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, 2019
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________________ to _____________________

Commission File Number: 333-185443

_________________________________________

Aleris Corporation

(Exact name of registrant as specified in its charter)

__________________________________________



Delaware			27-1539594
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

25825 Science Park Drive, Suite 400

Cleveland, Ohio 44122-7392

(Address of principal executive offices) (Zip code)

(216) 910-3400

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

______________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨

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

(Note: Registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 and 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required during the preceding 12 months, had it been subject to such filing requirements.)

Indicate by check mark whether the registrant has submitted electronically on its corporate Web site, if any, every Interactive Data File required to be submitted 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 such files). Yes x No ¨

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

Large accelerated filer ¨ Accelerated filer¨ Non-accelerated filer x Smaller reporting company ¨ Emerging growth 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 x

The registrant is a privately held corporation. As of June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public trading market for the common stock of the registrant and therefore, an aggregate market value of the registrant’s common stock is not determinable.

There were 32,527,026 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 15, 2020.

DOCUMENTS INCORPORATED BY REFERENCE: None



PART I		Page
Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	26
Item 2.	Properties	26
Item 3.	Legal Proceedings	26
Item 4.	Mine Safety Disclosures	26

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 8.	Financial Statements and Supplementary Data	63
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	117
Item 9A.	Controls and Procedures	117
Item 9B.	Other Information	118

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	118
Item 11.	Executive Compensation	121
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	141
Item 13.	Certain Relationships and Related Transactions, and Director Independence	145
Item 14.	Principal Accounting Fees and Services	146

PART IV
Item 15.	Exhibits and Financial Statement Schedules	146
Item 16.	Form 10-K Summary	146

Signatures		147

PART I

ITEM 1. BUSINESS.

General

Aleris Corporation is a Delaware corporation with its principal executive offices located in Cleveland, Ohio. We are a holding company and currently conduct our business and operations through our direct wholly owned subsidiary, Aleris International, Inc. and its consolidated subsidiaries. As used in this annual report on Form 10-K, unless otherwise specified or the context otherwise requires, “Aleris,” “we,” “our,” “us,” and the “Company” refer to Aleris Corporation and its consolidated subsidiaries. Aleris International, Inc. is referred to herein as “Aleris International.”

The Company is majority owned by Oaktree Capital Management, L.P. (“Oaktree”) or its respective subsidiaries. The investment funds managed by Oaktree or its respective subsidiaries that are invested in the Company are referred to collectively as the “Oaktree Funds.”

On July 26, 2018, we announced that we entered into a definitive agreement to be acquired by Novelis Inc., a subsidiary of Hindalco Industries Limited, for approximately $2,600.0 million, including the assumption of the Company’s outstanding indebtedness (the “Merger”). The Merger is subject to customary regulatory approvals and closing conditions. There can be no assurance that the Merger will be consummated. See the Company’s Current Report on Form 8-K filed on July 27, 2018 for a more detailed discussion of the definitive agreement and the transactions contemplated thereby, including the Merger. See Item 1A. – “Risk Factors – Risks Related to Our Business – The closing of the Merger is subject to customer closing conditions as well as other uncertainties, and the Merger may not be completed.”

Available Information

We make available on or through our website (www.aleris.com) our reports on Forms 10-K, 10-Q and 8-K, and amendments thereto, as soon as reasonably practicable after we electronically file (or furnish, as applicable) such material with the Securities and Exchange Commission (“SEC”). The SEC maintains an internet site that contains these reports at www.sec.gov. We use our investor website (investor.aleris.com) as a channel of distribution of Company information. The information we post through this channel may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings, and public conference calls and webcasts. None of the websites referenced in this annual report on Form 10-K or the information contained therein is incorporated herein by reference.

Company Overview

We are a global leader in the manufacture and sale of aluminum rolled products, with 13 production facilities located throughout North America, Europe and China. Our product portfolio ranges from the most technically demanding heat treated plate and sheet used in mission-critical applications to sheet produced through our low-cost continuous cast process. We possess a combination of technically advanced, flexible and low-cost manufacturing operations supported by an industry-leading research and development (“R&D”) platform. Our facilities are strategically located to serve our customers globally. Our diversified customer base includes a number of industry-leading companies such as Airbus, Audi, Boeing, Bombardier, Daimler, Embraer, Ford, General Motors and Volvo. Our technological and R&D capabilities allow us to produce the most technically demanding products, many of which require close collaboration and, in some cases, joint development with our customers. For the year ended December 31, 2019, we generated revenues of $3.4 billion, of which approximately 63% were derived from North America, 27% were derived from Europe and the remaining 10% were derived from the rest of the world.

Company History

Our predecessor was formed at the end of 2004 through the merger of Commonwealth Industries, Inc. and IMCO Recycling, Inc. The predecessor’s business grew through a combination of organic growth and strategic acquisitions, the most significant of which was the 2006 acquisition of the downstream aluminum business of Corus Group plc (“Corus Aluminum”). The Corus Aluminum acquisition doubled our predecessor’s size and significantly expanded both its presence in Europe and its ability to manufacture higher value-added products, including aerospace and autobody sheet (“ABS”).

The predecessor was acquired by Texas Pacific Group (“TPG”) in December 2006 and taken private. In 2007, it sold its zinc business in order to focus on its core aluminum business. In 2009, the predecessor, along with certain of its U.S. subsidiaries, filed voluntary petitions for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. The bankruptcy filings were the result of a liquidity crisis brought on by the global recession and financial crisis. The predecessor’s ability to respond to the liquidity crisis was constrained by its highly leveraged capital structure, which at filing included $2.7 billion of debt, resulting from the 2006 leveraged buyout of the predecessor by TPG. As a result of the severe economic decline, the predecessor experienced sudden and significant value reductions across each end-use industry it served and a precipitous decline in the London Metal Exchange (“LME”) price of aluminum. These factors reduced the

availability of financing under the predecessor’s revolving credit facility and required the posting of cash collateral on aluminum hedges. The predecessor sought bankruptcy protection to alleviate its liquidity constraints and restructure its operations and financial position.

The Company was formed as a Delaware corporation in 2009 to acquire the assets and operations of the predecessor upon emergence from bankruptcy, which occurred on June 1, 2010. TPG exited our business during this time and we received significant support from new equity investors, led by the Oaktree Funds, the majority owner of Aleris Corporation, as well as certain investment funds managed by affiliates of Apollo Management Holdings, L.P. (“Apollo”) and Bain Capital Credit, LP (“Bain Capital Credit” and, together with the Oaktree Funds and Apollo, the “Investors”).

Since 2010, the Company has grown through the successful combination of strategic growth initiatives involving acquisitions, such as the 2014 acquisition of Nichols Aluminum LLC (“Nichols”), and investments in our existing facilities and in China. These initiatives were targeted at broadening our product offerings and geographic presence, diversifying our end-use customer base, increasing our scale and scope, and offering a higher value-added product mix. In 2015, we sold our recycling and specification alloys and extrusions businesses in order to focus on our aluminum rolled products business.

Business Segments

We report three operating segments based on the organizational structure that we use to evaluate performance, make decisions on resource allocations and perform business reviews of financial results. The Company’s operating segments (each of which is considered a reportable segment) are North America, Europe and Asia Pacific.

In addition to these reportable segments, we disclose corporate and other unallocated amounts, including start-up costs.

See Note 17, “Segment and Geographic Information,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K for financial and geographic information about our segments.

The following charts present the percentage of our consolidated revenue by reportable segment and by end-use for the year ended December 31, 2019:

North America

Our North America segment consists of nine manufacturing facilities located throughout the United States that produce rolled aluminum and coated products for the building and construction, automotive, truck trailer, consumer durables and other general industrial and distribution end-uses. Substantially all of our North America segment’s products are manufactured to specific customer requirements, using continuous cast and direct-chill technologies that provide us with significant flexibility to produce a wide range of products. Specifically, those products are integrated into, among other applications, building products, automobiles, truck trailers, appliances and recreational vehicles.

cold mill, two continuous annealing lines with pre-treatment (each, a “CALP”) and an automotive innovation center. We have also invested in upgrades to other key equipment at this facility, including upgrading our ingot scalper and pre-heating furnaces and widening the hot mill, to capture additional opportunities. We believe the investments position us to meet significant growth in demand for ABS in North America as the automotive industry pursues broader aluminum use for the production of lighter, more fuel-efficient vehicles.

In connection with the North America ABS Project, the segment has incurred costs associated with start-up activities, including the design and development of new products and processes, commissioning equipment upgrades, qualification of products, the manufacture of commissioning and qualification products, and the development of sales and marketing efforts necessary to enter this new end-use. These start-up costs were historically excluded from segment Adjusted EBITDA and segment income. The North America ABS Project substantially exited the start-up phase for the first CALP during the third quarter of 2018 and for the second CALP during the third quarter of 2019. The majority of the costs previously classified as start-up costs have been included in segment Adjusted EBITDA and segment income since the third quarter of 2018.

We have the largest footprint of continuous cast operations of any aluminum rolled products producer in North America. Our continuous cast operations have lower capital requirements and lower operating costs compared to our direct-chill cast operations.

For our continuous cast operations, scrap input typically comprises over 90% of our overall metal needs, which provides substantial benefits, including metal cost savings. For the year ended December 31, 2019, approximately 97% of our North America revenues were derived using a formula pricing model which allows us to pass through risks from the volatility of aluminum price changes by charging a market-based aluminum price plus a conversion fee.

Our North America segment produces rolled aluminum products ranging from thickness (gauge) of 0.002 to 0.249 inches in widths of up to 84 inches. The following table summarizes our North America segment’s principal products, end-uses, major customers and competitors:



Principal end use/product category	Major customers	Competitors

• Building and construction (roofing, rainware and siding)	• American Construction Metals, First American, Gentek Building Products, Kaycan, Midwest Metals, Omnimax, Ply Gem Industries, Service Partners Gutter Supply, Rollex	• Jupiter Aluminum, JW Aluminum, Arconic, Vulcan, Oman Aluminum Rolling Company
• Automotive	• General Motors, Ford, Tesla	• Arconic, Novelis, Constellium, Nanshan, AMAG, UACJ
• Metal distribution	• Champagne Metals, Metals USA, Reliance, Ryerson, Wieland Metal Services, Thyssenkrupp-KenMac	• Arconic, Novelis, Constellium, Ta-Chen, Asian-American, Metal Exchange, Texarkana, Garmco, Hulamin, Alumindo Light Metal
• Truck trailer	• Hyundai Translead, Rockwell Metals, Utility Trailer, Aluminum Line Products	• Arconic, Constellium, Novelis
• Consumer durables, specialty coil and sheet (cookware, fuel tanks, ventilation, cooling and lamp bases)	• ABB, Brunswick Boat Group, Ermco Distribution Transformers, Generation III, RPR Products	• Arconic, Gränges, JW Aluminum, Novelis, Skana Aluminum, Constellium
• Converter foil, fins and tray materials	• Chart Energy & Chemicals, Handi-foil of America, Reynolds	• JW Aluminum, Gränges, Novelis, Rusal, Kibar Americas

Key operating and financial information for the segment is presented below:



North America	For the years ended December 31,
(Dollars in millions, volumes in thousands of tons)	2019		2018		2017
Metric tons of finished product shipped	517.4		517.5		462.0
Revenues	$	1,935.0	$	1,915.7	$	1,467.8
Segment income (1)	$	259.8	$	196.0	$	88.0
Segment Adjusted EBITDA (1)(2)	$	257.0	$	162.1	$	96.5
Total segment assets	$	1,467.7	$	1,460.0


(1)	Segment income and segment Adjusted EBITDA exclude start-up operating losses and expenses incurred during the start-up period. For the years ended December 31, 2019, 2018 and 2017, start-up costs were $7.8 million, $45.3 million and $66.6 million, respectively.


(2)	Segment Adjusted EBITDA is a non-GAAP financial measure. See Item 7. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Segments” for a definition and discussion of segment Adjusted EBITDA and a reconciliation to segment income.

Europe

Our Europe segment consists of two world-class aluminum rolling mills, one in Koblenz, Germany and the other in Duffel, Belgium, and an aluminum cast house in Voerde, Germany. The segment produces aerospace plate and sheet, ABS, clad brazing sheet (clad aluminum material used for, among other applications, vehicle radiators and HVAC systems), heat-treated plate for engineered product applications and industrial coil and sheets. Substantially all of our Europe segment’s products are manufactured to specific customer requirements using direct-chill cast technologies that allow us to use and offer a variety of alloys and products for a number of technically demanding end-uses.

For over a decade, we have been a leading supplier of automotive and aerospace aluminum rolled products in Europe. We believe the technical and quality requirements needed to participate in these end-uses provides us with a competitive advantage. In 2018 we qualified and started production of wingskin products, a product for commercial aircraft wings to be used in the aerospace industry, in Koblenz.

Our Europe segment produces rolled aluminum products ranging from thickness (gauge) of 0.00031 to 11.0 inches in widths of up to 138 inches. The following table summarizes our Europe segment’s principal products, end-uses, major customers and competitors:



Principal end use/product category	Major customers	Competitors

• Aerospace plate and sheet	• Airbus, Boeing, Bombardier, Dassault, Embraer	• Arconic, AMAG, Constellium, Kaiser
• Autobody sheet (inner, outer and structural parts)	• Audi, Daimler, Renault, Volvo, VW Group	• AMAG, Constellium, Hydro, Novelis, Profilglass, Maaden, Nanshan
• Clad brazing sheet (heat exchanger materials for automotive and general industrial)	• Mahle, Dana, Denso, Hanon, Modine, Chart	• Arconic, AMAG, Gränges, Hydro, UACJ
• Industrial plate and sheet (tooling, molding, road & rail, shipbuilding, LNG, silos, anodizing qualities for architecture, multi-layer tubing, and general industry)	• Amari Group, Amco, Euramax, Gilette, Henco, Linde, Multivac, RemiClaeys, SAG, Thyssenkrupp	• Arconic, AMAG, Constellium, Hydro, Novelis, Elval. Aludium, Zhongwang, Nanshan

Key operating and financial information for the segment is presented below:



Europe	For the years ended December 31,
(Dollars in millions, volumes in thousands of tons)	2019		2018		2017
Metric tons of finished product shipped	310.8		330.4		317.3
Revenues	$	1,275.9	$	1,407.4	$	1,300.7
Segment income	$	130.1	$	129.8	$	127.4
Segment Adjusted EBITDA (1)	$	125.1	$	128.7	$	127.7
Total segment assets	$	719.7	$	736.4


(1)	Segment Adjusted EBITDA is a non-GAAP financial measure. See Item 7. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Segments” for a definition and discussion of segment Adjusted EBITDA and a reconciliation to segment income.

Asia Pacific

Our Asia Pacific segment consists of a rolling mill in Zhenjiang, Peoples Republic of China (PRC) that produces technically demanding and value-added plate products for aerospace, semiconductor equipment, general engineering, distribution and other end-uses worldwide. Substantially all of our Asia Pacific segment’s products are manufactured to specific customer requirements using direct-chill cast technologies that allow us to use and offer a variety of alloys and products principally for aerospace and also for a number of other technically demanding end-uses.

The Zhenjiang rolling mill commenced operations in the first quarter of 2013 and achieved Nadcap certification, an industry standard for the production of aerospace aluminum, in 2014. Since then, the Zhenjiang rolling mill has received qualifications from several industry-leading aircraft manufacturers, including Airbus, Boeing, Bombardier and COMAC, and is one of few facilities in Asia capable of meeting the exacting standards of the global aerospace industry.

We expect demand for aluminum plate in Asia to grow, driven by the development and expansion of industries serving aerospace, semiconductor, rail and other technically demanding applications. In anticipation of this demand, we built the

Zhenjiang rolling mill with 250,000 tons of annual hot mill capacity and the capability to both expand into other high growth and high value-added products, including ABS, clad brazing sheet and other technically demanding products, as well as produce additional aerospace and heat treated plate with modest incremental investment. We recently expanded our aerospace offerings by investing in machining equipment, and are introducing advanced alloys to allow for the production of pre-machined plates for commercial aircraft wings to be used in the aerospace industry, commercial shipments of which commenced in the second half of 2019.

The following table summarizes our Asia Pacific segment’s principal products, end-uses, major customers and competitors:



Principal end use/product category	Major customers	Competitors

• Aerospace plate	• Airbus, Bombardier, Boeing, All Metal Services, Castle Metals, AVIC, Comac, Korean Aerospace Industries, Thyssenkrupp Aeropsace	• Arconic, Constellium, Kaiser, Nanshan, Chinalco, Kumz, SWA, NELA
• Heat treated plate	• Clinton Aluminum, Hengtai, Jusung, Thyssenkrupp, Huahang	• Arconic, AMAG, Alro, Constellium, Kaiser, Kumz, Nanshan, UACJ, Zhongwang
• Non-heat treated plate	• Kobelco Precision Parts, Korean Non Ferrous, Tozzhin	• UACJ, Alnan, SWA, NELA, Zhongwang, Nanshan, Kobelco

Key operating and financial information for the segment is presented below:



Asia Pacific	For the years ended December 31,
(Dollars in millions, volumes in thousands of tons)	2019		2018		2017
Metric tons of finished product shipped	35.1		29.4		26.9
Revenues	$	186.6	$	148.8	$	122.3
Segment income	$	44.0	$	23.6	$	15.0
Segment Adjusted EBITDA (1)	$	42.7	$	22.2	$	12.6
Total segment assets	$	345.7	$	340.2


(1)	Segment Adjusted EBITDA is non-GAAP financial measure. See Item 7. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Segments” for a definition and discussion of segment Adjusted EBITDA and a reconciliation to segment income.

Industry Overview

Aluminum is a widely-used, attractive industrial material. Compared to several alternative metals such as steel and copper, aluminum is lightweight, has a high strength-to-weight ratio and is resistant to corrosion. Aluminum can be recycled repeatedly without any material decline in performance or quality. The recycling of aluminum delivers energy and capital investment savings relative to both the cost of producing primary aluminum and many other competing materials. The penetration of aluminum into a wide variety of applications continues to grow. We believe several factors support fundamental long-term growth in aluminum consumption in the end-uses we serve.

The global aluminum industry consists of primary aluminum producers with bauxite mining, alumina refining and aluminum smelting capabilities; aluminum semi-fabricated products manufacturers, including aluminum casters, recyclers, extruders and flat rolled products producers; and integrated companies that are present across multiple stages of the aluminum production chain. The industry is cyclical and is affected by global economic conditions, industry competition and product development.

Primary aluminum prices are determined by worldwide forces of supply and demand and, as a result, are volatile. This volatility has a significant impact on the profitability of primary aluminum producers whose selling prices are typically based upon prevailing LME prices while their costs to manufacture are not highly correlated to LME prices. We participate in select segments of the aluminum fabricated products industry, focusing on aluminum rolled products. We do not smelt aluminum, nor do we participate in other upstream activities, including mining bauxite or refining alumina. Since the majority of our products are sold on a market-based aluminum price plus conversion fee basis, we are less exposed to aluminum price volatility.

Sales and Marketing

We sell our products to end-users and distributors, principally for use in the aerospace, automotive, building and construction, truck trailer, consumer durables, other general industrial and distribution industries. Backlog as of December 31, 2019 and 2018 was approximately $102.7 million and $88.1 million, respectively, for North America, $222.0 million and $251.2 million, respectively, for Europe, and $70.5 million and $86.0 million, respectively, for Asia Pacific.

Sales of products are made through each segment’s own sales force, which are strategically located to provide international coverage, and through a broad network of sales offices and agents in North America and major European countries, as well as in Asia and Australia. The majority of our customer sales agreements in our segments are for a term of one year or less.

Competition

The worldwide aluminum industry is highly competitive. Aluminum also competes with other materials such as steel, plastic, composite materials and glass for various applications.

We compete in the production and sale of rolled aluminum sheet and plate. In the sectors in which we compete, other industry leaders include Arconic, Constellium, Novelis, Kaiser, Hydro, JW Aluminum and Jupiter Aluminum. We compete with other rolled products suppliers on the basis of quality, price, timeliness of delivery and customer service.

Raw Materials and Supplies

A significant portion of the aluminum metal used by our North America segment is purchased aluminum scrap that is acquired from aluminum scrap dealers or brokers. We believe that our North America segment is one of the largest users of aluminum scrap (other than beverage can scrap) in North America. The remaining metal requirements of this segment are met with purchased primary metal and rolling slab, including metal produced in the U.S. and internationally.

Our Europe segment relies on a number of European smelters for primary aluminum and rolling slab. Due to a shortage of internal slab casting capacity, we contract with smelters and other third parties to provide slab that meets our specifications.

Our Asia Pacific segment relies primarily on domestic smelters for primary aluminum. A portion of the raw material used by this segment is imported in order to meet quality requirements.

We believe that the raw materials necessary to our business are and will continue to be available. In an effort to manage our exposure to commodity price fluctuations, we use a formula pricing model which allows us to pass through risks from the volatility of aluminum price changes by charging a market-based aluminum price plus a conversion fee for the substantial majority of our contracts, and we strive to manage the remaining key commodity risks through our hedging programs.

Energy Supplies

Our operations are fueled by natural gas and electricity, which represent a large component of our cost of sales. We purchase the majority of our natural gas and electricity on a spot-market basis. However, in an effort to acquire the most favorable energy costs, we have secured some of our natural gas and electricity at fixed price commitments. We use forward contracts and options, as well as contractual price escalators, to reduce the risks associated with our natural gas requirements.

Research and Development

Our research and development organization includes three centers in Europe, one in North America and one in Asia, with a support staff focused on new product and alloy offerings and process performance technology. Research and development expenses were $17.4 million, $18.4 million and $16.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Patents and Other Intellectual Property

We hold patents registered in the United States and other countries relating to our business. In addition to patents, we also possess other intellectual property, including trademarks, tradenames, know-how, developed technology and trade secrets. Although we believe these intellectual property rights are important to the operations of our specific businesses, we do not consider any single patent, trademark, tradename, know-how, developed technology, trade secret or any group of patents, trademarks, tradenames, know-how, developed technology or trade secrets to be material to our business as a whole.

Seasonality

Certain of our products are seasonal. Demand in the rolled products business is generally stronger in the spring and summer seasons due to higher demand in the building and construction industry. This typically results in higher operating income in our second and third quarters, followed by our first and fourth quarters.

Employees

As of December 31, 2019, we had a total of approximately 5,600 employees, which included approximately 1,900 employees engaged in administrative and supervisory activities and approximately 3,700 employees engaged in manufacturing, production and maintenance functions. In addition, collectively, approximately 64% of our U.S. employees and substantially all

of our non-U.S. employees were covered by collective bargaining agreements. We believe our labor relations with employees have been satisfactory.

Environmental

Our operations are subject to federal, state, local and foreign environmental, health and safety laws and regulations, which govern, among other things, air emissions, wastewater discharges, the handling, storage, and disposal of hazardous substances and wastes, the investigation or remediation of contaminated sites and employee health and safety. These laws can impose joint and several liability for releases or threatened releases of hazardous substances upon statutorily defined parties, including us, regardless of fault or the lawfulness of the original activity or disposal. Given the changing nature of environmental, health and safety legal requirements, we may be required, from time to time, to incur substantial costs in order to achieve and maintain compliance with these laws and regulations. For example, we may be required to install additional pollution control equipment, make process changes, or take other environmental control measures at some of our facilities to meet future requirements.

We have been named as a potentially responsible party in certain proceedings initiated pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (“Superfund”) and similar state statutes and may be named a potentially responsible party in other similar proceedings in the future. We are performing operations and maintenance at two Superfund sites for matters arising out of past waste disposal activity associated with closed facilities. We are also under orders to perform environmental remediation by agencies in four states and one non-U.S. country at seven sites. It is not anticipated that the costs incurred in connection with the presently pending proceedings will, individually or in the aggregate, have a material adverse effect on our financial condition or results of operations. Currently, and from time to time, we are a party to notices of violation brought by governmental agencies concerning the laws governing environmental, health and safety matters, such as air emissions.

Our aggregate accrual for environmental matters was $24.5 million and $25.6 million at December 31, 2019 and 2018, respectively. Of these amounts, approximately $9.9 million and $11.9 million are indemnified at December 31, 2019 and 2018, respectively. Although the outcome of any such matters, to the extent they exceed any applicable accrual, could have a material adverse effect on our financial condition, results of operations or cash flows for the applicable period, we currently believe that any such outcome would not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

In addition, we have asset retirement obligations of $6.8 million for both of the years ended December 31, 2019 and 2018 for costs related to the future removal of asbestos and costs to remove underground storage tanks. The related asset retirement costs are capitalized as long-lived assets (asset retirement cost), and are being amortized over the remaining useful life of the related asset. See Note 2, “Summary of Significant Accounting Policies,” and Note 10, “Asset Retirement Obligations,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.

The processing of scrap generates solid waste in the form of salt cake and baghouse dust. This material is disposed of at off-site landfills. If salt cake was ever classified as a hazardous waste in the U.S., the costs to manage and dispose of it would increase, which could result in significant increased expenditures.

Financial Information About Geographic Areas

See Note 17, “Segment and Geographic Information,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.

ITEM 1A. RISK FACTORS.

Risks Related to Our Business

If we fail to implement our business strategy, our financial condition and results of operations could be adversely affected.

Our future financial performance and success depend in large part on our ability to successfully implement our business strategy. We cannot assure you that we will be able to successfully implement our business strategy or be able to continue improving our operating results. In particular, we cannot assure you that we will be able to successfully execute our significant ongoing, or any future, strategic investments, achieve all operating cost savings targeted through focused productivity improvements and capacity optimization, further enhance our business and product mix, manage key commodity exposures and opportunistically pursue strategic transactions, some of which may be material. Implementation of our business strategy may be impacted by factors outside of our control, including competition, commodity price fluctuations, industry, legal and regulatory changes or developments and general economic and political conditions. Any failure to successfully implement our business strategy could adversely affect our financial condition and results of operations. We may, in addition, decide to alter or discontinue certain aspects of our business strategy at any time.

Although we have undertaken and expect to continue to undertake productivity and manufacturing system and process transformation initiatives to improve performance, we cannot assure you that all of these initiatives will be completed or that any estimated cost savings from such activities will be fully realized. Even when we are able to generate new efficiencies in the short- to medium-term, we may not be able to continue to reduce costs and increase productivity over the long-term.

While the Merger is pending, we are subject to business uncertainties and contractual restrictions that could materially adversely affect our business or result in a loss of customers or employees.

The agreement governing the Merger includes restrictions on how we conduct our business while the Merger is pending, generally requiring us to conduct our business in the ordinary course in all material respects, as well as imposing more specific limits with respect to certain matters absent our Merger counterparty’s consent. These and other restrictions in the agreement governing the Merger may prevent us from responding effectively to business developments and opportunities. The pendency of the Merger may also divert our management’s attention and our other resources from ongoing business and operations. In addition, customers may have uncertainties about the Merger, and delay or defer business decisions or seek to terminate or change their relationships because of the Merger. Similarly, the Merger may materially adversely affect our ability to attract, retain or motivate employees. If any of these effects were to occur, it could materially and adversely impact our financial performance while the Merger is pending.

The closing of the Merger is subject to customary closing conditions as well as other uncertainties, and the Merger may not be completed.

The consummation of the Merger is subject to the satisfaction of certain closing conditions, including, but not limited to, (i) the representations and warranties of the parties being true and correct, except as permitted by the agreement governing the Merger, (ii) the parties’ performance in all material respects of their respective covenants and other obligations, and (iii) the expiration or termination of the applicable Hart-Scott-Rodino waiting period and the receipt of certain foreign regulatory approvals. The Merger is not subject to a financing condition. If these conditions to the closing of the Merger are not fulfilled, then the Merger may not be consummated. Several of the closing conditions are not within our control, and it is not known whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise. In addition, the outside date in the Merger Agreement of January 21, 2020 has passed. If the closing conditions are not satisfied, or if another event occurs that delays or prevents the Merger, or if the Merger Agreement is validly terminated, our business, financial condition and results of operations may be materially and adversely affected.

We may undertake acquisitions or divestitures, or be the target of a strategic acquisition, which may not be successful, and which could adversely affect our business, financial condition and results of operations.

As part of our strategy, from time to time, we may consider acquisitions or strategic alliances, which may not be completed or, if completed, may not be ultimately beneficial to us. We also consider potential divestitures of businesses from time to time. We prudently evaluate these opportunities as potential enhancements to our existing operating platforms and continue to consider strategic alternatives on an ongoing basis, including having discussions concerning potential acquisitions, strategic alliances and divestitures that may be material.

There are numerous risks commonly encountered in business combinations, including the following:


▪	our ability to identify appropriate acquisition targets and to negotiate acceptable terms for their acquisition;


▪	our ability to obtain all necessary regulatory approvals on the terms expected and/or to complete any acquisition in a timely manner or at all;


▪	our ability to integrate new businesses into our operations;


▪	the availability of capital on acceptable terms to finance acquisitions;


▪	the ability to generate the cost savings or synergies anticipated;


▪	the inaccurate assessment of undisclosed liabilities;


▪	increasing demands on our operational systems; and


▪	the amortization of acquired intangible assets.

In addition, the process of integrating new businesses could cause the interruption of, or loss of momentum in, the activities of our existing businesses, the diversion of management’s attention or the loss of key employees, customers, suppliers or other business partners. Any delays or difficulties encountered in connection with the integration of new businesses or divestiture of existing assets or businesses could negatively impact our business, financial condition and results of operations. Furthermore, any acquisition we may make could result in significant increases in our outstanding indebtedness and debt service requirements. The terms of our indebtedness may limit the acquisitions, strategic alliances and divestitures that we can pursue.

There are numerous risks commonly encountered in divestitures, including the following:


▪	our ability to identify appropriate assets or businesses for divestiture and buyers, and to negotiate favorable terms for the divestiture of such assets or businesses;


▪	diversion of resources and management’s attention from the operation of our business, including providing on-going services to the divested business;


▪	loss of key employees following such a transaction;


▪	difficulties in the separation of operations, services, products and personnel;


▪	retention of future liabilities as a result of contractual indemnity obligations; and


▪	loss of, or damage to our relationships with, our existing customers, suppliers or other business relationships.

In addition, sellers typically retain certain liabilities or indemnify buyers for certain matters such as lawsuits, tax liabilities, product liability claims and environmental matters. The magnitude of any such retained liability or indemnification obligation may be difficult to quantify at the time of the transaction, may involve conditions outside our control and ultimately may be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release us from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, we may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations.

We cannot readily predict the timing or size of any future acquisition, strategic alliance or divestiture, and there can be no assurance that we will realize any anticipated benefits from any such acquisition, strategic alliance or divestiture. If we do not realize any such anticipated benefits, our business, financial condition and results of operations could be materially adversely affected.

The cyclical nature of the metals industry, our end-uses and our customers’ industries could negatively affect our financial condition and results of operations.

The metals industry in general is cyclical in nature. It tends to reflect and be amplified by changes in general and local economic conditions. These conditions include the level of economic growth, financing availability, the availability of affordable raw materials and energy sources, employment levels, interest rates, consumer confidence and housing demand. Historically, in periods of recession or periods of minimal economic growth, metals companies have often tended to underperform other sectors. We are particularly sensitive to trends in the key end-uses we serve, such as the automotive, aerospace, heat exchanger, building and construction and truck trailer industries. During recessions or periods of low growth, these industries typically experience major cutbacks in production, resulting in decreased demand for aluminum, which can lead to significant fluctuations in demand and pricing for our products and services.

Demand for our automotive and heat exchanger products is dependent on the production of cars, light trucks and heavy duty vehicles and trailers. The automotive industry is highly cyclical, as new vehicle demand is dependent on consumer spending and is tied closely to the strength of the overall economy, including credit markets and interest rates. In addition, the automotive industry is sensitive to consumer preferences regarding vehicle ownership and usage and vehicle size, fuel prices, regulatory requirements and levels of competition. Production cuts by manufacturers may adversely affect the demand for our products. Many automotive-related manufacturers and first tier suppliers are burdened with substantial structural costs, including pension, healthcare and labor costs that have resulted in severe financial difficulty, including bankruptcy, for several of them. A worsening of these companies’ financial condition or their bankruptcy could have further serious effects on the conditions of the automotive industry, which directly affects the demand for our products. In addition, sensitivity to fuel prices and consumer preferences can influence consumer demand for vehicles that have a higher content of aluminum. The loss of business with respect to, or a lack of commercial success of, one or more particular vehicle models for which we are a significant supplier could have a materially adverse impact on our financial condition and results of operations.

We derive a portion of our revenues from products sold to the aerospace industry, which is highly cyclical and tends to decline in response to overall declines in the general economy. The commercial aerospace industry is historically driven by demand from commercial airlines for new aircraft. Demand for commercial aircraft is influenced by airline industry profitability, trends in airline passenger traffic, the state of the U.S. and global economies and numerous other factors, including the availability of financing, regulatory requirements, the retirement of older aircraft and the effects of terrorism. A number of major airlines have consolidated, undergone bankruptcy or comparable insolvency proceedings and experienced financial strain from competitive pressures and volatile fuel prices. Despite existing backlogs, continued financial uncertainty in the industry, inadequate liquidity of certain airline companies, production issues and delays in the launch of new aircraft programs at major aircraft manufacturers, stock variations in the supply chain, terrorist acts or the increased threat of terrorism may lead to reduced demand for new aircraft that utilize our products, which could materially adversely affect our financial condition and results of operations. For example, the grounding of the Boeing 737 MAX may have a negative impact on demand.

Because we generally have high fixed costs, our near-term profitability is significantly affected by decreased processing volume. Accordingly, reduced demand and pricing pressures may significantly reduce our profitability and adversely affect our financial condition. Economic downturns in regional and global economies or a prolonged recession in our principal industry

end-uses have had a negative impact on our operations in the past and could have a negative impact on our future financial condition or results of operations. Although we continue to seek to diversify our business on a geographic and industry end-use basis, we cannot assure you that diversification will significantly mitigate the effect of cyclical downturns.

In addition, the market price of aluminum has historically been subject to significant cyclical price fluctuations. Although in recent years global economic and commodity trends have been increasingly correlated, the timing of changes in the market price of aluminum is largely unpredictable. Changes in the market price of aluminum impact the selling prices of our products and the benefit we gain from using scrap in our manufacturing process. Market prices of aluminum are dependent upon supply and demand and a variety of factors over which we have minimal or no control, including:


▪	regional, global economic and political conditions;


▪	availability and relative pricing of metal substitutes;


▪	labor costs;


▪	energy prices;


▪	governmental regulations;


▪	seasonal factors and weather; and


▪	tariffs, import and export levels and/or other trade restrictions.

Furthermore, we depend upon third-party transportation providers for delivery of products to us and to our customers, and we are sensitive to cyclical and other trends that impact such providers. Transportation disruptions or other conditions in the transportation industry, including, but not limited to, increases in fuel prices, disruptions in rail service, port congestion or shortages of truck drivers, could increase our costs and disrupt our operations and our ability to service our customers on a timely basis.

We may encounter increases in the cost, or limited availability, of raw materials and energy, which could cause our cost of sales to increase thereby reducing our operating results and limiting our operating flexibility.

We require substantial amounts of raw materials and energy in our business, consisting principally of primary aluminum, aluminum scrap, alloys and other materials and energy, including natural gas. Any substantial increases in the cost of raw materials or energy could cause our operating costs to increase and negatively affect our financial condition and results of operations.

Primary aluminum, aluminum scrap, rolling slab and alloy prices are subject to significant cyclical price fluctuations. Metallics (primary aluminum and aluminum scrap) represent the largest component of our costs of sales. We purchase aluminum primarily from aluminum producers, aluminum scrap dealers and other intermediaries. We have limited control over the price or availability of these supplies.

In particular, the availability and price of aluminum scrap and rolling slab depend on a number of factors outside our control, including general economic conditions, international demand for metallics and internal recycling activities by primary aluminum producers and other consumers of aluminum. Increased regional and global demand for aluminum scrap can have the effect of increasing the prices that we pay for these raw materials thereby increasing our cost of sales. We may not be able to adjust the selling prices for our products to recover the increases in scrap prices. If scrap prices were to increase significantly without a commensurate increase in the traded value of the primary metals, our future financial condition and results of operations could be affected by higher costs and lower profitability.

After raw material and labor costs, energy costs represent the third largest component of our cost of sales. The price of natural gas, and therefore the costs, can be particularly volatile. Price and volatility can differ by global region based on supply and demand, political issues, government regulation and the imposition of further taxes on energy, among other things. As a result, our natural gas costs may fluctuate dramatically, and we may not be able to reduce the effect of higher natural gas costs on our cost of sales. If natural gas costs increase, our financial condition and results of operations may be adversely affected. Although we attempt to mitigate volatility in natural gas costs through the use of hedging and the inclusion of price escalators in certain of our long-term supply contracts, we may not be able to eliminate or reduce the effects of such cost volatility. Furthermore, in an effort to offset the effect of increasing costs, we may also limit our potential benefit from declining costs.

We may be unable to manage effectively our exposure to commodity price fluctuations, and our hedging activities may affect profitability in a changing metals price environment and subject our earnings to greater volatility from period-to-period.

Significant increases in the price of primary aluminum, aluminum scrap, alloys, hardeners, or energy would cause our cost of sales to increase significantly and, if not offset by product price increases, would negatively affect our financial condition and results of operations. We are substantial consumers of raw materials, and by far the largest input cost in producing our goods is the cost of aluminum. The cost of energy used by us is also substantial. Customers pay for our products based on the price of the aluminum contained in the products, plus a “rolling margin” or “conversion margin” fee (the “Price

Margin”), or based on a fixed price. Although we generally use this pricing mechanism to pass changes in the price of aluminum through to our customers, we may not be able to pass on the entire cost of the increases to our customers. In most end-uses and by industry convention, however, we offer our products at times on a fixed price basis as a service to the customer. This commitment to supply an aluminum-based product to a customer at a fixed price often extends months, but sometimes years, into the future. Such commitments require us to purchase raw materials in the future, exposing us to the risk that increased aluminum or energy prices will increase the cost of our products, thereby reducing or eliminating the Price Margin we receive when we deliver the product. These risks may be exacerbated by the failure of our customers to pay for products on a timely basis, or at all.

The overall price of primary aluminum consists of several components, including the underlying base metal component, which is typically based on quoted prices from the London Metal Exchange (LME) and the regional premium, which comprises the incremental price over the base LME component that is associated with the delivery of metal to a particular region as further described below. The LME price is typically driven by macroeconomic factors, global supply and demand of aluminum (including expectations for growth and contraction and the level of global inventories) and financial investors, and may be impacted by political conditions and changes in laws, regulations and policies, such as those related to international trade. Speculative trading in aluminum and the influence of hedge funds and other financial institutions participating in commodity markets have contributed to higher levels of price volatility. Furthermore, the North America and Europe segments are exposed to variability in the market price of a regional premium differential (referred to as “Midwest Premium” in the U.S. and “Rotterdam Premium” in Europe) charged by industry participants to deliver aluminum from the smelter to the manufacturing facility. This premium differential also fluctuates in relation to several conditions, including based on the supply of and demand for metal in a particular region, associated transportation costs and the extent of warehouse financing transactions, which limit the amount of physical metal flowing to consumers and increases the price differential as a result. During times of greater volatility in the premium, the variability in our earnings can also increase. In addition to impacting the price we pay for the raw materials we purchase, changing premium differentials impact our customers, who may delay purchases from us during times of uncertainty with respect to the premium differential or seek to purchase alternative materials or lower priced imported products which are not susceptible to the changes in these premium differentials. The North America and Europe segments follow a pattern of increasing or decreasing their selling prices to customers in response to changes in the Midwest Premium and the Rotterdam Premium. In addition, aluminum prices could fluctuate as a result of LME warehousing rules. Warehousing rules could also cause an increase in the supply of aluminum which may cause regional delivery premiums and LME aluminum prices to fall. A sustained weak LME aluminum pricing environment or adverse changes in LME aluminum prices or regional premiums, or the inability to pass through any fluctuation in aluminum prices or regional premiums to our customers, could have a material adverse effect on our business, financial condition, results of operations and cash flow.

As we maintain large quantities of base inventory, significant and rapid decreases in the price of primary aluminum would reduce the realizable value of our inventory, negatively affecting our financial condition and results of operations. In addition, a decrease in aluminum prices between the date of purchase and the final settlement date on derivative contracts used to mitigate the risk of price fluctuations may require us to post additional margin, which, in turn, could place a significant demand on our liquidity.

We purchase and sell LME forwards, futures and options contracts to reduce our exposure to changes in aluminum, copper and zinc prices. While exchanges have recently begun to offer derivative financial instruments to hedge premium differentials, we are only beginning to use these markets in our risk management practices. Despite the use of LME forwards, futures and options contracts, we remain exposed to the variability in prices of aluminum scrap and premium differentials. We depend on scrap for our operations, and seek to take advantage of the lower price of scrap metals compared to primary aluminum to provide a cost-competitive product. While aluminum scrap is typically priced in relation to prevailing LME prices, it may also be priced at a discount to LME aluminum (depending upon the quality of the material supplied). This discount is referred to in the industry as the “scrap spread” and fluctuates depending upon industry conditions. At this time, financial instruments are not readily available to effectively hedge against the scrap spread, and to the extent this spread narrows, our competitive advantage may be reduced. In addition, we purchase forwards, futures or options contracts to reduce our exposure to changes in natural gas and fuel prices, currency risks and interest rate risks. To the extent our hedging contracts fix prices or exchange rates, if prices or exchange rates are below the fixed prices or rates established by such contracts, then our income and cash flows will be lower than they otherwise would have been.

The ability to realize the benefit of our hedging program is dependent upon factors beyond our control, such as counterparty risk as well as our customers making timely payment to us for products. In addition, at certain times, hedging options may be unavailable or not available on terms acceptable to us. In certain scenarios when market price movements result in a decline in value of our current derivatives position, our mark-to-market expense may exceed our credit line and counterparties may request the posting of cash collateral. We do not account for our forwards, futures, or options contracts as hedges of the underlying risks. As a result, unrealized gains and losses on our derivative financial instruments must be reported in our consolidated results of operations. The inclusion of such unrealized gains and losses in earnings may produce significant

period to period earnings volatility that is not necessarily reflective of our underlying operating performance. See Item 7A. - “Quantitative and Qualitative Disclosures about Market Risk.”

A deterioration of our financial position or a downgrade of our ratings by a credit rating agency could impair our business, financial condition and results of operations, and our business relationships could be adversely affected.

A deterioration of our financial position or a downgrade of our credit ratings could adversely affect our financing, limit our access to the capital or credit markets or our liquidity facilities, or otherwise adversely affect our ability to obtain new financing on favorable terms or at all, result in more restrictive covenants in agreements governing the terms of any future indebtedness that we incur, or otherwise impair our business, financial condition and results of operations. Moreover, it could also increase our borrowing costs, trigger the posting of cash collateral and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. As discussed above, we enter into various forms of hedging arrangements against commodity, energy, currency and interest rate risks. Financial strength and credit ratings are important to the availability and terms of these hedging and financing activities. As a result, any downgrade of our credit ratings may make it more costly for us to engage in these activities.

The profitability of our operations depends, in part, on the availability of an adequate source of supplies.

The availability and price of aluminum could impact our margins and our ability to meet customer volumes. We rely on third parties for the supply of aluminum. There can be no assurance that we will be able to maintain or renew, or obtain replacements for, any of our supply arrangements on terms that are as favorable as our existing agreements or at all. In the future, we may face an increased risk of supply to meet our demand due to issues affecting suppliers, including their rising costs of production, their ability to extend short-term credit to us and their ability to sustain their business, and we may be required to purchase aluminum from alternative sources, which may not be available in sufficient quantities or on favorable terms. Our inability to satisfy our future supply needs may impact our profitability and expose us to penalties as a result of contractual commitments with some of our customers.

In addition, the price and availability of aluminum may be influenced by factors beyond our control, such as weak or deteriorating economic conditions, changes in world politics or regulatory requirements, trade restrictions and forces of supply and demand, which may cause regional supply constraints or may cause rapid aluminum price fluctuations. In particular, we depend on scrap for our operations and acquire our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metal to us. In periods of low industry prices, suppliers may elect to hold scrap and wait for higher prices, which may cause periodic supply interruptions. In addition, the slowdown in industrial production and consumer consumption in the U.S. during the previous economic crisis reduced the supply of scrap metal available to us. Furthermore, exports of scrap out of North America and Europe can negatively impact scrap availability and scrap spreads. If an adequate supply of scrap metal is not available to us, we would be unable to use recycled metals in our products at desired volumes and our results of operations and financial condition would be materially and adversely affected.

Our operating segments also depend on external suppliers for rolling slab for certain products. The availability of rolling slab is dependent upon a number of factors, including general economic conditions, which can impact the supply of available rolling slab and LME pricing, where lower LME prices may cause certain rolling slab producers to curtail production. If rolling slab is less available, our margins could be impacted by higher premiums that we may not be able to pass along to our customers or we may not be able to meet the volume requirements of our customers, which may cause sales losses or result in damage claims from our customers. We maintain long-term contracts for certain volumes of our rolling slab requirements, for the remainder we depend on annual and spot purchases. If we enter into a period of persistent short supply, we could incur significant capital expenditures to internally produce 100% of our rolling slab requirements.

Our business requires substantial amounts of capital to operate; failure to maintain sufficient liquidity will have a material adverse effect on our financial condition and results of operations.

Our business requires substantial amounts of cash to operate and our liquidity and ability to access capital can be adversely affected by a number of factors, including many factors outside our control. For example, fluctuations in the LME prices for aluminum may result in increased cash costs for metal or scrap. In addition, if aluminum price movements result in a negative valuation of our current financial derivative positions, our counterparties may require posting of cash collateral. Furthermore, in an environment of falling LME prices, the borrowing base under Aleris International’s asset backed multi-currency revolving credit facility (the “ABL Facility”) may shrink, which would constrain our liquidity. The borrowing base may also fluctuate due to, in part, seasonal working capital increases. As a result of these factors, both our borrowing base and ABL Facility utilization may fluctuate on a monthly basis. We cannot assure you that we will be able to draw under the ABL Facility in an amount sufficient to fund our liquidity needs.

We may not be able to compete successfully in the industry end-uses we serve and aluminum may become less competitive with alternative materials, which could reduce our share of industry sales, sales volumes and selling prices.

Aluminum competes with other materials such as steel, plastic, composite materials and glass for various applications. Higher aluminum prices relative to substitute materials tend to make aluminum products less competitive with these alternative materials. In addition, environmental, trade and other laws and regulations may also increase our costs, which we may seek to pass on to our customers. These regulations may make our products less competitive as compared to materials that are subject to fewer regulations. The willingness of customers to accept substitutions for aluminum could reduce demand or prices for our products, either of which could materially and adversely affect our business, financial condition, results of operations and cash flows.

Our aerospace and automotive customers use and continue to evaluate the further use of alternative materials to aluminum in order to reduce the weight and increase the efficiency of their products. Although trends in “light-weighting” have generally increased rates of using aluminum as a substitute for another material, the willingness of customers to accept substitutions for aluminum, or the ability of large customers to exert leverage in the marketplace to reduce the pricing for fabricated aluminum products, could adversely affect the demand for our products, and thus materially adversely affect our financial position, results of operations and cash flows. In addition, the automotive industry, while motivated to reduce vehicle weight through the use of aluminum, may revert to steel or other materials for certain applications.

We compete in the production and sale of rolled aluminum products with a number of other aluminum rolling mills, including large, single-purpose sheet mills, continuous casters and other multi-purpose mills, some of which are larger and have greater financial and technical resources than we do. We compete on the basis of quality, price, timeliness of delivery, technological innovation and customer service. Producers with a different cost basis may, in certain circumstances, have a competitive pricing advantage. Our competitors may be better able to withstand reductions in price or other adverse industry or economic conditions. In addition, a current or new competitor may also add or build new capacity, which could diminish our profitability by decreasing the equilibrium prices in our marketplace. Our competitive position may also be adversely affected by industry consolidation and economies of scale in purchasing, production and sales, which accrue to the benefit of some of our competitors. In addition, technological innovation is important to our customers who require us to lead or keep pace with new innovations to address their needs, and new product offerings or new technologies in the marketplace may compete with or replace our products. If we do not compete successfully, our share of industry sales, sales volumes and selling prices may be negatively impacted.

As we increase our international business, we encounter the risk that governments could take actions to enhance local production or local ownership at our expense. In addition, new competitors could emerge globally in emerging or transitioning markets with abundant natural resources, low-cost labor and energy, and lower environmental and other standards. This may pose a significant competitive threat to our business. Our competitive position may also be affected by exchange rate fluctuations that may make our products less competitive. Changes in regulation that have a disproportionately negative effect on us or our methods of production may also diminish our competitive advantage and industry position.

Additional competition could result in a reduced share of industry sales, reduced prices for our products and services, or increased expenditures, which could decrease revenues, reduce volumes or increase costs, all of which could have a negative effect on our financial condition and results of operations.

If our products fail to meet customer requirements, we could incur losses which could adversely affect our reputation, business and results of operations.

Product manufacturing in our business is a highly complex process. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards or are defective, we may be required to replace or rework the products. In some cases, our products may contain undetected defects or flaws that only become evident at a later time, including after shipment. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, supply chain interruptions, natural disasters, labor unrest and environmental factors. We have experienced product quality, performance or reliability problems and defects from time to time, and similar defects or failures may occur in the future. If these failures or defects occur, they could result in losses or product recalls, customer penalties, contract cancellation and product liability exposure. A significant product recall could adversely affect product demand, result in negative publicity, damage to our reputation and could lead to a loss of customer confidence in our products. Any of such consequences could have a material adverse effect on our reputation, business and results of operations.

The qualification process for our products can be lengthy and unpredictable, possibly delaying adoption of our products and causing us to incur expense possibly without recovery.

Qualification of our products by many of our customers can be lengthy and unpredictable and many of these customers have extensive sourcing and qualification processes. The qualification process requires substantial time and financial resources, with no certainty of success or recovery of our related expenses. In addition, even after an extensive qualification process, our products may fail to meet the standards sought by our customers and may not be qualified for use by such customers. Further, our continued process improvements and cost-reduction efforts may require us or our customers to re-qualify our products. Failure to qualify or re-qualify our products may result in us losing such customers or customer contracts, which could materially adversely affect our business and results of operations.

The loss of certain members of our management may have an adverse effect on our operating results.

Our success will depend, in part, on the efforts of our senior management and other key employees. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills that are critical to the operation of our business. The continuity of key personnel and the preservation of institutional knowledge are vital to the success of our growth and business strategy. If we lose or suffer an extended interruption in the services of one or more of our senior management or other key employees or fail to develop adequate succession plans for key positions, our financial condition and results of operations may be negatively affected. Moreover, competition for the pool of qualified individuals may be high, and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise.

If we were to lose order volumes from any of our largest customers, our sales volumes, revenues and cash flows could be reduced.

Our business is exposed to risks related to customer concentration. Our ten largest customers were responsible for less than 38% of our consolidated revenues for the year ended December 31, 2019. No one customer accounted for more than 11% of those revenues. A loss of order volumes from, a loss of industry share by, or a significant downturn or deterioration in the business or financial condition of, any major customer could negatively affect our financial condition and results of operations by lowering sales volumes, increasing costs and lowering profitability. If we fail to successfully maintain, renew, renegotiate or re-price our long-term agreements or related arrangements with our largest customers, or if we fail to successfully replace business lost from any such customers, our results of operations, financial condition and cash flows could be materially adversely affected.

Our strategy of having dedicated facilities and arrangements with customers subjects us to the inherent risk of increased dependence on a single or a few customers with respect to these facilities. In such cases, our failure to renew such arrangements on terms as favorable as our existing contracts, the loss of such a customer, or the reduction of that customer’s business at one or more of our facilities, could negatively affect our financial condition and results of operations, and we may be unable to timely replace, or replace at all, lost order volumes. In addition, several of our customers have become involved in bankruptcy or insolvency proceedings and have defaulted on their obligations to us in recent years. Similar incidents in the future would adversely impact our financial condition and results of operations.

Customers in our end-uses, including aerospace and automotive, may consolidate and grow in a manner that could affect their relationships with us. For example, if one of our competitors’ customers acquires any of our customers, we may lose that acquired customer’s business. Additionally, if our customers become larger and more concentrated, they could exert pricing pressure on all suppliers, including us. Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of consolidation, pricing or other methods of competition, our financial position, results of operations and cash flows may be adversely affected.

We do not have long-term contractual arrangements with a substantial number of our customers, and our sales volumes and revenues could be reduced if our customers switch their suppliers.

Approximately 64% of our consolidated revenues for the year ended December 31, 2019 were generated from customers who do not have long-term contractual arrangements with us. These customers purchase products and services from us on a purchase order basis and may choose not to continue to purchase our products and services. Any significant loss of these customers or a significant reduction in their purchase orders could have a material negative impact on our sales volume and business.

Our business requires substantial capital investments that we may be unable to fulfill, and we may be unable to timely complete our expected capital investments or may be unable to achieve the anticipated benefits of such investments.

Our operations are capital intensive. Our capital expenditures were $125.7 million, $108.2 million and $207.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. There can be no assurance that we will be able to complete our capital expenditure projects, which includes spending related to maintenance and strategic investments, on schedule or at all, or that we will be able to execute such projects quickly enough to respond to changing industry conditions or that we will be able to achieve the anticipated benefits of such capital expenditures. In particular, our capital expenditure projects may not result in the improvements in our business that we anticipate and the realization of any return on these projects is dependent on a number of factors, including general economic conditions, customer preferences and other events beyond our control, whether our assumptions in making the investment were correct and changes in the factors underlying our investment decision. In addition, if we are unable to, or determine not to, complete any capital expenditure project, or such projects are delayed, we will not realize the anticipated benefits of such investments, which may adversely affect our business, financial condition and results of operations.

In recent periods, we have not generated sufficient cash flows from operations to fund our capital expenditure requirements. In the future, we may not generate sufficient operating cash flows and our external financing sources may not be available in an amount sufficient to enable us to make anticipated capital expenditures, service or refinance our indebtedness or fund other liquidity needs. If we are not able to reduce our high leverage and fund capital expenditures through the generation of cash flows from our business, we would have to do one or more of the following: raise additional capital through debt or equity issuances or both; cancel, delay or reduce current and future business initiatives; or sell properties or assets. If the cost of our capital expenditures exceed budgeted amounts, and/or the time period for completion is longer than initially anticipated, our business, financial condition and results of operations could be materially adversely affected. In addition, capital expenditure projects may require planned outages at existing facilities and/or cause production inefficiencies. Such outages, production inefficiencies and other operational difficulties have resulted, and may in the future result, in significant production downtime at facilities undergoing capital expenditure projects, which has negatively impacted, and may in the future negatively impact, our business, results of operations and financial condition. For example, our 2017 results of operations were negatively impacted by an extended planned hot mill outage at our Lewisport facility in connection with the North America ABS Project.

Our production capacity might not be able to meet end-use demand or changing industry conditions.

We may be unable to meet end-use demand or changing industry conditions due to production capacity constraints or operational challenges. Meeting such demand may require us to make substantial capital investments to repair, maintain, upgrade and expand our facilities and equipment. Notwithstanding our ongoing plans and investments to increase our capacity, we may not be able to expand our production capacity quickly enough in response to changing industry conditions, and there can be no assurance that our production capacity will be able to meet our existing obligations and the growing end-use demand for our products. In addition, if we are unable to expand our production capacity, make upgrades or repairs or purchase new plants and equipment, we may be unable to take advantage of improved industry conditions or increased demand for our products and our financial condition and results of operations could be adversely affected by operational difficulties, higher maintenance costs, lower sales volumes due to the impact of reduced product quality, penalties for late deliveries, reputational harm and other competitive influences.

Reductions in demand for our products may be more severe than, and may occur prior to, reductions in demand for our customers’ products.

Customers purchasing our products, such as those in the cyclical aerospace industry, generally require significant lead time in production of their own products. Therefore, demand for our products may increase prior to demand for our customers’ products. Conversely, demand for our products may decrease as our customers anticipate a downturn in their respective businesses. As demand for our customers’ products begins to soften, our customers could meet the reduced demand for their products using their existing inventory without replenishing the inventory, which would result in a reduction in demand for our products greater than the reduction in demand for their products. Further, the reduction in demand for our products can be exacerbated if inventory levels held by our customers exceed normal levels and our customers can use existing inventory for their own production requirements. This amplified reduction in demand for our products while our customers consume their inventory to meet their business needs, or “destocking,” may adversely affect our financial condition, results of operations and cash flows.

We may not be able to successfully develop and implement new technology initiatives.

We have invested in, and are involved with, a number of technology and process initiatives, including those related to the production of more technologically advanced aluminum for commercial aircraft wings to be used in the aerospace industry. Several technical aspects of these initiatives are still unproven and the eventual commercial outcomes cannot be assessed with any certainty. Even if we are successful with these initiatives, we may not be able to deploy them in a timely fashion or at all.

Accordingly, the costs and benefits from our investments in new technologies and the consequent effects on our financial results may vary from present expectations.

Our Asia Pacific operations may require significant funding support that we may be unable to fulfill and expose us to certain risks inherent with operating a facility in China.

Since the start of operations at the Zhenjiang rolling mill, we have been required to fund the majority of the rolling mill’s capital expenditures, working capital, and principal and interest on third party debt. In recent years, the profitability and cash flow generation of the Zhenjiang rolling mill has improved significantly. Consequently, the funding, obtained from capital provided by us, was limited to $11.0 million in 2019. We may need to provide the rolling mill with our own or other sources of additional capital in the future.

We also have an RMB 410.0 million (or equivalent to approximately $58.8 million as of December 31, 2019) revolving credit facility (the “Zhenjiang Revolver”) provided by the People’s Bank of China. As of December 31, 2019, we had no amounts outstanding under the Zhenjiang Revolver. The Chinese government exercises significant control over economic growth in China through the allocation of resources, including imposing policies that impact particular industries or companies in different ways, so we may experience future disruptions to our access to capital in the Chinese region. In addition, we have to meet certain conditions to be able to draw on the Zhenjiang Revolver. We cannot be certain that we will be able to draw any amounts committed under the Zhenjiang Revolver in the future. We also may not generate sufficient operating cash flows and our external financing sources may not be available in an amount sufficient to enable us to fund the anticipated working capital needs of the Zhenjiang rolling mill. To the extent that funding is not available under the Zhenjiang Revolver, we may need to further increase the amount of capital necessary to fund the Zhenjiang rolling mill from our own or other sources of capital. The availability of financing, as well as future actions or policies of the Chinese government, could materially affect the funding of our working capital and other capital needs in China, which may diminish or delay our ability to produce and sell material from the Zhenjiang rolling mill.

Our operations in China may be materially adversely affected by economic, political, legal, regulatory, competitive and other factors in China. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement and control over economic growth. Our operations in China are governed by Chinese laws, rules and regulations, some of which are relatively new and/or vague and uncertain. The Chinese legal system continues to rapidly evolve, which may result in uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations that could have a material adverse effect on our business. China also experiences high turnover of direct labor due to the intensely competitive and fluid market for labor, and the retention of adequate labor may be a challenge for our operations in China. If our labor turnover rates are higher than we expect, or we otherwise fail to adequately manage our labor needs, then our business and results of operations could be adversely affected. In addition, any political or trade controversies between the United States and China could adversely affect our operations in China, which in turn could affect our business, financial condition and results of operations. Additionally, public health crises in China could adversely affect our operations in China, which in turn could affect our business, financial condition and results of operations. For example, in December 2019, a strain of the coronavirus disease 2019 (“COVID-19”) surfaced in Wuhan, China that has resulted in travel disruption and affected certain companies’ operations in China.

Our business involves significant activity in Europe, and adverse conditions and disruptions in European economies could have a material adverse effect on our operations or financial performance.

A material portion of our sales are generated by customers located in Europe and the euro is the functional currency of substantially all of our European-based operations. The financial markets remain concerned about the ability of certain European countries to finance their deficits and service growing debt burdens amidst difficult economic conditions. This loss of confidence led to rescue measures by Eurozone countries and the International Monetary Fund. Despite these measures, concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries. The interdependencies among European economies and financial institutions have also exacerbated concern regarding the stability of European financial markets generally. These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries, or, in more extreme circumstances, the possible dissolution of the euro currency entirely. Should the euro dissolve entirely, the legal and contractual consequences for holders of euro-denominated obligations would be determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related issues, could materially adversely affect the value of our euro-denominated assets and obligations. In addition, concerns over financial institutions in Europe and globally could have a material adverse impact on the capital markets generally. Persistent disruptions in the European financial markets, the overall stability of the euro and the suitability of the euro as a single currency, the failure of a significant European financial institution or additional political and regulatory developments, could have a material adverse impact on our operations or financial performance.

In addition, the United Kingdom left the European Union (Brexit) on January 31, 2020, with a transition period up to December 31, 2020 in which the status quo is expected to be largely unchanged. Brexit could have implications on economic conditions globally as a result of changes in policy direction which may in turn influence the economic outlook for the European Union and its key trading partners. There can be no assurance that the actions we have taken or may take in response to global economic conditions more generally may be sufficient to counter any continuation or recurrence of the downturn or disruptions. A significant global economic downturn or disruptions in the financial markets would have a material adverse effect on our operations or financial performance.

Our international operations expose us to certain risks inherent in doing business abroad.

We have operations in the United States, Germany, Belgium and China. We continue to explore opportunities to expand our international operations. Our international operations generally are subject to risks, including:


▪	changes in U.S. and international governmental regulations, trade policy and laws, including tax laws and regulations;


▪	compliance with U.S. and foreign anti-corruption and trade control laws, such as the Foreign Corrupt Practices Act, export controls and economic sanction programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control;


▪	currency exchange rate fluctuations;


▪	tariffs and other trade barriers;


▪	the potential for nationalization of enterprises or government policies favoring local production;


▪	renegotiation or nullification of existing agreements;


▪	interest rate fluctuations;


▪	high rates of inflation;


▪	currency restrictions and limitations on repatriation of funds;


▪	compliance with privacy and data security laws, such as the European Union’s General Data Protection Regulation;


▪	differing protections for intellectual property and enforcement thereof;


▪	differing and, in some cases, more stringent labor regulations;


▪	an outbreak of disease or similarly public health threat, such as the existing threat of COVID-19, particularly as it may impact our operations and supply chain in China;


▪	divergent environmental laws and regulations; and


▪	political, economic and social instability.

The occurrence of, or uncertainty related to, any of these events (or the perception that such events may occur) could cause our costs to rise, limit growth opportunities, have a negative effect on our operations and our ability to plan for future periods or cause our customers to delay or reduce their spending or result in market volatility or currency exchange fluctuations. In certain regions, the degree of these risks may be higher due to more volatile economic conditions, less developed and predictable legal and regulatory regimes and increased potential for various types of adverse governmental action.

In particular, global uncertainty about the direction of U.S. trade policy and the rising threat of changes in tariffs and trade barriers in countries where we do business could cause our customers to delay or reduce their spending or seek substitute materials as a result of increased costs. Also, other countries may retaliate against the U.S. by imposing tariffs on U.S. exports which could reduce demand for our customers’ products outside the U.S. The current U.S. administration has also indicated its intention to withdraw from or substantially modify various international trade agreements. Depending on the nature of these changes, our business could be adversely impacted.

The financial condition and results of operations of some of our operating entities are reported in various currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. As a result, appreciation of the U.S. dollar against these currencies may have a negative impact on reported revenues and operating profit while depreciation of the U.S. dollar against these currencies may generally have a positive effect on reported revenues and operating profit. In addition, a portion of the revenues generated by our international operations are denominated in U.S. dollars, while the majority of costs incurred are denominated in local currencies. As a result, appreciation in the U.S. dollar may have a positive impact on margins at the time of sale and on the subsequent translation of the resulting accounts receivable until collection, while depreciation of the U.S. dollar may have the opposite effect. While we engage in hedging activity to attempt to mitigate currency risk, this may not fully protect our business, financial condition or results of operations from adverse effects due to currency fluctuations.

Our business and operations, and the operations of our customers, may be adversely affected by epidemics and pandemics, such as the recent COVID-19 outbreak.

We may face risks related to health epidemics and pandemics or other outbreaks of communicable diseases, which could result in a widespread health crisis that could adversely affect general commercial activity and the economies and financial markets of many countries. For example, the recent outbreak of COVID-19, which began in China, has been declared by the World Health Organization to be a “pandemic,” has spread across the globe to many countries in which we do business and is impacting worldwide economic activity. A health epidemic or pandemic or other outbreak of communicable diseases, such as the current COVID-19 pandemic, poses the risk that we or our customers, suppliers and other business partners may be disrupted or prevented from conducting business activities for certain periods of time, the durations of which are uncertain, and may otherwise experience significant impairments of business activities, including due to, among other things, operational shutdowns or suspensions that may be requested or mandated by national or local governmental authorities or self-imposed by us, our customers, suppliers or other business partners. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, customers, suppliers or other business partners, the continued spread of COVID-19, the measures taken by the governments of affected countries, actions taken to protect employees, and the impact of the pandemic on various business activities in affected countries could adversely affect our results of operations and financial condition.

Current environmental liabilities as well as the cost of compliance with, and liabilities under, environmental, health and safety laws could increase our operating costs and negatively affect our financial condition and results of operations.

Our operations are subject to federal, state, local and foreign laws and regulations, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the investigation and remediation of contaminated sites and employee health and safety. Future environmental, health and safety regulations could impose stricter compliance requirements on the industries in which we operate. We could incur substantial costs in order to achieve and maintain compliance with these laws and regulations. For example, additional pollution control equipment, process changes, or other environmental control measures may be needed at some of our facilities to meet future requirements. Additionally, evolving regulatory standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on earnings and cash flows.

Financial responsibility for contaminated property can be imposed on us where current or past operations have had an environmental impact. Such liability can include the cost of investigating and remediating contaminated soil or ground water, fines and penalties sought by environmental authorities, and damages arising out of personal injury, contaminated property and other toxic tort claims, as well as lost or impaired natural resources. Certain environmental laws impose strict, and in certain circumstances joint and several, liability for certain kinds of matters, such that a person can be held liable without regard to fault for all of the costs of a matter even though others were also involved or responsible. The costs of all such matters have not been material to net income (loss) for any accounting period since January 1, 2013. However, future remedial requirements at currently or formerly owned or operated properties or adjacent areas, or at properties to which we have disposed of hazardous substances, could result in significant liabilities. We are subject to or a party to certain environmental claims and matters and there can be no assurance that those matters will be resolved favorably or that such matters will not adversely affect our business, results of operations or financial condition. See Item 1. – “Business – Environmental.” We have accrued costs relating to these matters that are reasonably expected to be incurred based on available information. However, it is possible that actual costs may differ, perhaps significantly, from the amounts expected or accrued. Similarly, the timing of those expenditures may occur faster than anticipated. These differences could negatively affect our financial position, results of operations and cash flows.

Changes in environmental, health and safety requirements or changes in their enforcement could materially increase our costs. For example, if salt cake, a by-product from some of our operations, were to become classified as a hazardous waste in the U.S., the costs to manage and dispose of it would increase and could result in significant increased expenditures.

New governmental regulation relating to greenhouse gas emissions and physical impacts of climate change, such as extreme weather conditions, may subject us to significant new costs and restrictions on our operations.

Climate change is receiving increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. New laws enacted could directly and indirectly affect our customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on the availability or raw materials, our operations or demand for our products), any of which could have a material adverse effect on our business, financial condition and results of operations. There are legislative and regulatory initiatives in various jurisdictions that would regulate greenhouse gas emissions through a carbon tax or a cap-and-trade system under which emitters would be required to buy allowances to offset emissions of greenhouse gas. In addition, several states, including states where we have manufacturing facilities, are considering various greenhouse gas registration and reduction programs. Certain of our manufacturing facilities use significant amounts of energy, including electricity and natural gas, and certain of our facilities emit amounts of greenhouse gas above certain minimum thresholds that are likely to be affected by existing proposals. Greenhouse gas regulation could increase the price of the electricity we purchase, increase costs for our use of natural gas,

potentially restrict access to or the use of natural gas, require us to purchase allowances to offset our own emissions or result in an overall increase in our costs of raw materials, capital expenditures and insurance premiums or deductibles, any one of which could significantly increase our costs, reduce our competitiveness in a global economy or otherwise negatively affect our business, operations or financial results. While future global emission regulation appears likely, it is too early to predict how this regulation may affect our business, operations or financial results.

The potential physical impacts of climate change or extreme weather conditions on our operations are highly uncertain and will be particular to the geographic circumstances. These may include changing sea levels, changing storm patterns, increased frequency and intensities of storms, changing rainfall patterns, changing temperature levels, and shortages of water or other natural resources. Effects such as these may adversely impact the cost, production and financial performance of our operations.

We could experience labor disputes and work stoppages that could disrupt our business.

Approximately 64% of our U.S. employees and substantially all of our non-U.S. employees, located primarily in Europe where union membership is common, are represented by unions or equivalent bodies and are covered by collective bargaining or similar agreements which are subject to periodic renegotiation. Although we believe that we will successfully negotiate new collective bargaining agreements when the current agreements expire, these negotiations may not prove successful, may result in a significant increase in the cost of labor, or may break down and result in the disruption or cessation of our operations.

Labor negotiations may not conclude successfully, and, in that case or any other, work stoppages or labor disturbances may occur. Existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities. Any such stoppages or disturbances may have a negative impact on our financial condition and results of operations by limiting plant production, sales volumes and profitability.

Further aluminum industry consolidation could impact our business.

The aluminum industry has experienced consolidation over the past several years, and there may be further industry consolidation in the future. Although current industry consolidation has not yet had a significant negative impact on our business, if we do not have sufficient industry end-use presence or are unable to differentiate ourselves from our competitors, we may not be able to compete successfully against other companies. If as a result of consolidation, our competitors are able to obtain more favorable terms from suppliers or otherwise take actions that could increase their competitive strengths, our competitive position and therefore our business, results of operations and financial condition may be materially adversely affected.

Our operations present significant risk of injury or death. We may be subject to claims that are not covered by or exceed our insurance.

Because of the heavy industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors, notwithstanding the safety precautions we take. Our operations are subject to regulation by various federal, state and local agencies responsible for employee health and safety, including the Occupational Safety and Health Administration, which has from time to time levied fines against us for certain isolated incidents. While we have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future. These types of incidents may not be covered by or may exceed our insurance coverage and may have a material adverse effect on our results of operations and financial condition.

We are subject to unplanned business interruptions that may materially adversely affect our business.

Our operations may be materially adversely affected by unplanned business interruptions caused by events such as explosions, fires, war or terrorism, inclement weather, natural disasters, accidents, equipment failures, information technology systems and process failures, electrical blackouts or outages, transportation interruptions and supply interruptions. Our suppliers and customers may also experience unplanned interruptions, which may cause our cost of sales to increase, if we are required to make alternate supply arrangements, or our sales to decrease, if customers are required to delay their purchases. Operational interruptions at one or more of our production facilities could cause substantial losses and delays in our production capacity or increase our operating costs. In addition, replacement of assets damaged by such events could be difficult or expensive, and to the extent these losses are not covered by insurance or if our insurance policies have significant deductibles, our financial position, results of operations and cash flows may be materially adversely affected by such events. Furthermore, because customers may be dependent on planned deliveries from us, customers that have to reschedule or cancel their own production due to our delivery delays or operational challenges may be able to pursue financial claims against us, and we may incur costs to correct such problems in addition to any liability resulting from such claims. Interruptions may also harm our reputation among actual and potential customers, potentially resulting in a loss of business.

Derivatives legislation could have an adverse impact on our ability to hedge risks associated with our business and on the cost of our hedging activities.

We use over-the-counter (“OTC”) derivatives products to hedge our metal commodity, energy, currency and interest rate risks. Legislation has been adopted to increase the regulatory oversight of the OTC derivatives markets and participants in these markets, including, for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). As such, we have become and could continue to become subject to additional regulatory costs, both directly and indirectly, through increased costs of doing business with market intermediaries that are subject to extensive regulation. In addition, if major financial institutions are forced to operate under more restrictive capital constraints and regulations, there could be less liquidity in the derivative markets, which could have a negative effect on our ability to hedge and transact with creditworthy counterparties. As regulatory regimes continue to develop and additional regulations may be implemented, the ultimate costs of derivatives legislation in the U.S. and other jurisdictions, including the European Union, on our business remain uncertain. However, any such costs could be significant and have an adverse effect on our results of operations and financial condition. Additional derivatives regulations or changes to existing regulations could also add significant cost or operational constraints that might have an adverse effect on our results of operations and financial condition or could require us to change certain of our business practices or develop a new compliance infrastructure.

Our pension obligations are currently underfunded. We may have to make significant cash payments to our pension plans, which would reduce the cash available for our business and have an adverse effect on our financial condition, results of operations and ability to satisfy our obligations under our indebtedness.

Our U.S. defined benefit pension plans cover certain salaried and non-salaried employees at our corporate headquarters and within our North America segment. The plan benefits are based on age, years of service and employees’ eligible compensation during employment for all employees not covered under a collective bargaining agreement and on stated amounts based on job grade and years of service prior to retirement for non-salaried employees covered under a collective bargaining agreement. Our funding policy for the U.S. defined benefit pension plans is to make annual contributions based on advice from our actuaries and the evaluation of our cash position, but not less than minimum statutory requirements. All of the minimum funding requirements of the U.S. Internal Revenue Code (“Code”) and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), for these plans have been met as of December 31, 2019, at which time, the U.S. defined benefit pension plans, in the aggregate, were underfunded (on a Generally Accepted Accounting Principles in the United States of America (“GAAP”) basis) by approximately $47.4 million. The liabilities could increase or decrease, depending on a number of factors, including future changes in benefits, investment returns, and the assumptions used to calculate the liability. The current underfunded status of the U.S. defined benefit plans requires us to notify the Pension Benefit Guaranty Corporation (“PBGC”) of certain “reportable events” (within the meaning of ERISA), including if we pay certain extraordinary dividends. Under Title IV of ERISA, the PBGC has the authority under certain circumstances or upon the occurrence of certain events to terminate an underfunded pension plan. One such circumstance is the occurrence of an event that unreasonably increases the risk of unreasonably large losses to the PBGC. We believe it is unlikely that the PBGC would terminate any of our plans, which would result in our incurring a liability to the PBGC that could be equal to the entire amount of the underfunding. However, in the event we increase our indebtedness and/or pay an extraordinary dividend, the PBGC could enter into a negotiation with us that could cause us to materially increase or accelerate our funding obligations under our U.S. defined benefit pension plans. The occurrence of either of those actions could have an adverse effect on our financial condition, results of operations and ability to satisfy our obligations under our indebtedness.

We are subject to risks relating to our information technology systems.

Our global operations are managed through numerous information technology systems, some of which are managed by third parties, which we rely on to effectively manage our business, data, accounting, financial reporting, communications, supply chain, order entry and fulfillment and other business processes. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, as well as personally identifiable information of our employees, in data centers and on information technology networks. If these systems or networks are damaged or cease to function properly, we may suffer an interruption in our ability to manage and operate the business which may have a material adverse effect on our financial condition and results of operations. Cyber security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks.

Despite security measures and business continuity plans, our information systems and networks may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors or malfeasance by employees and others who have access to our systems and networks or other disruptions, including as a result of natural disasters or other catastrophic events. The occurrence of any of these events could compromise our systems or networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or loss of information could result in legal claims or proceedings, liability or regulatory penalties under privacy laws, or could disrupt our operations, cause us to lose

business and reduce the competitive advantage we hope to derive from our investment in new or proprietary business initiatives.

We are continually modifying and enhancing our information systems and technology to increase safety, productivity and efficiency, and to ensure that we are protected against and are able to remediate evolving cyber-threats. As new systems and technologies are implemented, we could experience unanticipated difficulties resulting in unexpected costs and adverse impacts to our manufacturing and other business processes. When implemented, the information systems and technology may not provide the benefits anticipated and could add costs and complications to ongoing operations, which may have a material adverse effect on our reputation, financial condition and results of operations.

Changes in applicable domestic or foreign tax laws and regulations or disputes with taxing authorities could adversely affect our business, financial condition and profitability by increasing our tax liabilities and tax compliance costs.

The Company is subject to income taxes in the United States and various foreign jurisdictions. Changes in applicable domestic or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, or disputes with taxing authorities, could affect the Company’s business, financial condition and profitability by increasing our tax liabilities and tax compliance costs. The Company’s future results of operations could be adversely affected by changes in its effective tax rate as a result of a change in the mix of earnings in jurisdictions with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation and rates, changes in generally accepted accounting principles and changes in the valuation of deferred tax assets and liabilities. In particular, the Tax Cuts and Jobs Act (H.R. 1), which was signed into law on December 22, 2017, made extensive changes to the U.S. tax laws and, among other things, limits our annual deduction for business interest expense to an amount equal to 30% of our “adjusted taxable income” (as defined in the Code) for the taxable year. We expect to be significantly impacted by the limitation on the deductibility of business interest expense, though we expect to offset this impact through utilization of our net operating losses.

Our internal controls over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur.

Each quarter, our chief executive officer and chief financial officer evaluate our internal controls over financial reporting and our disclosure controls and procedures, which includes a review of the objectives, design, implementation and effect of the controls relating to the information generated for use in our financial reports. In the course of our controls evaluation, we seek to identify data errors or control problems and to confirm that appropriate corrective action, including process improvements, are being undertaken. The overall goals of these various evaluation activities are to monitor our internal controls over financial reporting and our disclosure controls and procedures and to make modifications as necessary. Our intent in this regard is that our internal controls over financial reporting and our disclosure controls and procedures will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be satisfied. These inherent limitations include the possibility that judgments in our decision-making could be faulty, and that isolated breakdowns could occur because of simple human error or mistake. We cannot provide absolute assurance that all possible control issues within our company have been detected. The design of our system of controls is based in part upon certain assumptions about the likelihood of events, and there can be no assurance that any design will succeed absolutely in achieving our stated goals. Because of the inherent limitations in any control system, misstatements could occur and not be detected. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide reliable financial reports could harm our business.

Risks Related to Our Indebtedness

Our substantial leverage and debt service obligations could adversely affect our financial condition and restrict our operating flexibility.

We have substantial consolidated debt and, as a result, significant debt service obligations. As of December 31, 2019, our total consolidated indebtedness was $2.0 billion, excluding $25.4 million of outstanding letters of credit. We also would have had the ability to borrow up to $290.8 million under the ABL Facility. Aleris Zhenjiang has a $58.8 million (on a U.S. dollar equivalent subject to exchange rate fluctuations) revolving credit facility, none of which was borrowed at December 31, 2019. Aleris Zhenjiang is an unrestricted subsidiary and non-guarantor under the indenture governing the $400.0 million aggregate principal amount of the 10.75% senior secured junior priority notes due 2023 (the “2023 Junior Priority Notes”) and the credit agreement governing the senior secured first-lien term loan in an aggregate principal amount of $1,100 million (the “Term Loan Facility”).

Our substantial level of debt and debt service obligations could have important consequences, including the following:


▪	making it more difficult for us to satisfy our obligations with respect to our indebtedness, which could result in an event of default under the indenture governing the 2023 Junior Priority Notes and the agreements governing our other indebtedness;


▪	limiting our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements;


▪	increasing our vulnerability to general economic downturns, competition and industry conditions, which could place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore we may be unable to take advantage of opportunities that our leverage prevents us from exploiting;


▪	exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under the ABL Facility and the Term Loan Facility, are at variable rates of interest;


▪	exposing our cash flows to changes in floating rates of interest such that an increase in floating rates could negatively impact our cash flows;


▪	imposing additional restrictions on the manner in which we conduct our business under financing documents, including restrictions on our ability to pay dividends, make investments, incur additional debt and sell assets; and


▪	reducing the availability of our cash flows to fund our working capital requirements, capital expenditures, acquisitions, investments, other debt obligations and other general corporate requirements, because we will be required to use a substantial portion of our cash flows to service debt obligations.

The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations, cash flows and ability to satisfy our obligations under our indebtedness.

The ABL Facility matures on the earliest of (x) June 25, 2023, (y) the date that is 60 days prior to the scheduled maturity date of the term loans under the Term Loan Facility or (z) the date that is 60 days prior to the scheduled maturity date of the 2023 Junior Priority Notes, the 2023 Junior Priority Notes mature on July 15, 2023 and the Term Loan Facility matures on February 27, 2023. On or before the applicable maturity dates, we will need to refinance such indebtedness, which we may seek to refinance at any time. We cannot assure you the timing of any potential refinancing, that we will be able to access the capital or credit markets or refinance any of our indebtedness on attractive terms on or before maturity or on commercially reasonable terms or at all.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness, including secured indebtedness, in the future. Although the credit agreement governing the ABL Facility and the indenture governing the 2023 Junior Priority Notes and the credit agreement governing the Term Loan Facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and any indebtedness incurred in compliance with these restrictions could be substantial. Aleris International’s ability to borrow under the ABL Facility will remain limited by the amount of the borrowing base. In addition, the credit agreement governing the ABL Facility, the indenture governing the Junior Priority Notes and the credit agreement governing the Term Loan Facility allow Aleris International to incur a significant amount of indebtedness in connection with acquisitions and a significant amount of purchase money debt and foreign subsidiary debt. If new debt is added to our and/or our subsidiaries’ current debt levels, the related risks that we and they face would be increased.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt obligations could harm our business, financial condition and results of operations.

Our ability to satisfy our debt obligations will primarily depend upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments to satisfy our debt obligations. Included in such factors are the requirements, under certain scenarios, of our counterparties that we post cash collateral to maintain our hedging positions and the timing and costs of current and future capital expenditure projects. In addition, LME price declines, by reducing the borrowing base, could limit availability under the ABL Facility and further constrain our liquidity.

If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the condition of the capital and credit markets and our financial condition at such time. Any refinancing of our debt could be at higher interest

rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the credit agreement governing the ABL Facility and the indenture governing the 2023 Junior Priority Notes and the credit agreement governing the Term Loan Facility, may restrict us from adopting some of these alternatives, which in turn could exacerbate the effects of any failure to generate sufficient cash flow to satisfy our debt obligations. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms.

Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations at all or on commercially reasonable terms, would have an adverse effect, which could be material, on our business, financial condition and results of operations, may restrict our current and future operations, particularly our ability to respond to business changes or to take certain actions, and would have an adverse effect on our ability to satisfy our debt service obligations.

The terms of the ABL Facility, the indenture governing the 2023 Junior Priority Notes and the credit agreement governing the Term Loan Facility may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

The credit agreement governing the ABL Facility, the indenture governing the 2023 Junior Priority Notes and the credit agreement governing the Term Loan Facility contain, and the terms of any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interests. The credit agreement governing the ABL Facility, the indenture governing the 2023 Junior Priority Notes and the credit agreement governing the Term Loan Facility include covenants that, among other things, restrict the ability of Aleris International and certain of its subsidiaries’ to:


▪	incur additional indebtedness;


▪	pay dividends on capital stock and make other restricted payments;


▪	make investments and acquisitions;


▪	engage in transactions with our affiliates;


▪	sell assets;


▪	merge or consolidate with other entities; and


▪	create liens.

In addition, Aleris International’s ability to borrow under the ABL Facility is limited by a borrowing base. Under certain circumstances, the ABL Facility requires Aleris International to comply with a minimum fixed charge coverage ratio and may require Aleris International to reduce its debt or take other actions in order to comply with this ratio. See Note 10, “Long-Term Debt,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K for further details. Moreover, the ABL Facility provides discretion to the agent bank acting on behalf of the lenders to impose additional availability and other reserves, which could materially impair the amount of borrowings that would otherwise be available to Aleris International. There can be no assurance that the agent bank will not impose such reserves or, were it to do so, that the resulting impact of this action would not materially and adversely impair our liquidity.

A breach of any of these provisions could result in a default under the ABL Facility, the indenture governing the 2023 Junior Priority Notes or the credit agreement governing the Term Loan Facility, as the case may be, that would allow lenders or noteholders, as applicable, to declare the applicable outstanding debt immediately due and payable. If we are unable to pay those amounts because we do not have sufficient cash on hand or are unable to obtain alternative financing on acceptable terms, the lenders or noteholders, as applicable, could initiate a bankruptcy proceeding or proceed against any assets that serve as collateral to secure such debt. The lenders under the ABL Facility will also have the right in these circumstances to terminate any commitments they have to provide further borrowings.

These restrictions could limit our ability to obtain future financings, make needed capital expenditures, withstand future downturns in our business or the economy in general or otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of limitations imposed on Aleris International and its subsidiaries by the restrictive covenants under the ABL Facility the 2023 Junior Priority Notes and the Term Loan Facility.

We may be adversely affected by changes in LIBOR reporting practices or the method by which LIBOR is determined.

In July 2017, the Financial Conduct Authority (“FCA”) that regulates the London Interbank Offered Rate (“LIBOR”) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR in derivatives and other financial contracts. We are not able to predict when LIBOR may be limited or discontinued or when there will be sufficient liquidity in the SOFR market. As of December 31, 2019, we had $1,373.5 million of debt that was indexed to LIBOR. We are

monitoring and evaluating the risks related to potential changes in LIBOR availability, which include potential changes in interest paid on debt and amounts received and paid on interest rate swaps. In addition, the value of debt or derivative instruments tied to LIBOR could also be impacted when LIBOR is limited or discontinued and contracts must be transitioned to a new alternative rate. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty. If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts is likely to vary by contract.

While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that time. This could occur, for example, if a sufficient number of banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate would be accelerated and/or magnified. Any of these events could have an adverse effect on our financing costs, and as a result, our financial condition, operating results and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

Our production and manufacturing facilities are listed below by reportable segment.



Reportable Segment	Location	Owned / Leased

North America	Clayton, New Jersey	Owned
	Buckhannon, West Virginia	Owned
	Ashville, Ohio	Owned
	Richmond, Virginia	Owned
	Uhrichsville, Ohio	Owned
	Lewisport, Kentucky	Owned
	Davenport, Iowa (1)	Owned
	Lincolnshire, Illinois	Owned

Europe	Duffel, Belgium	Owned
	Koblenz, Germany	Owned
	Voerde, Germany	Owned

Asia Pacific	Zhenjiang, PRC	Granted Land Rights

(1)Two facilities at this location.

The following table presents the average operating rates for each of our three operating segments’ facilities for the years ended December 31, 2019, 2018 and 2017:



	For the years ended December 31,
Segment	2019	2018	2017
North America	78%	80%	70%
Europe	84	89	86
Asia Pacific	97	97	84

The Zhenjiang rolling mill is located in Zhenjiang City, Jiangsu Province in China and has been granted a 50 year right to occupy the land on which the factory resides.

Our Cleveland, Ohio corporate facility houses our principal executive offices, as well as our offices for North America, and we currently lease approximately 57,419 square feet for those purposes.

We believe that our facilities are suitable and adequate for our operations.

ITEM 3. LEGAL PROCEEDINGS.

We are a party from time to time to what we believe are routine litigation and proceedings considered part of the ordinary course of our business. We believe that the outcome of such existing proceedings would not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is privately held. There is no established public trading market for our common stock.

Holders

As of February 15, 2020, there were 206 holders of our common stock.

Dividends

In connection with the 2015 sale of our former recycling and specification alloys business, we received shares of Real Industry Inc.’s Series B non-participating preferred stock. In 2017, Real Industry, Inc. filed for Chapter 11 bankruptcy protection. In the second quarter of 2018, the bankruptcy reorganization was finalized, and we received shares of Elah Holdings, Inc.’s (the reorganized company) common stock in exchange for the Series B non-participating preferred stock, with an estimated fair value of $11.1 million. Upon receipt of such common stock, on May 22, 2018, we declared a special property dividend and these shares were distributed pro rata to our stockholders. In addition, dividend equivalent right payments of approximately $0.2 million were paid in cash to holders of unvested restricted stock units.

We do not intend to pay any cash dividends on our common stock for the foreseeable future and instead may retain earnings, if any, for future operation and expansion and debt repayment. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant.

We depend on our subsidiaries for cash and unless we receive dividends, distributions, advances, transfers of funds or other cash payments from our subsidiaries, we will be unable to pay any cash dividends on our common stock in the future. However, none of our subsidiaries are obligated to make funds available to us for payment of dividends. Further, the Term Loan Facility, the ABL Facility, the indentures governing the 2023 Junior Priority Notes and the China Loan Facility (as defined in Item 7 below) contain a number of covenants that, among other things and subject to certain exceptions, restrict the ability of our subsidiaries to pay dividends on their capital stock and make other restricted payments. See Item 7. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for further details of the Term Loan Facility, the ABL Facility, the 2023 Junior Priority Notes and the China Loan Facility.

Securities Authorized for Issuance Under Equity Compensation Plans

For information on the Aleris Corporation 2010 Equity Compensation Plan, see Item 11. – “Executive Compensation – Equity compensation plan information.”

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 6. SELECTED FINANCIAL DATA.

The following table presents the selected historical financial and other operating data of the Company derived from our consolidated financial statements. The audited consolidated statements of operations, consolidated statements of comprehensive loss, consolidated statements of cash flows and consolidated statements of changes in stockholders’ equity (deficit) for the years ended December 31, 2019, 2018 and 2017 and the audited consolidated balance sheet as of December 31, 2019 and 2018 are included elsewhere in this annual report on Form 10-K. See Item 8. – “Financial Statements and Supplementary Data.”

We have reported the recycling and specification alloys and extrusions businesses as discontinued operations for all periods presented, and reclassified the results of operations of these businesses into a single caption on the accompanying Consolidated Statements of Operations as “Income from discontinued operations, net of tax.” Except as otherwise indicated, the discussion of the Company’s business and financial information throughout this annual report on Form 10-K refers to the Company’s continuing operations and the financial position and results of operations of its continuing operations, while the

presentation and discussion of our cash flows for the year ended December 31, 2015 reflects the combined cash flows from our continuing and discontinued operations.

The following information should be read in conjunction with, and is qualified by reference to, our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated audited financial statements and the notes included elsewhere in this annual report on Form 10-K, as well as other financial information included in this annual report on Form 10-K.



(Dollars in millions, metric tons in thousands)	For the years ended December 31,
	2019			2018			2017			2016			2015
Statement of Operations Data (a):
Revenues	$	3,375.9		$	3,445.9		$	2,857.3		$	2,633.9		$	2,917.8
Operating income (loss)	180.6			110.2			(11.1		)	54.7			(8.3		)
Income (loss) from continuing operations before income taxes	19.5			(73.1		)	(174.0		)	(32.3		)	(95.0		)
Net (loss) income attributable to Aleris Corporation	(11.8		)	(91.6		)	(210.6		)	(75.6		)	48.7
Balance Sheet Data (at end of period) (a):
Cash and cash equivalents	$	54.6		$	108.6		$	102.4		$	55.6		$	62.2
Total assets	2,712.2			2,779.4			2,644.4			2,389.9			2,160.5
Total debt	1,957.4			1,928.3			1,780.5			1,466.2			1,118.3
Total Aleris Corporation stockholders’ (deficit) equity (b)	(61.2		)	(27.1		)	92.7			216.6			327.2

Other Financial Data:
Net cash provided (used) by:
Operating activities	$	46.7		$	22.3		$	(31.4	)	$	12.0		$	119.5
Investing activities	(126.7		)	(110.2		)	(210.7		)	(354.6		)	273.7
Financing activities	27.1			97.7			290.5			338.1			(359.9		)
Depreciation and amortization	142.6			139.7			115.7			104.9			123.8
Capital expenditures	(125.7		)	(108.2		)	(207.7		)	(358.1		)	(313.6		)

Other Data (a):
Metric tons of finished product shipped:
North America	517.4			517.5			462.0			484.3			492.8
Europe	310.8			330.4			317.3			326.7			313.6
Asia Pacific	35.1			29.4			26.9			22.2			21.8
Intra-entity shipments	(5.3		)	(4.7		)	(6.6		)	(6.1		)	(5.8		)
Total	858.0			872.6			799.6			827.1			822.4


(a)	As a result of the divestitures of the recycling and specification alloys and extrusions businesses in 2015, the Company has presented the results of operations and financial position of these former businesses as discontinued operations for all periods presented.


(b)	We paid $11.3 million in dividends to our stockholders during the year ended December 31, 2018, $11.1 million of which was in the form of a special property dividend.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our operations as well as the industry in which we operate. This discussion should be read in conjunction with our audited consolidated financial statements and notes and other financial information appearing elsewhere in this annual report on Form 10-K. Our discussions of our financial condition and results of operations also include various forward-looking statements about our industry, the demand for our products and services and our projected results. These statements are based on certain assumptions that we consider reasonable. For more information about these assumptions and other risks relating to our businesses and our Company, you should refer to Item 1A. – “Risk Factors.”

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us and the industry in which we operate and beliefs and assumptions made by our management. Statements contained in this annual report that are not historical in nature are considered to be forward-looking statements. They include statements regarding the Merger and our expectations, hopes, beliefs, estimates, intentions or strategies regarding the future. Statements regarding future costs and prices of commodities, production volumes, industry trends, anticipated cost savings, anticipated benefits from new products, facilities, acquisitions or divestitures, projected results of operations,

achievement of production efficiencies, capacity expansions, future prices and demand for our products and estimated cash flows and sufficiency of cash flows to fund operations, capital expenditures and debt obligations, as well as statements regarding trade cases, tariffs and other future governmental actions, are forward-looking statements. The words “may,” “could,” “would,” “should,” “will,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “look forward to,” “intend” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements should be read in conjunction with the cautionary statements and other important factors included in this annual report under “Business,” “Risk Factors,” and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which include descriptions of important factors which could cause actual results to differ materially from those contained in the forward-looking statements. Our expectations, beliefs and projections are expressed in good faith, and we believe we have a reasonable basis to make these statements through our management’s examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that our management’s expectations, beliefs or projections will result or be achieved.

Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in or implied by any forward-looking statement. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:


▪	our ability to successfully implement our business strategy;


▪	the success of past and future acquisitions or divestitures;


▪	the cyclical nature of the aluminum industry, material adverse changes in the aluminum industry or our end-uses, such as global and regional supply and demand conditions for aluminum and aluminum products, and changes in our customers’ industries;


▪	increases in the cost, or limited availability, of raw materials and energy;


▪	our ability to enter into effective metal, energy and other commodity derivatives or arrangements with customers to manage effectively our exposure to commodity price fluctuations and changes in the pricing of metals, especially LME-based aluminum prices;


▪	our ability to generate sufficient cash flows to fund our operations and capital expenditure requirements and to meet our debt obligations;


▪	competitor pricing activity, competition of aluminum with alternative materials and the general impact of competition in the industry end-uses we serve;


▪	our ability to retain the services of certain members of our management;


▪	the loss of order volumes from any of our largest customers;


▪	our ability to retain customers, a substantial number of whom do not have long-term contractual arrangements with us;


▪	risks of investing in and conducting operations on a global basis, including political, social, economic, currency and regulatory factors (such as the outbreak of COVID-19);


▪	variability in general economic and political conditions on a global or regional basis;


▪	current environmental liabilities and the cost of compliance with and liabilities under health and safety laws;


▪	labor relations (i.e., disruptions, strikes or work stoppages) and labor costs;


▪	our internal controls over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur;


▪	our levels of indebtedness and debt service obligations, including changes in our credit ratings, material increases in our cost of borrowing or the failure of financial institutions to fulfill their commitments to us under committed facilities;


▪	our ability to access credit or capital markets;


▪	the possibility that we may incur additional indebtedness in the future;


▪	limitations on operating our business and incurring additional indebtedness as a result of covenant restrictions under our indebtedness, and our ability to pay amounts due under our outstanding indebtedness; and


▪	risks related to the Merger, including the possibility that the Merger may not be consummated.

The above list is not exhaustive. Some of these factors and additional risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from those expressed or implied in our written or oral forward-looking statements may be found under “Risk Factors” contained in this annual report.

These factors and other risk factors disclosed in this annual report and elsewhere are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected

consequences to, or effects on, us. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

The forward-looking statements contained in this annual report are made only as of the date of this annual report. Except to the extent required by law, we do not undertake, and specifically decline any obligation, to update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.

Basis of Presentation

The financial information included in this annual report on Form 10-K represents our consolidated financial position as of December 31, 2019 and 2018 and our consolidated results of operations and cash flows for the years ended December 31, 2019, 2018 and 2017.

Overview

This overview summarizes our MD&A, which includes the following sections:


▪	Our Business – a general description of our operations, recent strategic initiatives, the aluminum industry, our critical measures of financial performance and our operating segments;


▪	Fiscal 2019 Summary and Outlook – a discussion of the key financial highlights for 2019, as well as material trends and uncertainties that may impact our business in the future;


▪	Results of Operations – an analysis of our consolidated and segment operating results and production for the years presented in our consolidated financial statements;


▪	Liquidity and Capital Resources – an analysis and discussion of our cash flows and current sources of capital;


▪	Non-GAAP Financial Measures – an analysis and discussion of key financial performance measures, including EBITDA, Adjusted EBITDA and commercial margin, as well as reconciliations to the applicable generally accepted accounting principles in the United States of America (“GAAP”) performance measures;


▪	Exchange Rates – a discussion of our subsidiaries’ functional currencies and the related currency translation adjustments;


▪	Contractual Obligations – a summary of our estimated significant contractual cash obligations and other commercial commitments at December 31, 2019;


▪	Environmental Contingencies – a summary of environmental laws and regulations that govern our operations; and


▪	Critical Accounting Policies and Estimates – a discussion of the accounting policies that require us to make estimates and judgments.

Potential Acquisition of Aleris Corporation

Our Business

We are a global leader in the manufacture and sale of aluminum rolled products, with 13 production facilities located throughout North America, Europe and China. Our product portfolio ranges from the most technically demanding heat treated plate and sheet used in mission-critical applications to sheet produced through our low-cost continuous cast process. We possess a combination of technically advanced, flexible and low-cost manufacturing operations supported by an industry-leading research and development (“R&D”) platform. Our facilities are strategically located to serve our customers globally. Our diversified customer base includes a number of industry-leading companies in the aerospace, automotive, truck trailer and building and construction end-uses. Our technological and R&D capabilities allow us to produce the most technically demanding products, many of which require close collaboration and, in some cases, joint development with our customers.

London Metal Exchange (“LME”) aluminum prices and regional premium differentials (referred to as “Midwest Premium” in the U.S. and “Rotterdam Premium” in Europe) serve as the pricing mechanisms for both the aluminum we purchase and the products we sell. In addition, we depend on scrap for our operations, which is typically priced in relation to prevailing LME prices, but may also be priced at a discount to LME aluminum (depending upon the quality of the material

supplied). Aluminum and other metal costs represented approximately 66% of our costs of sales for the year ended December 31, 2019. Aluminum prices are determined by worldwide forces of supply and demand, and, as a result, aluminum prices are volatile. Average LME aluminum prices per ton for the years ended December 31, 2019, 2018 and 2017 were $1,792, $2,110 and $1,968, respectively. Average LME aluminum prices per ton in 2019 were approximately 15% lower than 2018. As our invoiced prices are, in most cases, established months prior to physical delivery, the impact of aluminum price changes on our revenues may not correspond to LME and regional premium price changes for the applicable period.

Our business model strives to reduce the impact of aluminum price fluctuations on our financial results and protect and stabilize our margins, principally through pass-through pricing (market-based aluminum price plus a conversion fee) and derivative financial instruments.

As a result of using LME aluminum prices and regional premium differentials to both buy our raw materials and to sell our products, we are able to pass through aluminum price changes in the majority of our commercial transactions. Consequently, while our revenues can fluctuate significantly as aluminum prices change, we would expect the impact of these price changes on our profitability to be less significant. Approximately 88% of our sales for the year ended December 31, 2019 were generated from aluminum pass-through arrangements. In addition to using LME prices and regional premiums to establish our invoice prices to customers, we use derivative financial instruments to further reduce the impacts of changing aluminum prices. Derivative financial instruments are entered into at the time fixed prices are established for aluminum purchases or sales, on a net basis, and allow us to fix the margin to be realized on our long-term contracts and on short-term contracts where selling prices are not established at the same time as the physical purchase price of aluminum. However, as we have elected not to account for our derivative financial instruments as hedges for accounting purposes, changes in the fair value of our derivative financial instruments are included in our results of operations immediately. These changes in fair value (referred to as “unrealized gains and losses”) can have a significant impact on our pre-tax income in the same way LME aluminum and regional premium prices can have a significant impact on our revenues. In assessing the performance of our operating segments, we exclude these unrealized gains and losses, electing to include them only at the time of settlement to better match the period in which the underlying physical purchases and sales affect earnings.

Although our business model strives to reduce the impact of aluminum price fluctuations on our financial results, it cannot eliminate the impact completely. For example, as discussed in further detail below, at times the profitability of our North America segment is impacted by changes in scrap aluminum prices whose movement may not be correlated to movements in LME prices. Furthermore, certain segments are exposed to variability in the previously mentioned regional premium differentials charged by industry participants to deliver aluminum from the smelter to the manufacturing facility. This premium differential fluctuates in relation to several conditions, including the extent of warehouse financing transactions, which limit the amount of physical metal flowing to consumers and increase the price differential as a result. In addition to impacting the price we pay for the raw materials we purchase, our customers may be reluctant to place orders with us during times of uncertainty in the pricing of the Midwest Premium or Rotterdam Premium.

For additional information on the key factors impacting our profitability, see “– Critical Measures of Our Financial Performance” and “– Our Segments,” below.

The Aluminum Industry

Critical Measures of Our Financial Performance

The financial performance of our operating segments is the result of several factors, the most critical of which are as follows:


▪	volumes;


▪	commercial margins; and


▪	cash conversion costs.

The financial performance of our business is determined, in part, by the volume of metric tons shipped and processed. Increased production volume will result in lower per unit costs, while higher shipped volumes will result in additional revenue and associated margins. As a significant component of our revenue is derived from aluminum prices that we generally pass through to our customers, we measure the performance of our segments based upon a percentage of commercial margin and commercial margin per ton in addition to a percentage of revenue and revenue per ton. Commercial margin removes the hedged cost of the metal we purchase and metal price lag (as defined below) from our revenue. Commercial margins capture the value-added components of our business and are impacted by factors, including rolling margins (the fee we charge to convert aluminum), product yields from our manufacturing process, the value-added mix of products sold and scrap spreads, which management are able to influence more readily than aluminum prices and, therefore, provide another basis upon which certain elements of our segments’ performance can be measured.

Although our conversion fee-based pricing model is designed to reduce the impact of changing primary aluminum prices, we remain susceptible to the impact of these changes and changes in regional premium differentials on our operating results. This exposure exists because of changes in metal prices during the period of time between the pricing of our metal purchases, the holding and processing of the metal, and the pricing of the finished product for sale to our customer. As we typically purchase metal prior to having a fixed selling price, and value our inventories under the first-in, first-out method, this lag will, generally, increase our earnings in times of rising aluminum prices and decrease our earnings in times of declining aluminum prices.

Our exposure to changing primary aluminum prices and premium differentials, both in terms of liquidity and operating results, is greater for fixed price sales contracts and other sales contracts where aluminum price changes are not able to be passed along to our customers. In addition, our operations require that a significant amount of inventory be kept on hand to meet future production requirements. This base level of inventory is also susceptible to changing primary aluminum prices and regional premium differentials to the extent it is not committed to fixed price sales orders.

In order to reduce these exposures, we focus on reducing working capital and offsetting future physical purchases and sales. We also use various derivative financial instruments designed to reduce the impact of changing primary aluminum prices on these net physical purchases and sales and on inventory for which a fixed sale price has not yet been determined. Our risk management practices reduce but do not eliminate our exposure to changing primary aluminum prices. In addition, exchanges have only recently begun to offer derivative financial instruments to hedge premium differentials. These markets are becoming more liquid and we are beginning to use these markets in our risk management practices. At this time, however, derivative financial instruments are not available to effectively hedge against changing scrap prices. While we have limited our exposure to unfavorable aluminum price changes, we have also limited our ability to benefit from favorable price changes. Further, our counterparties may require that we post cash collateral if the fair value of our derivative liabilities exceed the amount of credit granted by each counterparty, thereby reducing our liquidity. At December 31, 2019, no cash collateral was posted. At December 31, 2018, $0.2 million of cash collateral was posted.

We refer to the estimated difference between the price of aluminum included in our revenues and the price of aluminum impacting our cost of sales, net of realized gains and losses from our hedging activities, as “metal price lag.” The aluminum price used in the metal price lag calculation for all segments includes the regional premium. Metal price lag will, generally, increase our earnings and net income and loss before interest, taxes, depreciation and amortization and income from discontinued operations, net of tax (“EBITDA”) in times of rising aluminum prices and decrease our earnings and EBITDA in times of declining aluminum prices. We seek to reduce this impact through the use of derivative financial instruments. We exclude metal price lag from our determination of Adjusted EBITDA because it is not an indicator of the performance of our underlying operations. We also exclude the impact of metal price lag from our measurement of commercial margin to more closely align the metal prices inherent in our sales prices to those included in our cost of sales.

In addition to rolling margins and product mix, commercial margins are impacted by the differences between changes in the prices of primary and scrap aluminum, as well as the availability of scrap aluminum, particularly in our North America segment where aluminum scrap is used more frequently than in our European and Asia Pacific operations. As we price our product using the prevailing price of primary aluminum but purchase large amounts of scrap aluminum to produce our products, we benefit when primary aluminum price increases exceed scrap price increases. Conversely, when scrap price increases exceed primary aluminum price increases, our commercial margin will be negatively impacted. The difference

between the price of primary aluminum and scrap prices is referred to as the “scrap spread” and is impacted by the effectiveness of our scrap purchasing activities, the supply of scrap available and movements in the terminal commodity markets, such as the price of aluminum.

Our operations are labor intensive and also require a significant amount of energy (primarily natural gas and electricity) be consumed to melt scrap or primary aluminum and to re-heat and roll aluminum slabs into rolled products. As a result, we incur a significant amount of fixed and variable labor and overhead costs which we refer to as conversion costs. Conversion costs excluding depreciation expense, or cash conversion costs, on a per ton basis are a critical measure of the effectiveness of our operations.

Commercial margin, EBITDA and Adjusted EBITDA are non-GAAP financial measures that have limitations as analytical tools and should be considered in addition to, and not in isolation, or as a substitute for, or as superior to, our measures of financial performance prepared in accordance with GAAP. For additional information regarding non-GAAP financial measures, see “-Non-GAAP Financial Measures.”

Our Segments

In addition to analyzing our consolidated operating performance based upon revenues and Adjusted EBITDA, we measure the performance of our operating segments using segment income, segment Adjusted EBITDA and commercial margin. Segment income includes gross profits, segment specific realized gains and losses on derivative financial instruments, segment specific other income and expense, segment specific selling, general and administrative (“SG&A”) expenses and an allocation of certain functional SG&A expenses. Segment income excludes provisions for and benefits from income taxes, restructuring items, interest, depreciation and amortization, unrealized and certain realized gains and losses on derivative financial instruments, corporate general and administrative costs, start-up costs, gains and losses on asset sales, currency exchange gains and losses on debt and certain other gains and losses. Intra-entity sales and transfers are recorded at market value. Consolidated cash, restricted cash, net capitalized debt costs, deferred tax assets and assets related to our headquarters offices are not allocated to the segments.

Segment Adjusted EBITDA eliminates from segment income the impact of metal price lag. Commercial margin represents revenues less the hedged cost of metal, or the raw material costs included in our cost of sales, net of the impact of our hedging activities and the effects of metal price lag. Segment Adjusted EBITDA and commercial margin are non-GAAP financial measures that have limitations as analytical tools and should be considered in addition to, and not in isolation, or as a substitute for, or as superior to, our measures of financial performance prepared in accordance with GAAP. Management uses segment Adjusted EBITDA in managing and assessing the performance of our business segments and overall business and believes that segment Adjusted EBITDA provides investors and other users of our financial information with additional useful information regarding the ongoing performance of the underlying business activities of our segments, as well as comparisons between our current results and results in prior periods. Management also uses commercial margin as a performance metric and believes that it provides useful information regarding the performance of our segments because it measures the estimated price at which we sell our aluminum products above the hedged cost of the metal and the effects of metal price lag, thereby reflecting the value-added components of our commercial activities independent of aluminum prices which we cannot control.

For additional information regarding non-GAAP financial measures, see “—Non-GAAP Financial Measures.”

North America

Our North America segment consists of nine manufacturing facilities located throughout the United States that produce rolled aluminum and coated products for the building and construction, automotive, truck trailer, consumer durables, other general industrial and distribution end-uses. Substantially all of our North America segment’s products are manufactured to specific customer requirements, using continuous cast and direct-chill technologies that provide us with significant flexibility to produce a wide range of products. Specifically, those products are integrated into, among other applications, building products, automobiles, truck trailers, gutters, appliances and recreational vehicles.

We have substantially completed our project to add autobody sheet (“ABS”) capabilities at our aluminum rolling mill in Lewisport, Kentucky (the “North America ABS Project”). We have invested approximately $425.0 million to build a new wide cold mill, two continuous annealing lines with pre-treatment (each, a “CALP”) and an automotive innovation center. We have also invested in upgrades to other key equipment at this facility, including upgrading our ingot scalper and pre-heating furnaces and widening the hot mill, to capture additional opportunities. We believe the investments position us to meet significant growth in demand for ABS in North America as the automotive industry pursues broader aluminum use for the production of lighter, more fuel-efficient vehicles.

Key operating and financial information for the segment is presented below:



	For the years ended December 31,
	2019			2018			2017
North America	(dollars in millions, except per ton measures, volume in thousands of tons)
Metric tons of finished product shipped	517.4			517.5			462.0

Revenues	$	1,935.0		$	1,915.7		$	1,467.8
Hedged cost of metal	(1,043.9		)	(1,127.8		)	(895.7		)
(Favorable) unfavorable metal price lag	(2.9		)	(33.9		)	8.5
Commercial margin	$	888.2		$	754.0		$	580.6
Commercial margin per ton shipped	$	1,716.5		$	1,457.0		$	1,256.6

Segment income	$	259.8		$	196.0		$	88.0
(Favorable) unfavorable metal price lag	(2.9		)	(33.9		)	8.5
Segment Adjusted EBITDA (1)	$	257.0		$	162.1		$	96.5
Segment Adjusted EBITDA per ton shipped	$	496.6		$	313.2		$	208.8

Start-up costs	$	7.8		$	45.3		$	66.6


(1)	Amounts may not foot as they represent the calculated totals based on actual amounts and not the rounded amounts presented in this table.

Europe

Our Europe segment consists of two world-class aluminum rolling mills, one in Germany and the other in Belgium, and an aluminum cast house in Germany. The segment produces aerospace plate and sheet, ABS, clad brazing sheet (clad aluminum material used for, among other applications, vehicle radiators and HVAC systems), heat-treated plate for engineered product applications and industrial coil and sheet. Substantially all of our Europe segment’s products are manufactured to specific customer requirements using direct-chill ingot cast technologies that allow us to use and offer a variety of alloys and products for a number of technically demanding end-uses.

Key operating and financial information for the segment is presented below:



	For the years ended December 31,
	2019			2018			2017
Europe	(dollars in millions, except per ton measures, volume in thousands of tons)
Metric tons of finished product shipped	310.8			330.4			317.3

Revenues	$	1,275.9		$	1,407.4		$	1,300.7
Hedged cost of metal	(692.2		)	(810.7		)	(739.1		)
(Favorable) unfavorable metal price lag	(5.0		)	(1.0		)	0.3
Commercial margin	$	578.7		$	595.7		$	561.9
Commercial margin per ton shipped	$	1,862.1		$	1,797.3		$	1,771.0

Segment income	$	130.1		$	129.8		$	127.4
(Favorable) unfavorable metal price lag	(5.0		)	(1.0		)	0.3
Segment Adjusted EBITDA (1)	$	125.1		$	128.7		$	127.7
Segment Adjusted EBITDA per ton shipped	$	402.5		$	388.4		$	402.4


(1)	Amounts may not foot as they represent the calculated totals based on actual amounts and not the rounded amounts presented in this table.

Asia Pacific

Our Asia Pacific segment consists of the Zhenjiang rolling mill that produces technically demanding and value-added plate products for aerospace, semiconductor equipment, general engineering, distribution and other end-uses worldwide. Substantially all of our Asia Pacific segment’s products are manufactured to specific customer requirements using direct-chill ingot cast technologies that allow us to use and offer a variety of alloys and products principally for aerospace and also for a number of other technically demanding end-uses.

Key operating and financial information for the segment is presented below:



	For the years ended December 31,
	2019			2018			2017
Asia Pacific	(dollars in millions, except per ton measures, volume in thousands of tons)
Metric tons of finished product shipped	35.1			29.4			26.9

Revenues	$	186.6		$	148.8		$	122.3
Hedged cost of metal	(93.4		)	(78.9		)	(63.5		)
Favorable metal price lag	(1.3		)	(1.4		)	(2.4		)
Commercial margin	$	91.9		$	68.5		$	56.4
Commercial margin per ton shipped	$	2,619.0		$	2,326.7		$	2,101.0

Segment income	$	44.0		$	23.6		$	15.0
Favorable metal price lag	(1.3		)	(1.4		)	(2.4		)
Segment Adjusted EBITDA (1)	$	42.7		$	22.2		$	12.6
Segment Adjusted EBITDA per ton shipped	$	1,216.9		$	753.9		$	469.7

(1) Amounts may not foot as they represent the calculated totals based on actual amounts and not the rounded amounts presented in this table.

Fiscal 2019 Summary

Listed below are key financial highlights for the year ended December 31, 2019 as compared to 2018:

▪

Our 2019 revenues decreased $70.0 million, or 2%, due in part to the lower average price of aluminum included in our invoiced prices and the stronger average U.S. dollar that unfavorably impacted the translation of our Europe and Asia-Pacific based revenues. These decreases were partially offset by improved margins and a favorable mix of products sold that more than offset a 2% decrease in volumes. The improved mix of products sold resulted from an increase in global aerospace volumes, which benefited from improved demand patterns and growth in Asia Pacific, and an increase in global automotive volumes, resulting from increased shipments of autobody sheet from our Lewisport facility.


▪	Losses from continuing operations were $11.8 million in 2019 compared to $91.6 million in 2018. Contributing to the decreased loss in the current year were:


▪	a $112.1 million increase in Adjusted EBITDA;


▪	debt extinguishment costs of $48.9 million recorded in 2018, resulting from the debt refinancing, which did not recur in 2019; and


▪	a $47.4 million reduction in start-up costs, primarily related to labor and other expenses associated with the North America ABS Project. Substantially all of the costs previously considered start-up expense have been absorbed within Adjusted EBITDA, as discussed below.

These favorable changes were partially offset by the following:


▪	an unfavorable change of $57.9 million in unrealized gains on derivative financial instruments (a gain of $22.7 million in 2018 compared to a loss of $35.2 million in 2019);


▪	a $27.0 million unfavorable change in metal lag, net of realized derivative gains and losses;


▪	a $12.8 million increase in the tax provision;


▪	a $12.2 million gain recorded in 2018, as the Real Industry, Inc. bankruptcy reorganization was finalized and we received shares of Elah Holdings, Inc.’s (the reorganized company) common stock (which shares were distributed to our stockholders through a special property dividend) and cash considerations; and


▪	an $11.7 million increase in interest expense resulting from increased debt and decreased capitalized interest.


▪	Adjusted EBITDA was $388.1 million in 2019 compared to $276.0 million in the prior year. Improved rolling margins and favorable metal spreads increased Adjusted EBITDA approximately $104.0 million and an improved

mix of products sold increased Adjusted EBITDA approximately $37.0 million. These increases were partially offset by an unfavorable impact of approximately $32.0 million related to inflation and net productivity. Productivity was impacted by the ramp-up of automotive production and the higher cost structure of the Lewisport facility as we absorb costs previously considered start-up expense.


▪	Liquidity at December 31, 2019 was approximately $352.9 million, which consisted of $290.8 million of availability under Aleris International’s ABL Facility (as defined below), $54.6 million of cash and $7.5 million of cash restricted for payment of the China Loan Facility (as defined below).


▪	Capital expenditures increased to $125.7 million in 2019 from $108.2 million in the prior year.

Outlook

The following discusses trends impacting the major end uses we serve as well as the factors anticipated to have a significant impact on our 2020 performance:

Automotive

Aluminum usage in automotive applications continues to grow steadily as a result of efforts by original equipment manufacturers (“OEMs”) to reduce vehicle weight in order to meet government regulations targeted at reducing carbon emissions and increasing fuel efficiency. Ducker Worldwide estimates that aluminum content per light vehicle in North America will increase from 397 pounds in 2015 to 565 pounds by 2028 as shown below. In 2019, we saw a 37% year-over-year increase in global automotive volumes as a result of our new North America assets supplying our primary OEM customer under a multi-year agreement which was partly offset by demand softness in Europe due to lower vehicle production. Although the long-term prospects for increasing demand for aluminum in automotive applications, particularly ABS, remain positive, we expect a decrease in global automotive volumes in 2020 due to continued demand softness in Europe and customer right-sizing of inventories in North America. Additionally, we have faced difficulty in winning new ABS business in North America due to concerns from OEM customers as a result of the pending Merger with Novelis and the uncertainty of the regulatory review process.

* Source: July 2017 Ducker Worldwide

Aerospace

Aircraft order backlogs for Airbus and Boeing as of December 31, 2019 continue to remain at a very high level for the industry (see the aircraft backlog chart below). We believe the significant order backlog at these key OEMs will translate into growth in the future, and we believe our multi-year supply agreements have positioned us to benefit from future expected demand. However, in 2020, we may experience lower year-over-year volumes as a general increase in demand is expected to be somewhat offset by the negative impact of the grounding of the Boeing 737 MAX as well as potential disruption stemming from the impact of coronavirus disease 2019 (“COVID-19”) on global air travel. See Item 1A. – “Risk Factors – Risks Related to Our Business – Our business and operations, and the operations of our customers, may be adversely affected by epidemics and pandemics, such as the recent COVID-19 outbreak.”

* Source: Airbus and Boeing websites and build rate estimates (data as of December 31, 2019)

Building and Construction and Distribution

We are the largest supplier of aluminum sheet to the building and construction industry in North America and housing starts are expected to see another year of growth in 2020. According to the National Association of Home Builders (“NAHB”), single family housing starts in the United States are projected to grow from 894,000 in 2019 to 930,000 in 2020, representing growth of approximately 4%. In addition, the NAHB estimates that total housing starts in the U.S. will increase from approximately 1,298,000 in 2019 to 1,333,000 in 2020, representing growth of approximately 3%. This potential growth in housing starts may increase demand for our products in 2020.

We have made substantial progress in Lewisport through capital expenditures and operational excellence programs to increase our non-automotive product output, which could provide us additional volume opportunities with our North America distribution customers. However, we remain guarded on this opportunity due to a significant increase in imported metal which could impact our distribution volume opportunities, as well as lower rolling margins compared to 2019.

2020 Outlook

For 2020, we expect that segment income and Adjusted EBITDA will be lower than 2019. Volumes are expected to be higher compared to 2019 benefiting from improved U.S. housing industry conditions and higher distribution volumes in North America. However, increasing imports of common alloy products may limit our ability to realize additional distribution volumes and may also negatively impact rolling margins. These increases are expected to be partly offset by lower global aerospace volumes resulting from the grounding of the Boeing 737 MAX. We also expect lower global automotive volumes based on continued demand softness in Europe and customer right-sizing of inventories in North America. Additionally, we are expecting increased productivity and improved operating efficiency in all three operating segments. We expect full year capital expenditures of approximately $140 million to $150 million. As a result of these factors, along with working capital improvements expected to be realized as our Lewisport facility’s operations stabilize following the completion of the North America ABS Project, we expect to generate positive cash flow in 2020.

We estimate that first quarter 2020 segment income and Adjusted EBITDA will be lower than the first quarter of 2019. Factors influencing anticipated first quarter 2020 performance include:


▪	Global aerospace shipments are expected to be slightly down as prior year volumes benefited from the timing of our annual maintenance outages in Koblenz and we executed a first quarter 2020 expansion-related outage in Zhenjiang;


▪	North America automotive volumes are expected to decrease as a result of customer right-sizing inventories following a 2019 labor disruption in the automotive supply chain;


▪	Softer European automotive production and industrial activity will continue to impact automotive, heat exchanger and regional products; and


▪	Unfavorable year-over-year rolling margins in North America due to increased foreign imports are expected to be offset by stronger productivity and operating efficiency.

Lastly, we are constantly monitoring the impact that the spread of COVID-19 might have on our operations and our customers. However, given the rapidly changing implications of the spread of COVID-19, it is difficult to assess its impact on our 2020 outlook at this time. See Item 1A. – “Risk Factors – Risks Related to Our Business – Our business and operations, and the operations of our customers, may be adversely affected by epidemics and pandemics, such as the recent COVID-19 outbreak.”

Results of Operations

Review of Consolidated Results

Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

Revenues for the year ended December 31, 2019 decreased to $3,375.9 million from $3,445.9 million for the year ended December 31, 2018 primarily due to the following:


▪	the lower average price of aluminum included in our invoiced prices decreased revenues approximately $213.0 million;


▪	the stronger average U.S. dollar unfavorably impacted the translation of our Europe and Asia-Pacific based revenues, decreasing revenues approximately $57.0 million;

▪

an improved mix of products sold more than offset a 2% decline in volume and increased revenues approximately $130.0 million. Our global automotive volumes increased approximately 37%, as increasing shipments of autobody sheet from our Lewisport facility more than offset softness in automotive demand in Europe. Our global aerospace volumes increased approximately 33%, benefiting from improved demand patterns and growth in Asia Pacific. North America distribution volumes decreased 36% as the Lewisport facility continued to ramp-up automotive volumes; and


▪	improved rolling margins increased revenues approximately $65.0 million.

The following table presents the estimated impact of key factors that resulted in the 2% decrease in our consolidated revenues from 2018:



	North America					Europe					Asia Pacific					Consolidated
	$			%		$			%		$			%		$			%
	(dollars in millions)
LME / aluminum pass-through	$	(133.0	)	(7	)%	$	(76.0	)	(5	)%	$	(4.0	)	(3	)%	$	(213.0	)	(6	)%
Commercial price	65.0			3		—			—		—			—		65.0			2
Volume/mix	88.0			5		(1.0		)	—		43.0			29		130.0			4
Currency	—			—		(55.0		)	(4	)	(2.0		)	(1	)	(57.0		)	(2	)
Other	(0.7		)	—		0.5			—		0.8			1		0.6			—
Total	$	19.3		1	%	$	(131.5	)	(9	)%	$	37.8		25	%	$	(74.4	)	(2	)%
Intra-entity revenues																4.4			—
Total																$	(70.0	)	(2	)%

Gross profit for the year ended December 31, 2019 increased to $389.0 million from $285.2 million for the year ended December 31, 2018 primarily due to the following:


▪	improved rolling margins and favorable metal spreads increased gross profit approximately $104.0 million;


▪	an improved mix of products sold increased gross profit approximately $46.0 million;


▪	a $31.2 million decrease in start-up expenses as the North America ABS Project substantially exited the start-up phase for the first CALP during the third quarter of 2018 and the second CALP during the third quarter of 2019 (the majority of costs previously classified as start-up expenses in the prior year period continue to be incurred, however, they now impact volume and productivity);


▪	metal price lag had an estimated $52.8 million unfavorable impact on gross profit for the year ended December 31, 2019 when compared to the year ended December 31, 2018. This unfavorable impact from metal price lag excludes the realized gains and losses on metal derivative financial instruments, which are classified separately in the Consolidated Statements of Operations (see table below); and

▪

inflation and unfavorable productivity combined to decrease gross profit approximately $29.0 million. The unfavorable productivity resulted primarily from the ramp-up of automotive production and the higher cost structure of the Lewisport facility, as costs considered start-up expense in the prior year period are now considered within segment operating results, and the lower production requirements in Europe from weaker automotive demand due to lower automotive build rates.

The following table presents the estimated impact of metal price lag on our Consolidated Statements of Operations for the years ended December 31, 2019 and 2018:



		For the years ended December 31,
		2019			2018		Change
Location in Consolidated Statements of Operations		(dollars in millions)
Gross profit	(Unfavorable) favorable metal price lag	$	(40.0	)	$	12.8	$	(52.8	)
(Gains) losses on derivative financial instruments	Realized gains (losses) on metal derivatives	49.3			23.5		25.8
	Favorable (unfavorable) metal price lag net of realized derivative gains/losses	$	9.3		$	36.3	$	(27.0	)

Selling, General and Administrative Expenses

SG&A expenses decreased to $208.4 million for the year ended December 31, 2019 from $213.7 million for the year ended December 31, 2018 primarily due to the following:


▪	a $16.2 million decrease in SG&A start-up costs, primarily related to labor, consulting, research and development and other expenses;


▪	a $7.8 million increase in business development expenses and professional fees, primarily related to the Merger; and


▪	a $3.1 million increase in labor costs, primarily due to increased incentive compensation expenses as well as wage inflation.

Gains and Losses on Derivative Financial Instruments

During the twelve months ended December 31, 2019 and 2018, we recorded realized gains on derivative financial instruments of $42.9 million and $24.3 million, respectively, and unrealized losses (gains) of $35.2 million and $(22.7) million, respectively. Generally, our realized gains or losses represent the cash paid or received upon settlement of our derivative financial instruments. Unrealized gains or losses reflect the change in the fair value of derivative financial instruments from the later of the end of the prior period or our entering into the derivative instrument as well as the reversal of previously recorded unrealized gains or losses for derivatives that settled during the period. Derivative financial instruments are used to reduce our exposure to fluctuations in commodity prices, including metal and natural gas prices, and currency fluctuations. See “– Critical Measures of Our Financial Performance,” above, and Item 7A. “– Quantitative and Qualitative Disclosures about Market Risk,” below, for additional information regarding our use of derivative financial instruments.

Interest Expense, Net

Net interest expense increased $11.7 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 resulting primarily from increased debt as a result of refinancing activities completed in the second quarter of 2018 and additional average borrowings on the ABL Facility.

Debt Extinguishment Costs

We recorded debt extinguishment costs of $48.9 million during the second quarter of 2018 related to the debt refinancing transaction.

Other Income / Expense

The unfavorable $15.0 million change in other (income) expense included:


▪	a $12.2 million gain recorded in the second quarter of 2018 as the Real Industry, Inc. bankruptcy reorganization was finalized and we received shares of Elah Holdings, Inc.’s (the reorganized company) common stock (which shares were distributed to our stockholders through a special property dividend) and cash considerations; and


▪	a $2.5 million increase in the non-operational component of our pension expense.

Income Taxes

The provision for income taxes was $31.3 million for the year ended December 31, 2019, compared to a provision for income taxes of $18.5 million for the year ended December 31, 2018. The income tax provision for the year ended December 31, 2019 consisted of income tax expense of $31.0 million from international jurisdictions and an income tax provision of $0.3 million in the U.S. The income tax provision for the year ended December 31, 2018 consisted of income tax expense of $20.1 million from international jurisdictions and an income tax benefit of $1.6 million in the U.S.

At December 31, 2019 and 2018 we had valuation allowances from continuing operations of $252.4 million and $257.1 million, respectively, to reduce certain deferred tax assets to amounts that are more likely than not to be realized. Of the total valuation allowances at December 31, 2019 and 2018, $54.6 million and $65.7 million, respectively, relate primarily to net operating losses in non-U.S. tax jurisdictions, $160.6 million and $154.1 million, respectively, relate primarily to the U.S. federal effects of net operating losses, interest expense carryforwards and amortization and $37.2 million and $37.3 million, respectively, relate primarily to the state effects of net operating losses, interest expense carryforwards and amortization.

The net decrease in the valuation allowance in 2019 is mainly comprised of a $11.1 million decrease in non-U.S. tax jurisdictions resulting from the reduction of net operating loss carryforwards with offsetting valuation allowances due to expiration and utilization. The net increase in the U.S. of $6.4 million is mainly comprised of a $34.0 million increase resulting from interest expense carryforwards arising from the 2017 Tax Cuts and Jobs Act, a $21.9 million decrease resulting from net operating loss carryforward utilization and a $5.7 million decrease resulting from net reversals of other deductible temporary differences and net increases in taxable temporary differences.

During the fourth quarter of 2013, a non-U.S. taxing jurisdiction commenced an examination of our tax returns for tax years ended December 31, 2012, 2011, 2010 and 2009. During 2019, the non-U.S. taxing jurisdiction issued its final audit report which included certain significant adjustments to our transfer pricing tax position resulting in additional tax of $3.6 million along with additional interest of $1.3 million. Both amounts were expensed in 2019. $15.7 million of withholding tax associated with the audit was paid in 2019 and is expected to be refunded in 2020.

Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017

Revenues for the year ended December 31, 2018 increased to $3,445.9 million from $2,857.3 million for the year ended December 31, 2017 primarily due to the following:

▪

a 9% increase in volumes increased revenues approximately $255.0 million. In North America, automotive volumes increased more than 200% as production on the first Lewisport CALP ramped-up. In addition, North America distribution volumes increased 11% as prior year sales were affected by both an extended planned outage at our Lewisport facility and the strategic build of inventory in advance of that outage, while building and construction volumes increased 7% as a result of favorable demand and improved operating performance. In Europe, automotive volumes increased 18% as demand improved and we benefited from recent multi-year supply agreements, customer model launches and improved operating performance. European aerospace volumes increased 2% as we saw the impact of customer destocking subside in the second half of the year. In Asia Pacific, increased shipments and an improved mix of products sold resulted from a 50% increase in aerospace volumes;


▪	the higher average price of aluminum included in our invoiced prices increased revenues approximately $262.0 million;


▪	the weaker average U.S. dollar favorably impacted the translation of our Europe and Asia-Pacific based revenues, increasing revenues approximately $46.0 million; and


▪	improved rolling margins increased revenues approximately $13.0 million.

The following table presents the estimated impact of key factors that resulted in the 21% increase in our consolidated revenues from 2017:



	North America				Europe					Asia Pacific					Consolidated
	$		%		$			%		$			%		$		%
	(dollars in millions)
LME / aluminum pass-through	$	206.0	14	%	$	49.0		4	%	$	7.0		6	%	$	262.0	9	%
Commercial price	18.0		1		(5.0		)	—		—			—		13.0		—
Volume/mix	218.0		15		17.0			1		20.0			16		255.0		9
Currency	—		—		46.0			4		—			—		46.0		2
Other	5.9		—		(0.3		)	—		(0.5		)	—		5.1		—
Total	$	447.9	30	%	$	106.7		9	%	$	26.5		22	%	$	581.1	20	%
Intra-entity revenues															7.5		—
Total															$	588.6	21	%

Gross profit for the year ended December 31, 2018 increased to $285.2 million from $261.4 million for the year ended December 31, 2017 primarily due to the following:


▪	improved rolling margins and favorable metal spreads increased gross profit approximately $71.0 million;


▪	higher volumes and an improved mix of products sold increased gross profit approximately $30.0 million;


▪	metal price lag had an estimated $28.2 million unfavorable impact on gross profit for the year ended December 31, 2018 when compared to the year ended December 31, 2017. This unfavorable impact from metal price lag excludes the realized gains and losses on metal derivative financial instruments, which are classified separately in the Consolidated Statements of Operations (see table below);


▪	depreciation expense increased approximately $22.8 million as substantially all of the assets related to the North America ABS Project were placed in service;

▪

an unfavorable $20.0 million impact related to inflation and net productivity, as favorable productivity in Europe and the North America continuous cast business was more than offset by the impact of the ramp-up of automotive production and the higher cost structure of the Lewisport facility, as well as labor cost inflation, energy price increases and significantly higher North America freight costs; and


▪	start-up costs, primarily attributable to the North America ABS Project, increased $3.2 million.

The following table presents the estimated impact of metal price lag on our Consolidated Statements of Operations for the years ended December 31, 2018 and 2017:



		For the years ended December 31,
		2018		2017			Change
Location in Consolidated Statements of Operations		(dollars in millions)
Gross profit	Favorable metal price lag	$	12.8	$	41.0		$	(28.2	)
(Gains) losses on derivative financial instruments	Realized gains (losses) on metal derivatives	23.5		(47.3		)	70.8
	Favorable (unfavorable) metal price lag net of realized derivative gains/losses	$	36.3	$	(6.3	)	$	42.6

Selling, General and Administrative Expenses

SG&A expenses for the year ended December 31, 2018 decreased to $213.7 million from $219.2 million for the year ended December 31, 2017 primarily due to the following:


▪	a $21.8 million decrease in start-up costs, primarily related to labor, consulting and other expenses associated with the North America ABS Project. The majority of these costs continued to be incurred but were either recorded within “Cost of sales” as production began or contributed to the increase in SG&A labor costs discussed below;


▪	a $2.0 million decrease in stock-based compensation expense;


▪	an $8.1 million increase in professional fees and business development expenses, primarily related to the Merger; and


▪	a $7.8 million increase in labor costs, primarily due to the costs previously considered start-up expenses being recorded within segment SG&A expense in the second half of 2018, as well as wage inflation.

Gains and Losses on Derivative Financial Instruments

During the years ended December 31, 2018 and 2017, we recorded realized (gains) losses on derivative financial instruments of $(24.3) million and $47.7 million, respectively, and unrealized gains of $22.7 million and $3.0 million, respectively.

Interest Expense, Net

Net interest expense increased $20.6 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 resulting primarily from increased debt as a result of refinancing activities completed in the second quarter of 2018 and the first quarter of 2017, additional average borrowings on the ABL Facility and a decrease in capitalized interest as a result of lower capital expenditures for the North America ABS Project.

Debt Extinguishment Costs

We recorded debt extinguishment costs of $48.9 million during 2018 related to the debt refinancing transactions described further below. These costs consisted primarily of the redemption costs for the Prior Notes (as defined below) and expensing the net unamortized discounts and debt issuance costs associated with the Prior Notes.

Other Income / Expense

A favorable $49.1 million change in other (income) expense included:


▪	a prior year expense of $22.8 million related to the impairment of amounts held in escrow from the sale of our former recycling business to Real Industry, Inc. The amounts in escrow were shares of Series B non-participating preferred stock of Real Industry, Inc., which filed for bankruptcy protection in November 2017. The value of the preferred stock was fully impaired upon the bankruptcy filing;


▪	a $12.2 million gain recorded in the second quarter of 2018 as the Real Industry, Inc. bankruptcy reorganization was finalized and we received shares of Elah Holdings, Inc.’s (the reorganized company) common stock (which shares were distributed to our stockholders through a special property dividend) and cash considerations;


▪	a $7.9 million favorable change in currency exchange rate gains and losses (a $0.3 million loss in 2018 compared to an $8.2 million loss in 2017), primarily related to the remeasurement of U.S. dollar working capital and debt balances in Europe; and


▪	a prior year expense of $6.5 million from recording a liability for taxes related to prior acquisitions.

Income Taxes

The provision for income taxes was $18.5 million for the year ended December 31, 2018, compared to a provision for income taxes of $40.4 million for the year ended December 31, 2017. The income tax provision for the year ended December 31, 2018 consisted of income tax expense of $20.1 million from international jurisdictions and an income tax benefit of $1.6 million in the U.S. The income tax provision for the year ended December 31, 2017 consisted of income tax expense of $43.8 million from international jurisdictions and an income tax benefit of $3.4 million in the U.S.

At December 31, 2018 and 2017, we had valuation allowances from continuing operations of $257.1 million and $257.6 million, respectively, to reduce certain deferred tax assets to amounts that are more likely than not to be realized. Of the total valuation allowances at December 31, 2018 and 2017, $65.7 million and $83.9 million, respectively, relate primarily to net operating losses in non-U.S. tax jurisdictions, $154.1 million and $141.0 million, respectively, relate primarily to the U.S. federal effects of net operating losses, interest expense carryforwards and amortization in 2018 and net operating losses and amortization in 2017, and $37.3 million and $32.7 million, respectively, relate primarily to the state effects of net operating losses, interest expense carryforwards and amortization in 2018 and net operating losses and amortization in 2017.

The net decrease in the valuation allowance in 2018 is mainly comprised of an $18.2 million decrease in non-U.S. tax jurisdictions resulting from the reduction of net operating loss carryforwards with offsetting valuation allowances due to expiration and an audit adjustment offset by a $17.7 million increase in the U.S. resulting from a $25.5 million increase resulting from interest expense carryforwards arising from the recent U.S. tax legislation and a $7.8 million decrease from net reversals of other deductible temporary differences and net increases in taxable temporary differences.

The following table presents key financial and operating data on a consolidated basis for the years ended December 31, 2019, 2018 and 2017:



	For the years ended December 31,
	2019			2018			2017
	(in millions, except percentages)
Revenues	$	3,375.9		$	3,445.9		$	2,857.3
Cost of sales	2,986.9			3,160.7			2,595.9
Gross profit	389.0			285.2			261.4
Gross profit as a percentage of revenues	11.5		%	8.3		%	9.1		%
Selling, general and administrative expenses	208.4			213.7			219.2
Restructuring charges	4.6			4.8			2.9
(Gains) losses on derivative financial instruments	(7.7		)	(47.0		)	44.7
Other operating expense, net	3.1			3.5			5.7
Operating income (loss)	180.6			110.2			(11.1		)
Interest expense, net	156.4			144.7			124.1
Debt extinguishment costs	—			48.9			—
Other expense (income), net	4.7			(10.3		)	38.8
Income (loss) from continuing operations before income taxes	19.5			(73.1		)	(174.0		)
Provision for income taxes	31.3			18.5			40.4
Loss from continuing operations	(11.8		)	(91.6		)	(214.4		)
Income from discontinued operations, net of tax	—			—			3.8
Net loss	$	(11.8	)	$	(91.6	)	$	(210.6	)

Total segment income	$	433.9		$	349.4		$	230.4
Depreciation and amortization of continuing operations	(142.6		)	(139.7		)	(115.7		)
Corporate general and administrative expenses, excluding depreciation, amortization and start-up costs	(65.2		)	(58.1		)	(56.3		)
Restructuring charges	(4.6		)	(4.8		)	(2.9		)
Interest expense, net	(156.4		)	(144.7		)	(124.1		)
Unallocated (losses) gains on derivative financial instruments	(35.3		)	22.6			3.1
Unallocated currency exchange losses	(0.3		)	(2.3		)	(2.5		)
Start-up costs	(7.6		)	(55.0		)	(73.6		)
Loss on extinguishment of debt	—			(48.9		)	—
Impairment of amounts held in escrow related to the sale of the recycling business	—			—			(22.8		)
Other (expense) income, net	(2.4		)	8.4			(9.6		)
Income (loss) from continuing operations before income taxes	$	19.5		$	(73.1	)	$	(174.0	)

Review of Segment Revenues and Shipments

The following tables present revenues and metric tons of finished product shipped by segment:



	For the years ended December 31,
	2019			2018			2017
	(dollars in millions, metric tons in thousands)
Revenues:
North America	$	1,935.0		$	1,915.7		$	1,467.8
Europe	1,275.9			1,407.4			1,300.7
Asia Pacific	186.6			148.8			122.3
Intra-entity revenues	(21.6		)	(26.0		)	(33.5		)
Consolidated revenues	$	3,375.9		$	3,445.9		$	2,857.3

Metric tons of finished product shipped:
North America	517.4			517.5			462.0
Europe	310.8			330.4			317.3
Asia Pacific	35.1			29.4			26.9
Intra-entity	(5.3		)	(4.7		)	(6.6		)
Total metric tons of finished product shipped	858.0			872.6			799.6

North America Revenues

North America revenues for the year ended December 31, 2019 increased $19.3 million compared to the year ended December 31, 2018. This increase was primarily due to the following:

▪

an improved mix of products sold increased revenues approximately $88.0 million. Automotive volumes were up significantly as shipments of ABS from our Lewisport facility continue to increase and truck trailer volumes increased 13% on favorable demand. These increases were partially offset by a 36% decrease in distribution volumes, which were replaced by automotive volumes in Lewisport, and a 6% decrease in building and construction volumes as we experienced choppiness in the housing market;


▪	improved rolling margins increased revenues approximately $65.0 million; and


▪	lower aluminum prices included in the invoiced prices of products sold decreased revenues approximately $133.0 million.

North America revenues for the year ended December 31, 2018 increased $447.9 million compared to the year ended December 31, 2017 primarily due to the following:

▪

a 12% increase in volumes and an improved mix of products sold increased revenues approximately $218.0 million. Automotive volumes were up over 200%, as commercial shipments from the first CALP in Lewisport ramped-up during the period. Distribution volumes increased 11% as 2017 sales were affected by an extended planned outage at our Lewisport facility as well as the strategic build of inventory in advance of that outage. Building and construction volumes increased 7% as a result of favorable demand and improved operating performance;


▪	higher aluminum prices included in the invoiced prices of products sold increased revenues approximately $206.0 million; and


▪	improved rolling margins increased revenues approximately $18.0 million.

Europe Revenues

Europe revenues for the year ended December 31, 2019 decreased $131.5 million compared to the year ended December 31, 2018 primarily due to the following:


▪	lower aluminum prices included in the invoiced prices of products sold decreased revenues approximately $76.0 million;


▪	a stronger average U.S. dollar unfavorably impacted the translation of euro-based revenues by approximately $55.0 million; and


▪	an improved mix of products sold offset a 6% decrease in volumes. Aerospace volumes increased 22% as demand patterns improved following a prolonged period of de-stocking. Automotive, heat exchanger and regional end-use volumes decreased 12%, 13% and 8%, respectively, on weaker demand due to lower automotive and industrial activity.

Europe revenues for the year ended December 31, 2018 increased $106.7 million compared to the year ended December 31, 2017 primarily due to the following:


▪	higher aluminum prices included in the invoiced prices of products sold increased revenues approximately $49.0 million;


▪	a weaker average U.S. dollar favorably impacted the translation of euro-based revenues by approximately $46.0 million;

▪

a 4% increase in volumes increased revenues approximately $17.0 million. Recent multi-year supply agreements as well as customer model launches resulted in a 18% increase in automotive volumes. The impact of aerospace supply chain destocking in the first half of 2018 was more than offset by both a return to normal demand patterns in the third quarter of 2018 and the benefits from our multi-year supply agreements, resulting in a 2% increase in aerospace volumes; and


▪	lower rolling margins decreased revenues approximately $5.0 million.

Asia Pacific Revenues

Asia Pacific revenues for the year ended December 31, 2019 increased $37.8 million compared to the year ended December 31, 2018 primarily due to the following:


▪	a 65% increase in aerospace volumes, partially offset by a 37% decrease in commercial plate volumes, increased revenues approximately $43.0 million; and


▪	lower aluminum prices included in the invoiced prices of products sold decreased revenues approximately $4.0 million.

Asia Pacific revenues for the year ended December 31, 2018 increased $26.5 million compared to the year ended December 31, 2017 primarily due to the following:


▪	an increase in aerospace volumes increased revenues approximately $20.0 million; and


▪	higher aluminum prices included in the invoiced prices of products sold increased revenues approximately $7.0 million.

Review of Segment Income and Gross Profit

For the years ended December 31, 2019, 2018 and 2017, segment income and our reconciliation of segment income to gross profit are presented below:



	For the years ended December 31,
	2019			2018			2017
	(in millions)
Segment income:
North America	$	259.8		$	196.0		$	88.0
Europe	130.1			129.8			127.4
Asia Pacific	44.0			23.6			15.0
Total segment income	433.9			349.4			230.4
Items excluded from segment income and included in gross profit:
Depreciation	(132.8		)	(128.1		)	(105.4		)
Start-up costs	(5.1		)	(36.3		)	(33.0		)
Other	0.1			(0.1)			0.9
Items included in segment income and excluded from gross profit:
Segment selling, general and administrative expenses	131.0			125.3			112.2
Realized (gains) losses on derivative financial instruments	(43.0		)	(24.5		)	47.8
Other expense (income), net	4.9			(0.5		)	8.5
Gross profit	$	389.0		$	285.2		$	261.4

North America Segment Income

North America segment income for the year ended December 31, 2019 increased $63.8 million compared to the year ended December 31, 2018 primarily due to the following:


▪	improved rolling margins and favorable metal spreads, which resulted from improved scrap availability and strategic metal purchasing decisions, increased segment income approximately $105.0 million;


▪	an improved mix of products sold increased segment income approximately $7.0 million;


▪	an unfavorable change in metal price lag compared to the prior year period decreased segment income approximately $31.0 million. 2018 metal lag was favorably impacted by a substantially higher Midwest Premium; and


▪	cost inflation, primarily from wages, more than offset productivity, decreasing segment income approximately $16.0 million. Favorable productivity in our continuous cast operations was largely offset by the absorption of certain costs that were classified as start-up expenses in the prior year period.

North America segment income for the year ended December 31, 2018 increased $108.0 million compared to the year ended December 31, 2017 primarily due to the following:


▪	improved rolling margins and favorable metal spreads, which resulted from rising aluminum prices, improved scrap availability and strategic metal purchasing decisions, increased segment income approximately $79.0 million;


▪	a favorable change in metal price lag compared to the prior year period, resulting from a substantially higher Midwest Premium, increased segment income approximately $42.4 million;


▪	an increase in volumes increased segment income approximately $20.0 million; and

▪

inflation and negative net productivity decreased segment income approximately $32.0 million. Our continuous cast operations delivered solid productivity gains and improved operational performance. However, these improvements were more than offset by wage inflation, significantly higher freight costs and unfavorable productivity at our Lewisport facility. Productivity at the Lewisport facility was affected by the automotive ramp-up, the absorption of costs previously considered start-up expense and a cost structure designed for a manufacturing rate at which the facility was not yet producing.

Europe Segment Income

Europe segment income for the year ended December 31, 2019 increased $0.3 million compared to the year ended December 31, 2018 primarily due to the following:


▪	an improved mix of products sold more than offset a 6% decrease in volumes, increasing segment income approximately $10.0 million;


▪	the net impact of currency changes increased segment income approximately $2.0 million;


▪	a favorable change in metal price lag compared to the prior year period increased segment income approximately $4.0 million; and


▪	cost inflation, primarily from wages, and unfavorable productivity decreased segment income approximately $16.0 million.

Europe segment income for the year ended December 31, 2018 increased $2.4 million compared to the year ended December 31, 2017 primarily due to the following:


▪	productivity gains from improved operational stability and cost optimization more than offset inflation, resulting in increased segment income of approximately $6.0 million;


▪	higher volumes increased segment income approximately $2.0 million;


▪	the net impact of currency changes increased segment income approximately $2.0 million;


▪	favorable metal price lag compared to the prior year increased segment income approximately $1.3 million; and


▪	lower rolling margins, higher hardener costs and increased third-party slab costs, as the Rusal sanctions resulted in sourcing purchases from other suppliers. These factors decreased segment income approximately $9.0 million.

Asia Pacific Segment Income

Asia Pacific segment income for the year ended December 31, 2019 increased $20.4 million compared to the year ended December 31, 2018. This increase was primarily due to higher volumes and an improved mix of aerospace shipments that increased segment income approximately $20.0 million.

Asia Pacific segment income for the year ended December 31, 2018 increased $8.6 million compared to the year ended December 31, 2017. This increase was primarily due to higher volumes and an improved mix of aerospace shipments that increased segment income approximately $8.0 million.

Liquidity and Capital Resources

Summary

At December 31, 2019, cash and cash equivalents totaled $54.6 million compared with $108.6 million at December 31, 2018. Liquidity at December 31, 2019 was $352.9 million, which consisted of $290.8 million of availability under the ABL Facility, $54.6 million of cash and $7.5 million of cash restricted for payments of the China Loan Facility. Both our borrowing base and ABL Facility utilization may fluctuate on a monthly basis due, in part, to changes in seasonal working capital and aluminum prices.

Based on our current and anticipated levels of operations and the condition in the industries we serve, we believe that our cash on hand, cash flows from operations and availability under the ABL Facility, will enable us to meet our working capital, capital expenditures, debt service and other funding requirements for the foreseeable future. However, our ability to fund our working capital needs, debt payments and other obligations, and to comply with the covenants under our indebtedness, including borrowing base limitations under the ABL Facility and debt incurrence restrictions in our debt agreements, depends on our future operating performance and cash flows and many factors outside of our control, including the costs of raw materials, our ability to access the capital and credit markets, the state of the overall industry and financial and economic conditions and other factors, including those described under Item 1A. – “Risk Factors.” Any future investments, acquisitions,

joint ventures or other similar transactions will likely require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.

We will need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on attractive terms on or before maturity or on commercially reasonable terms at all.

At December 31, 2019, approximately $53.2 million of our cash and cash equivalents were held by our non-U.S. subsidiaries.

The following discussion provides a summary description of the significant components of our sources of liquidity and long-term debt.

Cash Flows

The following table summarizes our net cash provided (used) by operating, investing and financing activities for the years ended December 31, 2019, 2018 and 2017.



	For the years ended December 31,
	2019			2018			2017
	(in millions)
Net cash provided (used) by:
Operating activities	$	46.7		$	22.3		$	(31.4	)
Investing activities	(126.7		)	(110.2		)	(210.7		)
Financing activities	27.1			97.7			290.5

Cash Flows From Operating Activities

Operating activities provided $46.7 million of cash for the year ended December 31, 2019, which was the result of $194.3 million of cash from earnings partially offset by a $147.6 million increase in net operating assets. The significant components of the change in net operating assets included an increase of $18.2 million, $2.7 million, and $13.6 million in accounts receivable, inventory and other assets, respectively and decreases of $90.9 million and $22.2 million in accounts payable and accrued liabilities, respectively. The average days sales outstanding (“DSO”) for the year ended December 31, 2019 increased one day from the average DSO for the year ended December 31, 2018, in part due to increased sales to Original Equipment Manufacturers (“OEMs”) who generally have longer payment terms partly offset by lower aluminum prices. In addition, revenues in December 2019 were $17.7 million higher than revenues in December 2018, leading to an increase in accounts receivable at December 31, 2019. The increase in inventory was primarily due to increased inventory in North America related to the ramp-up of automotive production and higher Europe inventory levels partially offset by lower aluminum prices. These factors also led to a seven day increase in our average days inventory outstanding (“DIO”) for the year ended December 31, 2019 compared to the average DIO for the year ended December 31, 2018. This increase in inventory was partially offset by lower aluminum prices. The increase in other assets resulted primarily from a $17.8 million increase in the income tax receivable, $15.7 million of which resulted from a withholding tax paid to a non-U.S. taxing jurisdiction that is expected to be refunded in 2020. The decrease in accounts payable was primarily due to lower aluminum prices and timing of payments. Our average days payable outstanding (“DPO”) for the year ended December 31, 2019 decreased three days from the average DPO for the year ended December 31, 2018. The decrease in accrued and other liabilities was primarily attributable to interest payments during the period.

Operating activities provided $22.3 million of cash for the year ended December 31, 2018, which was the result of $86.4 million of cash from earnings partially offset by a $64.1 million increase in net operating assets. The significant components of the change in net operating assets included increases of $45.7 million, $183.5 million, $84.7 million and $70.5 million in accounts receivable, inventory, accounts payable and accrued liabilities, respectively. The average DSO for the year ended December 31, 2018 increased three days from the average DSO for the year ended December 31, 2017, in part due to increased sales to OEMs who generally have longer payment terms and the adoption of Accounting Standard Update No. 2014-09, “Revenue from Contracts with Customers” (“ASC 606”) on January 1, 2018, which accelerated the recognition by revenue of approximately $26.0 million at December 31, 2018, but did not impact invoicing or payment terms. In addition, revenues in the month of December 2018 increased $16.2 million over revenues in the month of December 2017, leading to an increase in accounts receivable at December 31, 2018. The increase in inventory was primarily due to an increase in aluminum prices and increased inventory in North America related to the ramp-up of automotive production, partially offset by working capital optimization efforts in Europe. Our average DIO for the year ended December 31, 2018 decreased two days from the average DIO for the year ended December 31, 2017 as a result of the Europe optimization efforts as well as the reduction of inventory associated with the adoption of ASC 606, partially offset by higher North America inventory levels. The increase in accounts payable was also due in part to the increase in inventories and in aluminum prices as well as the lingering impact from the

Rusal sanctions in Europe. Our average DPO for the year ended December 31, 2018 remained consistent with the average DPO for the year ended December 31, 2017. The increase in accrued liabilities was primarily due to deferred revenue associated with $60.0 million of capacity reservation fees received in the first half of 2018 as well as an increase in accrued interest.

Operating activities used $31.4 million of cash for the year ended December 31, 2017, which was the result of $23.1 million of cash used to fund operating losses and a $8.3 million increase in net operating assets. The significant components of the change in net operating assets included increases of $5.7 million, $58.4 million, $33.7 million and $18.2 million in accounts receivable, inventory, accounts payable and accrued liabilities, respectively. The average DSO for the year ended December 31, 2017 remained consistent with the average DSO for the year ended December 31, 2016. The increase in inventory was primarily due to an increase in aluminum prices that more than offset the favorable impacts of working capital optimization efforts. Our average DIO for the year ended December 31, 2017 increased from the average DIO for the year ended December 31, 2016 due to rising aluminum prices as well as lower shipment volumes and the strategic build of inventory in North America in preparation for the planned production outage at the Lewisport hot mill during the third quarter of 2017. The increase in accounts payable was also due in part to the increase in aluminum prices. Our average DPO for the year ended December 31, 2017 remained consistent with the average DPO for the year ended December 31, 2016. The increase in accrued liabilities was primarily due to increased accrued interest resulting from the additional 2021 Notes issued in the first quarter of 2017.

Cash Flows from Investing Activities

Cash flows used by investing activities were $126.7 million for the year ended December 31, 2019 and included $125.7 million of capital expenditures.

Cash flows used by investing activities were $110.2 million for the year ended December 31, 2018 and included $108.2 million of capital expenditures.

Cash flows used by investing activities were $210.7 million for the year ended December 31, 2017 and included $207.7 million of capital expenditures, primarily resulting from the North America ABS Project and related non-ABS equipment upgrades at the Lewisport facility.

Cash Flows From Financing Activities

Cash flows provided by financing activities were $27.1 million for the year ended December 31, 2019, which resulted from an additional $52.1 million of net borrowings under the ABL Facility, partially offset by $11.0 million of scheduled repayments of the Term Loan Facility (as defined below) and $7.0 million of scheduled repayments on the Zhenjiang Term Loans (as defined below).

Cash flows provided by financing activities were $97.7 million for the year ended December 31, 2018, which resulted from net cash proceeds of $1,483.0 million from the New Financing. These proceeds were partially offset by the redemption of the Prior Notes, which totaled $1,286.7 million including the prepayment premiums, net cash repayments of $59.8 million on outstanding borrowings under the ABL Facility, $21.0 million of debt issuance costs related to the New Financing, $5.5 million of payments on the Term Loan Facility and $5.5 million of payments on the China Loan Facility.

Cash flows provided by financing activities were $290.5 million for the year ended December 31, 2017, and included $263.8 million of net proceeds from the issuance of an additional $250.0 million aggregate principal amount of 2021 Notes in February 2017 and $61.7 million of net borrowings under the ABL Facility. These sources of cash were partially offset by $26.3 million of net repayments under the China Loan Facility and $2.8 million of debt issuance costs, primarily related to the issuance of the additional 2021 Notes.

Description of Indebtedness

Term Loan Facility

The senior secured first lien term loan (the “Term Loan Facility”) consists of a $1,083.5 million first lien senior secured term loan facility, which will mature on February 27, 2023. Aleris International’s obligations under the Term Loan Facility are guaranteed by Aleris Corporation and Aleris International’s domestic restricted subsidiaries that guarantee Aleris International’s existing obligations under the ABL Facility and the 2023 Junior Priority Notes (the “Guarantor Subsidiaries” and, together with Aleris Corporation, the “Guarantors”).

The Term Loan Facility also includes an uncommitted incremental facility, which, subject to certain conditions, provides for additional term loan facilities in an aggregate principal amount not to exceed the sum of (i) $75.0 million, plus (ii) an amount equal to all voluntary prepayments and loan buybacks of the Term Loan Facility and any other indebtedness that is secured on a pari passu basis with the Term Loan Facility (other than prepayments and buybacks financed with long-term

indebtedness (other than revolving indebtedness)), plus (iii) an additional unlimited amount subject to a First Lien Net Leverage Ratio (as defined in the Term Loan Facility) of 3.75 to 1.00.

The Term Loan Facility bears interest on the unpaid principal amount at a rate equal to, at Aleris International’s option, either:


▪	a base rate determined by reference to the highest of (i) the rate which Deutsche Bank AG New York Branch announces as its prime lending rate, (ii) the overnight federal funds rate plus 0.50% and (iii) one-month LIBOR plus 1.00%, in each case plus 3.75%; or


▪	a LIBOR rate determined by reference to the London interbank offered rate for dollars for the relevant interest period, adjusted for statutory reserve requirements, plus 4.75%. The LIBOR rate will be subject to a 0.00% rate floor.

Amounts borrowed under the Term Loan Facility amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Term Loan Facility, with the balance payable on the maturity date of the Term Loan Facility.

The Term Loan Facility requires certain mandatory prepayments of outstanding loans under the Term Loan Facility, subject to certain exceptions, based on (i) a percentage of net cash proceeds of certain asset sales and casualty and condemnation events in excess of certain thresholds (subject to certain reinvestment rights), (ii) net cash proceeds of any issuance of debt, excluding permitted debt issuances and (iii) a percentage of Excess Cash Flow (as defined in the Term Loan Facility) in excess of certain thresholds during a fiscal year.

Aleris International may voluntarily prepay loans outstanding under the Term Loan Facility, in whole or in part, without premium or penalty (except as described below) in minimum amounts, at any time, subject to customary “breakage” costs with respect to LIBOR rate loans. If Aleris International prepays loans in connection with a repricing transaction prior to the date that is twelve months after the closing of the Term Loan Facility, subject to certain exceptions, such prepayment will be subject to a 1.00% prepayment fee.

The Term Loan Facility is secured by (i) a first-priority lien on substantially all of Aleris International’s and the Guarantors’ assets (excluding the ABL Collateral (as defined below)), including, without limitation, all owned and material U.S. real property, equipment, intellectual property and stock of Aleris International and the Guarantors (other than Aleris Corporation) and other subsidiaries (including 100% of the outstanding non-voting stock (if any) and 65% of the outstanding voting stock of certain “first tier” foreign subsidiaries and certain “first tier” foreign subsidiary holding companies), which assets secure the 2023 Junior Priority Notes on a second priority basis and secure the ABL Facility on a third priority basis (the “Term Loan Collateral”) and (ii) a second-priority lien on all of Aleris International’s and the Guarantors’ (other than Aleris Corporation) inventory, accounts receivable, deposit accounts and related assets (subject to certain exceptions), which assets secure the ABL Facility on a first priority basis and secure the 2023 Junior Priority Notes on a third priority basis (the “ABL Collateral” and, together with the Term Loan Collateral, the “Collateral”), in each case excluding certain assets and subject to permitted liens.

The Term Loan Facility contains a number of covenants that, subject to certain exceptions, impose restrictions on Aleris International and certain of its subsidiaries, including, without limitation, restrictions on the ability to, among other things, incur additional debt, grant liens or security interests on assets, merge, consolidate or sell assets, make investments, loans and acquisitions, pay dividends and make restricted payments, modify terms of junior indebtedness or enter into affiliate transactions. The Term Loan Facility also contains certain customary affirmative covenants and events of default. Aleris International was in compliance with all covenants set forth in the Term Loan Facility as of December 31, 2019.

2023 Junior Priority Notes

On June 25, 2018, Aleris International completed the issuance of $400.0 million aggregate principal amount of 10.75% senior secured junior priority notes due 2023 (the “2023 Junior Priority Notes”) and related guarantees in a private offering under Rule 144A and Regulation S of the Securities Act of 1933, as amended. The 2023 Junior Priority Notes were issued under an indenture (as amended and supplemented from time to time, the “2023 Junior Priority Notes Indenture”), dated as of June 25, 2018, among Aleris International, the guarantors named therein and U.S. Bank National Association, as trustee and collateral agent. The 2023 Junior Priority Notes are jointly and severally, irrevocably and unconditionally guaranteed on a senior secured basis, by each of the Guarantors, as primary obligor and not merely as surety.

The 2023 Junior Priority Notes bear interest at an annual rate of 10.75%. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2019. The 2023 Junior Priority Notes will mature on July 15, 2023.

The 2023 Junior Priority Notes are secured by (i) a second-priority lien on the Term Loan Collateral and (ii) a third-priority lien on the ABL Collateral, in each case excluding certain assets and subject to permitted liens.

Aleris International is not required to make any mandatory redemption or sinking fund payments with respect to the 2023 Junior Priority Notes, but under certain circumstances, it may be required to offer to purchase the 2023 Junior Priority Notes as described below. Aleris International may from time to time acquire 2023 Junior Priority Notes by means other than redemption, whether by tender offer, in open market purchases, through negotiated transactions or otherwise, in accordance with applicable securities laws.

From and after July 15, 2020, Aleris International may redeem the 2023 Junior Priority Notes, in whole or in part, at a redemption price of 104.00% of the principal amount, thereof plus accrued and unpaid interest, declining ratably to 100.00% of the principal amount thereof, plus accrued and unpaid interest, on or after July 15, 2022. Prior to July 15, 2020, Aleris International may redeem up to 40.00% of the aggregate principal amount of the 2023 Junior Priority Notes with funds in an amount equal to all or a portion of the net cash proceeds from certain equity offerings at a redemption price of 110.75%, plus accrued and unpaid interest. Aleris International may make such redemption so long as, immediately after the occurrence of any such redemption, at least 60.00% of the aggregate principal amount of the 2023 Junior Priority Notes remains outstanding and such redemption occurs within 180 days of the closing of the applicable equity offering. Additionally, at any time prior to July 15, 2020, Aleris International may redeem the 2023 Junior Priority Notes, in whole or in part, at a redemption price equal to 100.00% of the principal amount thereof, plus the applicable premium as provided in the 2023 Junior Priority Notes Indenture and accrued and unpaid interest.

If Aleris International or any restricted subsidiary consummates one or more asset sales generating net proceeds in excess of $35.0 million in the aggregate at any time after July 15, 2019 but on or prior to July 15, 2020, Aleris International may, at its option, redeem all or a portion of the 2023 Junior Priority Notes in an aggregate principal amount not to exceed such net proceeds at a redemption price equal to 103.00% of the principal amount thereof, in each case, plus accrued and unpaid interest.

If Aleris International experiences a “change of control” as specified in the 2023 Junior Priority Notes Indenture at any time after July 15, 2019 but on or prior to July 15, 2020, Aleris International may, at its option, redeem all, but not less than all, of the 2023 Junior Priority Notes at a redemption price equal to 103.00% of the principal amount thereof, in each case, plus accrued and unpaid interest.

In addition, if Aleris International experiences a change of control and does not elect to redeem the notes as provided above, Aleris International must offer to purchase all of the 2023 Junior Priority Notes at a price equal to 101.00% of the principal amount thereof, plus accrued and unpaid interest. If Aleris International or its restricted subsidiaries engage in certain asset sales, Aleris International will be required to use 80.00% of the consideration received from such asset sales to permanently reduce certain debt within a specified period of time. Aleris International will be required to use a portion of the remaining proceeds of such asset sales, as well as the proceeds of certain events of loss with respect to the Collateral, as the case may be, to make an offer to purchase a principal amount of the 2023 Junior Priority Notes at a price of 100.00% of the principal amount thereof, plus accrued and unpaid interest, to the extent such proceeds are not invested or used to permanently reduce certain debt within a specified period of time.

The 2023 Junior Priority Notes Indenture contains covenants, subject to certain limitations and exceptions, limiting the ability of Aleris International and its restricted subsidiaries to, among other things: incur additional debt; pay dividends or distributions on Aleris International’s capital stock or redeem, repurchase or retire Aleris International’s capital stock or subordinated debt; issue preferred stock of restricted subsidiaries; make certain investments; create liens on Aleris International’s or its Guarantor Subsidiaries’ assets to secure debt; enter into sale and leaseback transactions; create restrictions on the payment of dividends or other amounts to Aleris International from the restricted subsidiaries that are not guarantors of the 2023 Junior Priority Notes; enter into transactions with affiliates; merge or consolidate with another company; and sell assets, including capital stock of Aleris International’s subsidiaries. The 2023 Junior Priority Notes Indenture also contains customary events of default. Aleris International was in compliance with all covenants set forth in the 2023 Junior Priority Notes Indenture as of December 31, 2019.

ABL Facility

On June 15, 2015, Aleris International entered into a credit agreement, as amended and supplemented from time to time, providing for an asset-based revolving credit facility (as amended, the “ABL Facility”) which permits multi-currency borrowings up to $750.0 million by Aleris International and its U.S. subsidiaries and up to a combined $375.0 million by Aleris Switzerland GmbH, a wholly owned Swiss subsidiary, Aleris Aluminum Duffel BVBA, a wholly owned Belgian subsidiary, Aleris Rolled Products Germany GmbH, a wholly owned German subsidiary and, upon its accession to the credit agreement, Aleris Casthouse Germany GmbH, a wholly owned German subsidiary (but limited to $750.0 million in total). The availability

of funds to the borrowers located in each jurisdiction is subject to a borrowing base for that jurisdiction and the jurisdictions in which certain subsidiaries of such borrowers are located. Both the borrowing base and the ABL Facility utilization may fluctuate on a monthly basis. Our borrowing base may also fluctuate due to, in part, seasonal working capital increases and increased aluminum prices. The ABL Facility provides for the issuance of up to $125.0 million of letters of credit. The credit agreement provides that commitments under the ABL Facility may be increased at any time by an additional $300.0 million, subject to certain conditions.

As of December 31, 2019, we estimate that the borrowing base would have supported borrowings of up to $621.1 million. We had outstanding borrowings of $304.9 million under the ABL Facility as of December 31, 2019. After giving effect to outstanding borrowings and letters of credit, Aleris International had $290.8 million available for borrowing under the ABL Facility.

Borrowings under the ABL Facility bear interest at rates equal to the following:

▪

in the case of borrowings in U.S. dollars, (a) a LIBOR determined by reference to the offered rate for deposits in dollars for the interest period relevant to such borrowing (the “Eurodollar Rate”), plus an applicable margin ranging from 1.50% to 2.00% based on availability under the ABL Facility or (b) a base rate determined by reference to the higher of (1) JPMorgan Chase Bank, N.A.’s prime lending rate and (2) the one month Eurodollar Rate, plus an applicable margin ranging from 0.50% to 1.00% based on excess availability under the ABL Facility;


▪	in the case of borrowings in euros, a EURIBOR determined by the administrative agent plus an applicable margin ranging from 1.50% to 2.00% based on excess availability under the ABL Facility; and


▪	in the case of borrowings in Sterling, a LIBOR determined by reference to the offered rate for deposits in Sterling for the interest period relevant to such borrowing, plus an applicable margin ranging from 1.50% to 2.00% based on excess availability under the ABL Facility.

In addition to paying interest on any outstanding principal under the ABL Facility, Aleris International is required to pay a commitment fee in respect of unutilized commitments ranging from 0.250% to 0.375% based on average utilization for the applicable period. Aleris International must also pay customary letter of credit fees and agency fees.

The ABL Facility is subject to mandatory prepayment with (i) 100% of the net cash proceeds of certain asset sales and casualty proceeds relating to the collateral for the ABL Facility under certain circumstances, and (ii) 100% of the net cash proceeds from issuance of debt, other than debt permitted under the ABL Facility.

In addition, if at any time outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the ABL Facility exceed the applicable borrowing base in effect at such time, Aleris International is required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.

There is no scheduled amortization under the ABL Facility. The maturity date of the ABL Facility is the earliest of (x) June 25, 2023, (y) the date that is 60 days prior to the scheduled maturity date of the term loans under the Term Loan Facility (currently February 27, 2023) and (z) the date that is 60 days prior to the scheduled maturity date of the 2023 Junior Priority Notes (currently July 15, 2023).

Aleris International may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time upon three business days’ prior written notice without premium or penalty other than customary “breakage” costs with respect to Eurodollar Rate loans, Sterling LIBOR loans and EURIBOR loans.

The ABL Facility is secured by a first-priority lien over the ABL Collateral and is also secured by a third-priority lien (ranking junior to the lien therein in favor of the Term Loan Facility and the 2023 Junior Priority Notes) over the Term Loan Collateral, in each case excluding certain assets and subject to permitted liens. The obligations of the Swiss borrower, the Belgian borrower and the German borrowers are secured by their respective current assets and related intangible assets, if any.

The credit agreement governing the ABL Facility contains a number of covenants that, subject to certain exceptions, impose restrictions on Aleris International and certain of its subsidiaries, including, without limitation, restrictions on its ability to, among other things, incur additional debt, create liens, merge, consolidate or sell assets, make investments, loans and acquisitions, pay dividends and make certain payments or enter into affiliate transactions.

Although the credit agreement governing the ABL Facility generally does not require Aleris International to comply with any financial ratio maintenance covenants, if combined availability is less than the greater of (a) 10% of the lesser of the combined borrowing base and the combined commitments and (b) $40.0 million, a minimum fixed charge coverage ratio (as defined in the credit agreement) of at least 1.0 to 1.0 will apply. The credit agreement also contains certain customary

affirmative covenants and events of default. Aleris International was in compliance with all of the covenants set forth in the credit agreement as of December 31, 2019.

Exchangeable Notes

On June 1, 2010, Aleris International issued $45.0 million aggregate principal amount of 6% senior subordinated exchangeable notes (the “Exchangeable Notes”). The Exchangeable Notes are scheduled to mature on June 1, 2020. The Exchangeable Notes have exchange rights at the holder’s option and are exchangeable at any time for our common stock at a rate equivalent to 60.58 shares of our common stock per $1,000 principal amount of the Exchangeable Notes (after adjustment for the payments of certain cash dividends in 2011 and 2013), subject to further adjustment. The Exchangeable Notes may currently be redeemed at Aleris International’s option at specified redemption prices.

The Exchangeable Notes are the unsecured, senior subordinated obligations of Aleris International and rank (i) junior to all of its existing and future senior indebtedness, including the ABL Facility, the Term Loan Facility and the 2023 Junior Priority Notes; (ii) equally to all of its existing and future senior subordinated indebtedness; and (iii) senior to all of its existing and future subordinated indebtedness.

China Loan Facility

Our wholly owned subsidiary, Aleris Aluminum (Zhenjiang) Co., Ltd (“Aleris Zhenjiang”), maintains a loan agreement comprised of non-recourse multi-currency secured term loan facilities and a revolving facility (collectively, as amended and supplemented from time to time, the “China Loan Facility”). The China Loan Facility consists of a $27.6 million U.S. dollar term loan facility, an RMB 846.2 million (or equivalent to approximately $121.4 million as of December 31, 2019) term loan facility (collectively referred to as the “Zhenjiang Term Loans”) and an RMB 410.0 million (or equivalent to approximately $58.8 million as of December 31, 2019) revolving facility (referred to as the “Zhenjiang Revolver”). The Zhenjiang Revolver has certain restrictions that have limited our ability to borrow funds on the Zhenjiang Revolver and will continue to limit our ability to borrow funds in the future. Although the final maturity date for all borrowings under the Zhenjiang Revolver is May 18, 2021, all amounts outstanding under the Zhenjiang Revolver were repaid in 2017. The interest rate on the U.S. dollar term facility is six month U.S. dollar LIBOR plus 5.0% and the interest rate on the RMB term facility and the Zhenjiang Revolver is 110% of the base rate applicable to any loan denominated in RMB of the same tenor, as announced by the People’s Bank of China. As of December 31, 2019, $149.0 million was outstanding on the Zhenjiang Term Loans and the final maturity date for all borrowings under the Zhenjiang Term Loans is May 16, 2024. The repayment of borrowings under the Zhenjiang Term Loans is due semi-annually. According to the amended repayment schedule, the semi-annual repayment in 2020 will be RMB 60.0 million (or equivalent to approximately $8.6 million as of December 31, 2019) and will increase to RMB 258.7 million (or equivalent to approximately $37.1 million as of December 31, 2019) by 2024.

The China Loan Facility contains certain customary covenants and events of default. The China Loan Facility requires Aleris Zhenjiang to, among other things, maintain a certain ratio of outstanding term loans to invested equity capital. In addition, Aleris Zhenjiang is restricted from, subject to certain exceptions, repaying loans or distributing dividends to stockholders, disposing of assets, providing third party guarantees, permitting individual investor or key management personnel changes that result in a material adverse effect, using any proceeds from the China Loan Facility for any purpose other than as set forth therein, or entering into additional financing to expand the capacity of the project, among other things.

Aleris Zhenjiang was in compliance with all of the covenants set forth in the China Loan Facility as of December 31, 2019. Aleris Zhenjiang has had delays in its ability to make timely draws of amounts committed under the China Loan Facility in the past and we cannot be certain that Aleris Zhenjiang will be able to draw any amounts committed under the Zhenjiang Revolver in the future or as to the timing or cost of any such draws.

Non-GAAP Financial Measures

We report our financial results in accordance with GAAP. However, our management believes that certain non-GAAP performance measures, which we use in managing the business, may provide investors with additional meaningful comparisons between current results and results in prior periods. EBITDA, Adjusted EBITDA, segment Adjusted EBITDA and commercial margin are examples of non-GAAP financial measures that we believe provide investors and other users of our financial information with useful information.

Management uses EBITDA, Adjusted EBITDA, segment Adjusted EBITDA and commercial margin as performance metrics and believes these measures provide additional information commonly used by holders of the 2023 Junior Priority Notes and parties to the Term Loan Facility and the ABL Facility with respect to the ongoing performance of our underlying business activities, as well as our ability to meet our future debt service, capital expenditures and working capital needs. In addition, EBITDA with certain adjustments is a component of certain covenants under the credit agreement governing the Term Loan Facility and the indenture governing the 2023 Junior Priority Notes. Adjusted EBITDA, including the impacts of metal price lag, is a component of certain financial covenants under the credit agreement governing the ABL Facility. Management

also uses commercial margin as a performance metric and believes that it provides useful information regarding the performance of our segments because it measures the price at which we sell our aluminum products above the hedged cost of the metal and the effects of metal price lag, thereby reflecting the value-added components of our commercial activities independent of aluminum prices which we cannot control.

Our EBITDA calculations represent net income and loss before interest income and expense, provision for and benefit from income taxes, depreciation and amortization and income and loss from discontinued operations, net of tax. Adjusted EBITDA is defined as EBITDA excluding metal price lag, unrealized gains and losses on derivative financial instruments, restructuring charges, currency exchange gains and losses on debt, stock-based compensation expense, start-up costs, loss on extinguishment of debt, impairment of amounts held in escrow related to the sale of the recycling business and certain other gains and losses. Segment Adjusted EBITDA represents Adjusted EBITDA on a per segment basis. EBITDA as defined in the credit agreement governing the Term Loan Facility and the indenture governing the 2023 Junior Priority Notes also limits the amount of adjustments for cost savings, operational improvement and synergies for the purpose of determining our compliance with such covenants. Adjusted EBITDA as defined under the ABL Facility also limits the amount of adjustments for restructuring charges and requires additional adjustments be made if certain annual pension funding levels are exceeded. Commercial margin represents revenues less the hedged cost of metal and the effects of metal price lag.

EBITDA, Adjusted EBITDA, segment Adjusted EBITDA and commercial margin (collectively, the “Non-GAAP Measures”), as we use them, may not be comparable to similarly titled measures used by other companies. We calculate the Non-GAAP Measures by eliminating the impact of a number of items we do not consider indicative of our ongoing operating performance and certain other items. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. However, the Non-GAAP Measures are not financial measurements recognized under GAAP, and when analyzing our operating performance, investors should use the Non-GAAP Measures in addition to, and not as an alternative for, net income and loss, operating income and loss or any other performance measure derived in accordance with GAAP, or in addition to, and not as an alternative for, cash flow from operating activities as a measure of our liquidity. The Non-GAAP Measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for, or superior to, our measures of financial performance prepared in accordance with GAAP. These limitations include:


▪	They do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;


▪	They do not reflect changes in, or cash requirements for, working capital needs;


▪	They do not reflect interest expense or cash requirements necessary to service interest expense or principal payments under our outstanding indebtedness;


▪	They do not reflect certain tax payments that may represent a reduction in cash available to us;


▪	Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA, including segment Adjusted EBITDA, do not reflect cash requirements for such replacements; and


▪	Other companies, including companies in our industry, may calculate these measures differently and, as the number of differences in the way companies calculate these measures increases, the degree of their usefulness as a comparative measure correspondingly decreases.

In addition, in evaluating Adjusted EBITDA, including segment Adjusted EBITDA, we may incur expenses in the future that are similar to the adjustments in the below presentation. Our presentation of Adjusted EBITDA, including segment Adjusted EBITDA, should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

For reconciliations of EBITDA, Adjusted EBITDA and commercial margin to their most directly comparable financial measures presented in accordance with GAAP, see the tables below. For a reconciliation of segment Adjusted EBITDA to segment income and a reconciliation of commercial margin to revenues, which are the most directly comparable financial measures presented in accordance with GAAP, for the North America, Europe and Asia Pacific segments, see the reconciliations in “– Our Segments.”

For the years ended December 31, 2019, 2018 and 2017, our reconciliations of EBITDA and Adjusted EBITDA to net loss and net cash provided (used) by operating activities are presented below:



	For the years ended December 31,
	2019			2018			2017
	(in millions)
Adjusted EBITDA from continuing operations	$	388.1		$	276.0		$	200.6
Unrealized gains on derivative financial instruments	(35.2		)	22.7			3.0
Restructuring charges (i)	(4.6		)	(4.8		)	(2.9		)
Currency exchange losses on debt	(0.2		)	(2.3		)	(2.5		)
Stock-based compensation expense	(8.2		)	(9.2		)	(11.3		)
Start-up costs	(7.6		)	(55.0		)	(73.6		)
Favorable (unfavorable) metal price lag (ii)	9.2			36.3			(6.3		)
Loss on extinguishment of debt	—			(48.9		)	—
Impairment of amounts held in escrow related to the sale of the recycling business	—			—			(22.8		)
Other (iii)	(23.0		)	(3.5		)	(18.4		)
EBITDA from continuing operations	318.5			211.3			65.8
Interest expense, net	(156.4		)	(144.7		)	(124.1		)
Provision for income taxes	(31.3		)	(18.5		)	(40.4		)
Depreciation and amortization from continuing operations	(142.6		)	(139.7		)	(115.7		)
Income (loss) from discontinued operations, net of tax	—			—			3.8
Net loss	(11.8		)	(91.6		)	(210.6		)
Depreciation and amortization	142.6			139.7			115.7
Provision for deferred income taxes	7.1			2.0			32.3
Stock-based compensation expense	8.2			9.2			11.3
Unrealized losses (gains) on derivative financial instruments	35.2			(23.1		)	(3.0		)
Amortization of debt issuance costs	9.1			5.9			2.8
Loss on extinguishment of debt	—			48.9			—
Net gain on sale of discontinued operations	—			—			(4.5		)
Non-cash (gain) loss	—			(11.1		)	22.8
Other	3.9			6.5			10.1
Change in operating assets and liabilities:
Change in accounts receivable	(18.2		)	(45.7		)	(5.7		)
Change in inventories	(2.7		)	(183.5		)	(58.4		)
Change in other assets	(13.6		)	9.9			3.9
Change in accounts payable	(90.9		)	84.7			33.7
Change in accrued liabilities	(22.2		)	70.5			18.2
Net cash provided (used) by operating activities	$	46.7		$	22.3		$	(31.4	)


(i)	See Note 4, “Restructuring Charges,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.

(ii)

Represents the financial impact of the timing difference between when aluminum prices included within our revenues are established and when aluminum purchase prices included in our cost of sales are established. This lag will, generally, increase our earnings and EBITDA in times of rising primary aluminum prices and decrease our earnings and EBITDA in times of declining primary aluminum prices; however, our use of derivative financial instruments seeks to reduce this impact. Metal price lag is net of the realized gains and losses from our derivative financial instruments. We exclude metal price lag from our determination of Adjusted EBITDA because it is not an indicator of the performance of our underlying operations.

(iii)

Includes gains and losses on the disposal of assets, costs incurred in connection with proposed capital raising transactions, certain acquisition and disposition activities and other business development costs and in 2018 a gain from the resolution of the bankruptcy of our former recycling business (see Note 20, “Stockholders’ Equity” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K).

For the years ended December 31, 2019, 2018 and 2017, our reconciliations of revenues to commercial margin are presented below.



	For the years ended December 31,
	2019			2018			2017
	(in millions)
Revenues	$	3,375.9		$	3,445.9		$	2,857.3
Hedged cost of metal	(1,807.9		)	(1,991.5		)	(1,664.7		)
(Favorable) unfavorable metal price lag	(9.2		)	(36.3		)	6.3
Commercial margin	$	1,558.8		$	1,418.1		$	1,198.9

Exchange Rates

During 2019, the fluctuation of the U.S. dollar against other currencies resulted in unrealized currency translation losses that decreased our stockholders’ deficit by $10.7 million. Currency translation adjustments are the result of the process of translating an international entity’s financial statements from the entity’s functional currency to U.S. dollars. Currency translation adjustments accumulate in consolidated stockholders’ deficit until the disposition or liquidation of the international entities.

The euro is the functional currency of substantially all of our European-based operations and the renminbi is the functional currency of our China operations. In the future, our results of operations will continue to be impacted by the exchange rate between the U.S. dollar and the euro and the U.S. dollar and renminbi. In addition, we have other operations where the functional currency is not our reporting currency, the U.S. dollar, and our results of operations are impacted by currency fluctuations between the U.S. dollar and such other currencies.

Contractual Obligations

We and our subsidiaries are obligated to make future payments under various contracts such as debt agreements, lease agreements, postretirement and pension benefit plans and unconditional purchase obligations. The following table summarizes our estimated significant contractual cash obligations and other commercial commitments at December 31, 2019.



	Cash Payments Due by Period
	(in millions)
	Total		2020		2021-2022		2023-2024		After 2024
Long-term debt	$	1,982.1	$	73.0	$	387.1	$	1,522.0	$	—
Interest on long-term debt obligations	412.6		127.5		247.1		38.0		—
Estimated postretirement benefit payments	23.0		2.8		5.1		4.8		10.3
Estimated pension benefit payments	49.1		11.9		7.9		7.9		21.4
Finance lease obligations	34.4		6.3		8.4		4.5		15.2
Operating lease obligations	11.2		4.5		4.7		2.0		—
Estimated payments for asset retirement obligations	8.5		0.2		—		—		8.3
Purchase obligations	1,559.5		1,174.4		380.8		2.7		1.6
Total	$	4,080.4	$	1,400.6	$	1,041.1	$	1,581.9	$	56.8

Our estimated funding for our funded pension plans and postretirement benefit plans is based on actuarial estimates using benefit assumptions for discount rates, expected long-term rates of return on assets, rates of compensation increases, and health care cost trend rates. For our funded pension plans, estimating funding beyond 2020 would depend upon the performance of the plans’ investments, among other things. As a result, estimating pension funding beyond 2020 is not practicable. Payments for unfunded pension plan benefits and postretirement benefit payments are estimated through 2029.

Finance lease obligations are payment obligations under leases classified as financing. The lease obligations include the costs of leasing vehicles, mobile equipment and certain other equipment used in our production facilities.

Operating lease obligations are payment obligations under leases classified as operating. Most of the lease obligations relate to the costs of leasing office or warehousing space. In addition, some leases relate to items used in our manufacturing processes, which typically are leased for a period of one to five years.

Our estimated payments for asset retirement obligations are based on management’s estimates of the timing and extent of payments to be made to fulfill legal or contractual obligations associated with the retirement of certain long-lived assets. Amounts presented represent the future value of expected payments.

Our purchase obligations represent non-cancellable agreements (short-term and long-term) to purchase goods or services that are enforceable and legally binding on us that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations include the pricing of anticipated metal purchases using contractual prices or, where pricing is dependent upon the prevailing LME metal prices at the time of delivery, market prices as of December 31, 2019, as well as natural gas and electricity purchases using minimum contractual quantities and either contractual prices or prevailing rates. As a result of the variability in the pricing of many of our metals purchasing obligations, actual amounts paid may vary from the amounts shown above. Purchase obligations also include amounts associated with capital expenditure projects.

The ABL Facility carries variable interest rates and variable outstanding amounts for which estimating future interest payments is not practicable. The Term Loan Facility and China Loan Facility carry variable interest rates. The estimated future interest payments were based on the average rate paid in 2019.

Environmental Contingencies

Our operations are subject to federal, state, local and international laws, regulations and ordinances. These laws and regulations (1) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as waste handling and disposal practices and (2) impose liability for costs of cleaning up, and certain damages resulting from, spills, disposals or other releases of regulated materials. It can be anticipated that more rigorous environmental laws will be enacted that could require us to make substantial expenditures in addition to those described in this annual report on Form 10-K. See Item 1. – “Business—Environmental.”

From time to time, our operations have resulted, or may result, in certain non-compliance with applicable requirements under such environmental laws. To date, any such non-compliance with such environmental laws have not had a material adverse effect on our financial position, results of operations or cash flows. See Note 16, “Commitments and Contingencies,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including, among others, those related to property and equipment and intangible assets, income taxes, pensions and other post-retirement benefits and environmental liabilities. Our management bases its estimates on historical experience, actuarial valuations and other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates. Our accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. There were no significant changes to our critical accounting policies or estimates during the year ended December 31, 2019.

The following critical accounting policies and estimates are used to prepare our consolidated financial statements:

Impairment of Long-Lived Assets and Amortizable Intangible Assets

We review the carrying value of property, plant and equipment to be held and used as well as amortizable intangible assets when events or circumstances indicate that their carrying value may not be recoverable. Factors that we consider important that could trigger our testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. We consider these factors quarterly and may test more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. To test for impairment, we compare the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. Although third-party estimates of fair value are utilized when available, the estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results, as well as appropriate discount rates, where necessary. The results of our impairment testing are dependent on these estimates which require significant judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and our ability to accurately assess whether an asset is impaired.

Environmental and Asset Retirement Obligations

Environmental obligations that are not legal or contractual asset retirement obligations and that relate to existing conditions caused by past operations with no benefit to future operations are expensed while expenditures that extend the life, increase the capacity or improve the safety of an asset or that mitigate or prevent future environmental contamination are capitalized in property, plant and equipment. Our environmental engineers and consultants review and monitor environmental issues at our existing operating sites. This process includes investigation and remedial action selection and implementation, as well as negotiations with other potentially responsible parties and governmental agencies. Based on the results of this process, we provide reserves for environmental liabilities when and if environmental assessment and/or remediation costs are probable and can be reasonably estimated in accordance with ASC 410-30 “Environmental Obligations.” While our accruals are based on management’s current best estimate of the future costs of remedial action, these liabilities can change substantially due to factors such as the nature and extent of contamination, changes in the required remedial actions and technological advancements. Our existing environmental liabilities are not discounted to their present values as the amount and timing of the expenditures are not fixed or reliably determinable.

Asset retirement obligations represent obligations associated with the retirement of tangible long-lived assets. Our asset retirement obligations relate primarily to costs related to the future removal of asbestos and costs to remove underground storage tanks. The costs associated with such legal obligations are accounted for under the provisions of ASC 410-20 “Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. These fair values are based upon the present value of the future cash flows expected to be incurred to satisfy the obligation. Determining the fair value of asset retirement obligations requires judgment, including estimates of the credit adjusted interest rate and estimates of future cash flows. Estimates of future cash flows are obtained primarily from independent engineering consulting firms. The present value of the obligations is accreted over time while the capitalized cost is depreciated over the useful life of the related asset.

Deferred Income Taxes

We record deferred income taxes to reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are regularly reviewed for recoverability. A valuation allowance is provided to reduce certain deferred tax assets to amounts that, in our estimate, are more likely than not to be realized.

In determining the adequacy of recorded valuation allowances, management assesses our profitability in the applicable jurisdictions by taking into account the current and forecasted amounts of earnings or losses as well as the forecasted taxable income as a result of the reversal of future taxable temporary differences. Although subjective positive evidence exists in some of the applicable jurisdictions in the form of forecasted earnings in future periods, our recent history of losses provides objective negative evidence that management believes outweighs any subjective positive evidence in those jurisdictions. Therefore, we will maintain valuation allowances against certain of our net deferred tax assets in the U.S. and other applicable jurisdictions until sufficient objective positive evidence (for example, cumulative positive earnings and future taxable income) exists to reduce or eliminate the valuation allowance.

Pension and Postretirement Benefits

Our pension and postretirement benefit costs are accrued based on annual analyses performed by our actuaries. These analyses are based on assumptions such as an assumed discount rate and an expected rate of return on plan assets. Both the discount rate and expected rate of return on plan assets require estimates and projections by management and can fluctuate from period to period. Our objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled. In making this estimate, projected cash flows are developed and matched with a yield curve based on an appropriate universe of high-quality corporate bonds. Assumptions for long-term rates of return on plan assets are based upon historical returns, future expectations for returns for each asset class and the effect of periodic target asset allocation rebalancing. The results are adjusted for the payment of reasonable expenses of the plan from plan assets. We believe these assumptions are appropriate based upon the mix of the investments and the long-term nature of the plans’ investments.

The weighted average discount rate used to determine the U.S. pension benefit obligation was 3.14% as of December 31, 2019 compared to 4.15% as of December 31, 2018 and 3.53% as of December 31, 2017. The weighted average discount rate used to determine the non-U.S. pension benefit obligation was 1.53% as of December 31, 2019 compared to 2.23% as of December 31, 2018 and 2.12% as of December 31, 2017. The weighted average discount rate used to determine the other postretirement benefit obligation was 3.07% as of December 31, 2019 compared to 4.08% as of December 31, 2018 and 3.43% as of December 31, 2017. The weighted average discount rate used to determine the net periodic benefit cost is the rate used to determine the benefit obligation at the end of the previous year.

We use an approach to develop the interest and service cost components of the net periodic benefit costs that discounts the individual expected cash flows underlying interest and service costs using the applicable spot rates derived from the yield curve used to determine the benefit obligation to the relevant projected cash flows. The use of this method provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates.

As of December 31, 2019, an increase in the discount rate of 0.5%, assuming inflation remains unchanged, would result in a decrease of $27.7 million in the pension and other postretirement obligations and a decrease of $1.4 million in the net periodic benefit cost. A decrease in the discount rate of 0.5% as of December 31, 2019, assuming inflation remains unchanged, would result in an increase of $31.3 million in the pension and other postretirement obligations and an increase of $1.5 million in the net periodic benefit expense.

The calculation of the estimate of the expected return on assets and additional discussion regarding pension and other postretirement plans is described in Note 12, “Employee Benefit Plans,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The weighted average expected return on assets associated with our U.S. pension benefits was 7.20% for 2019, 7.26% for 2018 and 7.75% for 2017. The weighted average expected return on assets associated with our U.S. pension benefit expense to be recognized in 2020 has been decreased to 6.94%, primarily as a result of our strategy to decrease exposure to equity investments as the funding level of the plans improves. The weighted average expected return on assets associated with our European pension benefits was 3.00% for 2019 and 2018 and 2.46% for 2017. The expected return on assets is a long-term assumption whose accuracy can only be measured over a long period based on past experience. A variation in the expected return on assets by 0.5% as of December 31, 2019 would result in a variation of approximately $0.6 million in the net periodic benefit expense.

Unrecognized actuarial gains and losses related to changes in our assumptions and actual experiences differing from them will be recognized over the expected remaining service life of the employee group. As of December 31, 2019, the accumulated amount of unrecognized losses on pension and other postretirement benefit plans was $104.7 million, of which $6.3 million is expected to be recognized in net periodic benefit expense in 2020.

The actuarial assumptions used to determine pension and other postretirement benefits may differ from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. We do not believe differences in actual experience or changes in assumptions will materially affect our financial position or results of operations.

Off-Balance Sheet Transactions

We had no off-balance sheet arrangements at December 31, 2019.

Recently Issued Accounting Standards Updates

For a summary of recently issued accounting standards, see Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included elsewhere in this annual report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the ordinary course of our business, we are exposed to earnings and cash flow volatility resulting from changes in the prices of aluminum and, to a lesser extent, hardeners, such as zinc and copper, and natural gas and other fuels, as well as changes in currency and interest rates. We use derivative instruments, such as forwards, futures, options, collars and swaps to manage the effect, both favorable and unfavorable, of such changes. For electricity and some natural gas price exposures, fixed price commitments are used.

Derivative contracts are used primarily to reduce uncertainty and volatility and cover underlying exposures and are held for purposes other than trading. Our commodity and derivative activities are subject to the management, direction and control of our Risk Management Committee, which is composed of our Chief Financial Officer and other officers and employees that the Chief Executive Officer designates. The Risk Management Committee reports to the Audit Committee of our Board of Directors, which has supervisory authority over all of its activities.

We are exposed to losses in the event of non-performance by the counterparties to the derivative contracts discussed below. Although non-performance by counterparties is possible, we do not currently anticipate any nonperformance by any of these parties. Counterparties are evaluated for creditworthiness and risk assessment prior to our initiating contract activities. The counterparties’ creditworthiness is then monitored on an ongoing basis, and credit levels are reviewed to ensure that there is not an inappropriate concentration of credit outstanding to any particular counterparty.

Metal Hedging

Aluminum ingots, copper and zinc are internationally produced, priced and traded commodities, with the LME being the primary exchange. As part of our efforts to preserve margins, we enter into forward, futures and options contracts. For accounting purposes, we do not consider our metal derivative instruments as hedges and, as a result, changes in the fair value of these derivatives are recorded immediately in our consolidated operating results.

The selling prices of the majority of the orders for our products are established at the time of order entry or, for certain customers, under long-term contracts. As the related raw materials used to produce these orders can be purchased several months or years after the selling prices are fixed, margins are subject to the risk of changes in the purchase price of the raw materials used for these fixed price sales. In order to manage this transactional exposure, future, swaps or forward purchase contracts are purchased at the time the selling prices are fixed. As metal is purchased to fill these fixed price sales orders, futures, swaps or forward contracts are then sold. We also maintain a significant amount of inventory on hand to meet anticipated and unpriced future sales. In order to preserve the value of this inventory, future, swaps or forward contracts are sold at the time inventory is purchased. As sales orders are priced, futures, swaps or forward contracts are purchased. These derivatives generally settle within three months.

We can also use call option contracts, which function in a manner similar to the natural gas call option contracts discussed below, and put option contracts for managing metal price exposures. Option contracts require the payment of a premium which is recorded as a realized loss upon settlement or expiration of the option contract. Upon settlement of a put option contract, we receive cash and recognize a related gain if the LME closing price is less than the strike price of the put option. If the put option strike price is less than the LME closing price, no amount is paid and the option expires.

As of December 31, 2019, we had 0.1 million metric tons and 0.3 million metric tons of metal buy and sell derivative contracts, respectively. As of December 31, 2018, we had 0.2 million metric tons and 0.3 million metric tons of metal buy and sell derivative contracts, respectively.

Energy Hedging

To manage the price exposure for natural gas purchases, we can fix the future price of a portion or all of our natural gas requirements by entering into financial hedge contracts. Additionally, we have entered into diesel fuel swaps with financial counterparties to mitigate the impact of the volatility of diesel fuel prices on our freight costs. We do not consider our natural gas or fuel derivative instruments as hedges for accounting purposes and as a result, changes in the fair value of these derivatives are recorded immediately in our consolidated operating results.

Under our natural gas contracts, payments are made or received based on the differential between the monthly closing price on the New York Mercantile Exchange (“NYMEX”) and the contractual hedge price. We can also use a combination of call option contracts and put option contracts for managing the exposure to increasing natural gas prices while maintaining our ability to benefit from declining prices. Upon settlement of call option contracts, we receive cash and recognize a related gain if the NYMEX closing price exceeds the strike price of the call option. If the call option strike price exceeds the NYMEX closing price, no amount is received and the option expires unexercised. Upon settlement of a put option contract, we pay cash and recognize a related loss if the NYMEX closing price is lower than the strike price of the put option. If the put option strike price is less than the NYMEX closing price, no amount is paid and the option expires unexercised. Option contracts require the payment of a premium which is recorded as a realized loss upon settlement or expiration of the option contract. Natural gas cost can also be managed through the use of cost escalators included in some of our long-term supply contracts with customers, which limits exposure to natural gas price risk. As of December 31, 2019 and 2018, we had 2.2 trillion and 4.6 trillion, respectively, of British thermal unit forward buy contracts.

We use independent freight carriers to deliver our products. As part of the total freight charge, these carriers include a per mile diesel surcharge based on the Department of Energy, Energy Information Administration’s (“DOE”) Weekly Retail Automotive Diesel National Average Price. From time to time, we enter into over-the-counter DOE diesel fuel swaps with financial counterparties to mitigate the impact of the volatility of diesel fuel prices on our freight costs. Under these swap agreements, we pay a fixed price per gallon of diesel fuel determined at the time the agreements were executed and receive a floating rate payment that is determined on a monthly basis based on the average price of the DOE Diesel Fuel Index during the applicable month. The swaps are designed to offset increases or decreases in fuel surcharges that we pay to our carriers. All swaps are financially settled. There is no possibility of physical settlement. As of December 31, 2019, we had 2.2 million gallons of diesel fuel swap contracts. As of December 31, 2018, we had 4.3 million gallons of diesel fuel swap contracts.

Currency Hedging and Exchange Risks

The financial condition and results of operations of some of our operating entities are reported in various currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. As a result, appreciation of the U.S. dollar against these currencies will have a negative impact on reported revenues and operating profit, while depreciation of the U.S. dollar against these currencies will generally have a positive effect on reported revenues and operating profit. In addition, our aerospace and heat exchanger businesses expose the U.S. dollar operating results of our European operations to fluctuations in the euro as sales contracts are generally in U.S. dollars while the costs of production are in euros. As a result, appreciation in the U.S. dollar will have a positive impact on earnings while depreciation of the U.S. dollar will have a negative impact on earnings. In order to mitigate the risk that fluctuations in the euro may have on our business we have entered into forward currency contracts. As of December 31, 2019 and 2018, we had euro forward contracts covering a notional amount of €86.9 million and €77.6 million, respectively.

Interest Rate Risks

As of December 31, 2019 approximately 78% of our debt obligations had variable interest rates. We are subject to interest rate risk related to the Term Loan Facility, the ABL Facility and the China Loan Facility, to the extent borrowings are outstanding under these facilities. As of December 31, 2019, Aleris International had $1,083.5 million and $304.9 million of borrowings under the Term Loan Facility and the ABL Facility, respectively, and Aleris Zhenjiang had $149.0 million of borrowings under the Zhenjiang Term Loans. In the third quarter of 2018, we entered into an interest rate swap to fix the LIBOR interest rate on $700.0 million the Term Loan Facility for the period of October 31, 2018 through June 28, 2019. At December 31, 2019, we had no interest rate swaps outstanding.

We estimate that if the market interest rates would have increased by 10%, our interest expense for the year ended December 31, 2019 would have increased by approximately $3.1 million, excluding the impact of any interest rate derivative instruments.

Fair Values and Sensitivity Analysis

The following table shows the fair values of outstanding derivative contracts at December 31, 2019 and the effect on the fair value of a hypothetical adverse change in the market prices that existed at December 31, 2019:



				Impact of
	Fair			10% Adverse
Derivative	Value			Price Change
Metal	$	(8.7	)	$	(28.2	)
Energy	(0.5		)	(1.6		)
Currency	(3.9		)	(9.9		)

The following table shows the fair values of outstanding derivative contracts at December 31, 2018 and the effect on the fair value of a hypothetical adverse change in the market prices that existed at December 31, 2018:



				Impact of
	Fair			10% Adverse
Derivative	Value			Price Change
Metal	$	28.0		$	(24.5	)
Energy	(1.3		)	(1.6		)
Currency	(4.2		)	(3.1		)

The disclosures above do not take into account the underlying commitments or anticipated transactions. If the underlying items were included in the analysis, the gains or losses on our derivative instruments would be offset by gains and losses realized on the purchase of the physical commodities. Actual results will be determined by a number of factors outside of our control and could vary significantly from the amounts disclosed. For additional information on derivative financial instruments, see Note 2, “Summary of Significant Accounting Policies,” and Note 14, “Derivative and Other Financial Instruments,” to our audited consolidated financial statements included elsewhere in the annual report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Consolidated Financial Statements



Index	Page Number
Management’s Report on Internal Control Over Financial Reporting	64
Reports o

Aleris Corp 10-K