Aleris International, Inc. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended March 31, 2007
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File No. 1-7170
Aleris International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2008280
(I.R.S. Employer Identification No.)
25825 Science Park Drive, Suite 400
Beachwood, Ohio 44122
(Address of principal executive offices) (Zip Code)
(216) 910-3400
(Registrants telephone number, including area code)
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o
Non-accelerated filer x |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the close of business on April 30, 2007.
Common Stock, $0.01 par value: 900 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALERIS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(in millions, except share and per share data)
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(Successor) |
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March 31, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
85.9 |
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$ |
126.1 |
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Accounts receivable (net of allowance of
$9.4 and $9.9 at March 31, 2007 and December
31, 2006, respectively) |
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776.7 |
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692.5 |
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Inventories |
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972.6 |
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1,023.6 |
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Deferred income taxes |
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4.8 |
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34.6 |
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Prepaid expenses |
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28.6 |
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20.6 |
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Derivative financial instruments |
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67.7 |
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77.5 |
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Other current assets |
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18.8 |
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18.3 |
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Total Current Assets |
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1,955.1 |
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1,993.2 |
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Property, plant and equipment, net |
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1,239.6 |
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1,223.1 |
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Goodwill |
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1,404.0 |
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1,362.4 |
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Intangible assets, net |
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81.6 |
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84.1 |
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Derivative financial instruments |
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46.7 |
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48.5 |
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Deferred income taxes |
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8.1 |
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8.1 |
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Other assets |
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86.5 |
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89.0 |
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$ |
4,821.6 |
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$ |
4,808.4 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
628.1 |
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$ |
554.3 |
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Accrued liabilities |
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309.6 |
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338.7 |
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Deferred income taxes |
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37.7 |
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37.7 |
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Current maturities of long-term debt |
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19.0 |
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20.5 |
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Total Current Liabilities |
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994.4 |
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951.2 |
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Long-term debt |
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2,581.4 |
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2,567.5 |
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Deferred income taxes |
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140.5 |
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141.2 |
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Accrued pension benefits |
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179.1 |
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179.2 |
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Accrued postretirement benefits |
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56.5 |
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57.5 |
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Other long-term liabilities |
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68.3 |
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66.4 |
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Stockholders Equity |
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Preferred stock; par value $.01; 100
shares authorized; none issued at March 31
2007 and December 31, 2006, respectively |
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Common stock; par value $.01; 900 shares
authorized and issued at March 31, 2007 and
December 31, 2006, respectively |
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Additional paid-in capital |
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849.6 |
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848.8 |
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Retained deficit |
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(56.5 |
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(3.4 |
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Accumulated other comprehensive income |
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8.3 |
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Total Stockholders Equity |
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801.4 |
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845.4 |
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$ |
4,821.6 |
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$ |
4,808.4 |
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See Notes to Consolidated Financial Statements.
2
ALERIS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in millions)
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(Successor) |
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(Predecessor) |
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For the three |
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For the three |
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months ended |
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months ended |
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March 31, 2007 |
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March 31, 2006 |
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Revenues |
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$ |
1,599.1 |
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$ |
847.6 |
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Cost of sales |
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1,532.3 |
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757.2 |
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Gross profit |
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66.8 |
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90.4 |
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Selling, general and administrative expense |
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61.7 |
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26.8 |
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Restructuring and other charges |
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7.2 |
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(Gains) losses on derivative financial instruments |
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(5.4 |
) |
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4.1 |
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Operating income |
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3.3 |
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59.5 |
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Interest expense |
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55.8 |
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14.0 |
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Interest income |
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(1.4 |
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(0.2 |
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Other expense, net |
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1.7 |
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0.5 |
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(Loss) income before provision for income taxes
and minority interests |
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(52.8 |
) |
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45.2 |
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Provision for income taxes |
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0.1 |
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16.8 |
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(Loss) income before minority interests |
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(52.9 |
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28.4 |
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Minority interests, net of provision for income taxes |
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0.2 |
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0.2 |
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Net (loss) income |
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$ |
(53.1 |
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$ |
28.2 |
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See Notes to Consolidated Financial Statements.
3
ALERIS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)
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(Successor) |
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(Predecessor) |
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For the three |
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For the three |
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months ended |
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months ended |
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March 31, 2007 |
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March 31, 2006 |
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Operating activities |
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Net (loss) income |
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$ |
(53.1 |
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$ |
28.2 |
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Depreciation and amortization |
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40.1 |
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15.7 |
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(Benefit from) provision for deferred income taxes |
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(0.7 |
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5.4 |
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Excess income tax benefits from exercise of stock options |
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(1.4 |
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Restructuring and other charges: |
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Charges |
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7.2 |
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Payments |
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(6.1 |
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(0.3 |
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Stock-based compensation expense |
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0.7 |
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1.8 |
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Unrealized (gains) losses on derivative financial instruments |
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(0.9 |
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0.8 |
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Charges related to step up in carrying value of inventory |
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55.2 |
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Other non-cash charges |
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3.0 |
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1.4 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(80.2 |
) |
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(75.3 |
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Inventories |
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(0.3 |
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4.3 |
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Other assets |
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1.5 |
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(1.5 |
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Accounts payable and accrued liabilities |
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36.4 |
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56.3 |
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Net cash provided by operating activities |
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2.8 |
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35.4 |
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Investing activities |
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Acquisition of Aleris International, Inc. |
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(7.4 |
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Payments for property, plant and equipment |
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(44.7 |
) |
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(11.0 |
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Proceeds from sale of property, plant and equipment |
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0.2 |
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Other |
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(0.1 |
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Net cash used by investing activities |
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(52.0 |
) |
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(11.0 |
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Financing activities |
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Net proceeds from (payments of) long-term revolving credit facilities |
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7.7 |
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(30.7 |
) |
Proceeds from issuance of long-term debt |
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5.3 |
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Decrease in restricted cash |
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0.1 |
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Proceeds from exercise of stock options |
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0.9 |
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Excess income tax benefits from exercise of stock options |
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1.4 |
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Other |
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(0.1 |
) |
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Net cash provided (used) by financing activities |
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7.8 |
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(23.2 |
) |
Effect of exchange rate differences on cash and cash equivalents |
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1.2 |
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0.2 |
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Net (decrease) increase in cash and cash equivalents |
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(40.2 |
) |
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1.4 |
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Cash and cash equivalents at beginning of period |
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126.1 |
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6.8 |
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Cash and cash equivalents at end of period |
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$ |
85.9 |
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$ |
8.2 |
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See Notes to Consolidated Financial Statements.
4
ALERIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2007
(amounts in millions, except share and per share data)
NOTE A BASIS OF PRESENTATION
On July 14, 2006, Texas Pacific Group (TPG) formed Aurora Acquisition Holdings, Inc.
(Holdings) and Aurora Acquisition Merger Sub, Inc. (Merger Sub), for purposes of acquiring
Aleris International, Inc. (we, our or the Company). On August 7, 2006, we entered into an
Agreement and Plan of Merger with Holdings, pursuant to which each share of our common stock (other
than shares held in treasury or owned by Holdings) would be converted into the right to receive
$52.50 in cash, subject to stockholder approval. The acquisition of the Company (the Acquisition)
was completed on December 19, 2006 at which time TPG and certain members of our management made a
cash contribution of $844.9 and a non-cash contribution of $3.9 to Holdings in exchange for
8,520,000 shares of Holdings stock. The non-cash contribution consisted of shares of common stock
held by management. Holdings contributed this amount to Merger Sub in exchange for the Merger Sub
issuing 900 shares of its common stock to Holdings. The cash contribution, along with the
additional indebtedness jointly entered into by us and Merger Sub, was used to acquire and retire
all of our then outstanding common stock, redeem all stock options and non-vested stock, refinance
substantially all of our indebtedness and to pay fees and expenses associated with the Acquisition.
Immediately upon consummation of the Acquisition, the Merger Sub was merged with and into the
Company. As the surviving corporation in the merger, we assumed, by operation of law, all of the
rights and obligations of Merger Sub.
The Acquisition was recorded as of December 19, 2006. The accompanying consolidated financial
statements for the three months ended March 31, 2007 (the Successor period) include the
preliminary application of purchase accounting and the establishment of a new basis of accounting
necessitated by the Acquisition. The accompanying financial statements for the three months ended
March 31, 2006 (the Predecessor period) does not reflect this new basis of accounting.
The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007. The accompanying financial statements include the
accounts of Aleris International, Inc. and all of its subsidiaries (collectively, except where the
context otherwise requires, referred to as we, us, our or similar terms). All intercompany
accounts and transactions have been eliminated. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2006.
NOTE B INVENTORIES
The components of inventories are:
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(Successor) |
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March 31, |
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December 31, |
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2007 |
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2006 |
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Finished goods |
|
$ |
315.7 |
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$ |
344.4 |
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Raw materials |
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|
333.0 |
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369.3 |
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Work in process |
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284.9 |
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270.7 |
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Supplies |
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39.0 |
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39.2 |
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$ |
972.6 |
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$ |
1,023.6 |
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At December 31, 2006, consolidated inventories included approximately $58.0 associated with
the write-up of acquired inventory to fair value in connection with the Acquisition. Substantially
all of this write-up was included within Cost of Sales in the consolidated statement of
operations for the three months ended March 31, 2007.
NOTE C GOODWILL
The following table details the changes in the carrying amount of goodwill for the three
months ended March 31, 2007. Due to the proximity of the Acquisition to March 31, 2007, the allocation
of goodwill to our reporting units has not yet
5
been determined. As a result, no goodwill is presented within our reportable segments as of
March 31, 2007. We expect the allocation of goodwill to our reportable segments to be completed
during 2007.
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Unallocated |
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|
goodwill |
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Balance at December 31, 2006 |
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$ |
1,362.4 |
|
Purchase price allocation adjustments |
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|
40.1 |
|
Currency translation adjustments |
|
|
1.5 |
|
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Balance at March 31, 2007 |
|
$ |
1,404.0 |
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|
During the three months ended
March 31, 2007 we recorded adjustments to the preliminary
purchase price allocation to finalize the adjustment necessary to state the acquired inventories to their
fair value, to record
certain liabilities assumed and to record deferred income taxes related to purchase price allocation adjustments.
The purchase price allocation remains preliminary and subject to the
completion of valuations of the acquired intangible long-lived
assets, the finalization of our restructuring activities and the determination of deferred income
taxes. In addition, the purchase price paid to acquire the downstream aluminum business of Corus
Group plc (Corus Aluminum) in August 2006 is subject to the finalization of an adjustment that is
based upon the working capital delivered and the net debt assumed. As of March 31, 2007, we
estimate that this adjustment will result in $65.0 being paid by us to Corus Group plc and have
accrued this amount within Accrued liabilities in the consolidated balance sheet. Any change in
this estimate will result in an adjustment to goodwill.
The purchase price allocation is expected to be completed in 2007 and may result in
significant changes to the long-lived assets included in our consolidated balance sheet as of March
31, 2007 and to the amount of depreciation and amortization expense associated with these
long-lived assets.
NOTE D LONG-TERM DEBT
Our long-term debt is summarized as follows:
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(Successor) |
|
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|
March 31, |
|
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December 31, |
|
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|
2007 |
|
|
2006 |
|
Revolving Credit Facility |
|
$ |
338.0 |
|
|
$ |
328.6 |
|
Term Loan Facility |
|
|
1,229.7 |
|
|
|
1,225.0 |
|
9% Senior Notes, due December 15, 2014 |
|
|
600.0 |
|
|
|
600.0 |
|
10% Senior Subordinated Notes, due December 15, 2016 |
|
|
400.0 |
|
|
|
400.0 |
|
7.65% Morgantown, Kentucky Solid Waste Disposal
Facilities Revenue Bonds-1996 Series, due May 1,
2016, net |
|
|
5.7 |
|
|
|
5.7 |
|
7.45% Morgantown, Kentucky Solid Waste Disposal
Facilities Revenue Bonds-1997 Series, due May 1,
2022 |
|
|
4.6 |
|
|
|
4.6 |
|
6.00% Morgantown, Kentucky Solid Waste Disposal
Facilities Revenue Bonds-1998 Series, due May 1,
2023 |
|
|
4.1 |
|
|
|
4.1 |
|
Morgantown, Kentucky Solid Waste Disposal
Facilities Revenue Bonds-2004 Series, due October
1, 2027 bearing interest at 3.90% at March 31, 2007 |
|
|
5.0 |
|
|
|
5.0 |
|
Other |
|
|
13.3 |
|
|
|
15.0 |
|
|
|
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Subtotal |
|
|
2,600.4 |
|
|
|
2,588.0 |
|
Less current maturities |
|
|
19.0 |
|
|
|
20.5 |
|
|
|
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|
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Total |
|
$ |
2,581.4 |
|
|
$ |
2,567.5 |
|
|
|
|
|
|
|
|
On December 19, 2006, in conjunction with the Acquisition, we amended and restated the
$750.0 revolving credit facility entered into on August 1, 2006 in connection with the acquisition
of Corus Aluminum (the Revolving Credit Facility) to, in part, increase the maximum borrowings by
$100.0, subject to lender approval. In addition, we amended and restated the term loan facility
entered into on August 1, 2006 in connection with the acquisition of Corus Aluminum to increase the
maximum borrowings to $825.0 and 303.0 (the Term Loan Facility and, together with the
Revolving Credit Facility, the 2006 Credit Facilities). We also issued $600.0 of senior notes
(the Senior Notes) and $400.0 of senior subordinated notes (the Senior Subordinated Notes). We
used proceeds from these facilities to refinance substantially all of
6
our existing indebtedness and to fund a portion of the purchase price of the Acquisition. We
incurred $86.0 of fees and expenses associated with the refinancing which have been capitalized as
debt issuance costs.
Revolving Credit Facility
Our Revolving Credit Facility provides senior secured financing of up to $750.0. We and
certain of our U.S. and international subsidiaries are borrowers under this Revolving Credit
Facility. The availability of funds to the borrowers located in each jurisdiction is subject to a
borrowing base for that jurisdiction, calculated on the basis of a predetermined percentage of the
value of selected accounts receivable and U.S. and Canadian inventory, less certain ineligible
amounts. Non-U.S. borrowers will also have the ability to borrow under this Revolving Credit
Facility based on excess availability under the borrowing base applicable to U.S. borrowers,
subject to certain sublimits. The Revolving Credit Facility provides for the issuance of up to
$50.0 of letters of credit as well as borrowings on same-day notice, referred to as swingline
loans, and will be available in U.S. dollars, Canadian dollars, euros and certain other currencies.
As of March 31, 2007, we estimate that our borrowing base would have supported borrowings of
$750.0, the maximum amount under the terms of the Revolving Credit Facility. After giving effect to
the $338.0 of outstanding borrowings as well as outstanding letters of credit of $23.3, we had
$388.7 available for borrowing as of March 31, 2007.
The weighted average interest rate under the Revolving Credit Facility as of March 31, 2007
was 6.90%.
There is no scheduled amortization under the Revolving Credit Facility. The principal
amount outstanding will be due and payable in full at maturity, on December 19, 2011.
Term Loan Facility
Our Term Loan Facility is a seven-year credit facility maturing on December 19, 2013. The Term
Loan Facility permits $825.0 in U.S. dollar borrowings and 303.0 in euro borrowings. We have
borrowed the maximum amount under this Term Loan Facility as of March 31, 2007. On March 16, 2007,
the Company entered into a First Amendment (the First Amendment) to the Term Loan Agreement,
pursuant to which, the pricing grid for loans under the Term Loan Agreement has been reduced by
37.5 basis points. In addition, the First Amendment provides that in the case of certain future
repricing transactions, the Company will pay the existing lenders under the Term Loan Agreement a
fee equal to 1% of the aggregate principal amount of all loans prepaid, converted or outstanding in
the repricing transaction.
At March 31, 2007, the weighted average interest rate for borrowings under the Term Loan
Facility was 6.92%.
In
March 2007, we entered into an interest rate swap to fix the base interest rate paid on $700.0
of the amount outstanding under the Term Loan Facility. Under the terms of the swap agreement, we
will receive interest based upon LIBOR and pay a base rate of 4.93%. The swap matures in March
2010.
Senior Notes
On December 19, 2006, Merger Sub, Inc. issued $600.0 aggregate original principal amount of
9.0% / 9.75% Senior Notes under a senior indenture (the Senior Indenture) with LaSalle Bank
National Association, as trustee. As the surviving corporation in the Acquisition, we assumed all
the obligations of Merger Sub under the Senior Indenture. The Senior Notes mature on December 15,
2014.
For any interest payment period through December 15, 2010, we may, at our option, elect to pay interest
on the Senior Notes entirely in cash (Cash Interest), entirely by increasing the principal amount of the outstanding Senior Notes or by issuing additional Senior Notes (PIK Interest) or by paying 50%
of the interest on the Senior Notes in Cash Interest and the remaining portion of such interest in PIK Interest. Cash Interest on the Senior Notes accrues at the rate of 9%
per annum. PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum. After December 15, 2010, we will make all interest payments
on the Senior Notes entirely in cash. All Senior Notes mature on December 15, 2014 and have the same rights and benefits as the Senior Notes issued on December 19, 2006. Interest on the Senior Notes is payable semi-annually in arrears on each June 15 and December 15, commencing on June 15, 2007.
Senior Subordinated Notes
On December 19, 2006, Merger Sub issued $400.0 aggregate original principal amount of 10.0%
Senior Subordinated Notes under a senior subordinated indenture (the Senior Subordinated
Indenture) with LaSalle Bank National Association, as trustee. As the surviving corporation in the
Acquisition, we assumed all the obligations of Merger Sub under the Senior Subordinated Indenture.
The Senior Subordinated Notes mature on December 15, 2016. Interest on the Senior Subordinated
Notes is payable in cash semi-annually in arrears on each June 15 and December 15, commencing June
15, 2007.
NOTE E COMMITMENTS AND CONTINGENCIES
Environmental Proceedings and Asset Retirement Obligations
Our operations are subject to environmental laws and regulations governing air emissions,
wastewater discharges, the handling, disposal and remediation of hazardous substances and wastes
and employee health and safety. These laws can impose joint and several liabilities 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
7
environmental legal requirements, we may be required, from time to time, to take environmental
control measures at some of our facilities to meet future requirements.
Currently and from time to time, we are a party to notices of violation brought by
environmental agencies concerning the laws governing air emissions. In connection with certain
pending proceedings, we are in discussions with government authorities for the purpose of resolving
similar issues that have arisen at a number of our facilities in different states. At present,
discussions are not sufficiently advanced to determine the scope of relief or the amount of
penalties. However, with respect to these pending proceedings, the company does not anticipate that
the amount of penalties would have a material adverse effect on our financial position or results
of operations.
We have been named as a potentially responsible party in certain proceedings initiated
pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act and similar
state statutes and may be named a potentially responsible party in other similar proceedings in the
future. 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
position or results of operations.
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 by
agencies in four states for environmental remediation at five sites, two of which are located at
our operating facilities.
Our reserves for environmental remediation liabilities totaled $15.0 at March 31, 2007 and
December 31, 2006 and have been classified as Other long-term liabilities in the consolidated
balance sheet.
In addition to environmental liabilities, we have recorded asset retirement obligations
associated with legal requirements related primarily to the normal operation of our landfills and
the retirement of the related assets. At March 31, 2007 and December 31, 2006, our total asset
retirement obligations for our landfills were $12.0.
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.
NOTE F
COMPREHENSIVE (LOSS) INCOME
The following table presents the components of comprehensive (loss) income for the three ended March
31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
|
(Predecessor) |
|
|
|
For the three |
|
|
|
For the three |
|
|
|
months ended |
|
|
|
months ended |
|
|
|
March 31, 2007 |
|
|
|
March 31, 2006 |
|
Net (loss) income |
|
$ |
(53.1 |
) |
|
|
$ |
28.2 |
|
Changes in other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
8.4 |
|
|
|
|
3.7 |
|
Unrealized (losses) gains on derivative financial instruments: |
|
|
|
|
|
|
|
|
|
Net change from periodic revaluations |
|
|
(0.2 |
) |
|
|
|
(13.1 |
) |
Net amount reclassified to income |
|
|
|
|
|
|
|
(3.0 |
) |
Income tax effect |
|
|
0.1 |
|
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains on derivative financial instruments |
|
|
(0.1 |
) |
|
|
|
(10.0 |
) |
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(44.8 |
) |
|
|
$ |
21.9 |
|
|
|
|
|
|
|
|
|
See Note K for further information relating to our derivative financial instruments.
NOTE G SEGMENT REPORTING
The acquisition of Corus Aluminum increased the size and scope of our international operations
substantially and, as a result, we re-aligned our reporting structure into global business units
that offer different types of metal products and services. Our operating segments consist of global
rolled and extruded products, global recycling, global specification alloy,
8
and global zinc. As a result, the former international segment is now included within the
global recycling and global specification alloy segments. The Predecessor Period has been restated
to reflect this change.
Our global rolled and extruded products segment produces aluminum sheet, plate and extruded
and fabricated products for distributors and customers serving the aerospace, building and
construction, transportation and consumer durables industry segments. For financial reporting
purposes, the global recycling and global specification alloy operating segments have been
aggregated into the global recycling reportable segment. The global recycling segment represents
all of our aluminum melting, processing, alloying and salt cake recycling activities. We have
aggregated these businesses because the products produced are identical (except for minor
differences in chemical composition), are delivered in the same manner (either molten or in bars),
the raw materials used are very similar, the production processes and equipment used are identical
and the long-term gross margins have been and are expected to remain similar. Our global zinc
segment represents all of our zinc melting, processing and trading activities.
Measurement of Segment Profit or Loss and Segment Assets
The accounting policies of the reportable segments are the same as those described in the
summary of significant accounting policies. Our measure of the profitability of our operating
segments is referred to as segment income. Segment income excludes provisions for income taxes,
restructuring and other charges, interest, unrealized losses (gains) on derivative financial
instruments, corporate general and administrative costs, including depreciation of corporate assets
and amortization of capitalized debt issuance costs. Intersegment sales and transfers are recorded
at market value. Consolidated cash, long-term debt, net capitalized debt costs, deferred tax assets
and assets located at our headquarters office are not allocated to the reportable segments.
Reportable Segment Information
The following table shows our segment assets as of March 31, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Assets: |
|
|
|
|
|
|
|
|
Global rolled and extruded products |
|
$ |
2,484.3 |
|
|
$ |
2,480.7 |
|
Global recycling |
|
|
605.0 |
|
|
|
597.8 |
|
Global zinc |
|
|
172.8 |
|
|
|
184.4 |
|
Other unallocated assets |
|
|
1,559.5 |
|
|
|
1,545.5 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,821.6 |
|
|
$ |
4,808.4 |
|
|
|
|
|
|
|
|
9
The following table shows our revenues and segment income for the three months ended
March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
|
(Predecessor) |
|
|
|
For the three |
|
|
|
For the three |
|
|
|
months ended |
|
|
|
months ended |
|
|
|
March 31, 2007 |
|
|
|
March 31, 2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Global rolled and extruded products |
|
$ |
1,063.6 |
|
|
|
$ |
412.5 |
|
Global recycling |
|
|
424.1 |
|
|
|
|
345.6 |
|
Global zinc |
|
|
142.6 |
|
|
|
|
96.9 |
|
Intersegment revenues |
|
|
(31.2 |
) |
|
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,599.1 |
|
|
|
$ |
847.6 |
|
|
|
|
|
|
|
|
|
Segment income (loss): |
|
|
|
|
|
|
|
|
|
Global rolled and extruded products |
|
$ |
10.8 |
|
|
|
$ |
42.4 |
|
Global recycling |
|
|
15.7 |
|
|
|
|
18.1 |
|
Global zinc |
|
|
(0.6 |
) |
|
|
|
15.1 |
|
|
|
|
|
|
|
|
|
Total segment income |
|
$ |
25.9 |
|
|
|
$ |
75.6 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
Corporate general and administrative expenses |
|
$ |
(18.1 |
) |
|
|
$ |
(15.4 |
) |
Restructuring and other charges |
|
|
(7.2 |
) |
|
|
|
|
|
Interest expense |
|
|
(55.8 |
) |
|
|
|
(14.0 |
) |
Unrealized gains (losses) on derivative financial instruments |
|
|
0.9 |
|
|
|
|
(0.8 |
) |
Interest and other income, net |
|
|
1.5 |
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes and minority interests |
|
$ |
(52.8 |
) |
|
|
$ |
45.2 |
|
|
|
|
|
|
|
|
|
NOTE H STOCK-BASED COMPENSATION
Successor
Stock-Based Compensation Plan
In February 2007 the Board of Directors of Holdings approved the Aurora Acquisition Holdings,
Inc. Amended and Restated Management Equity Incentive Plan (2007 Plan). Under the 2007 Plan,
Holdings may grant up to 740,870 stock options. During the three months ended March 31, 2007,
Holdings granted 637,866 stock options to certain members of the Companys senior management. The
options have an exercise price of $100.00 and a ten year life with 60% of the options vesting
ratably over five years and 40% vesting upon the occurrence of a liquidity event, as defined
under the terms of the 2007 Plan agreement, and the achievement of certain returns on TPGs
investment. A portion of the time-based options will be paid out upon
a liquidity event should the event occur prior to full vesting of
these awards. While the time based portion of the options will be
expensed over the requisite service period, the event-based awards will not be expensed until the occurrence of the liquidity event.
During the three months ended March 31, 2007, we recorded $0.7 of compensation expense
associated with these options. We have recorded the expense under the
push down accounting provisions of SEC Staff
Accounting Bulletin No. 107. The weighted-average fair value of
the time and event-based options was approximately $51.00 and
$36.00 per option, respectively. At March 31, 2007, there was
$18.7 of compensation expense that
will be expensed over the next five years and $9.2 of compensation expense that will be expensed
upon the occurrence of the liquidity event.
The Company used the Monte Carlo simulation method to estimate the fair value of the stock
options granted in 2007. Under this method, the estimate of fair value is affected by the
assumptions included in the following table, certain of which are highly complex and subjective.
Expected equity volatility was determined based upon historical stock prices
of our peer
companies. The expected term of the event-based options granted was
determined based upon a range of estimates regarding of the timing
of a liquidity event. The following table summarizes the significant assumption used to determine
the fair value of the stock options granted during the three months ended March 31, 2007:
|
|
|
|
|
Expected
timing of liquidity event in years |
|
|
2-7 |
|
Weighted
average expected option life in years |
|
|
4.6 |
|
Risk-free interest rate |
|
|
4.8 |
% |
Equity volatility factor |
|
|
66.3 |
% |
Dividend yield |
|
|
0.0 |
% |
Predecessor
Stock-Based Compensation Plan
As of
December 31, 2006 185,017 share units were granted prior to
the Acquisition remained outstanding. During the three months ended
March 31, 2007, the Company paid $7.4 to holders of certain of
these share units. The payment has been classified as Investing activities in the consolidated statement of
cash flows. Additional payments for the remaining share
units totaling $4.1 were made in April 2007.
10
NOTE I INCOME TAXES
Our
effective tax rate was 1.2% and 36.8% for the three months ended
March 31, 2007 and 2006, respectively. The effective tax rate
for the three months ended March 31, 2007 differed from the
federal statutory rate applied to losses before income taxes
primarily as a result of the mix of income, losses and tax rates
between tax jurisdictions.
We
have valuation allowances recorded to reduce certain deferred tax
assets to amounts that are more likely than not to be realized. The
remaining valuation allowances relate to our potential inability to
utilize certain foreign net operating loss carry forwards and
U.S. state net operating loss and tax credit carry forwards. We
intend to maintain these valuation allowances until sufficient
positive evidence exists (such as cumulative positive earnings and
estimated future taxable income) to support their reversal. Any
subsequent reversal of the state income tax valuation allowance will
result in a reduction in the otherwise determinable income tax
expense, and any reversal of the international valuation allowance
will result in a reduction of goodwill and other identifiable
intangible assets.
We
adopted the provisions of Financial Accounting Standards Board
Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes-an Interpretation of FASB Statement No. 109
on January 1, 2007. The effect of adoption was not material. As
of the date of adoption, we had $1.9 of unrecognized tax benefits,
all of which would be recorded against goodwill and other
identifiable intangible assets. As of March 31, 2007, we have
$2.3 of unrecognized tax benefits. The incremental $0.4 of
unrecognized benefit will impact our effective rate if recognized.
We
recognize interest and penalties related to uncertain tax positions
within the Provision for income taxes in the consolidated
statement of operations. As of March 31, 2007, we had
approximately $0.1 of accrued interest related to uncertain tax
positions.
The
2001 through 2006 tax years remain open to examination by the major
taxing jurisdictions to which we are subject. We do not anticipate
any significant changes to our total unrecognized tax benefits
through the end of the first quarter of 2008.
NOTE J EMPLOYEE BENEFITS
Defined Benefit Pension Plans
Components of the net periodic benefit expense for the three months ended March 31, 2007 and
2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European and Canadian |
|
|
|
U.S. pension benefits |
|
|
pension benefits |
|
|
|
(Successor) |
|
|
|
(Predecessor) |
|
|
(Successor) |
|
|
|
(Predecessor) |
|
|
|
For the three |
|
|
|
For the three |
|
|
For the three |
|
|
|
For the three |
|
|
|
months ended |
|
|
|
months ended |
|
|
months ended |
|
|
|
months ended |
|
|
|
March 31, 2007 |
|
|
|
March 31, 2006 |
|
|
March 31, 2007 |
|
|
|
March 31, 2006 |
|
Service cost |
|
$ |
0.6 |
|
|
|
$ |
0.9 |
|
|
$ |
1.2 |
|
|
|
$ |
0.1 |
|
Interest cost |
|
|
1.9 |
|
|
|
|
1.7 |
|
|
|
2.8 |
|
|
|
|
0.3 |
|
Amortization of net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Expected return on plan assets |
|
|
(2.2 |
) |
|
|
|
(1.9 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
0.3 |
|
|
|
$ |
0.7 |
|
|
$ |
2.2 |
|
|
|
$ |
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefit Plans
The components of net postretirement benefit expense for the three ended March 31, 2007 and
2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
|
(Predecessor) |
|
|
|
For the three |
|
|
|
For the three |
|
|
|
months ended |
|
|
|
months ended |
|
|
|
March 31, 2007 |
|
|
|
March 31, 2006 |
|
Service cost |
|
$ |
0.3 |
|
|
|
$ |
0.2 |
|
Interest cost |
|
|
0.8 |
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1.1 |
|
|
|
$ |
0.9 |
|
|
|
|
|
|
|
|
|
NOTE K DERIVATIVE FINANCIAL INSTRUMENTS
We enter into derivatives to hedge the cost of energy, the sale and purchase prices of certain
aluminum and zinc products as well as certain alloys used in our production processes, and certain
currency and interest rate exposures. The fair value gains (losses) of outstanding derivative
contracts are included in the consolidated balance sheet as Derivative financial instruments and
Other current liabilities. The fair value of our derivative financial instruments and amounts
deferred in Accumulated other comprehensive income as of March 31, 2007 and December 31, 2006:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Deferred gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses), |
|
|
|
|
|
|
Deferred gains, |
|
|
|
Fair value |
|
|
net of tax |
|
|
Fair value |
|
|
net of tax |
|
Natural gas |
|
$ |
1.5 |
|
|
$ |
0.6 |
|
|
$ |
(1.0 |
) |
|
$ |
|
|
Aluminum |
|
|
79.3 |
|
|
|
|
|
|
|
89.7 |
|
|
|
|
|
Zinc |
|
|
(0.4 |
) |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Currency |
|
|
10.9 |
|
|
|
|
|
|
|
11.2 |
|
|
|
|
|
Interest rate |
|
|
(1.1 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2006, our natural gas, zinc and certain of our
aluminum derivative financial instruments were accounted for as hedges and met SFAS No. 133s
requirements for hedge accounting treatment. As such, the changes in the fair value of certain of
these cash flow hedges accumulated on our consolidated balance sheet (in Accumulated other
comprehensive income) until the underlying hedged item impacted earnings. In conjunction with the
preliminary purchase price allocation related to the Acquisition, all amounts previously included
within Accumulated other comprehensive income were eliminated. Subsequent to the Acquisition, we
have elected not to treat our aluminum, zinc and currency derivative financial instruments as
hedges for accounting purposes and, as a result, all future changes in the fair value of these
derivatives will be included within our results of operations.
Both realized and unrealized gains and losses on those derivative financial instruments that
are not accounted for as hedges are included within (Gains) losses on derivative financial
instruments in the consolidated statement of operations while realized gains and (losses) on those
derivative financial instruments that are accounted for as hedges are included within Cost of
sales. Realized (losses) gains totaled the following in the three ended March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
|
(Predecessor) |
|
|
|
March 31, 2007 |
|
|
|
March 31, 2006 |
|
|
|
|
|
|
|
Gains (losses) on |
|
|
|
|
|
|
|
Gains (losses) on |
|
|
|
|
|
|
|
derivative financial |
|
|
|
|
|
|
|
derivative financial |
|
|
|
Cost of sales |
|
|
instruments |
|
|
|
Cost of sales |
|
|
instruments |
|
Natural gas |
|
$ |
1.5 |
|
|
$ |
|
|
|
|
$ |
1.6 |
|
|
$ |
|
|
Aluminum |
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
(3.3 |
) |
Zinc |
|
|
|
|
|
|
3.1 |
|
|
|
|
0.3 |
|
|
|
|
|
Currency |
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
Natural Gas Hedging
In order to manage our price exposure for natural gas purchases, we have fixed the future
price of a portion of our natural gas requirements by entering into financial hedge agreements.
Under these agreements, 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. These
contracts are accounted for as cash flow hedges, with all gains and losses recognized in Cost of
sales when the gas is consumed. In addition, we have cost escalators included in some of our
long-term supply contracts with customers, which limit our exposure to natural gas price risk.
Aluminum Hedging
The selling prices of the majority of the global rolled and extruded products segments
customer orders 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 are purchased
several months or years after the selling prices are fixed, the global rolled and extruded products
segment is subject to the risk of changes in the purchase price of the raw materials it purchases.
In order to manage this exposure, London Metal Exchange (LME) future or forward purchase
contracts are entered into at the time the selling prices are fixed. In addition, the global rolled
and extruded products segment enters into future sales contracts to protect the fair value of a
portion of its aluminum inventory against a potential decline in aluminum selling prices. We do not
treat these derivative financial instruments as hedges for accounting purposes. Accordingly, the
changes in the fair value of the contracts are recorded in earnings as (Gains) losses on
derivative financial instruments rather than being deferred in Accumulated other comprehensive
income.
The global recycling segment also enters into LME high-grade aluminum forward sales and
purchase contracts to mitigate the risk associated with changes in metal prices. These contracts
are not accounted for as hedges and, as a result, the
12
changes in fair value of the contracts are recorded within (Gains) losses on derivative
financial instruments in the consolidated statement of operations.
Zinc Hedging
In the normal course of business, the global zinc segment enters into fixed-price sales and
purchase contracts with a number of its customers and suppliers. In order to hedge the risk of
changing LME zinc prices, we enter into LME forward sale and future purchase contracts. During 2006
effective portions of these hedges were included within Other comprehensive income (loss) while
the ineffective portions were included within (Gains) losses on derivative financial instruments.
During 2007, we also entered into price collars and swaps designed to protect a portion of our
forecasted zinc sales from changes in the LME price of zinc. These derivatives have not been
accounted for as hedges and the changes in their fair value are included within (Gains) losses on
derivative financial instrument in the consolidated statement of operations.
Subsequent to the Acquisition, we no longer treat our zinc derivative financial instruments as
hedges for accounting purposes. As a result, the changes in fair value of the contracts are
recorded within (Gains) losses on derivative financial instruments in the consolidated statement
of operations.
Currency Hedging
Certain of our purchases and sales are denominated in currencies other than the functional
currency of the entities entering into these agreements. We have entered into foreign currency
forward contracts to mitigate the impact of currency fluctuations associated with these
transactions. As with the acquired aluminum and zinc derivatives, we do not account for currency
derivatives as hedges and, as a result, the changes in their fair value are recorded within (Gains) losses on derivative financial instruments within the statement of operations.
Interest Rate Hedging
As discussed in Note D, during the three months ended March 31, 2007, we entered into an
interest rate swap to fix the interest rate on a portion of our variable rate borrowings under the
Term Loan Facility. Changes in the fair value of the interest rate swap are recorded within
Accumulated other comprehensive income.
NOTE L RESTRUCTURING AND OTHER CHARGES
During the three months ended March 31, 2007, we incurred $7.2 of costs primarily related to a
potential acquisition that was not consummated.
NOTE M RELATED PARTY TRANSACTIONS
As discussed in Note H, we recorded $0.7 of compensation expense associated with the stock
option plan of Holdings, the beneficiaries of which are members of our senior management. In
addition, we recorded $2.3 of management fees payable to affiliates of TPG which have been included
within Accrued liabilities in the consolidated balance sheet.
13
NOTE N CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Certain of our subsidiaries (the Guarantor Subsidiaries) are guarantors of the indebtedness
under our Senior Notes and Senior Subordinated Notes. Condensed consolidating financial statements
of Aleris International, Inc., the Guarantor Subsidiaries, and those subsidiaries of Aleris
International, Inc. that are not guaranteeing the indebtedness under the Senior Notes or the Senior
Subordinated Notes (the Non-Guarantor Subsidiaries) are presented below. The condensed
consolidating balance sheets are presented as of March 31, 2007 and December 31, 2006 and the
condensed consolidating statements of operations and cash flows are presented for the three months
ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007 (Successor) |
|
|
|
Aleris |
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
International, |
|
|
guarantor |
|
|
non-guarantor |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
subsidiaries |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
0.8 |
|
|
$ |
12.2 |
|
|
$ |
72.9 |
|
|
$ |
|
|
|
$ |
85.9 |
|
Accounts receivable, net |
|
|
10.6 |
|
|
|
334.4 |
|
|
|
431.7 |
|
|
|
|
|
|
|
776.7 |
|
Inventories |
|
|
4.5 |
|
|
|
396.9 |
|
|
|
571.2 |
|
|
|
|
|
|
|
972.6 |
|
Deferred income taxes |
|
|
3.9 |
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
4.8 |
|
Prepaid expenses |
|
|
2.7 |
|
|
|
12.4 |
|
|
|
13.5 |
|
|
|
|
|
|
|
28.6 |
|
Derivative financial instruments |
|
|
3.3 |
|
|
|
6.3 |
|
|
|
58.1 |
|
|
|
|
|
|
|
67.7 |
|
Other current assets |
|
|
9.8 |
|
|
|
1.7 |
|
|
|
7.3 |
|
|
|
|
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
35.6 |
|
|
|
763.9 |
|
|
|
1,155.6 |
|
|
|
|
|
|
|
1,955.1 |
|
Property, plant and equipment, net |
|
|
42.3 |
|
|
|
336.5 |
|
|
|
860.8 |
|
|
|
|
|
|
|
1,239.6 |
|
Goodwill |
|
|
1,404.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,404.0 |
|
Intangible assets, net |
|
|
|
|
|
|
28.8 |
|
|
|
52.8 |
|
|
|
|
|
|
|
81.6 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
8.1 |
|
|
|
|
|
|
|
8.1 |
|
Other assets |
|
|
68.1 |
|
|
|
0.9 |
|
|
|
64.9 |
|
|
|
|
|
|
|
133.9 |
|
Investments in
subsidiaries/intercompany
receivable (payable), net |
|
|
1,454.8 |
|
|
|
(15.0 |
) |
|
|
124.8 |
|
|
|
(1,565.3 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,004.8 |
|
|
$ |
1,115.1 |
|
|
$ |
2,267.0 |
|
|
$ |
(1,565.3 |
) |
|
$ |
4,821.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
53.2 |
|
|
$ |
205.3 |
|
|
$ |
369.6 |
|
|
$ |
|
|
|
$ |
628.1 |
|
Accrued liabilities |
|
|
23.4 |
|
|
|
126.0 |
|
|
|
160.2 |
|
|
|
|
|
|
|
309.6 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
37.7 |
|
|
|
|
|
|
|
37.7 |
|
Current maturities of long-term debt |
|
|
8.3 |
|
|
|
0.6 |
|
|
|
10.1 |
|
|
|
|
|
|
|
19.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
84.9 |
|
|
|
331.9 |
|
|
|
577.6 |
|
|
|
|
|
|
|
994.4 |
|
Long-term debt |
|
|
2,064.1 |
|
|
|
2.1 |
|
|
|
515.2 |
|
|
|
|
|
|
|
2,581.4 |
|
Deferred income taxes |
|
|
43.9 |
|
|
|
|
|
|
|
96.6 |
|
|
|
|
|
|
|
140.5 |
|
Accrued pension benefits |
|
|
|
|
|
|
25.5 |
|
|
|
153.6 |
|
|
|
|
|
|
|
179.1 |
|
Accrued post-retirement benefits |
|
|
|
|
|
|
49.3 |
|
|
|
7.2 |
|
|
|
|
|
|
|
56.5 |
|
Other long-term liabilities |
|
|
10.5 |
|
|
|
14.5 |
|
|
|
43.3 |
|
|
|
|
|
|
|
68.3 |
|
Stockholders Equity |
|
|
801.4 |
|
|
|
691.8 |
|
|
|
873.5 |
|
|
|
(1,565.3 |
) |
|
|
801.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,004.8 |
|
|
$ |
1,115.1 |
|
|
$ |
2,267.0 |
|
|
$ |
(1,565.3 |
) |
|
$ |
4,821.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 (Successor) |
|
|
|
Aleris |
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
International, |
|
|
guarantor |
|
|
non-guarantor |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
subsidiaries |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3.4 |
|
|
$ |
9.8 |
|
|
$ |
112.9 |
|
|
$ |
|
|
|
$ |
126.1 |
|
Accounts receivable, net |
|
|
11.3 |
|
|
|
324.2 |
|
|
|
357.0 |
|
|
|
|
|
|
|
692.5 |
|
Inventories |
|
|
8.0 |
|
|
|
433.7 |
|
|
|
581.9 |
|
|
|
|
|
|
|
1,023.6 |
|
Deferred income taxes |
|
|
33.8 |
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
34.6 |
|
Prepaid expenses |
|
|
1.0 |
|
|
|
11.1 |
|
|
|
8.5 |
|
|
|
|
|
|
|
20.6 |
|
Derivative financial instruments |
|
|
1.9 |
|
|
|
5.6 |
|
|
|
70.0 |
|
|
|
|
|
|
|
77.5 |
|
Other current assets |
|
|
4.6 |
|
|
|
4.5 |
|
|
|
9.2 |
|
|
|
|
|
|
|
18.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
64.0 |
|
|
|
788.9 |
|
|
|
1,140.3 |
|
|
|
|
|
|
|
1,993.2 |
|
Property, plant and equipment, net |
|
|
43.4 |
|
|
|
339.3 |
|
|
|
840.4 |
|
|
|
|
|
|
|
1,223.1 |
|
Goodwill |
|
|
1,362.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,362.4 |
|
Intangible assets, net |
|
|
|
|
|
|
29.3 |
|
|
|
54.8 |
|
|
|
|
|
|
|
84.1 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
8.1 |
|
|
|
|
|
|
|
8.1 |
|
Other assets |
|
|
87.7 |
|
|
|
0.6 |
|
|
|
49.2 |
|
|
|
|
|
|
|
137.5 |
|
Investments in
subsidiaries/intercompany receivable
(payable), net |
|
|
1,400.6 |
|
|
|
46.9 |
|
|
|
157.1 |
|
|
|
(1,604.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,958.1 |
|
|
$ |
1,205.0 |
|
|
$ |
2,249.9 |
|
|
$ |
(1,604.6 |
) |
|
$ |
4,808.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
53.9 |
|
|
$ |
210.8 |
|
|
$ |
289.6 |
|
|
$ |
|
|
|
$ |
554.3 |
|
Accrued liabilities |
|
|
11.2 |
|
|
|
169.7 |
|
|
|
157.8 |
|
|
|
|
|
|
|
338.7 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
37.7 |
|
|
|
|
|
|
|
37.7 |
|
Current maturities of long-term debt |
|
|
8.3 |
|
|
|
0.7 |
|
|
|
11.5 |
|
|
|
|
|
|
|
20.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
73.4 |
|
|
|
381.2 |
|
|
|
496.6 |
|
|
|
|
|
|
|
951.2 |
|
Long-term debt |
|
|
2,001.7 |
|
|
|
2.3 |
|
|
|
563.5 |
|
|
|
|
|
|
|
2,567.5 |
|
Deferred income taxes |
|
|
28.6 |
|
|
|
|
|
|
|
112.6 |
|
|
|
|
|
|
|
141.2 |
|
Accrued pension benefits |
|
|
|
|
|
|
27.8 |
|
|
|
151.4 |
|
|
|
|
|
|
|
179.2 |
|
Accrued post-retirement benefits |
|
|
|
|
|
|
50.3 |
|
|
|
7.2 |
|
|
|
|
|
|
|
57.5 |
|
Other long-term liabilities |
|
|
9.1 |
|
|
|
13.0 |
|
|
|
44.3 |
|
|
|
|
|
|
|
66.4 |
|
Stockholders Equity |
|
|
845.3 |
|
|
|
730.4 |
|
|
|
874.3 |
|
|
|
(1,604.6 |
) |
|
|
845.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,958.1 |
|
|
$ |
1,205.0 |
|
|
$ |
2,249.9 |
|
|
$ |
(1,604.6 |
) |
|
$ |
4,808.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2007 (Successor) |
|
|
|
Aleris |
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
International, |
|
|
guarantor |
|
|
non-guarantor |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
subsidiaries |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues |
|
$ |
35.6 |
|
|
$ |
796.2 |
|
|
$ |
880.7 |
|
|
$ |
(113.4 |
) |
|
$ |
1,599.1 |
|
Cost of sales |
|
|
32.1 |
|
|
|
759.4 |
|
|
|
854.2 |
|
|
|
(113.4 |
) |
|
|
1,532.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
3.5 |
|
|
|
36.8 |
|
|
|
26.5 |
|
|
|
|
|
|
|
66.8 |
|
Selling, general and administrative expense |
|
|
3.6 |
|
|
|
25.5 |
|
|
|
32.6 |
|
|
|
|
|
|
|
61.7 |
|
Restructuring and other charges |
|
|
|
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
7.2 |
|
Losses (gains) on derivative financial
instruments |
|
|
5.6 |
|
|
|
(4.6 |
) |
|
|
(6.4 |
) |
|
|
|
|
|
|
(5.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(5.7 |
) |
|
|
8.7 |
|
|
|
0.3 |
|
|
|
|
|
|
|
3.3 |
|
Interest expense |
|
|
7.5 |
|
|
|
48.0 |
|
|
|
9.8 |
|
|
|
(9.5 |
) |
|
|
55.8 |
|
Other expense (income), net |
|
|
0.7 |
|
|
|
(1.0 |
) |
|
|
(8.9 |
) |
|
|
9.5 |
|
|
|
0.3 |
|
Equity in net (earnings) loss of affiliates |
|
|
38.6 |
|
|
|
0.8 |
|
|
|
|
|
|
|
(39.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(52.5 |
) |
|
|
(39.1 |
) |
|
|
(0.6 |
) |
|
|
39.4 |
|
|
|
(52.8 |
) |
Provision (benefit) for income taxes |
|
|
0.6 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority interest |
|
|
(53.1 |
) |
|
|
(38.6 |
) |
|
|
(0.6 |
) |
|
|
39.4 |
|
|
|
(52.9 |
) |
Minority interests, net of provision for
income taxes |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(53.1 |
) |
|
$ |
(38.6 |
) |
|
$ |
(0.8 |
) |
|
$ |
39.4 |
|
|
$ |
(53.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2006 (Predecessor) |
|
|
|
Aleris |
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
International, |
|
|
guarantor |
|
|
non-guarantor |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
subsidiaries |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues |
|
$ |
38.2 |
|
|
$ |
742.5 |
|
|
$ |
175.9 |
|
|
$ |
(109.0 |
) |
|
$ |
847.6 |
|
Cost of sales |
|
|
34.1 |
|
|
|
666.3 |
|
|
|
165.8 |
|
|
|
(109.0 |
) |
|
|
757.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4.1 |
|
|
|
76.2 |
|
|
|
10.1 |
|
|
|
|
|
|
|
90.4 |
|
Selling, general and administrative expense |
|
|
0.5 |
|
|
|
23.3 |
|
|
|
3.0 |
|
|
|
|
|
|
|
26.8 |
|
(Gains) losses on derivative financial
instruments |
|
|
|
|
|
|
2.2 |
|
|
|
1.9 |
|
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3.6 |
|
|
|
50.7 |
|
|
|
5.2 |
|
|
|
|
|
|
|
59.5 |
|
Interest expense |
|
|
13.4 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
14.0 |
|
Other (income) expense, net |
|
|
(0.6 |
) |
|
|
0.8 |
|
|
|
0.1 |
|
|
|
|
|
|
|
0.3 |
|
Equity in net (earnings) loss of affiliates |
|
|
(34.2 |
) |
|
|
|
|
|
|
|
|
|
|
34.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
25.0 |
|
|
|
49.8 |
|
|
|
4.6 |
|
|
|
(34.2 |
) |
|
|
45.2 |
|
(Benefit from) provision for income taxes |
|
|
(3.2 |
) |
|
|
18.3 |
|
|
|
1.7 |
|
|
|
|
|
|
|
16.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
28.2 |
|
|
|
31.5 |
|
|
|
2.9 |
|
|
|
(34.2 |
) |
|
|
28.4 |
|
Minority interests, net of provision for
income taxes |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
28.2 |
|
|
$ |
31.5 |
|
|
$ |
2.7 |
|
|
$ |
(34.2 |
) |
|
$ |
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2007 (Successor) |
|
|
|
Aleris |
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
International, |
|
|
guarantor |
|
|
non-guarantor |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
subsidiaries |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided by operating activities |
|
$ |
39.1 |
|
|
$ |
(45.9 |
) |
|
$ |
9.6 |
|
|
$ |
|
|
|
$ |
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Aleris International, Inc. |
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.4 |
) |
Payments for property, plant and equipment |
|
|
(0.3 |
) |
|
|
(9.3 |
) |
|
|
(35.1 |
) |
|
|
|
|
|
|
(44.7 |
) |
Proceeds from sale of property, plant and
equipment |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(7.7 |
) |
|
|
(9.1 |
) |
|
|
(35.2 |
) |
|
|
|
|
|
|
(52.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from (payments on) long-term
revolving credit facilities |
|
|
62.4 |
|
|
|
(0.1 |
) |
|
|
(54.6 |
) |
|
|
|
|
|
|
7.7 |
|
Decrease in restricted cash |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Net transfers with subsidiaries |
|
|
(96.4 |
) |
|
|
57.4 |
|
|
|
39.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing
activities |
|
|
(34.0 |
) |
|
|
57.4 |
|
|
|
(15.6 |
) |
|
|
|
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate differences on cash
and cash equivalents |
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
1.2 |
|
Net (decrease) increase in cash and cash
equivalents |
|
|
(2.6 |
) |
|
|
2.4 |
|
|
|
(40.0 |
) |
|
|
|
|
|
|
(40.2 |
) |
Cash and cash equivalents at beginning of
period |
|
|
3.4 |
|
|
|
9.8 |
|
|
|
112.9 |
|
|
|
|
|
|
|
126.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
0.8 |
|
|
$ |
12.2 |
|
|
$ |
72.9 |
|
|
$ |
|
|
|
$ |
85.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2006 (Predecessor) |
|
|
|
Aleris |
|
|
Combined |
|
|
Combined |
|
|
|
|
|
|
|
|
|
International, |
|
|
guarantor |
|
|
non-guarantor |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
subsidiaries |
|
|
subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash
provided by (used) operating activities |
|
$ |
21.6 |
|
|
$ |
21.9 |
|
|
$ |
(8.1 |
) |
|
$ |
|
|
|
$ |
35.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment |
|
|
(1.2 |
) |
|
|
(8.1 |
) |
|
|
(1.7 |
) |
|
|
|
|
|
|
(11.0 |
) |
Other |
|
|
|
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(1.2 |
) |
|
|
(8.2 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
(11.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments of long-term revolving
credit facility |
|
|
(30.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30.7 |
) |
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
(0.1 |
) |
|
|
5.4 |
|
|
|
|
|
|
|
5.3 |
|
Proceeds from exercise of stock options |
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
Excess income tax benefits from exercise
of stock options |
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
Net transfers with subsidiaries |
|
|
8.4 |
|
|
|
(14.4 |
) |
|
|
6.0 |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
0.3 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) financing
activities |
|
|
(20.0 |
) |
|
|
(14.2 |
) |
|
|
11.0 |
|
|
|
|
|
|
|
(23.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
Net decrease in cash and cash equivalents |
|
|
0.4 |
|
|
|
(0.5 |
) |
|
|
1.5 |
|
|
|
|
|
|
|
1.4 |
|
Cash and cash equivalents at beginning
of period |
|
|
0.4 |
|
|
|
(0.3 |
) |
|
|
6.7 |
|
|
|
|
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period |
|
$ |
0.8 |
|
|
$ |
(0.8 |
) |
|
$ |
8.2 |
|
|
$ |
|
|
|
$ |
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars and pounds in millions, except per pound data)
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
The following is a discussion of our financial condition and results of operations for the periods
presented. This discussion should be read in conjunction with the financial statements and notes
and other financial information appearing elsewhere in this Form 10-Q, as well as in our Annual
Report on Form 10-K for the year ended December 31, 2006.
Our discussion 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. Statements contained in this Form 10-Q that are not historical in nature are
considered to be forward-looking statements. They include statements regarding our expectations,
hopes, beliefs, estimates, intentions or strategies regarding the future. The words believe,
expect, anticipate, intend, estimate, will, look forward to and similar expressions are
intended to identify forward-looking statements. Forward-looking statements contained in this Form
10-Q and elsewhere are based on certain assumptions that we consider reasonable.
The expectations set forth in this report regarding, among other things, achievement of anticipated
cost savings and synergies; estimates of volumes, revenues, profitability and net income in future
quarters; future prices and demand for our products; and estimated cash flows and sufficiency of
cash flows to fund capital expenditures, reflect only our expectations regarding these matters.
Actual results could differ materially from these expectations, depending on certain risk factors
that generally affect our business such as:
|
|
|
The operations of Aleris, Corus Aluminum and the 2005 Acquisitions (acquisitions in
2005 of (i) ALSCO Holdings, Inc., (ii) Alumitech, Inc., (iii) Tomra Latasa Reciclagem and
(iv) certain assets of Ormet Corporation) may not be integrated successfully. |
|
|
|
If we fail to implement our business strategy, our financial condition and results of
operations could be adversely affected. |
|
|
|
|
The cyclical nature of the metals industry, our end-use segments and our customers
industries could limit our operating flexibility, which could negatively impact our
financial condition and results of operations. |
|
|
|
|
Our substantial leverage and debt service obligations could adversely affect our
financial condition and restrict our operating flexibility. |
|
|
|
|
The loss of certain members of our management may have an adverse effect on our
operating results. |
|
|
|
|
In addition to our net loss for the three months ended March 31, 2007, we had
substantial historical net losses prior to 2005, and any continuation of net losses in the
future may reduce our ability to raise needed capital. |
|
|
|
|
We may encounter issues under the Sarbanes-Oxley Act that require our management to
provide a management report containing an assessment that our internal controls over
financial reporting are ineffective. |
|
|
|
|
We may encounter increases in the cost of raw materials and energy, which could cause
our cost of goods sold to increase thereby reducing operating results and limiting our
operating flexibility. |
|
|
|
|
We 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. |
|
|
|
|
If we were to lose order volumes from any of our largest customers, our sales volumes
and revenues could be reduced and our cash flows lessened. |
|
|
|
|
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. |
|
|
|
|
We may not be able to generate sufficient cash flows to fund our capital expenditure
requirements or to meet our debt service obligations. Our ability to generate cash depends
on many factors beyond our control, and any failure to meet our debt service obligations
could harm our business, financial condition and results of operations. |
19
|
|
|
Our business requires substantial capital investments that we may be unable to
fulfill. |
|
|
|
|
We may not be able to compete successfully in the industry segments we serve and
aluminum may become less competitive with alternative materials, which could reduce our
share of industry sales, lower our selling prices and reduce our sales volumes. |
|
|
|
|
As a result of the acquisition of Corus Aluminum, a growing portion of our sales is
expected to be derived from our international operations, which exposes us to certain
risks inherent in doing business abroad. |
|
|
|
|
Current environmental liabilities, as well as the cost of compliance with and
liabilities under health and safety laws, could increase our operating costs, negatively
impacting our financial condition and results of operations. |
|
|
|
|
We could experience labor disputes that could disrupt our business. |
|
|
|
|
We may have to take further charges to earnings if our goodwill or asset values are impaired. |
|
|
|
|
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. |
|
|
|
|
The terms of our 2006 Credit Facilities and the indentures governing our issued $600.0
senior notes (Senior Notes) and $400.0 senior subordinated notes (Senior Subordinated
Notes) (Senior Notes and Senior Subordinated Notes collectively referred to as the
Notes) may restrict our current and future operations, particularly our ability to
respond to changes in our business or to take certain actions. |
These factors and other risk factors disclosed in this 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 report are made only as of the date hereof. 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.
OVERVIEW
On July 14, 2006 TPG formed Holdings and Merger Sub for purposes of acquiring us. On August 7,
2006, we entered into an Agreement and Plan of Merger with Holdings, pursuant to which each share
of our common stock (other than shares held in treasury or owned by Holdings) would be converted
into the right to receive $52.50 in cash. The Acquisition was completed on December 19, 2006 at
which time TPG and certain members of our management made a cash contribution of $844.9 million and
a non-cash contribution of $3.9 million to Holdings in exchange for 8,520,000 share of common stock
of Holdings. The non-cash contribution consisted of shares of common stock held by management.
Holdings contributed this amount to Merger Sub in exchange for Merger Sub issuing 900 shares of its
common stock to Holdings. The cash contribution, along with the additional indebtedness jointly
entered into by us and Merger Sub, was used to acquired all of our then outstanding common stock,
including non-vested restricted stock, pay the holders of all outstanding stock options, refinance
substantially all of our indebtedness and pay fees and expenses associated with the Acquisition.
Immediately upon consummation of the Acquisition, the Merger Sub was merged with and into the
Company. As the surviving corporation in the merger, we assumed, by operations of law, all of the
rights and obligations of Merger Sub. Subsequent to the Acquisition, our common shares were
delisted from the New York Stock Exchange. We continue to report with the SEC as a voluntary filer
because the terms of the indentures governing our Notes require us to file all current, quarterly
and annual filings with the SEC. Further, we expect to file a registration statement on Form S-4 in
2007 to register our Senior Notes and Senior Subordinated Notes thereby permitting holders of those
securities to freely trade them.
With the acquisition of the downstream aluminum business of Corus Group plc (Corus Aluminum)
in August 2006, we are a global leader in aluminum rolled products and extrusions, aluminum
recycling and specification alloy production. We are also a recycler of zinc and a leading U.S.
manufacturer of zinc metal and value-added zinc products that include zinc oxide and zinc dust. We
generate substantially all of our revenues from the manufacture and sale of these products.
20
The Corus Aluminum acquisition increased the size and scope of our international operations
substantially and, as a result, management re-aligned our reporting structure in the third quarter
of 2006 into global business units that offer different types of metal products and services. Our
reportable segments consist of global rolled and extruded products, global recycling and global
zinc. Segment performance is measured utilizing segment income which includes gross profits, plant
and business specific other expense (income), selling, general and administrative expense and
realized gains and losses on derivative financial instruments. Corporate general and administrative
expenses, unrealized gains and losses on derivative financial instruments, restructuring and other
charges, interest expense, interest and other income, amortization of capitalized debt issuance
costs and provisions for income taxes are not allocated to individual segments.
In the three months ended March 31, 2007, we generated revenues of $1.6 billion and segment
income of $25.9 million compared to revenues of $847.6 million and segment income of $75.6 million
in the three months ended March 31, 2006. Our segment operating results for the three months ended
March 31, 2007 were impacted by both the acquisition of Aleris by TPG and our acquisition of Corus
Aluminum. The acquired operations of Corus Aluminum generated revenues of $647.1 million in the
three months ended March 31, 2007 and contributed a segment loss of $14.5 million. The acquisition
by TPG required that all of our assets and liabilities be adjusted to fair value through purchase
accounting. These adjustments resulted in an increase in the value of the acquired inventory of
approximately $58.0 million. As substantially all of the acquired inventory was sold during the
three months ended March 31, 2007, we included approximately $55.2 million of this write-up in cost
of sales, significantly reducing our segment operating results. In addition, the application of
purchase accounting rules prohibited us from reflecting $11.5 million of economic benefits
associated with settled derivative financial instruments in segment income.
Our continued focus on achieving cost reductions from the implementation of companywide
productivity initiatives and synergies from the Corus Aluminum acquisition led to the realization
of cost reductions totaling approximately $25.0 million in the three months ended March 31, 2007,
$12.0 million of which were attributable to the Corus Aluminum
acquisition.
However, the positive impact of these cost savings was more than offset by lower volumes and
material margins in our North American rolled products operations which reduced segment income by
an estimated $24.3 million and lower volumes in our zinc operations which reduced segment income by
an estimated $3.6 million. Higher volumes and improved pricing in our global recycling segment were more than offset by tighter scrap spreads.
Further impacting our operating results in the three months ended March 31, 2007 was interest
expense of $55.8 million compared to $14.0 million in the three months ended March 31, 2006. The
increased interest expense reflects the increased indebtedness resulting from the acquisition of
Corus Aluminum and the Acquisition.
21
The following table presents key financial and operating data on a consolidated basis for
the three months ended March 31, 2007 and 2006. The 2007 period reflects the change in the basis of
accounting necessitated by the Acquisition and is referred to as the Successor Period throughout
this Form 10-Q while the 2006 period is referred to as the Predecessor Period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
(Predecessor) |
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
|
|
|
|
months ended |
|
|
months ended |
|
|
Percent |
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
change |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
Revenues |
|
$ |
1,599.1 |
|
|
$ |
847.6 |
|
|
|
89 |
% |
Cost of sales |
|
|
1,532.3 |
|
|
|
757.2 |
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
66.8 |
|
|
|
90.4 |
|
|
|
(26 |
) |
Gross profit as a percentage of revenues |
|
|
4.2 |
% |
|
|
10.7 |
% |
|
|
|
|
Selling, general and administrative expense |
|
|
61.7 |
|
|
|
26.8 |
|
|
|
130 |
|
Restructuring and other charges |
|
|
7.2 |
|
|
|
|
|
|
|
100 |
|
(Gains) losses on derivative financial instruments |
|
|
(5.4 |
) |
|
|
4.1 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3.3 |
|
|
|
59.5 |
|
|
|
(94 |
) |
Interest expense |
|
|
55.8 |
|
|
|
14.0 |
|
|
|
299 |
|
Interest income |
|
|
(1.4 |
) |
|
|
(0.2 |
) |
|
|
600 |
|
Other expense, net |
|
|
1.7 |
|
|
|
0.5 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes
and minority interests |
|
|
(52.8 |
) |
|
|
45.2 |
|
|
|
* |
|
Provision for income taxes |
|
|
0.1 |
|
|
|
16.8 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority interests |
|
|
(52.9 |
) |
|
|
28.4 |
|
|
|
* |
|
Minority interests, net of provision for income taxes |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(53.1 |
) |
|
$ |
28.2 |
|
|
|
* |
% |
|
|
|
|
|
|
|
|
|
|
|
Total segment income |
|
$ |
25.9 |
|
|
$ |
75.6 |
|
|
|
|
|
Corporate general and administrative expenses |
|
|
(18.1 |
) |
|
|
(15.4 |
) |
|
|
|
|
Restructuring and other charges |
|
|
(7.2 |
) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(55.8 |
) |
|
|
(14.0 |
) |
|
|
|
|
Unrealized gains (losses) on derivative financial
instruments |
|
|
0.9 |
|
|
|
(0.8 |
) |
|
|
|
|
Unallocated
interest and other income (expense), net |
|
|
1.5 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes and
minority interests |
|
$ |
(52.8 |
) |
|
$ |
45.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 2006
Revenues
The following tables show revenues and shipments by segment and the percentage changes from
the prior year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
(Predecessor) |
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
|
|
|
|
months ended |
|
|
months ended |
|
|
Percent |
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
change |
|
|
|
(in millions, except percentages) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Global rolled and extruded products |
|
$ |
1,063.6 |
|
|
$ |
412.5 |
|
|
|
158 |
% |
Global recycling |
|
|
424.1 |
|
|
|
345.6 |
|
|
|
23 |
|
Global zinc |
|
|
142.6 |
|
|
|
96.9 |
|
|
|
47 |
|
Intersegment revenues |
|
|
(31.2 |
) |
|
|
(7.4 |
) |
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
1,599.1 |
|
|
$ |
847.6 |
|
|
|
89 |
% |
|
|
|
|
|
|
|
|
|
|
|
Pounds shipped: |
|
|
|
|
|
|
|
|
|
|
|
|
Global rolled and extruded products |
|
|
552.0 |
|
|
|
274.9 |
|
|
|
101 |
% |
Global recycling |
|
|
789.0 |
|
|
|
730.3 |
|
|
|
8 |
% |
Global zinc |
|
|
87.0 |
|
|
|
102.8 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total pounds shipped |
|
|
1,428.0 |
|
|
|
1,108.0 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues for the three months ended March 31, 2007 increased $751.5 million
compared to the three months ended March 31, 2006. The acquired operations of Corus Aluminum
accounted for $647.1million of this increase. Excluding the impact of Corus Aluminum, global rolled
and extruded products revenues increased $4.0 million in the three months ended March 31, 2007
compared to the three months ended March 31, 2006 as the impact
of higher average primary aluminum prices
was substantially offset by lower shipment levels. Global recycling segment revenues increased
$78.5 million in the three months ended March 31, 2007 compared to the prior year period due to
higher average aluminum prices and higher shipment levels. Global zinc revenues increased $45.7
million in the first quarter of 2007 as compared to the first quarter of 2006 as higher average
primary zinc prices more than offset a 15% reduction in shipments.
Global
Rolled and Extruded Products Revenues
Global rolled and extruded products revenues for the three months ended March 31, 2007
increased $651.1 million compared to the three months ended March 31, 2006. The increase in
revenues resulted primarily from the acquisition of Corus Aluminum, which generated revenues of
$647.1 million in the three months ended March 31, 2007. Further, an 18% increase in the average
price of primary aluminum included in our invoiced prices in the first quarter of 2007 as compared
to the first quarter of 2006 increased revenues by an estimated $51.7 million. Shipment levels in
the three months ended March 31, 2007, excluding the impact of Corus Aluminum, decreased by 12%
which decreased revenues by an estimated $43.9 million. The reduction in shipments was due to
reduced demand in the North American housing market and across most other industry segments served
by our North American operations. Despite the lower demand, rolling margins remained comparable to
2006 levels through the first quarter of 2007.
Global
Recycling Revenues
Global recycling revenues increased $78.5 million in the three months ended March 31, 2007 as
compared to the three months ended March 31, 2006 primarily as a result of higher aluminum prices
which increased revenues by approximately $47.5 million. Shipment levels increased by 8% in the
three months ended March 31, 2007 compared to the prior year period, resulting in a $26.8 million
increase in revenues. The increase in shipment levels was principally due to strong European
industrial activity year over year.
Global
Zinc Revenues
Global zinc revenues increased $45.7 million in the three months ended March 31, 2007 compared
to the three months ended March 31, 2006 driven by an approximate 79% increase in the average LME
price of zinc which increased revenues an estimated $75.7 million. Partially offsetting this
increase was a 15% reduction in shipments due to weak demand
23
for zinc from our tire and rubber customers and our decision to exit lower margin business.
This volume reduction decreased revenues by an estimated $26.4 million.
Segment Income and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor) |
|
|
(Predecessor) |
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
|
|
|
|
months ended |
|
|
months ended |
|
|
Percent |
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
change |
|
|
|
(in millions, except percentages) |
|
|
|
|
Segment income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Global rolled and extruded products |
|
$ |
10.8 |
|
|
$ |
42.4 |
|
|
|
(75 |
)% |
Global recycling |
|
|
15.7 |
|
|
|
18.1 |
|
|
|
(13 |
) |
Global zinc |
|
|
(0.6 |
) |
|
|
15.1 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income (loss) |
|
$ |
25.9 |
|
|
$ |
75.6 |
|
|
|
(66 |
)% |
Items not included in gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Segment selling, general and administrative expense |
|
$ |
43.6 |
|
|
$ |
11.4 |
|
|
|
282 |
% |
Realized (gains) losses on derivative financial instruments |
|
|
(4.5 |
) |
|
|
3.3 |
|
|
|
* |
|
Other expense, net |
|
|
1.8 |
|
|
|
0.1 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
66.8 |
|
|
$ |
90.4 |
|
|
|
(26 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Global
Rolled and Extruded Products Segment Income
Global rolled and extruded products segment income for the three months ended March 31, 2007
decreased $31.6 million compared to the three months ended March 31, 2006. This net decrease was
primarily due to the following:
|
|
|
$39.0 million of additional cost of sales recognized during the first quarter of
2007 as a result of the application of purchase accounting rules under U.S.
generally accepted accounting principles. The rules effectively eliminate the
profit associated with acquired work-in-process and finished goods inventories by
requiring those inventories to be adjusted to fair value through the purchase price
allocation. Further, approximately $13.2 million of economic benefits associated
with settled derivative financial instruments were not included within segment
income as a result of the Acquisition; |
|
|
|
|
The acquired operations of Corus Aluminum which generated segment loss of $14.5
million in the three months ended March 31, 2007, including approximately $44.1
million of the higher costs associated with the impacts of purchase accounting
discussed above; |
|
|
|
|
Lower volumes, excluding the impact of Corus Aluminum, during the first quarter
of 2007 compared to the prior year period which reduced segment income by
approximately $7.9 million; |
|
|
|
|
Lower material margins, excluding Corus Aluminum, resulting from lower year over
year benefits from the FIFO impact of rising primary aluminum prices reduced
segment income by an estimated $16.4 million; and |
|
|
|
|
Productivity improvements and cost reductions resulting from the implementation
of six sigma initiatives increased segment income by approximately
$8.4 million in addition to the $12.0 million of benefits
realized by the acquired operations of Corus Aluminum. |
Global
Recycling Segment Income
Global recycling segment income in the three months ended March 31, 2007 decreased by $2.4
million compared to the same period in 2006 primarily due to $3.6 million of higher costs
associated with purchase accounting. These costs were offset by cost savings related to
productivity initiatives which resulted in an estimated $4.6 million increase in segment income in
2007. While the segment experienced higher volumes and slightly higher pricing in the three months
ended March 31, 2007 compared to the three months ended March 31, 2006, tighter scrap spreads and
higher operating costs more than offset the impact of these increases.
24
Global Zinc Segment Income
Global zinc segment income decreased by $15.7 million in the three months ended March 31, 2007
compared to the same period in 2006. This decrease is primarily attributable to the impact of
purchase accounting adjustments which resulted in $10.8 million in higher costs. Lower volumes also
reduced segment income by $3.6 million.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses (SG&A) increased $34.9 million in
the three months ended March 31, 2007 as compared to the prior year period. Corporate SG&A expense
increased $2.7 million primarily due to sponsor management fees of $2.3 million while segment SG&A
expense increased $32.2 million as a result of the acquisition of Corus Aluminum. As a percentage
of revenues, consolidated SG&A expense increased from 3.2% in the three months ended March 31, 2006
to 3.9% in the three months ended March 31, 2007, which is consistent with the three months ended
December 31, 2006.
Restructuring and Other Charges
During the three months ended March 31, 2007, we incurred $7.2 million of costs primarily
related to a potential acquisition that was not consummated.
(Gains) Losses on Derivative Financial Instruments
Amounts recorded within (Gains) losses on derivative financial instruments include the
realized and unrealized gains and losses associated with derivatives that we do not account for as
hedges. During the three months ended March 31, 2007 we recorded net realized and unrealized gains
of $4.4 million and $1.0 million on our metal and currency derivative financial instruments,
respectively. During the three months ended March 31, 2006 we recorded net realized and unrealized
losses of $4.1 on our metal derivative financial instruments.
Interest Expense
Interest expense in the three months ended March 31, 2007 increased $41.8 million from the
comparable period of 2006. The increase resulted from higher levels of debt outstanding as a result
of the acquisition of Corus Aluminum and the Acquisition.
Provision for Income Taxes
Our
effective tax rate was 1.2% and 36.8% for the three months ended March 31, 2007 and 2006,
respectively. The effective tax rate for the three months ended March 31, 2007 differed from the
federal statutory rate applied to losses before income taxes
primarily as a result of the mix of income, losses and tax rates
between tax jurisdictions.
We have valuation allowances recorded to reduce certain deferred tax assets to amounts that are
more likely than not to be realized. The remaining valuation allowances relate to our potential
inability to utilize certain foreign net operating loss carry forwards and U.S. state net operating
loss and tax credit carry forwards. We intend to maintain these existing valuation allowances until
sufficient positive evidence exists (such as cumulative positive earnings and estimated future
taxable income) to support their reversal. Any subsequent reversal of
the state income tax valuation allowance
will result in a reduction in the otherwise determinable income tax
expense, and any reversal of the international valuation allowance
will result in a reduction of goodwill and other intangible assets.
25
LIQUIDITY AND CAPITAL RESOURCES
We expect to finance our operations and capital expenditures from internally generated cash
and amounts available under our credit facilities. We have traditionally financed our acquisitions
and capacity expansions from a combination of cash on hand, funds from long-term borrowings and
equity issuances. The Acquisition has significantly increased our level of indebtedness. Our
ability to pay principal and interest on our debt, fund working capital and make anticipated
capital expenditures depends on our future performance, which is subject to general economic
conditions and other factors, some of which are beyond our control. We believe that based on
current and anticipated levels of operations and conditions in our industry and markets, a
combination of cash on hand, internally generated funds and borrowings available to us will be
adequate to fund our current level of operational needs and to make required payments of principal
and interest on our debt for the foreseeable future.
Cash Flows from Operations
Cash flows
generated from our operating activities were $2.8 million in the three months ended
March 31, 2007 and $35.4 million in the three months ended
March 31, 2006. Cash flows from operations in
the three months ended March 31, 2007 were impacted by higher cash
interest expense and higher accounts
receivable balances primarily due to a $135.3 million increase in revenues during the month of March 2007 as
compared to December 2006. The $36.4 million increase in accounts payable and accrued expenses resulted primarily from the rising price of primary aluminum and higher accruals for interest
payments to be made in the second quarter of 2007 partially offset by
incentive compensation payments. The impact of rising metal prices on inventory was offset by reduced volumes
at March 31, 2007 as compared to
December 31, 2006.
Cash Flows from Investing Activities
Cash
flows from investing activities primarily reflect capital
expenditures of $44.7 million
in the three months ended March 31, 2007 and increased from the prior year period as a result of
the acquisition of Corus Aluminum. Capital expenditures in 2007 relate primarily to expansions at
our rolling mills in Duffel, Belgium, Koblenz, Germany, Lewisport,
Kentucky and Uhrichsville, Ohio. Cash flows from investing activities
for the three months ended March 31, 2007 also reflect the
payment of $7.4 million for share units in
connection with the Acquisition.
Overall
capital expenditures for 2007 are expected to be approximately $175.0 million.
Cash Flows from Financing Activities
Cash flows from financing activities generally reflect changes in our borrowings and debt
obligations. Net cash provided by our financing activities was $7.8 for the three months ended
March 31, 2007, compared to $23.2 million of cash used by financing activities for the three months
ended March 31, 2006.
EBITDA
We report our financial results in accordance with U.S. generally accepted accounting
principles, or U.S. 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 is an example of a
non-GAAP financial measure that we believe provides investors and other users of our financial
information with useful information. Management uses EBITDA as a performance metric and believes
this measure provides additional information commonly used by our stockholders, noteholders and
lenders with respect to the performance of our fundamental business activities, as well as our
ability to meet our future debt service, capital expenditures and working capital needs.
Our EBITDA calculations represent net income, before interest income and expense, provision
for income taxes, depreciation and amortization and minority interests, net of provision for income
taxes. EBITDA is also used for internal analysis purposes and is a component of the fixed charge
coverage financial covenants under our ABL Facility and our Term Loan Facility. EBITDA should not
be construed as an alternative to net income as an indicator of our performance, or cash flows from
our operating activities, investing activities or financing activities as a measure of liquidity,
in each case as such measure is determined in accordance with GAAP. EBITDA as we use it may not be
comparable to similarly titled measures used by other entities. Historical EBITDA as presented
below may be different than EBITDA as defined under the indentures for the senior notes, senior
subordinated notes and the credit agreements for our credit facilities.
26
Our reconciliation of EBITDA to net income and net cash from operating activities is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the three |
|
|
For the three |
|
|
months ended |
|
|
months ended |
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
(in millions) |
|
|
EBITDA |
|
$ |
41.7 |
|
|
$ |
74.7 |
|
Interest expense |
|
|
(55.8 |
) |
|
|
(14.0 |
) |
Interest income |
|
|
1.4 |
|
|
|
0.2 |
|
Provision for income taxes |
|
|
(0.1 |
) |
|
|
(16.8 |
) |
Depreciation and amortization |
|
|
(40.1 |
) |
|
|
(15.7 |
) |
Minority interest, net of provision for income taxes |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(53.1 |
) |
|
$ |
28.2 |
|
Depreciation and amortization |
|
|
40.1 |
|
|
|
15.7 |
|
(Benefit from) provision for deferred income taxes |
|
|
(0.7 |
) |
|
|
5.4 |
|
Non-cash charges related to step-up in carrying value of inventory |
|
|
55.2 |
|
|
|
|
|
Excess income tax benefits from exercise of stock options |
|
|
|
|
|
|
(1.4 |
) |
Restructuring and other charges: |
|
|
|
|
|
|
|
|
Charges |
|
|
7.2 |
|
|
|
|
|
Payments |
|
|
(6.1 |
) |
|
|
(0.3 |
) |
Stock-based compensation expense |
|
|
0.7 |
|
|
|
1.8 |
|
Unrealized (gains) losses on derivative financial instruments |
|
|
(0.9 |
) |
|
|
0.8 |
|
Other non-cash charges |
|
|
3.0 |
|
|
|
1.4 |
|
Net change in working capital |
|
|
(42.6 |
) |
|
|
(16.2 |
) |
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
2.8 |
|
|
$ |
35.4 |
|
|
|
|
|
|
|
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with U.S. GAAP requires 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 those related to the valuation of inventory, property and
equipment and goodwill, the effectiveness of our derivative instruments under SFAS No. 133,
allowances for doubtful accounts, workers compensation liabilities, income taxes, pensions and
other postretirement 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.
A summary of our significant accounting policies and estimates is included in Managements
Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2006. There has been no significant change to
our critical accounting policies or estimates during the three months ended March 31, 2007.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement No. 109. FIN No. 48 clarifies the
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006. We adopted this interpretation on January 1, 2006. The adoption did not impact
our consolidated financial position, results of operations or cash flows.
ITEM 3. 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, zinc and natural gas as well as changes in
currency and interest rates. We use derivative instruments, such as forwards, futures, options,
collars, swaps and interest rate swaps to manage the effect of such changes. These
27
derivative financial instruments reduce the impact of both favorable and unfavorable
fluctuations in aluminum and zinc prices as well as fluctuations in currency and interest rates.
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 Oversight Committee,
which is composed of our chief financial officer and other officers and employees that the chief
executive officer designates. The Risk Oversight Committee reports to 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.
Commodity Price Risk
Aluminum and zinc ingots are internationally produced, priced and traded commodities, with
their principal trading market being the LME. As part of our efforts to preserve margins, we enter
into forwards, futures and options contracts. For accounting purposes, we do not consider our
aluminum derivative instruments as hedges and, as a result, changes in the fair value of these
derivatives are recorded immediately in our consolidated operating results. Our zinc derivative
instruments have historically been accounted for as hedges, and as a result, unrealized gains and
losses related to the effective portions of these hedges were recorded in Accumulated other
comprehensive income within our consolidated balance sheet until the underlying transaction
impacted earnings. Subsequent to the Acquisition, we no longer account for our zinc derivatives as
hedges and all future changes in fair value will be recorded immediately in our consolidated
statement of operations.
Aluminum Hedging
The global rolled and extruded products segment enters into a substantial number of derivative
financial instruments in an effort to eliminate the impact of movements in the price of aluminum
from the time of order entry and acceptance through product shipment as well as the impact of these
price movements on a portion of base inventory levels. As we do not account for these derivatives
as hedges, the changes in their fair values are included within Gains (losses) on derivative
financial instruments in our consolidated statement of operations. However, our measurement of
segment profitability only includes the gain or loss associated with those derivatives that settled
during the period.
Global rolled and extruded products segment income included realized gains of $3.0 million and
$0.2 million in the three months ended March 31, 2007 and 2006, respectively, related to settled
metal hedging contracts. However, as a result of application of purchase accounting rules, we did
not recognize additional cash gains of $12.5 million on derivatives that settled in the three
months ended March 31, 2007. These rules will continue to impact our reported segment results in
future periods.
From time-to-time, the global recycling segment enters into LME high-grade and alloy aluminum
forward sales and purchase contracts to mitigate the risk associated with changing metal prices.
These forward contracts are settled in the month of pricing of shipments.
For the three months ended March 31, 2007 and 2006, our global recycling segment income
included realized losses of $1.2 million and $3.5 million, respectively, for settled metal
derivative financial instruments.
Zinc Hedging
In the normal course of business, the global zinc segment enters into fixed-price sales and
purchase contracts with a number of its customers and suppliers. In order to hedge the risk of
changing LME zinc prices, we enter into LME forward sale and future purchase contracts. In 2007, we
also entered into price collars and swaps designed to protect a portion of our forecasted zinc
sales from changes in the LME price of zinc. These derivative financial instruments, while reducing
the risk associated with declining zinc prices, will limit our ability to benefit if zinc prices
were to increase.
Subsequent to the Acquisition, changes in the fair value of zinc derivative financial
instruments are included with (Gains) losses on derivative financial instruments in the
consolidated statement of operations.
In the three months ended March 31, 2007 and 2006, our zinc segments income included realized
gains of $3.1 million and $0.3 million, respectively, due to settled zinc metal hedging contracts.
28
Natural Gas Hedging
Natural gas is the principal fuel used in the production of our rolled aluminum products as
well as in the processing of aluminum and zinc. Natural gas prices are volatile, and we attempt to
manage this volatility through the use of derivative commodity instruments. Our natural gas
financial derivatives are traded in months forward, and settlement dates are scheduled to coincide
with gas purchases during those future periods. These contracts reference physical natural gas
prices or appropriate NYMEX futures contract prices. These contracts are accounted for as cash flow
hedges, with gains and losses recognized in Cost of sales in the same period as the underlying
gas purchases. Gains on the settlement of these contracts totaled $1.5 million and $1.6 million in
the three months ended March 31, 2007 and 2006, respectively. In addition, as with the aluminum
derivatives outstanding as of the Acquisition date, purchase accounting rules have resulted in our
segment results for the three months ended March 31, 2007 not including economic losses totaling
$2.7 million associated with natural gas hedges that settled during the period. These rules will
not have a material impact on our segment results in future periods.
Financial Risk
Currency
We are exposed to fluctuations in currencies as certain of the purchases and sales entered
into by our global rolled and extruded products operations are denominated in currencies other than
their functional currencies. We have assumed and entered into currency forward contracts to
mitigate the impact of currency fluctuations associated with these transactions. The currency
forward contracts are not accounted for as hedges and, as a result, the changes in their fair value
are recorded immediately in the consolidated statement of operations. However, as with the
commodity derivatives, our measurement of segment performance only includes gains and losses
associated with settled currency derivatives.
We recorded realized losses of $0.5 million in the three months ended March 31, 2007. The
application of purchase accounting prohibited us from recording $2.2 million of cash flow gains on
settled currency hedges during the three months ended March 31, 2007. These rules will continue to
impact our reported segment income in
future periods.
Interest Rates
A substantial amount of our indebtedness bears interest at variable rates. In order to reduce
the impact of fluctuations in these variable interest rates we entered into an interest rate swap
to fix the base interest rate on $700.0 million of our variable rate debt during the three months ended
March 31, 2007. Under the terms of the swap agreement, we will
receive interest based upon LIBOR and pay a base rate of 4.93%. Changes in the fair value of the
interest rate swaps will be included within Accumulated other
comprehensive income in the consolidated balance sheet.
Fair
Values and Sensitivity Analysis
The
following table shows the fair values of outstanding derivative
contracts at March 31, 2007 and the effect on the fair value of
a hypothetical adverse change in the market prices that existed at
March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Impact of |
|
|
|
|
|
|
10% adverse |
|
Derivative |
|
Fair value |
|
|
price change |
|
|
|
(in millions) |
Aluminum net contracts |
|
$ |
79.3 |
|
|
$ |
(19.6 |
) |
Zinc net contracts |
|
|
(0.4 |
) |
|
|
(3.9 |
) |
Natural gas |
|
|
1.5 |
|
|
|
(0.6 |
) |
Currency |
|
|
10.9 |
|
|
|
(36.6 |
) |
Interest rate swap |
|
|
(1.1 |
) |
|
|
(7.2 |
) |
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 K of our consolidated financial statements included elsewhere in
this quarterly report.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Aleris has established and maintains disclosure controls and procedures designed to ensure
that information required to be disclosed by it in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in rules and forms promulgated by the Securities Exchange Commission (SEC). As of
March 31, 2007, an evaluation was carried out, under the supervision and with the participation of
our management, including our chairman of the board and chief executive officer, and our executive
vice president and chief financial officer, of the effectiveness of Aleriss disclosure controls
and procedures as of March 31, 2007 and based on that evaluation of Aleriss disclosure controls
and procedures, our management, including the chief executive officer and chief financial officer,
concluded that, as of the end of the period covered by this report, Aleriss disclosure controls
and procedures are effective to ensure that information required to be disclosed by Aleris in the
reports that it files or submits
29
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms.
During the first quarter of 2007, our management completed its evaluation of the effectiveness
of Aleriss internal control over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act, which required our management to assess and report on the effectiveness of our
internal control over financial reporting as of our fiscal year-end, December 31, 2007 (the 404
Assessment). As previously disclosed, our management determined that it would exclude Corus
Aluminum, which was acquired during the year ended December 31, 2006, from the scope of its
assessment of internal control over financial reporting as of December 31, 2006 in reliance on the
guidance set forth in Question 3 of a Frequently Asked Questions interpretive release issued by
the staff of the SECs Office of the Chief Accountant and the Division of Corporation Finance in
September 2004 (and revised on October 6, 2004).
Changes in Internal Control over Financial Reporting
There have not been any changes in Aleriss internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three months ended March 31, 2007 that
have materially affected, or are reasonably likely to materially affect, Aleriss internal control
over financial reporting.
30
ITEM 6. EXHIBITS
|
|
|
Number |
|
Description |
12
|
|
Ratio of Earnings to Fixed Charges. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Aleris International, Inc. |
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert R. Holian |
|
|
|
|
|
|
|
Name:
|
|
Robert R. Holian |
|
|
Title:
|
|
Senior
Vice President |
|
|
|
|
Controller
and Chief Accounting Officer |
|
|
|
|
|
Date: May 15, 2007 |
|
|
|
|
32
EXHIBIT INDEX
|
|
|
Number |
|
Exhibit Title |
12
|
|
Ratio of Earnings to Fixed Charges. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
33