for such termination would not include lost profits.

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Seasonality
There is a slight decrease in our net sales in the fourth quarter as a result of the decrease in demand due to customer shutdowns for the holidays and year-end maintenance of plants and inventory by customers. We also typically experience slight working capital increases in the first fiscal quarter as our customers build inventory to serve the seasonal building and housing market.
Available Information
Our website address is http://www.gbcholdings.com. We make available on our website, free of charge, the periodic reports that we file with or furnish to the Securities and Exchange Commission (“SEC”), as well as all amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. We also make available on our website or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, charters for the standing committees of our Board of Directors and other information related to the Company. We are not including the information contained on our website as a part of, or incorporating it by reference into, this report.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information related to issuers that file electronically with the SEC.

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Item 1A. Risk Factors.
We are exposed to various risks as we operate our businesses. To provide a framework to understand our operating environment, we are providing a brief explanation of the more significant risks associated with our businesses. Although we have tried to identify and discuss key risk factors, others could emerge in the future.
Risks Related to Our Business
We are exposed to the cyclicality of the U.S. and certain foreign economies as well as fluctuations in certain industries. Our future growth also depends, to a significant extent, on improvements in the general economic conditions and the conditions of our markets.
Many of our products are used in industries that are, to varying degrees, cyclical and have historically experienced periodic downturns due to factors such as economic conditions, energy prices, the availability of credit, consumer sentiment, demand and other factors beyond our control. These economic and industry downturns have resulted in diminished product demand and excess capacity for our products. Any future economic disruptions may negatively impact our markets or the consumers served by those markets, which would adversely affect our operating results.
A significant amount of our volume is tied to the building and housing sector. If the housing, remodeling and residential and commercial construction markets stagnate or deteriorate, demand from such markets for our products, especially our brass rod products, is likely to be adversely affected. Any recovery in such markets may not necessarily directly correlate with increased sales or profitability. In addition, competition from imports and other sources may also dampen the effects of any such recovery on our results of operations.
Similarly, the automotive market has in the past experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions, the availability and cost of credit, the cost of fuel, and technological developments in the auto industry.
The coinage and general consumer markets are also affected by economic cycles, legislation, and trends in electronic commerce. Demand for coinage-related products generally increases with the number of cash transactions that occur, and the number of cash transactions generally increases during periods of economic growth. Demand for consumer goods is also very sensitive to economic conditions and drives demand in our electronics / electrical components market.
The munitions market is generally not correlated to any general economic indicators and thus, has a high degree of volatility.
We also buy a significant portion of our raw materials from scrap dealers at prices which are often quoted as a discount to prevailing publicly traded market prices for such commodities.  These discounts, or scrap spreads, can fluctuate based on many different conditions, including domestic and international forces beyond our control.  Since we include these scrap spreads in the non-metal conversion fee or Adjusted Sales component of our revenue, our financial results are therefore also subject to fluctuation due to these same conditions.
Failure to maintain our balanced book approach would cause increased volatility in our profitability and our operating results and may result in significant losses.
We use our balanced book approach to substantially eliminate the impact on our operating margins of metal price fluctuations affecting the cost of the metal raw materials used in manufacturing our products. Such fluctuations can significantly affect our operating margins. Under our balanced book approach, we seek to match the timing, quantity and price of the metal component of net sales with the timing, quantity and price of replacement metal purchases on all of our non-toll sales. We use a combination of matching price date of shipment terms, firm price terms and derivatives transactions to achieve our balanced book. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Principles Affecting Our Results of Operations—Balanced Book.”
We may not be able to maintain our balanced book approach if our customers become unwilling to bear metal price risk through the matching of price date of shipment terms. We may also not be able to find counterparties for the derivatives transactions entered into in connection with firm price terms, and the cost of those derivatives transactions may increase such that entering into such transactions is no longer cost-effective to us. If we fail to maintain our balanced book approach, we may be forced to accept higher replacement prices, which could generate losses and would increase volatility in our results of operations.

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However, our balanced book approach does not reduce the impact of the volatility in metal prices on our working capital requirements. Metal prices impact our investment in working capital because our collection terms with our customers are longer than our payment terms to our suppliers. As a result, when metal prices are rising, even if the number of pounds of metal we process does not change, working capital may be negatively affected as we are required to draw more on our cash or available financing sources to pay for raw materials. As a result, our liquidity may be negatively affected by increasing metal prices. See “Management’s Discussion and Analysis of Operating Results and Financial Condition—Key Business Principles Affecting Our Results of Operations—Metal Cost.”
Limited access to raw materials, infrastructure or energy could negatively affect our business, financial condition or results of operations or cash flows.
Among other things, our success depends on our ability to secure a sufficient and constant supply of raw materials and energy and access to infrastructure adequate to fulfill our business needs.
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. If an adequate supply of scrap metal is not available to us, we may be forced to use a larger amount of more expensive virgin raw materials which would materially adversely affect our ability to meet customer needs in a timely manner, our results of operations, and our financial condition.
We may experience disruptions in the supply of energy as a result of delivery curtailments to industrial customers due to extremely cold weather. We may also experience disruptions or increases in cost with respect to our access to water, electrical power, transport and wastewater treatment services and other infrastructure (including those subject to our transition services agreement with the parent of our predecessor). An inability to find an adequate and timely supply of raw materials or adequate and cost-effective access to infrastructure could have a material adverse effect on our profit margin, and in turn on our business, financial condition, results of operations or cash flows.
In 2017, the cost of energy and utilities represented approximately 7% of our non-metal cost of sales and prices can be volatile. As a result, our energy and utility costs may fluctuate dramatically, and we may not be able to mitigate the effect of higher energy and utility costs on our business, financial condition, results of operations, and cash flows. Although we attempt to mitigate short-term volatility in energy and utility costs through the use of derivatives contracts, we may not be able to eliminate the long-term effects of such cost volatility. Furthermore, in an effort to offset the effect of increasing costs, we may have also limited our potential benefit from declining costs.
Covenants under our debt agreements impose operating and financial restrictions. Failure to comply with these covenants could have a material adverse effect on our business, financial condition, results of operations or cash flows.
The agreement governing our asset-based revolving loan facility (“ABL Facility”) and the agreement covering our term loan facility that matures on July 18, 2023 (“Term Loan B Facility”) contain various covenants that limit or prohibit our ability, among other things, to:
incur or guarantee additional indebtedness;
pay dividends on our capital stock or redeem, repurchase, retire or make distributions in respect of our capital stock or subordinated indebtedness or make certain other restricted payments;
make certain loans, acquisitions, capital expenditures or investments;
sell certain assets, including stock of our subsidiaries;
enter into certain sale and leaseback transactions;
create or incur certain liens;
consolidate, merge, sell, transfer or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
engage in certain business activities.
The agreement governing the ABL Facility also contains a financial covenant that requires us to maintain a fixed charge coverage ratio that is tested whenever excess availability, as defined in such agreement, falls below a certain level. For more information regarding these covenants, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Outstanding Indebtedness.”
The agreement governing the Term Loan B Facility also contains a financial covenant that requires us to maintain a total debt leverage ratio that is tested quarterly.

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A violation of covenants may result in default or an event of default under our debt agreements.
Upon the occurrence of an event of default under the agreement governing the ABL Facility or the Term Loan B Facility, our outstanding indebtedness may become immediately due and payable and we may lose access to further credit under our ABL Facility. If we are unable to repay our indebtedness, the lenders under such facilities may proceed against the collateral granted to them to secure such indebtedness. Substantially all of our assets are pledged as collateral under the ABL Facility and the Term Loan B Facility. If the lenders under either facility, as applicable, accelerate the repayment of borrowings, such acceleration would have a material adverse effect on our business, financial condition, results of operations or cash flows. Furthermore, cross-default provisions in the ABL Facility and the Term Loan B Facility provide that any default under the other facility or other significant debt agreements could trigger a cross-default under the ABL Facility or the Term Loan B Facility, as applicable. If we are unable to repay the amounts outstanding under these agreements or obtain replacement financing on acceptable terms, which ability will depend in part upon the impact of economic conditions on the liquidity of credit markets, our creditors may exercise their rights and remedies against us and the assets that serve as collateral for the debt, including initiating a bankruptcy proceeding.
For a more detailed description on the limitations on our ability to incur additional indebtedness and our compliance with financial covenants, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Outstanding Indebtedness.”
Our sales volumes, financial results, and financial condition could be reduced if we were to lose order volumes from any of our largest customers.
Our five largest customers were responsible for approximately 31% of our net sales in 2017. A loss of order volumes from any major customer could negatively affect our business, financial condition or results of operations by lowering sales volumes, increasing costs and lowering profitability. Order volumes from customers could decrease for a variety of reasons including loss of industry share, customer production outages, technological obsolescence of our products, or other competitive factors. Our balance sheet reflected an allowance for doubtful accounts totaling $1.0 million at December 31, 2017. If adverse economic and market conditions impair the ability of our customers to pay us in the future, our allowance for doubtful accounts and write-offs of accounts receivable from the Company’s customers may increase in the future, which could materially and adversely affect our financial condition and results of operations.
In addition, we will not be entitled to lost profits should the United States Mint voluntarily terminate our contract prior to the contractual end date in 2022.
Our business could be disrupted if our customers shift either their manufacturing or sourcing offshore.
Much of our business depends on maintaining close geographical proximity to our customers because the costs of transporting metals across large distances can be prohibitive. If customers, especially those in the automotive, electrical, and building and housing industries, relocate the production of or source their products from foreign locations, we may lose business to foreign competitors or suffer deterioration in our business.
Competition and changes in trade tariffs could adversely affect our business, financial condition and results of operations.
We are engaged in a highly competitive industry. Each of our segments competes with a limited number of companies. The Olin Brass segment competes with domestic and foreign manufacturers of copper and brass alloys in the form of strip, sheet and foil. The Chase Brass segment competes with domestic as well as foreign manufacturers of brass rod and beginning in 2013, encountered increased competition from foreign rod suppliers. The A.J. Oster segment primarily competes with distributors, mills and processors of copper and brass products. Furthermore, we believe that domestic sales to customers that are not made by major companies, including us, are fragmented among many smaller companies. In the future, these smaller companies may choose to combine, creating a more significant domestic competitor against our business. We may be required to explore additional initiatives in each of our segments in order to maintain our sales volume at a competitive level. Increased competition in any of the fields in which our segments operate could adversely affect our business, financial condition and results of operations.
In December 2017, the U.S. Department of Commerce announced anti-dumping and countervailing duties on aluminum foil products from China. China previously served 22% of the U.S. aluminum foil market but was effectively priced out as a supplier to U.S. companies due to these duties. This resulted in significantly higher domestic prices as well as decreased supply with U.S. producers. Our inability to pass through these price increases and the reduced supply from U.S. producers

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could adversely affect the performance of our business or shipments to customers.  In addition, there are further trade cases pending that could result in additional price increases and constrained availability.
In addition, anti-dumping orders impose import duties on copper and brass products from France, Germany, Italy and Japan which allow us and our domestic competitors to compete more fairly against French, German, Italian and Japanese producers in the U.S. copper and brass product market. On March 21, 2012, the International Trade Commission (“ITC”) Commissioners voted to continue anti-dumping orders for brass sheet and strip from Germany, Italy, France and Japan. While domestic manufacturers lobby for the continued extension of these orders, if they expire, import duties on metal products from these countries will be significantly reduced, increasing the ability of such foreign producers to compete with our products domestically. Additionally, on March 15, 2012, the United States-Korea Free Trade Agreement (“KORUS FTA”) became effective, which largely eliminates tariffs on Korean industrial products imported to the United States. The reduction in prices of Korean products resulting from the KORUS FTA has increased the ability of Korean manufacturers to compete with our products and has had a negative effect on our business. Furthermore, the termination of any anti-dumping orders or other changes to international trade regimes could adversely affect our business, financial condition and results of operations.
Adverse developments in our relationship with our employees could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As of December 31, 2017, we had 1,926 employees, 1,074, or approximately 56%, of whom at various sites were members of unions. Our primary union contracts expire in 2020 and 2022. Our union agreements are a meaningful determinant of our labor costs and are very important to our ability to maintain flexibility to fulfill our customers’ needs. As we attempt to renew our collective bargaining agreements, labor negotiations may not conclude successfully and, in that case, may result in a significant increase in the cost of labor or may result in work stoppages or labor disturbances, disrupting our operations. Any such cost increases, stoppages or disturbances could have a material adverse effect on our business, financial condition, results of operations and cash flows by limiting plant production, sales volumes and profitability.
Our participation in multi-employer union pension plans may have a material adverse effect on our financial performance.
We are required to make contributions to the IAM National Pension Plan (“IAM Plan”), a multi-employer pension plan that covers certain of our union employees. Our obligations may be impacted by the funded status of the plan, the plan’s investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions. In addition, if a participating employer becomes insolvent and ceases to contribute to a multiemployer plan, the unfunded obligation of the plan will be borne by the remaining participating employers. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur withdrawal liability to the plan. If, in the future, we choose to withdraw from the multi-employer pension plan in which we participate, we will likely need to record withdrawal liabilities, which could negatively impact our financial performance in the applicable periods.
Our operations are subject to risks of natural disasters, acts of war, terrorism or widespread illness at our domestic and international locations, any one of which could result in a business stoppage and negatively affect our business, financial condition or results of operations.
Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our facilities and transportation for our employees are susceptible to damage from earthquakes and other natural disasters such as fires, floods, hurricanes, tornadoes and similar events. We have facilities located throughout North America, including in Illinois, Ohio, Connecticut, Rhode Island, Missouri, California, Puerto Rico and Mexico, as well as in China. We take precautions to safeguard our facilities, including obtaining insurance and maintaining health and safety protocols. However, a natural disaster, such as a tornado, fire, flood, hurricane or earthquake, could cause a substantial interruption in our operations, damage or destroy our facilities or inventory and cause us to incur additional expenses. The insurance we maintain against natural disasters may not be adequate to cover our losses in any particular case, which would require us to expend significant resources to replace any destroyed assets, thereby harming our financial condition and prospects significantly.
For example, Olin Brass’s manufacturing facilities and A.J. Oster’s California facility are located near geologic fault zones, and therefore are subject to greater risk of earthquakes which could result in increased costs and a disruption in our operations, which could harm our operating results and financial condition significantly. Our facility in East Alton, Illinois

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is located in a flood zone, and all of our facilities in the Midwestern United States are subject to the risk of tornadoes and damaging winds. A.J. Oster’s facility in Puerto Rico is subject to hurricanes. Should earthquakes or other catastrophes, such as fires, tornadoes, hurricanes, floods, power outages, communication failures or similar events disable our facilities, we do not have readily available alternative facilities from which we could continue our operations, and any resulting stoppage could have a negative effect on our operating results. Acts of terrorism, widespread illness and war could also have a negative effect at our international and domestic facilities.
Any prolonged disruptions, failures, or inability to operate our business, manufacturing facilities, or equipment, including those arising from information technology related incidents, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our ability to satisfy our customers’ orders in an efficient manner and to effectively manage inventory levels is dependent on the proper operation of our business, facilities, equipment, and information technology environment and tools. On-time delivery and accurate order fulfillment are essential to maintaining customer satisfaction and generating repeat business. Any prolonged equipment failures, supplier caused production delays, quality control incidents, network outages, information technology system failures or implementations, damage or disruption due to natural disasters, inclement weather conditions, acts of war, terrorism or widespread illness, temporary facility closures, or other disruptions in operations such as a major fire or major equipment breakdown at our manufacturing facilities could materially disrupt our operations and thereby adversely affect our business, financial condition, and results of operations. In addition, we may not have adequate insurance to cover all losses.
We do not have redundancy in our operations on certain critical pieces of equipment, including the Olin Brass hot and cold mills and Chase Brass extruders. If this equipment were damaged, we would have to make alternative arrangements to replicate these processes, which could be costly and result in manufacturing delays, which could materially adversely affect our business, financial condition and results of operations.
The increased use of substitute materials and miniaturization may adversely affect our business.
In many applications, copper and other commodities may be replaced by other materials such as aluminum, stainless steel, plastic and other materials and the use of copper and other commodities may be reduced by the miniaturization of components. Increased prices of copper could encourage our customers to use substitute materials and / or miniaturization to limit the amount of copper in their products and applications in an attempt to control their overall product costs. For example, historically, there has been discussion over reducing or eliminating copper content in coins in reaction to the rising prices of copper. Such increased use of substitute materials and / or miniaturization could have a material adverse effect on prices and demand for our products.
If we fail to develop or enhance our products to satisfy evolving customer demands, our business, operating results, financial condition and prospects may be harmed significantly.
The market for copper and copper-alloy products is characterized by changing technologies, periodic new product introductions and evolving customer and industry standards and demands. To achieve market acceptance for our products, we must effectively and timely anticipate and adapt to customer requirements, new technologies and production methods, and offer products and services that meet customer demands.

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A portion of our net sales is derived from our international operations, which exposes us to certain risks inherent in doing business abroad.
In the aggregate, our international operations accounted for 6% of our net sales in 2017. We have operations in China through Olin Luotong Metals and in Singapore through our subsidiary GBC Metals Asia Pacific PTE. In addition, we have various licensing agreements around the world and our products are distributed globally. We plan to 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;
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;
divergent environmental laws and regulations;
political, economic and social instability;
unfamiliarity with foreign laws and regulations and ability to enforce obligations of foreign counterparties;
difficulties in staffing and managing international operations and labor unrest;
language and cultural barriers;
natural disasters and widespread illness;
geopolitical conditions, such as terrorist attacks, war, or other military action; and
a divergence between the price of copper on the copper exchange in China and the LME, and the COMEX.
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, and subject us to risks not generally prevalent in North America.
New governmental regulations or legislation, or changes in existing regulations or legislation, may subject us to significant costs, taxes and restrictions on our operations.
Our operations are subject to a wide variety of U.S. federal, state, local and non-U.S. laws and regulations, including those relating to taxation, international trade and competition and firearms.
For example, the Olin Brass segment provides strip and cups to both the military and commercial munitions markets. In 2017, the shipments by Olin Brass to the munitions market accounted for 38% of its total shipments. The private use of firearms is subject to extensive regulation. Any restriction on the use of firearms and ammunition could affect the demand for munitions, and in turn could negatively affect our business, financial condition or results of operations. Moreover, any changes in the government budget or policy over military spending may adversely affect our contracts with customers in the munitions market.
Changes in U.S. or foreign tax laws, including possibly with retroactive effect, and audits by tax authorities could result in unanticipated increases in our tax expense and affect profitability and cash flows. From time to time, legislative initiatives are proposed in the U.S., such as the repeal of the election to use LIFO or to lower the U.S. corporate tax rate. The repeal of LIFO accounting for tax purposes could result in a substantial cash tax liability, which could adversely impact our liquidity and financial condition. Furthermore, such a repeal could result in an increase in the volatility of our earnings, a greater disparity between our earnings and net sales in our financial statements, and an increase in the costs associated with our derivative transactions to mitigate metal price fluctuations.
Our operations expose our employees to risk of injury or death. We may be subject to claims that are not covered by, or exceed, our insurance. Additional safety measures or rules imposed by regulatory agencies may reduce productivity, require additional capital expenditure or reduce profitability.
Because of the type manufacturing 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. Despite policies and standards that are designed to minimize such risks, we may nevertheless be unable to avoid material liabilities, civil or regulatory, 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.

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Our ability to retain our senior management team is critical to the success of our business, and failure to do so could materially adversely affect our business, financial condition, results of operations and cash flows.
We are dependent on our senior management team to remain competitive in our industry. We have employment contracts or severance agreements with members of our senior management team. Failure to renew the employment contracts or other agreements of a significant portion of our senior management team could have a material adverse effect on our business, financial condition, results of operations and cash flows. Members of our senior management team are subject to employment conditions or arrangements that permit the employees to terminate their employment without notice. We do not maintain any life insurance policies for our benefit covering our key employees.
If our senior management team were not able to dedicate adequate time to our business, due to personal or other factors, if we lose or suffer an extended interruption in the services of a significant portion of our senior management team, or if a significant portion of our senior management team were to terminate employment within a short period it could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the market for qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management team, should the need arise.
Environmental costs could decrease our net cash flow and adversely affect our profitability.
Our operations are subject to extensive regulations governing, amongst other things, the creation, use, transportation and disposal of wastes and hazardous substances, air and water emissions, remediation, workplace exposure and other environmental matters. The costs of complying with such laws and regulations, including participation in assessments and clean-ups of sites, as well as internal voluntary programs, can be significant and will continue to be so for the foreseeable future. Additionally, evolving regulatory standards and expectations could result in increased litigation and / or increased costs of compliance with environmental laws, all of which could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
Environmental matters for which we may be liable may arise in the future at our present sites, at previously owned sites, sites previously operated by us, sites owned by our predecessors or sites that we may acquire in the future. Our operations or liquidity in a particular period could be affected by certain health, safety or environmental matters, including remediation costs and damages related to several sites. Because a number of our properties are located in or near industrial or light industrial use areas, we may be liable for any contamination by pollutants which may have migrated to our facility from neighboring facilities or have been released by prior occupants. Some of our properties have been affected by releases of cutting oils and similar materials, and we are investigating and remediating such known contamination pursuant to applicable environmental laws. The costs of these clean-ups have not been material in the past. We are not currently subject to any material claims or notices with respect to clean-up or remediation under CERCLA or similar laws for contamination at our leased or owned properties or at any off-site location. However, we cannot rule out the possibility that we could be notified of such claims in the future. It is also possible that we could be identified by the Environmental Protection Agency, a state agency or one or more third parties as a potentially responsible party under CERCLA or under analogous state laws.
In January 2018, one of our Olin Brass operations experienced a leak of mineral oil at its Waterbury, Connecticut facility. Our personnel, the Waterbury fire department, the US EPA, the Connecticut DEEP, and remediation contractors responded immediately. While remediation efforts continue, we do not believe, at this time, this incident will materially affect our long-term financial stability or cash flows.
On November 19, 2007, we acquired the assets and operations relating to the worldwide metals business of Olin Corporation. Olin Corporation agreed to retain liability arising out of then existing conditions on certain of our properties for any remedial actions required by environmental laws, and agreed to indemnify us for all or part of a number of other environmental liabilities. Since 2007, Olin Corporation has been performing remedial actions at the facilities in East Alton, Illinois and Waterbury, Connecticut, and has been participating in remedial actions at our other properties as well. If Olin Corporation were to stop its environmental remedial activities at our properties, we could be required to assume responsibility for these activities, the cost of which could be material. For additional information concerning the indemnity granted to us by Olin Corporation for environmental liabilities, see “Business—Government Regulation and Environmental Matters.”

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We may be subject to litigation that could strain our resources and distract management.
From time to time, we are involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution and the cost of and time spent in defending ourselves in these matters as well as future lawsuits could have a material adverse effect on our reputation, business, financial condition, results of operations, cash flows or reputation.
Failure to protect, or uncertainty regarding the validity, enforceability or scope of, our intellectual property rights or the expiration of our intellectual property rights could impair our competitive position.
We rely on a combination of patents, trademarks, trade secrets and other intellectual property rights, in addition to contractual rights, to protect the intellectual property we use in making our business successful. It is possible that our intellectual property rights could be challenged, invalidated, violated or made obsolete by our competitors or third parties, or our pending patent applications may not be granted, thereby hurting our success.
In addition, Chase Brass has entered into agreements with Mitsubishi Shindoh pursuant to which Chase Brass has access to and the right to use certain of its technologies including lead-free Eco Brass® rod and the sublicensing of lead-free Eco Brass® ingot. To the extent that Mitsubishi Shindoh fails to adequately protect the technologies upon which we rely, our competitors may be able to use such technologies or develop similar technologies independently. Conversely, to the extent that we do not fulfill our contractual or other obligations to adequately protect the technologies to which we have been granted access by Mitsubishi Shindoh, we could be liable for any resulting harm to its business or could lose further access to this technology, which could harm our business, operating results or financial condition.
If the technologies upon which we rely infringe upon the patents or proprietary rights of third parties, we may be unable to continue using such technologies or we may face lawsuits related to our past use of these technologies. Furthermore, our competitors, who have made significant investments in competing technologies or products, may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make or sell our products or provide our services.
If we are unsuccessful in defending against any challenge to our rights to market and sell our products covered by intellectual property rights, our business, financial condition, and financial results may be adversely affected.
Even if we are successful, the expense, time, delay and burden on management of litigation could prevent us from maintaining or increasing our business. Further, negative publicity could decrease demand for our products and services and cause our revenues to decline, thus harming our operating results significantly.
Finally, for our products that are covered on patent protection, once a patent has expired, the product is generally open to competition. For example, patent protection for the most popular versions of Eco Brass® expires in May 2019. The expiration of such patent could enable other companies to compete more effectively with us by allowing our competitors to make and sell products substantially similar to those we offer. This could negatively impact our ability to produce and sell the associated products, thereby adversely affecting our operations.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology, products and services could be harmed significantly.
We rely on trade secrets, know-how and other proprietary information in operating our business. We seek to protect this information through a variety of means. In the event of unauthorized use or disclosure of our trade secrets or proprietary information, our business, financial condition, and financial results could be negatively affected.
The risk that other parties may breach confidentiality agreements or that our trade secrets become known or independently discovered by competitors, could harm us by enabling our competitors, who may have greater experience and financial resources, to copy or use our trade secrets and other proprietary information in the advancement of their products, methods or technologies. The disclosure of our trade secrets would impair our competitive position, thereby weakening demand for our products or services and harming our ability to maintain or increase our customer base.

21


Disruption or failures of our information technology systems could have a material adverse effect on our business.
Our business depends on the operation of our information technology systems, some of which have not been updated for many years. As a result, our information technology systems are more susceptible to security breaches, operational data loss, general disruptions in functionality, and may not be compatible with new technology. We depend on our information technology systems for the effectiveness of our operations and to interface with our customers, as well as to maintain financial records and accuracy. Disruption or failures of our information technology systems or security breaches could impair our ability to effectively and timely provide our services and products and maintain our financial records, which could damage our reputation and have a material adverse effect on our business.
Olin Brass and A.J. Oster began the process of implementing fully integrated enterprise resource planning (“ERP”) systems to replace their current management information systems and plan to implement the systems in a phased approach over the course of the next several years, and implemented the first phase in early fiscal 2017. These implementations may present challenges. Such challenges include, among other things, training of personnel, communication of new rules and procedures, changes in corporate culture, migration of data and the potential instability of the new system. Furthermore, large-scale system implementations are complex and time-consuming projects that are capital intensive and can span several months or even years. Certain of our business and financial processes also may require transformation in order to effectively leverage the ERP system’s benefits. The ERP system implementation may not result in the anticipated improvements and the cost of implementation may outweigh the benefits. There can be no assurance that the ERP system will be successfully implemented, and failure to do so could adversely affect our business, financial condition, results of operations and the effectiveness of our internal controls over financial reporting.
We face a number of risks related to future acquisitions and joint ventures.
We may continue to seek opportunities for further acquisitions to supplement our operations and for expansion of our international presence, particularly in Asia, through joint ventures.
Acquisitions and joint ventures involve a number of risks which could have an adverse effect on our business, financial condition, results of operations and cash flows, including the following:
we may experience adverse short-term effects on our operating results;
we may be unable to successfully and rapidly integrate the new businesses, personnel and products with our existing business, including financial reporting, management and information technology systems;
we may experience higher than anticipated costs of integration and unforeseen operating difficulties and expenditures, including potential disruption of our ongoing business and distraction of management;
an acquisition may be in a market or geographical area in which we have little experience and could increase the scope, geographic diversity and complexity of our operations;
the acquisition or joint venture formation process may require significant attention by our senior management and the engagement of outside advisors (and the payment of related fees), and proposed acquisitions and joint ventures may not be successfully completed;
we may lose key employees or customers of the acquired company; and
we may encounter unknown contingent liabilities that could be material.
In addition, we may require additional debt or equity financing for future acquisitions, and such financing may not be available on favorable terms, if available at all. We may not be able to successfully integrate or profitably operate any new business we acquire, and we cannot assure you that any such acquisition will meet our expectations. The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Finally, in the event we decide to discontinue pursuit of a potential acquisition, we will be required to immediately expense all costs incurred in pursuit of the possible acquisition, which may have an adverse effect on our results of operations in the period in which the expense is recognized.
Our common stock is subject to price and volume fluctuations.
The market price of our common stock may be volatile and affected by not only our performance but also the risk factors discussed herein.  In addition, the market price of our common shares may fluctuate and is subject to volatility due to factors beyond our control.

22


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “projects,” “may,” “would,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make or may make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements contained in this report are based upon information available to us on the date of this report.
All forward-looking information in this report and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by important factors that could cause actual results to differ materially from our expectations (“cautionary statements”). In addition to those items discussed in the “Risk Factors” section in Item 1A in this annual report on Form 10-K, some of the factors that we believe could affect our results include, but are not limited to: 
our ability to maintain business relationships with our customers on favorable terms;
the effects of industry consolidation or competition in our business lines;
supply, demand, prices and other market conditions for our products;
our ability to accommodate increases in production to meet demand for our products;
our ability to realize the planned cost savings and efficiency gains as part of our various initiatives;
our ability to successfully execute acquisitions and joint ventures;
our ability to retain key employees;
our ability to maintain cost-effective insurance policies;
fluctuations in interest rates; and
restrictive covenants in our indebtedness that may adversely affect our operational flexibility.
We caution you that these factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. Accordingly, investors should not place undue reliance on those statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.


23


Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table summarizes our major facilities as of December 31, 2017:
Entity
 
Operation
 
Location
 
Owned or
Leased
 
Products
Corporate
 
Corporate Headquarters
 
Schaumburg, Illinois
 
Leased
 
N/A
Olin Brass segment
 
Mill Products
 
East Alton, Illinois
 
Owned (1)
 
Copper-based strip
Clad copper & copper-alloy strip
 
 
Fabricated Products
 
East Alton, Illinois
 
Owned (1)
 
Stamped & drawn copper-based parts
 
 
Fineweld Tube
 
Cuba, Missouri
 
Owned
 
Welded copper-alloy tube
 
 
Bryan Metals
 
Bryan, Ohio
 
Owned
 
Copper-based strip
 
 
Somers Thin Strip
 
Waterbury, Connecticut
 
Owned
 
Copper-based strip and foil
Stainless steel light gauge strip
 
 
Olin Luotong Metals
 
Guangzhou, China
 
Owned building; 50-year lease on land
 
Copper-based strip
 
 
Olin Brass
Headquarters
 
Louisville, Kentucky
 
Leased
 
N/A
Chase Brass segment
 
Manufacturing
 
Montpelier, Ohio
 
Owned
 
Copper-based rod
 
 
Warehouse
 
Los Angeles, California
 
Leased
 
Copper-based rod
A.J. Oster segment
 
Processing and Distribution
 
Warwick, Rhode Island
 
Leased
 
Copper-alloy sheet, strip, bar, rod and wire
Aluminum sheet and strip
Stainless steel sheet, strip and specialty rod
 
 
Processing and Distribution
 
Alliance, Ohio
 
Owned
 
 
 
Processing and Distribution
 
Carol Stream, Illinois
 
Owned
 
 
 
Processing and Distribution
 
Yorba Linda, California
 
Leased
 
 
 
Processing and Distribution
 
Fullerton, California
 
Leased
 
 
 
Processing and Distribution
 
Caguas, Puerto Rico
 
Owned
 
 
 
Processing and Distribution
 
Queretaro, Mexico
 
Owned
 
 
 
Processing and Distribution
 
Parsippany, New Jersey
 
Leased
 
 
 
Processing and Distribution
 
Irving, Texas
 
Leased
 
 
 
Distribution
 
Houston, Texas
 
Leased
 
 
 
Distribution
 
Atlanta, Georgia
 
Leased
 
 
 
A.J. Oster
Headquarters
 
Warwick, Rhode Island
 
Leased
 
N/A
(1) Certain utility infrastructure at the East Alton, Illinois facility is leased by Olin Brass from Olin Corporation.
Pursuant to a 2007 transition services agreement, Olin Corporation supplies Olin Brass with natural gas, water, steam and waste water disposal, among other things, at Olin Brass’s East Alton, Illinois facility. According to the transition services agreement, Olin Corporation has agreed to provide utility services until Olin Corporation ceases operations at its East Alton, Illinois facility, at which time Olin Brass has the option to acquire the utilities infrastructure at fair market value. The transition services agreement renewed automatically in November 2017 and automatically renews for one-year terms thereafter subject to termination by either party upon one year’s notice.
Item 3. Legal Proceedings.
We are currently and from time to time involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business, none of which management currently believes are, or will be, material to our business.

24


Item 4. Mine Safety Disclosures.
Not applicable.

25


PART II
Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Holders of Record
Our common stock is traded on the New York Stock Exchange (ticker symbol BRSS). As of February 16, 2018, we had approximately 113 holders of record of our common stock.
Market Information for Common Stock
The high and low selling prices per share of our common stock, as well as the cash dividend declared per share of our common stock, for the quarters during 2017 and 2016 were as follows:
 
 
2017
 
First
Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
High
$
39.85

  
$
36.05

  
$
34.15

  
$
36.50

Low
31.00

  
29.75

  
28.10

  
31.75

Cash dividends declared
0.0375

  
0.0375

  
0.06

  
0.06

 
 
 
 
 
 
 
 
 
2016
 
First
Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
High
$
25.31

  
$
28.80

  
$
30.11

  
$
35.00

Low
18.97

  
23.43

  
26.72

  
23.85

Cash dividends declared
0.0375

  
0.0375

  
0.0375

  
0.0375

For certain information regarding our equity compensation plans, see Part III—Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Dividends

The payment of dividends in the future will be at the discretion of our Board of Directors and will depend on a number of factors, including our financial and operating results, financial position, anticipated cash requirements and restrictions contained in the agreements governing our asset-based revolving loan facility, which matures on July 19, 2021 (“ABL Facility”) and our term loan facility, which matures on July 18, 2023 (“Term Loan B Facility”). Currently, we have significant availability under our credit agreements to pay dividends consistent with past practice and future expectations. We can give no assurance that dividends will be paid in the future. See Note 10, “Financing,” of our consolidated financial statements, which are included elsewhere in this report, for further discussion of these restrictive covenants.
Issuer Purchases of Equity Securities
None.


26



Performance Graph

This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Global Brass and Copper Holdings, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.

The following graph shows a comparison from May 23, 2013 (the date our common stock commenced trading on the New York Stock Exchange) through December 31, 2017 of the cumulative total return for our common stock, the Russell 2000 Index (“Total Market Index”) and the S&P SmallCap 600 Index—Materials (“Materials Index”). The graph assumes that $100 was invested at the market close on May 23, 2013 in the common stock of Global Brass and Copper Holdings, Inc., the Total Market Index and the Materials Index and data assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
 
chart-5ab5444d9d1458feb3c.jpg

27


Item 6. Selected Financial Data.
Set forth below is selected historical consolidated financial data of our business as of the dates and for the periods indicated. The selected historical consolidated financial data for the years ended December 31, 2017, 2016 and 2015 and as of December 31, 2017 and 2016 have been derived from our consolidated financial statements included elsewhere in this report. The selected historical consolidated financial data as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013 have been derived from our consolidated financial statements not included in this report.
The selected historical consolidated financial data should be read in conjunction with the information about the limitations on comparability of our financial results, including as a result of acquisitions. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 1A, “Risk Factors,” and our consolidated financial statements and related notes included in Item 8 to this report. 
(in millions, except per share data)
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Pounds shipped (1)
507.3

 
520.8

 
511.9

 
520.4

 
523.0

Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
1,560.8

 
$
1,338.5

 
$
1,506.2

 
$
1,711.4

 
$
1,758.5

Cost of sales
(1,376.8
)
 
(1,156.9
)
 
(1,335.9
)
 
(1,546.8
)
 
(1,576.2
)
Gross profit
184.0

 
181.6

 
170.3

 
164.6

 
182.3

Selling, general and administrative expenses (2)
(83.8
)
 
(82.8
)
 
(83.2
)
 
(76.9
)
 
(110.8
)
Operating income
100.2

 
98.8

 
87.1

 
87.7

 
71.5

Interest expense, net
(17.6
)
 
(26.2
)
 
(39.1
)
 
(39.6
)
 
(39.8
)
Loss on extinguishment of debt
(0.2
)
 
(23.4
)
 
(3.1
)
 

 

Gain on sale of investment in joint venture

 

 
6.3

 

 

Other income (expense), net
3.0

 
0.2

 
0.2

 
(0.5
)
 
(0.3
)
Income before provision for income taxes and equity income
85.4

 
49.4

 
51.4

 
47.6

 
31.4

Provision for income taxes
(33.9
)
 
(16.6
)
 
(15.9
)
 
(16.6
)
 
(22.2
)
Income before equity income
51.5

 
32.8

 
35.5

 
31.0

 
9.2

Equity income, net of tax

 

 
0.3

 
1.1

 
1.5

Net income
51.5

 
32.8

 
35.8

 
32.1

 
10.7

Net income attributable to noncontrolling interest
(0.6
)
 
(0.6
)
 
(0.2
)
 
(0.4
)
 
(0.3
)
Net income attributable to Global Brass and Copper Holdings, Inc.
$
50.9

 
$
32.2

 
$
35.6

 
$
31.7

 
$
10.4

Per Share Data:
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share (3)
$
0.1950

 
$
0.1500

 
$
0.1500

 
$
0.1500

 
$
0.0375

Basic net income attributable to Global Brass and Copper Holdings, Inc. per common share
$
2.35

 
$
1.50

 
$
1.67

 
$
1.50

 
$
0.49

Diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share
$
2.30

 
$
1.49

 
$
1.66

 
$
1.49

 
$
0.49

Number of common shares used in basic per share calculations
21.7

 
21.4

 
21.3

 
21.2

 
21.1

Number of common shares used in diluted per share calculations
22.1

 
21.6

 
21.4

 
21.3

 
21.2

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash
$
59.0

 
$
88.2

 
$
83.5

 
$
44.6

 
$
10.8

Total assets
673.9

 
582.6

 
557.2

 
566.3

 
537.7

Total debt (4)
314.0

 
316.0

 
343.1

 
371.4

 
369.5

Total liabilities
526.8

 
487.4

 
496.5

 
540.3

 
541.1

Total equity (deficit)
147.1

 
95.2

 
60.7

 
26.0

 
(3.4
)
(1)
Amounts exclude quantity of unprocessed metal sold.
(2)
The year ended December 31, 2013 includes non-cash profits interest compensation expense of $29.3 million. We did not record any non-cash profits interest compensation expense in 2017, 2016, 2015 or 2014.
(3)
In 2017, 2016, 2015, 2014 and 2013, we declared dividends of $4.5 million, $3.3 million, $3.2 million, $3.2 million and $0.8 million, respectively, to the Company’s stockholders.
(4)
Consists of long-term debt, capital lease obligations and current maturities of long-term debt (presented net of discount and net of deferred financing fees incurred in connection with the issuance of debt).

28


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Readers should refer to the information presented under the caption “Risk Factors” for risk factors that may affect our future performance. The following discussion and analysis of financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this report. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in the sections entitled “Risk Factors” and “Cautionary Statements Concerning Forward-Looking Statements” included elsewhere in this report.
Overview
Our Company
Global Brass and Copper Holdings, Inc. (“Holdings,” “GBC,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware on October 10, 2007. We commenced commercial operations on November 19, 2007 following the acquisition of the metals business from Olin Corporation.
We are a leading value-added converter, fabricator, processor and distributor of specialized non-ferrous products, including a wide range of sheet, strip, foil, rod, tube and fabricated metal component products. While we primarily process copper and copper alloys, we also reroll and form certain other metals such as stainless steel, carbon steel and aluminum. Using processed scrap, virgin metals and other refined metals, we engage in metal melting and casting, rolling, drawing, extruding, welding and stamping to fabricate finished and semi-finished alloy products. Key attributes of copper and copper alloys are conductivity, corrosion resistance, strength, malleability, cosmetic appearance and bactericidal properties.
Unlike traditional metals companies, particularly those that engage in mining, smelting and refining activities, we are purely a metal converter, fabricator, processor and distributor, and we do not attempt to generate profits from fluctuations in metal prices. Our financial performance is primarily driven by metal conversion economics, not by the underlying movements in the price of copper and the other metals we use. Through our “balanced book” approach, we strive to match the timing, quantity and price of our metal sales with the timing, quantity and price of our replacement metal purchases. This practice, along with our toll processing operations and last-in, first-out (“LIFO”) inventory accounting methodology, substantially reduces the financial impact of metal price movements on our earnings and operating margins.
Our products are used in a variety of applications across diversified markets, including the building and housing, munitions, automotive, transportation, coinage, electronics / electrical components, industrial machinery and equipment, signage, and general consumer markets. We access these markets through direct mill sales, our captive distribution network and third-party distributors. We hold the exclusive production and distribution rights in North America for a lead-free brass rod product, which we sell under the Green Dot® and Eco Brass® brand names. We believe we are the only domestic copper and brass sheet manufacturer with captive distribution and service center operations, a competitive advantage which allows us to service and access customers with a wide variety of volume and service needs.
We service nearly 4,500 customers in 28 countries across four continents. We employ approximately 1,900 people and operate 16 manufacturing facilities and distribution centers across the United States (“U.S.”), Puerto Rico and Mexico.
We own 80% of a value-added service center in Guangzhou, China (“Olin Luotong Metals” or “OLM”); the other 20% is owned by Chinalco Luoyang Copper Co. Ltd. (“Chinalco”). Through Olin Luotong Metals, together with our sales offices in China and Singapore, we supply our products in China and throughout Asia.
Our Operating Segments
We operate through three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster.
Our Olin Brass segment is the leading manufacturer, fabricator and converter of specialized copper and brass sheet, strip, foil, tube and fabricated components in North America. While primarily processing copper and copper alloys, the segment also rerolls and forms other metals such as stainless steel, carbon steel and aluminum. Olin Brass’s customers further process the rod into finished products that are sold into five primary markets: munitions, coinage, automotive, building and housing and electronics / electrical components. In 2017, Olin Brass shipped approximately 17% of its domestic copper-based products to A.J. Oster.

29


Chase Brass is a leading manufacturer of brass rod in North America. Chase Brass primarily manufactures brass rod, including round and other shapes, ranging from 1/4 inch to 4 1/2 inches in diameter. The key attributes of brass rod include its machinability, corrosion resistance and moderate strength, making it especially suitable for forging and machining products such as valves and fittings. Brass rod is generally manufactured from copper or copper-alloy scrap. Chase Brass’s customers further process the rod into finished products that are sold into four primary markets: building and housing, transportation, electronics / electrical components and industrial machinery and equipment.
A.J. Oster is a processor and distributor of primarily copper and copper-alloy sheet, strip, and foil. However, with the acquisition of the Alumet business on November 1, 2017, A.J. Oster significantly expanded its product portfolio into aluminum sheet and coated aluminum products. The acquisition also deepened its presence in the signage (aluminum) and roofing (copper and copper-alloy) markets within the building and housing industry. A.J. Oster historically operated six strategically located service centers in the U.S., Puerto Rico, and Mexico and, with the Alumet acquisition, added five more service centers, including those in the South and Southeast where A.J. Oster previously had no presence. Each A.J. Oster service center reliably provides a broad range of high quality products with short lead-times in small quantities. These capabilities, combined with A.J. Oster’s operations of precision slitting, hot tinning, traverse winding, cutting and special packaging, provide value to a broad customer base. A.J. Oster’s customers further process the rod into finished products that are sold into three primary markets: building and housing, automotive and electronics / electrical components. In 2017, 54% of A.J. Oster’s brass and copper material requirements were supplied by our Olin Brass segment.
All three segments generate revenue from product sales and earn a premium margin over the cost of metal as a result of our metal conversion, value-added processing, and service capabilities.
Finally, we also have a Corporate entity which includes expenses for corporate employee compensation salaries and professional fees for accounting, tax and legal services. Corporate and other also includes interest expense, state and federal income taxes, overhead costs that management has not allocated to the operating segments, share-based compensation expense, gains and losses associated with certain acquisitions and dispositions and the elimination of intercompany sales and balances.
Formation and Acquisition of the Worldwide Metals Business of Olin Corporation
On October 10, 2007, affiliates of KPS Capital Partners, L.P. (“KPS”) formed GBC as an acquisition vehicle to acquire the worldwide metals business of Olin Corporation, which was completed on November 19, 2007. The transaction was accounted for under the purchase method of accounting.
At the time of the transaction, the fair market value of the net assets acquired exceeded the purchase price in the acquisition. This resulted in a bargain purchase, and we reduced the value of all identified intangible assets and other noncurrent assets, including the acquired property, plant and equipment, to zero in the opening balance sheet as of the acquisition date. Accordingly, our fixed assets reflect only post-acquisition capital investments, and our cost of sales and selling, general and administrative expense, depending on the nature and use of the underlying asset, includes depreciation only on capital investments made after the acquisition date.
Recent Transactions
Purchases and Redemption of Senior Secured Notes
Prior to obtaining the Term Loan B Credit Agreement and the ABL Credit Agreement (as defined below), our debt facilities consisted of our 9.50% senior secured notes due 2019 (“Senior Secured Notes”) and a former asset-based loan facility (“former ABL Facility”).
During the year ended December 31, 2016, we purchased in the open market an aggregate of $40.0 million principal amount of our then existing Senior Secured Notes, for an aggregate purchase price of $42.5 million, plus accrued interest.
On July 18, 2016, we obtained a new Term Loan B Facility and used a portion of the proceeds to redeem the remaining $305.3 million principal amount outstanding of our Senior Secured Notes. As part of this refinancing and in accordance with the indenture governing the then existing Senior Secured Notes (“Indenture”), we called and terminated the notes at a redemption price of 104.75% plus accrued interest.
We recognized a loss on the extinguishment of debt in the year ended December 31, 2016 of $23.4 million, which includes a premium of $17.0 million and the write-off of $6.4 million of unamortized debt issuance costs for both the Senior Secured Notes and the former ABL Facility.

30


For additional information regarding the purchases of Senior Secured Notes and the 2016 Refinancing, see Note 10, “Financing,” of our consolidated financial statements, which are included elsewhere in this report.
2016 Refinancing
On July 18, 2016, we entered into a long-term credit agreement that matures July 18, 2023 (the “Term Loan B Credit Agreement” and the loans thereunder, the “Term Loan B Facility”) and provides for borrowings of $320.0 million. We may request an increase in the aggregate term loans, at our option and under certain circumstances, of up to an additional $75.0 million or an unlimited amount so long as after giving effect to any incremental facility or incremental equivalent debt, the net senior secured leverage ratio does not exceed 2.50 to 1.00 (but the lenders, in either case, are not obligated to grant such an increase). Commencing on December 30, 2016, we began making quarterly payments of $0.8 million ($3.2 million annually) with the balance expected to be due on July 18, 2023.
On July 18, 2016, we also entered into a credit agreement with a syndicate of lenders that matures on July 19, 2021 (the “ABL Credit Agreement” and the facility thereunder, the “ABL Facility”). The ABL Facility is an asset-based revolving loan facility that provides for borrowings of up to the lesser of $200.0 million or the borrowing base, in each case less outstanding loans and letters of credit.
Amounts outstanding, if any, under the ABL Facility bear interest at a rate per annum equal to, at our option, either (1) 0.25% to 0.75% subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus an Alternate Base Rate (as defined in the ABL Credit Agreement) or (2) 1.25% to 1.75% subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus the Adjusted LIBO Rate (as defined in the ABL Credit Agreement). Unused amounts under the ABL Facility incur an unused line fee of 0.375% or 0.25% per annum (depending on the percentage of aggregate revolving exposure), payable in arrears on a quarterly basis.
2017 Refinancing
On July 18, 2017, we amended our credit agreements (“Amended Term Loan B Credit Agreement” and the loans thereunder, the “Term Loan B Facility” and “Amended ABL Credit Agreement” and the facility thereunder, the “ABL Facility”) to make the following changes:
A 100 basis point reduction in our interest rate on our Term Loan B Facility. Amounts outstanding under this facility now bear interest at a rate per annum equal to, at our option, either (1) 2.25% plus an Alternate Base Rate (as defined in the Amended Term Loan B Credit Agreement) or (2) 3.25% plus the Adjusted LIBO Rate (as defined in the Amended Term Loan B Credit Agreement). At December 31, 2017, amounts outstanding under the Term Loan B Facility accrued interest at a rate of 4.875%;
The removal of the net leverage financial maintenance covenant in the Term Loan B Credit Agreement;
Instituting a new soft call prepayment penalty of 1.00% for six months after the refinancing date on our Term Loan B Facility; and
An increased capacity to make certain restricted payments.
Acquisition
On November 1, 2017, our A.J. Oster subsidiary acquired certain assets and assumed certain liabilities of Unimet Metal Supply, Inc. and Alliance Service Centers, Inc. (together “Alumet”). Headquartered in Parsippany, New Jersey, Alumet is a non-ferrous metals service center that provides coated aluminum, aluminum, copper and brass sheet, and strip products to the building and housing and transportation markets through its cut to length, slitting, and coating capabilities. The acquisition of Alumet expands A.J. Oster’s geographic presence into the South and Southeast through Alumet’s facilities in Atlanta and Texas while also providing additional outlets for Alumet’s products through A.J. Oster’s facilities in Chicago and Mexico. The Alumet acquisition was part of our strategic efforts to profitably grow through acquisitions and expands our geographic presence in targeted regions, strengthens our position in the aluminum market, and enhances our position as a market leader in the non-ferrous metals distribution business.
We accounted for the Alumet acquisition as a business combination using the acquisition method in accordance with ASC 805, Business Combinations. The results of operations of Alumet since November 1, 2017 have been included in the Consolidated Statement of Operations. We acquired the net assets of Alumet for approximately $41.1 million.

31


Key Business Principles Affecting Our Results of Operations
LIFO Accounting
The metals component of inventory that is valued on last-in, first-out (“LIFO”) basis comprises approximately 65% and 70% of total inventory at December 31, 2017 and 2016, respectively. The impact of LIFO accounting on our financial results may be significant with respect to period-to-period comparisons depending on the fluctuations in our inventory levels. During 2017, 2016 and 2015, certain domestic metal inventory quantities were reduced, resulting in a liquidation of LIFO inventory layers. The effect of this reduction increased cost of sales by $1.0 million, $1.9 million and $0.1 million in 2017, 2016 and 2015, respectively.
Metal Cost
We are a leading, value-added converter, fabricator, processor and distributor of specialized non-ferrous products in North America. We generate our profits from the conversion, manufacturing and fabrication of metal into end products, and not by taking advantage of fluctuations in the price of copper and other metals. Our business model uses various methods to substantially reduce the financial impact of fluctuations in metal prices so that our operating margins are largely unaffected by trends in metal prices. Nevertheless, fluctuations in metal prices will impact the total amount of our net sales, the cost of shrinkage loss, the impact of LIFO liquidations (as previously discussed) and our investments in working capital.
Shrinkage loss, which is primarily the loss of metal that occurs in the melting and casting operations, is an inherent part of any metal casting process. While the shrinkage loss rate is very low relative to the total volume of metal cast, the cost of the shrinkage loss and its impact on financial performance increases as metal prices increase.
Over the last three years, approximately 25% of our sales volumes were made on a toll basis where our customers supply us with the metal and we charge them a processing or conversion fee to melt the metal and convert it into a finished product. For metal processed on a non-toll basis, we procure and own the metal until we sell it to the customer, whereby we charge them not only a conversion fee but also a metal replacement fee. For these non-toll sales, we use our balanced book approach, discussed below, to substantially reduce the impact of metal price movements on earnings and operating margins.
Metal prices also impact our investment in working capital because our collection terms with our customers are longer than our payment terms to our suppliers. Therefore, our investments in working capital are directly correlated to fluctuations in metal prices, even if the number of pounds sold does not change.
Balanced Book
The majority of our sales volume is from non-toll customers. To substantially reduce the financial impact of metal price volatility on earnings and operating margins on these non-toll sales, we use a balanced book approach to hedge the impact of metal price fluctuations. The balanced book approach minimizes the financial impact of metal price movements in the period between date of order and date of shipment by matching a) the timing, quantity and price of the metal cost recovery component of net sales made on a non-toll basis with b) the timing, quantity and price of the replacement metal purchases. For any non-toll sale, we seek to achieve our balanced book through one of the following three mechanisms:
“Price date of shipment” terms - meaning that the metal sale price to the customer and the purchase price for replacement metal from a supplier are set on the date of shipment. The customer bears the risk of metal price changes from the date of order to the date of shipment;
Firm pricing - meaning that the metal sale price to the customer is fixed on the order date and a matching replacement purchase from a metal vendor is made at a fixed price. The supplier therefore bears the risk of metal price changes from the date of order to the date of shipment;
Financial derivatives - meaning we use financial derivatives when one of the other two mechanisms is unavailable. In this situation, we execute a forward purchase on “price date of shipment” terms by entering into a financial derivative transaction in the form of a forward purchase contract. The impact of price changes from date of order to the date of shipment on the previously required metal replacement purchase is offset by gains or losses on the derivative contract. The derivative counterparty bears the risk of metal price changes from the date of order to the date of shipment.
In 2017, approximately 61% of our non-toll sales volumes (47% of our total unit shipments) were conducted with price date of shipment terms. All other non-toll unit sales volumes were conducted with firm pricing or financial derivatives.

32


Metal Derivatives
As discussed above, we use derivative contracts in support of our balanced book approach. These derivative contracts are not designated as hedges for accounting purposes and are recorded at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). Thus, we include the unrealized and realized gains and losses on these derivatives within cost of sales in our consolidated statements of operations.
Industry Dynamics and Demand for Our Products
Demand for our product is driven predominantly by six markets: 1) building and housing, 2) munitions, 3) automotive, 4) electronics / electrical components, 5) coinage and 6) industrial machinery and equipment.
Building and Housing
According to our estimates, we expect U.S. housing starts and U.S. existing home sales to increase 1.3% and 3.4% annually, respectively, from 2017 through 2020.
Demand within this market is affected by new residential housing, existing home sales and commercial construction, all of which are significantly dependent on overall economic conditions. In addition, the correlation between housing statistics and our sales is not entirely direct as products containing our metal are typically installed near the completion of construction. Thus, there is an inherent lag time compared to housing starts. Sales of our products to customers in the building and housing market can be also affected by factors such as housing mix (single family versus multi-family homes), unit size and unit price point as these affect the quality of components used in and the quantity of plumbing fixtures and products. Sales of our products can also be impacted by changes and trends in the composition of materials and fixtures used in construction.
Also, we expect continued growth for our customers’ lead-free plumbing products that utilize our green portfolio products, including Eco Brass®.
Munitions
In 2014, our customers began destocking their munitions inventories and thus, Olin Brass’s munitions volumes decreased in 2015 as these efforts continued. In 2016, we saw improved volumes in this market, but again experienced a decline in munitions volumes in 2017 due to decreased demand after the 2016 U.S. Presidential election and a production outage at one of our main customer’s facilities. We expect continued softness entering 2018 with a return later in the year to a longer-term normalized run rate that is at or slightly above historical 2012-2014 average annual run rates.
We remain focused on managing the factors within our control from a volume standpoint and we are encouraged by the continued improvements in quality and on-time performance at Olin Brass.
Automotive
The automotive market is dependent on the level of consumer spending on automobiles, which is significantly dependent on overall economic conditions, replacement needs, and the amount of electrical components contained within automobiles. According to our estimates, North American light vehicle production is expected to grow by 1.1% annually from 2017 through 2020.
Particularly within Olin Brass and A.J. Oster, we are implementing pricing strategies that focus on pricing our products to automotive customers: to earn a return commensurate with cost complexity required to produce them, to earn an appropriate return on the assets used to produce them, and to earn an appropriate return in relation to other competitive offerings. We believe these pricing strategies will better position us in the long-term.
Electronics / Electrical Components
Customers use our products to manufacture electronics / electrical components in a wide range of applications, from medical devices to computers to aviation components, and demand is largely correlated to general economic activity and technological developments.

33


Coinage
As it has done from time to time for over 40 years, Olin Brass renewed its long-term contract with the U.S. Mint in 2017 to extend the supply agreement into 2022. Demand for coinage is directly tied to consumer transactions and coinage demand has fluctuated in the last three years.
Industrial Machinery and Equipment (“IM&E”)
Sales in this market primarily lie within Chase Brass. IM&E volumes decreased in both 2015 and 2016 as compared to each previous year due to softness in the oil and gas, metals and mining, and agricultural industries, as well as competition from imported parts. IM&E volumes in 2017 were consistent with the prior year.
Industry Dynamics Affecting Growth Opportunities
Regarding demand for copper and copper-alloy sheet, strip and plate (“SSP”), there are a number of growth opportunities that could increase the demand for SSP products, including our CuVerro® bactericidal products. Olin Brass completed the federal and state registration processes necessary to market its CuVerro® materials as having bactericidal properties. It has also registered more than 30 component manufacturers to market products made with CuVerro®.
Legislation to replace the one-dollar paper notes with dollar coins keeps receiving attention in Congress, most recently by the reintroduction of the Unified Savings and Accountability Act (“USA Act”) in July 2015. Among other matters, the USA Act brings added focus and support to replace the one dollar note with the dollar coin. We anticipate a significant increase in the size of the coinage market if the U.S. transitions to the dollar coin and eliminates the one-dollar paper note.
Regarding demand for brass rod, we expect favorable dynamics in the building and housing market, which should drive sustained demand for our green product portfolio resulting from the need for plumbing devices to be compliant with national potable water regulations. Some of our green portfolio products are marketed under the Eco Brass® tradename under an exclusive license in North America which expires in 2019.
Finally, the North American market may be affected by certain factors related to the supply of brass and copper, including imported rod and finished parts made from foreign sourced rod. Therefore, competition from offshore suppliers could become more significant in the future if certain factors change. Historically these factors have included foreign trade agreements, competition, antidumping orders, foreign exchange rate fluctuations, domestic capacity and pricing levels, as well as costs in the import supply chain.
Management’s View of Performance
In addition to the results reported in accordance with accounting principles generally accepted in the United States of America, (“US GAAP”), we also report “adjusted sales,” “adjusted gross profit,” “adjusted selling, general and administrative expenses,” “adjusted EBITDA” and “adjusted diluted earnings per common share” which are non-GAAP financial measures as defined below.
Adjusted sales, adjusted gross profit, adjusted selling, general and administrative expenses, adjusted EBITDA and adjusted diluted earnings per common share may not be comparable to similarly titled measures presented by other companies and are not intended as alternatives to any other measure of performance in conformity with US GAAP.
You should therefore not place undue reliance on adjusted sales, adjusted gross profit, adjusted selling, general and administrative expenses, adjusted EBITDA, adjusted diluted earnings per common share, or any ratios calculated using them. The most comparable US GAAP-based measure for each respective non-GAAP financial measure can be found in our consolidated financial statements and the related notes thereto included elsewhere in this report.
The following discussions present an analysis of certain US GAAP and non-GAAP measures for 2017, 2016, and 2015. These discussions should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Net sales and adjusted sales
Net sales is the most directly comparable US GAAP measure to adjusted sales, which represents the value-added premium we earn over our conversion and fabrication costs. Adjusted sales is defined as net sales less the metal cost recovery component of products sold. We use adjusted sales on a consolidated basis to monitor the revenues that are generated from our value-added conversion and fabrication processes excluding the effects of fluctuations in metal costs. We believe that

34


adjusted sales supplements our US GAAP results because it provides a more complete understanding of the results of our business, and we believe it is useful to our investors and other parties for these same reasons.
Net sales is reconciled to adjusted sales as follows:
 
Year Ended
December 31,
 
Change:
2017 vs. 2016
 
Change:
2016 vs. 2015
(in millions, except per pound values)
2017
 
2016
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
Pounds shipped (a)
507.3

 
520.8

 
511.9

 
(13.5
)
 
(2.6
)%
 
8.9

 
1.7
 %
Net sales
$
1,560.8

 
$
1,338.5

 
$
1,506.2

 
$
222.3

 
16.6
 %
 
$
(167.7
)
 
(11.1
)%
Metal component of net sales
(1,025.3
)
 
(796.3
)
 
(971.9
)
 
(229.0
)
 
28.8
 %
 
175.6

 
(18.1
)%
Adjusted sales
$
535.5

 
$
542.2

 
$
534.3

 
$
(6.7
)
 
(1.2
)%
 
$
7.9

 
1.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales per pound
$
3.08

 
$
2.57

 
$
2.94

 
$
0.51

 
19.8
 %
 
$
(0.37
)
 
(12.6
)%
less: Metal component of net sales per pound
2.02

 
1.53

 
1.90

 
0.49

 
32.0
 %
 
(0.37
)
 
(19.5
)%
Adjusted sales per pound
$
1.06

 
$
1.04

 
$
1.04

 
$
0.02

 
1.9
 %
 
$

 
 %
Average copper price per pound (b)
$
2.80

 
$
2.20

 
$
2.51

 
$
0.60

 
27.3
 %
 
$
(0.31
)
 
(12.4
)%
(a)Amounts exclude quantity of unprocessed metal sold.
(b)Copper prices reported by the Commodity Exchange (“COMEX”).
2017 compared to 2016
Net sales increased by $222.3 million, or 16.6%, primarily as the result of a $229.0 million increase in the metal cost recovery component stemming from increased metal prices and greater sales of unprocessed metals (combined $245.3 million) and the Alumet acquisition, partially offset by decreased volumes ($52.6 million). Adjusted sales decreased by $6.7 million due to lower demand, largely in the munitions market, partially offset by an increase from Alumet.
2016 compared to 2015
Net sales decreased by $167.7 million, or 11.1%, primarily as the result of a $175.6 million decline in the metal cost recovery component due to decreased metal prices and less sales of unprocessed metals (combined $189.7 million), partially ameliorated by increased volumes ($24.0 million). Adjusted sales increased by $7.9 million due to increased volumes as the result of increased demand in the munitions and building and housing markets, partially offset by lower demand in the coinage, industrial machinery and equipment and transportation markets. Average selling prices also decreased slightly due to increased concentration of sales to lower margin customers and increased mix of sales in generally lower priced markets.
Gross profit and adjusted gross profit
Gross profit is the most directly comparable US GAAP measure to adjusted gross profit. Adjusted gross profit is defined as gross profit less items excluded from the calculation of adjusted EBITDA, as detailed in the following table. We believe that adjusted gross profit supplements our US GAAP results to provide a more complete understanding of the results of our business as it provides period-to-period comparisons of our core operations that are more consistent and more easily understood.

35


Gross profit is reconciled to adjusted gross profit as follows:
 
Year Ended
December 31,
 
Amount change:
(in millions)
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Total gross profit
$
184.0

 
$
181.6

 
$
170.3

 
$
2.4

 
$
11.3

Unrealized (gain) loss on derivative contracts
0.8

 
(3.1
)
 
(0.6
)
 
3.9

 
(2.5
)
LIFO liquidation loss (gain)
1.0

 
1.9

 
0.1

 
(0.9
)
 
1.8

Lower of cost or market adjustment to inventory
(3.6
)
 
(1.7
)
 
6.6

 
(1.9
)
 
(8.3
)
Restructuring and other business transformation charges
0.2

 

 
0.4

 
0.2

 
(0.4
)
Step-up costs from acquisition accounting
0.3

 

 

 
0.3

 

Depreciation expense
15.0

 
12.9

 
12.0

 
2.1

 
0.9

Adjusted gross profit
$
197.7

 
$
191.6

 
$
188.8

 
$
6.1

 
$
2.8

2017 compared to 2016
Gross profit increased by $2.4 million, or 1.3%, and benefited from a $1.9 million reduction in lower of cost or market charges, a $0.9 million favorable LIFO liquidation loss, and an increase in adjusted gross profit, partially offset by increased depreciation expense and unfavorable fluctuations in unrealized gains / losses on derivative contracts. Adjusted gross profit increased by $6.1 million (3.2%) due to the net result of four main factors: decreased volumes, the 2016 production outage at Olin Brass, increased shrinkage costs, and a few specific decisions discussed below.
Volumes have decreased most significantly in our munitions market due to both depletion of inventory levels throughout the channel following the 2016 Presidential election and a production outage at one of our larger customers. Our building and housing volumes, excluding Alumet, suffered as our customers lost pieces of their business. Volumes decreased in our stamping and automotive markets due to underlying demand. In addition, volumes at A.J. Oster earlier in the year were hampered by the implementation of a new Enterprise Resource Planning (“ERP”) system, which later led to customer service issues at one of our facilities.
In the second quarter of 2016, Olin Brass suffered a production outage for which we recorded, in 2017, $7.4 million of proceeds ($3.5 million recorded as a reduction to cost of sales) from insurance policies we collected relating to this outage. In 2016, we also incurred increased production expenses to toll process inventory to meet customer needs during the outage. These costs were not incurred again in 2017.
As metal prices, especially copper, have increased, the cost of shrinkage, which is a normal part of production, has increased, unfavorably impacting the comparison of gross profit to the prior year amounts.
In 2017, we also made certain specific decisions which increased costs and negatively impacted our gross profit by $1.8 million. These relate to transitioning to a health savings account (“HSA”) medical program for our employees, reducing inventory levels at Olin Brass to generate increased cash flow without commensurate reductions in production overhead costs, and launching a fully integrated ERP system at A.J. Oster which led to increased consulting, freight, and other expenses.
2016 compared to 2015
Gross profit increased by $11.3 million, or 6.6%, and benefited $8.3 million from a reduction in lower of cost or market charges and favorable fluctuations ($2.5 million) in unrealized gains / losses on derivative contracts. Adjusted gross profit increased by $2.8 million (1.5%) due to increased volumes, partially offset by a negative impact from the aforementioned shift in sales towards less profitable customers and markets. Additionally, while gross profit was unfavorably impacted by the one-time production costs incurred as a result of the production outage, these were more than offset by productivity improvements leading to an overall decrease in production costs.
Selling, general and administrative expenses and adjusted selling, general and administrative expenses
Selling, general and administrative expenses are the most directly comparable US GAAP measure to adjusted selling, general and administrative expenses. Adjusted selling, general and administrative expenses is defined as selling, general

36


and administrative expenses less items excluded from the calculation of adjusted EBITDA. We believe that adjusted selling, general and administrative expenses supplement our US GAAP results and provides a more complete understanding of the results of our business as it provides period-to-period comparisons of our core operations that are more consistent and more easily understood.
Selling, general and administrative expenses is reconciled to adjusted selling, general and administrative expenses as follows:
 
Year Ended
December 31,
 
Amount change:
(in millions)
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Total selling, general and administrative expenses
$
83.8

 
$
82.8

 
$
83.2

 
$
1.0

 
$
(0.4
)
Specified legal / professional expenses
(1.3
)
 
(1.2
)
 
(2.8
)
 
(0.1
)
 
1.6

Share-based compensation expense
(8.2
)
 
(6.9
)
 
(4.2
)
 
(1.3
)
 
(2.7
)
Restructuring and other business transformation charges
(0.2
)
 

 
(0.5
)
 
(0.2
)
 
0.5

Depreciation and amortization expense
(3.6
)
 
(2.0
)
 
(1.6
)
 
(1.6
)
 
(0.4
)
Adjusted selling, general and administrative expenses
$
70.5

 
$
72.7

 
$
74.1

 
$
(2.2
)
 
$
(1.4
)
2017 compared to 2016
Selling, general and administrative expenses increased by $1.0 million (1.2%) and were unfavorably impacted by an increase in share-based compensation and depreciation expense and favorably impacted by the change in adjusted selling, general and administrative expenses which decreased by $2.2 million (3.0%). Adjusted selling, general and administrative expenses declined primarily due to lower outside services ($3.6 million) and lower employee and employee related costs ($2.0 million) largely relating to incentive compensation, partially offset by the combined costs of approximately $1.1 million associated with transitioning to the HSA medical plan and consulting fees associated with the implementation of A.J. Oster’s ERP system. We have made significant progress in reducing professional fees for accounting, tax, legal and consulting services incurred in our early years as a public company and thus, in 2017, these costs are no longer an adjustment for purposes of calculating adjusted selling, general and administrative expenses. Specified legal / professional expenses in 2017 represent accounting, tax, legal, and consulting services related to merger and acquisition activity.
2016 compared to 2015
Selling, general and administrative expenses decreased by $0.4 million (0.5%) and adjusted selling, general and administrative expenses decreased by $1.4 million (1.9%), primarily due to lower employee and employee related costs ($3.1 million), partially offset by an increase in outside services. Additionally, selling, general and administrative expenses were unfavorably impacted by an increase in share-based compensation expense and favorably impacted by decreased professional fees. In 2016, adjusted selling, general and administrative expenses would have been $1.2 million greater and adjusted EBITDA (defined hereafter) would have decreased by this same amount had we not adjusted for the above noted professional fees for accounting, tax, legal and consulting services.
Net income and adjusted EBITDA
Net income attributable to Global Brass and Copper Holdings, Inc. is the most directly comparable US GAAP measure to adjusted EBITDA. Adjusted EBITDA is defined as net income attributable to Global Brass and Copper Holdings, Inc., plus interest, taxes, depreciation and amortization (“EBITDA”) adjusted to exclude the following:
unrealized gains and losses on derivative contracts in support of our balanced book approach;
unrealized gains and losses associated with derivative contracts related to energy and utility costs;
impact associated with lower of cost or market adjustments to inventory;
gains and losses due to the depletion of a LIFO layer of metal inventory;
share-based compensation expense;
refinancing costs;
income accretion related to Dowa Olin Metal Corporation (the “Dowa Joint Venture”);
restructuring and other business transformation charges;
inventory step-up costs related to acquisition accounting;
specified legal and professional expenses; and
certain other items.

37


We believe adjusted EBITDA represents a meaningful presentation of the financial performance of our core operations, because it provides period-to-period comparisons that are more consistent and more easily understood. We also believe it is an important supplemental measure that is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
Adjusted EBITDA is the key metric used by our Chief Operating Decision Maker to evaluate the segment performance in a way that we believe reflects our core operating performance, and in turn, incentivizes members of management and certain employees. For example, we use adjusted EBITDA per pound in order to measure the effectiveness of the balanced book approach in reducing the financial impact of metal price volatility on earnings and operating margins, and to measure the effectiveness of our business transformation initiatives in improving earnings and operating margins.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. We compensate for these limitations by using adjusted EBITDA along with other comparative tools, together with US GAAP measurements, to assist in the evaluation of operating performance. Such US GAAP measurements include operating income and net income.
Net income attributable to Global Brass and Copper Holdings, Inc. is reconciled to adjusted EBITDA as follows:
 
Year Ended
December 31,
 
Amount change:
(in millions)
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Net income attributable to Global Brass and Copper Holdings, Inc.
$
50.9

 
$
32.2

 
$
35.6

 
$
18.7

 
$
(3.4
)
Interest expense, net
17.6

 
26.2

 
39.1

 
(8.6
)
 
(12.9
)
Provision for income taxes
33.9

 
16.6

 
15.9

 
17.3

 
0.7

Depreciation expense
18.5

 
14.8

 
13.5

 
3.7

 
1.3

Amortization expense
0.1

 
0.1

 
0.1

 

 

Unrealized (gain) loss on derivative contracts
0.8

 
(3.1
)
 
(0.6
)
 
3.9

 
(2.5
)
LIFO liquidation loss (gain)
1.0

 
1.9

 
0.1

 
(0.9
)
 
1.8

Refinancing costs
0.9

 
23.4

 
3.1

 
(22.5
)
 
20.3

Non-cash accretion of income of Dowa Joint Venture

 

 
(0.2
)
 

 
0.2

Specified legal / professional expenses (a)
1.3

 
1.2

 
2.8

 
0.1

 
(1.6
)
Lower of cost or market adjustment to inventory
(3.6
)
 
(1.7
)
 
6.6

 
(1.9
)
 
(8.3
)
Share-based compensation expense
8.2

 
6.9

 
4.2

 
1.3

 
2.7

Restructuring and other business transformation charges (b)
0.4

 

 
0.9

 
0.4

 
(0.9
)
Step-up costs from acquisition accounting
0.3

 

 

 
0.3

 

Adjusted EBITDA
$
130.3

 
$
118.5

 
$
121.1

 
$
11.8

 
$
(2.6
)
(a)
Represents selected professional fees for accounting, tax, legal, and consulting services for merger and acquisition activity or incurred as a public company that exceed our expected long-term requirements. 
(b)
Restructuring and other business transformation charges in 2015 and 2017 represent severance charges at Olin Brass.
2017 compared to 2016
Net income attributable to Global Brass and Copper Holdings, Inc. increased by $18.7 million, or 58.1% mainly due to the decrease in refinancing costs and interest expense, as well as the $7.4 million of income resulting from the recovery of insurance proceeds, and the fact that the prior year includes the impact of the Olin Brass production outage. These favorable fluctuations were partially offset by unfavorable fluctuations in the provision for income taxes, unrealized gains / losses on derivative contracts and depreciation expense.
Adjusted EBITDA increased $11.8 million, or 10.0%, primarily due to $7.4 million of income resulting from an insurance recovery and the absence of costs related to the Olin Brass 2016 production outage, partially offset by the costs in 2017 related to transitioning to an HSA medical plan and the A.J. Oster ERP implementation. The negative effect of reduced volumes was partially offset by favorable customer pricing and reduced employee and related compensation costs, mostly related to incentive compensation.

38


2016 compared to 2015
Net income attributable to Global Brass and Copper Holdings, Inc. decreased by $3.4 million, or 9.6% mainly due to the increase in refinancing costs and the fact that the prior year included a gain on the sale of our joint venture, partially offset by the aforementioned increase in gross profit and decreased interest expense, as described later herein.
Excluding the $6.3 million gain on the sale of our joint venture in 2015, adjusted EBITDA increased $3.7 million in 2016. Despite the 2016 production outage at Olin Brass, which required us to outsource some production activities at increased costs, productivity and yield improvements resulted in a decrease in overall manufacturing costs even as volumes increased almost two percent. Adjusted EBITDA also benefited from an overall increase in volumes despite volumes being more concentrated in lower priced markets and customers. Last, adjusted EBITDA benefited from the aforementioned decrease in adjusted selling, general and administrative expenses.
Diluted earnings per common share and adjusted diluted earnings per common share
Diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share is the most directly comparable US GAAP measure to adjusted diluted earnings per common share. Diluted income per common share increased by $0.81 in 2017 and decreased by $0.17 in 2016 as compared to the previous year for each, for the same reasons driving the fluctuations in net income and an increase in our weighted average diluted common shares outstanding, which increased 2.3% in 2017 due to the issuance and vesting of share based compensation awards. The increase in weighted average diluted common shares outstanding decreased diluted net income per common share by $0.06 in 2017.
Adjusted diluted earnings per common share is defined as diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share adjusted to remove the per share impact of the add backs to EBITDA in calculating adjusted EBITDA. Adjusted diluted earnings per common share increased by $0.09 in 2017 and $0.16 in 2016 as compared to the previous year for each, for the same reasons driving the fluctuations in adjusted EBITDA. The increase in weighted average diluted common shares outstanding in 2017 reduced our adjusted diluted earnings per common share by $0.06.
We believe adjusted diluted earnings per common share represents a meaningful presentation of the financial performance of our consolidated results because it provides period-to-period comparisons that are more consistent, and more easily understood, and thus is more useful to and is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
Adjusted diluted earnings per share is a key metric used to evaluate our performance, and in turn, incentivize members of management and certain employees.
Diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share is reconciled to adjusted diluted earnings per common share as follows:
 
Year Ended
December 31,
 
Amount change:
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Diluted net income attributable to Global Brass and
Copper Holdings, Inc. per common share
$
2.30

 
$
1.49

 
$
1.66

 
$
0.81

 
$
(0.17
)
Unrealized (gain) loss on derivative contracts
0.03

 
(0.15
)
 
(0.03
)
 
0.18

 
(0.12
)
Refinancing costs
0.04

 
1.08

 
0.14

 
(1.04
)
 
0.94

Non-cash accretion of income of Dowa Joint Venture

 

 
(0.01
)
 

 
0.01

Specified legal / professional expenses
0.06

 
0.06

 
0.13

 

 
(0.07
)
Lower of cost or market adjustment to inventory
(0.16
)
 
(0.08
)
 
0.31

 
(0.08
)
 
(0.39
)
LIFO liquidation loss (gain)
0.04

 
0.09

 
0.01

 
(0.05
)
 
0.08

Share-based compensation expense
0.37

 
0.32

 
0.19

 
0.05

 
0.13

Restructuring and other business transformation charges
0.02

 

 
0.05

 
0.02

 
(0.05
)
Step-up costs from acquisition accounting

0.01

 



 
0.01

 

Tax impact on above adjustments (a)
(0.26
)
 
(0.45
)
 
(0.25
)
 
0.19

 
(0.20
)
Adjusted diluted earnings per common share
$
2.45

 
$
2.36

 
$
2.20

 
$
0.09

 
$
0.16

(a)    Calculated based on our estimated tax rate.

39


Results of Operations
Consolidated Results of Operations for the Year Ended December 31, 2017, Compared to the Year Ended December 31, 2016.
 
Year ended December 31,
 
Change:
2017 vs. 2016
(in millions)
2017
 
% of Net 
Sales
 
2016
 
% of Net 
Sales
 
Amount
 
Percent
Net sales
$
1,560.8

 
100.0
 %
 
$
1,338.5

 
100.0
 %
 
$
222.3

 
16.6
 %
Cost of sales
(1,376.8
)
 
88.2
 %
 
(1,156.9
)
 
86.4
 %
 
(219.9
)
 
19.0
 %
Gross profit
184.0

 
11.8
 %
 
181.6

 
13.6
 %
 
2.4

 
1.3
 %
Selling, general and administrative expenses
(83.8
)
 
5.4
 %
 
(82.8
)
 
6.2
 %
 
(1.0
)
 
1.2
 %
Operating income
100.2

 
6.4
 %
 
98.8

 
7.4
 %
 
1.4

 
1.4
 %
Interest expense, net
(17.6
)
 
1.1
 %
 
(26.2
)
 
2.0
 %
 
8.6

 
(32.8
)%
Loss on extinguishment of debt
(0.2
)
 
 %
 
(23.4
)
 
1.7
 %
 
23.2

 
(99.1
)%
Other income (expense), net
3.0

 
(0.2
)%
 
0.2

 
 %
 
2.8

 
N/M

Income before provision for income taxes and equity income
85.4

 
5.5
 %
 
49.4

 
3.7
 %
 
36.0

 
72.9
 %
Provision for income taxes
(33.9
)
 
2.2
 %
 
(16.6
)
 
1.2
 %
 
(17.3
)
 
104.2
 %
Net income
51.5

 
3.3
 %
 
32.8

 
2.5
 %
 
18.7

 
57.0
 %
Net income attributable to noncontrolling interest
(0.6
)
 
 %
 
(0.6
)
 
 %
 

 
 %
Net income attributable to Global Brass and Copper Holdings, Inc.
$
50.9

 
3.3
 %
 
$
32.2

 
2.4
 %
 
$
18.7

 
58.1
 %
Adjusted EBITDA (a)
$
130.3

 
8.3
 %
 
$
118.5

 
8.9
 %
 
$
11.8

 
10.0
 %

(a)See “Management’s View of PerformanceNet income and adjusted EBITDA.”
N/M - not meaningful
The following discussions present an analysis of our results of operations for 2017 as compared to 2016. See “Management’s View of Performance” for discussions of net sales, adjusted sales, gross profit, adjusted gross profit, selling, general and administrative expenses, adjusted selling, general and administrative expenses, net income attributable to Global Brass and Copper Holdings, Inc., adjusted EBITDA, diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share and adjusted diluted earnings per common share. These discussions should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Interest expense, net
Interest expense, net decreased by $8.6 million primarily due to lower average interest rates resulting from our July 2016 and July 2017 refinancings. Our average interest rate on our debt principal decreased from 7.5% to 5.0%. In addition, in 2017, we began investing our cash balances in marketable securities to generate interest income.

40


The following table summarizes the components of interest expense, net:
 
Year Ended
December 31,
 
Amount change:
(in millions)
2017
 
2016
 
2017 vs. 2016
Interest on principal
$
16.1

 
$
24.4

 
$
(8.3
)
Amortization of debt discount and issuance costs
1.3

 
2.0

 
(0.7
)
Capitalized interest
(0.1
)
 
(1.1
)
 
1.0

Other borrowing costs (a)
0.8

 
0.9

 
(0.1
)
Interest income
(0.5
)
 

 
(0.5
)
Total interest expense, net
$
17.6

 
$
26.2

 
$
(8.6
)

(a)Includes fees related to letters of credit and unused line of credit fees.
Loss on extinguishment of debt
In 2017, we amended our ABL facility and Term Loan B debt agreement, which resulted in an expense of $0.2 million related to the write-off of unamortized debt issuance costs. In 2016, we bought back and redeemed all of our Senior Secured Notes for an aggregate purchase price of $362.3 million, plus accrued interest. As a result of these purchases, we recognized a loss on the extinguishment of debt of $23.4 million, which includes a premium of $17.0 million and the write-off of $6.4 million of unamortized debt issuance costs related to both the Senior Secured Notes and the former asset-based loan facility.
Other income (expense), net
Other income (expense), net increased favorably by $2.8 million, due primarily to the $7.4 million recovery of insurance proceeds related to the temporary Olin Brass production outage in 2016, of which $3.9 million was recorded as other income in 2017. For additional information regarding these insurance recoveries, see Note 15, “Commitments and Contingencies.”
Provision for income taxes
The provision for income taxes increased by $17.3 million, or 104.2%, due primarily to an increase in income before provision for income taxes, the components of which are discussed elsewhere in this report. The effective tax rate increased from 33.6% to 39.7% for the following reasons:
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act makes broad and complex changes to the U.S. tax code, which resulted in an increase in the provision for income taxes in 2017 of $7.3 million, an 860 basis point increase in our effective tax rate;
We adopted a new accounting standard covering stock compensation in 2017 as mandated by the Securities Exchange Commission. As a result of adopting the new standard, we recorded a $2.7 million tax benefit related to the vesting of share awards and option exercises during 2017, reducing the effective tax rate by 321 basis points;
The prior year effective tax rate benefited from the release of our valuation allowance recorded against our foreign tax credits, resulting in a one-time reduction in income tax expense of approximately $1.0 million or 198 basis points.

41


Segment Results of Operations
Segment Results of Operations for the Year Ended December 31, 2017, Compared to the Year Ended December 31, 2016.
 
Year Ended
December 31,
 
Change:
2017 vs. 2016
(in millions)
2017
 
2016
 
Amount
 
Percent
Pounds shipped (a)
 
 
 
 
 
 
 
Olin Brass
245.5

 
260.5

 
(15.0
)
 
(5.8
)%
Chase Brass
218.5

 
222.7

 
(4.2
)
 
(1.9
)%
A.J. Oster
81.0

 
75.6

 
5.4

 
7.1
 %
Corporate and other (b)
(37.7
)
 
(38.0
)
 
0.3

 
0.8
 %
Total
507.3

 
520.8

 
(13.5
)
 
(2.6
)%
Net sales
 
 
 
 
 
 
 
Olin Brass
$
725.5

 
$
629.6

 
$
95.9

 
15.2
 %
Chase Brass
590.9

 
502.7

 
88.2

 
17.5
 %
A.J. Oster
323.6

 
282.7

 
40.9

 
14.5
 %
Corporate and other (b)
(79.2
)
 
(76.5
)
 
(2.7
)
 
(3.5
)%
Total
$
1,560.8

 
$
1,338.5

 
$
222.3

 
16.6
 %
Adjusted EBITDA
 
 
 
 
 
 
 
Olin Brass
$
51.0

 
$
49.8

 
$
1.2

 
2.4
 %
Chase Brass
73.2

 
68.0

 
5.2

 
7.6
 %
A.J. Oster
14.8

 
18.4

 
(3.6
)
 
(19.6
)%
Total adjusted EBITDA of operating segments
139.0

 
136.2

 
2.8

 
2.1
 %
Corporate and other (c)
(8.7
)
 
(17.7
)
 
9.0

 
(50.8
)%
Total consolidated adjusted EBITDA
$
130.3

 
$
118.5

 
$
11.8

 
10.0
 %
 
(a)Amounts exclude the sales of unprocessed metal.
(b)Amounts represent intercompany eliminations.
(c)Includes a $7.4 million recovery of insurance proceeds in 2017 relating to a production outage in 2016.
See Note 4, “Segment Information,” of our consolidated financial statements, which are included elsewhere in this report, for a reconciliation of adjusted EBITDA of segments to income before provision for income taxes and equity income.
The following discussions present an analysis of our results by segment for 2017 as compared to 2016. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Olin Brass
Net sales increased by $95.9 million primarily as a result of an increase in the metal cost recovery component ($113.2 million) stemming from increased metal prices along with increased sales of unprocessed metal ($127.9 million), partially offset by decreased volumes ($32.5 million). Adjusted sales decreased by $17.3 million due to decreased volumes ($17.8 million). Volumes decreased in the munitions market due to decreased demand and a production outage at a significant munitions customer’s facilities.
Adjusted EBITDA increased by $1.2 million, primarily due to the combination of the following:
decreased volumes;
improved productivity, especially taking into account the impact of the 2016 production outage at Olin Brass;
reduced selling, general and administrative expenses stemming from less consulting expenses in 2017 than were incurred in 2016 given the software upgrades undertaken at that time;
increased benefit costs associated with transitioning to a HSA medical plan; and
increased cost of goods sold due to a reduction in inventories.

42


Chase Brass
Net sales increased by $88.2 million as increased prices ($97.8 million) were partially offset by decreased volumes ($9.6 million). Volumes decreased in the building and housing, distributor and transportation markets due to underlying demand from our customers.
Adjusted EBITDA increased by $5.2 million as increased pricing on metal conversion activities were partially offset by decreased volumes and increased costs of conversion activities.
A.J. Oster
We experienced fluctuations in our performance due to both organic and acquisition activity as shown in the following table, which shows increases or decreases for each category over prior year amounts:
(in millions)
Organic
 
Acquisition
 
Total
Pounds shipped
(2.9
)
 
8.3

 
5.4

Net sales
$
21.9

 
$
19.0

 
$
40.9

Adjusted EBITDA
$
(4.7
)
 
$
1.1

 
$
(3.6
)
On November 1, 2017, we completed the Alumet acquisition and the activity in the above table shows the impact of this acquisition on our performance. Note that the volume impact occurred mostly in the building and housing market due to their sales of signage and roofing products.
Regarding our organic activity, volumes decreased predominately in the automotive, stamping, distribution and building and housing markets, partially offset by increased volumes in the electronics / electrical components market due to underlying demand. In addition, volumes earlier in the year were hampered by the implementation of a new ERP system, which later led to a customer service issue at one of our facilities. Remediation of the customer service issue at the facility is underway and yielding improvement.
In addition, net sales increased by $21.9 million due to the combination of increased metal prices ($33.3 million) and lower volumes ($10.9 million). Adjusted EBITDA decreased by $4.7 million due to the impact of decreased volumes, unfavorable conversion costs, and costs incurred early in 2017 as a result of transitioning to an HSA medical plan for our employees and implementing a new ERP system.

43


Results of Operations
Consolidated Results of Operations for the Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015.
 
Year ended December 31,
 
Change:
2016 vs. 2015
(in millions)
2016
 
% of Net Sales
 
2015
 
% of Net Sales
 
Amount
 
Percent
Net sales
$
1,338.5

 
100.0
 %
 
$
1,506.2

 
100.0
 %
 
$
(167.7
)
 
(11.1
)%
Cost of sales
(1,156.9
)
 
86.4
 %
 
(1,335.9
)
 
88.7
 %
 
179.0

 
(13.4
)%
Gross profit
181.6

 
13.6
 %
 
170.3

 
11.3
 %
 
11.3

 
6.6
 %
Selling, general and administrative expenses 
(82.8
)
 
6.2
 %
 
(83.2
)
 
5.5
 %
 
0.4

 
(0.5
)%
Operating income
98.8

 
7.4
 %
 
87.1

 
5.8
 %
 
11.7

 
13.4
 %
Interest expense, net
(26.2
)
 
2.0
 %
 
(39.1
)
 
2.6
 %
 
12.9

 
(33.0
)%
Loss on extinguishment of debt
(23.4
)
 
1.7
 %
 
(3.1
)
 
0.2
 %
 
(20.3
)
 
N/M

Gain on sale of investment in joint venture

 
 %
 
6.3

 
0.4
 %
 
(6.3
)
 
(100.0
)%
Other income (expense), net
0.2

 
 %
 
0.2

 
 %
 

 
 %
Income before provision for income taxes and equity income
49.4

 
3.7
 %
 
51.4

 
3.4
 %
 
(2.0
)
 
(3.9
)%
Provision for income taxes
(16.6
)
 
1.2
 %
 
(15.9
)
 
1.1
 %
 
(0.7
)
 
4.4
 %
Income before equity income
32.8

 
2.5
 %
 
35.5

 
2.4
 %
 
(2.7
)
 
(7.6
)%
Equity income, net of tax

 
 %
 
0.3

 
 %
 
(0.3
)
 
(100.0
)%
Net income
32.8

 
2.5
 %
 
35.8

 
2.4
 %
 
(3.0
)
 
(8.4
)%
Net income attributable to noncontrolling interest
(0.6
)
 
 %
 
(0.2
)
 
 %
 
(0.4
)
 
N/M

Net income attributable to Global Brass and Copper Holdings, Inc.
$
32.2

 
2.4
 %
 
$
35.6

 
2.4
 %
 
$
(3.4
)
 
(9.6
)%
Adjusted EBITDA (a)
$
118.5

 
8.9
 %
 
$
121.1

 
8.0
 %
 
$
(2.6
)
 
(2.1
)%

(a)    See “Management’s View of PerformanceNet income and adjusted EBITDA.”
N/M - not meaningful
The following discussions present an analysis of our results of operations for 2016 as compared to 2015. See “Management’s View of Performance” for discussions of net sales, adjusted sales, gross profit, adjusted gross profit, selling, general and administrative expenses, adjusted selling, general and administrative expenses, net income attributable to Global Brass and Copper Holdings, Inc., adjusted EBITDA, diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share and adjusted diluted earnings per common share. These discussions should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Interest expense, net
Interest expense, net decreased by $12.9 million primarily due to lower average interest rates and lower borrowings under our debt facilities as we bought back an aggregate of $69.7 million of Senior Secured Notes in the open market during the latter half of 2015 and the first half of 2016. Additionally, in July of 2016, we refinanced the remaining $305.3 million of 9.5% Senior Secured Notes with a new $320.0 million Term Loan B Facility, which accrued interest at a rate of 5.25% during the second half of 2016. Lastly, we capitalized interest relating to the construction of long-term assets in the amount of $1.1 million and $0.2 million in 2016 and 2015, respectively.

44


The following table summarizes the components of interest expense, net:
 
 Year Ended
December 31,
 
Amount change:
(in millions)
2016
 
2015
 
2016 vs. 2015
Interest on principal
$
24.4

 
$
35.5

 
$
(11.1
)
Amortization of debt issuance costs
2.0

 
2.8

 
(0.8
)
Capitalized interest
(1.1
)
 
(0.2
)
 
(0.9
)
Other borrowing costs (a)
0.9

 
1.0

 
(0.1
)
Total interest expense, net
$
26.2

 
$
39.1

 
$
(12.9
)

(a)Includes fees related to letters of credit and unused line of credit fees.
Loss on extinguishment of debt
We bought back an aggregate of $69.7 million of Senior Secured Notes in the open market during the latter half of 2015 and the first half of 2016. Additionally, in July of 2016, we refinanced the remaining $305.3 million of 9.5% Senior Secured Notes. As a result of the activity in 2016, we recognized a loss on the extinguishment of debt of $23.4 million, which includes a premium of $17.0 million and the write-off of $6.4 million of unamortized debt issuance costs related to both the Senior Secured Notes and the former asset-based loan facility.
Provision for income taxes
The provision for income taxes increased by $0.7 million, or 4.4%, and the effective income tax rate increased from 30.9% to 33.6%. The prior year effective tax rate benefited from the utilization of foreign tax credits in 2015 due to the sale of our joint venture. Due to the expected decrease in interest expense in future years resulting from our refinancing, we released the valuation allowance recorded against our foreign tax credits, resulting in a one-time reduction in income tax expense of approximately $1.0 million, which benefited our effective tax rate in 2016. Additionally, the effective tax rate increased from 2015 to 2016 due to less Section 199 manufacturing credit benefit.


45


Segment Results of Operations
Segment Results of Operations for the Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
 
Year Ended
December 31,
 
Change:
2016 vs. 2015
(in millions)
2016
 
2015
 
Amount
 
Percent
Pounds shipped (a)
 
 
 
 
 
 
 
Olin Brass
260.5

 
260.0

 
0.5

 
0.2
 %
Chase Brass
222.7

 
218.9

 
3.8