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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________ 
FORM 10-K
__________________________________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 001-35938
__________________________________________________________
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GLOBAL BRASS AND COPPER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________ 
Delaware
 
06-1826563
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
475 N. Martingale Road Suite 1050
Schaumburg, IL
 
60173
(Address of principal executive offices)
 
(Zip Code)
(847) 240-4700
(Registrant’s telephone number, including area code)
__________________________________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $575.3 million (based upon the closing price per share of the registrant’s common stock on the New York Stock Exchange on that date).
On February 23, 2017, there were 21,671,338 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2016, are incorporated by reference in Part III of this Form 10-K.
 




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PART I
Item 1. Business.
Our Company
Global Brass and Copper Holdings, Inc. (“Holdings,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware on October 10, 2007. Holdings, through its wholly-owned principal operating subsidiary, Global Brass and Copper, Inc. (“GBC”), commenced commercial operations on November 19, 2007 following the acquisition of the metals business from Olin Corporation. The majority of our operations are managed through three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster. We also have a Corporate entity which includes certain administrative costs and expenses and the elimination of intercompany balances. Our sales activities are primarily focused in North America under the Olin Brass, Chase Brass and A.J. Oster brand names.
We are a leading, value-added converter, fabricator, processor and distributor of specialized non-ferrous products, including a wide range of sheet, strip, foil, rod, tube and fabricated metal component products. While we primarily process copper and copper alloys, we also reroll and form certain other metals such as stainless steel, carbon steel and aluminum. Using processed scrap, virgin metals and other refined metals, we engage in metal melting and casting, rolling, drawing, extruding, welding and stamping to fabricate finished and semi-finished alloy products. Key attributes of copper and copper alloys are conductivity, corrosion resistance, strength, malleability, cosmetic appearance and bactericidal properties.
Our products are used in a variety of applications across diversified markets, including the building and housing, munitions, automotive, transportation, coinage, electronics / electrical components, industrial machinery and equipment and general consumer markets. We access these markets through direct mill sales, our captive distribution network and third-party distributors. We hold the exclusive production and distribution rights in North America for a lead-free brass rod product, which we sell under the Green Dot® and Eco Brass® brand names. The vertical integration of Olin Brass’s manufacturing capabilities and A.J. Oster’s distribution capabilities allows us to access customers with a wide variety of volume and service needs.
We service nearly 1,600 customers in 28 countries across four continents. We employ approximately 1,850 people and operate 11 manufacturing facilities and distribution centers across the United States (“U.S.”), Puerto Rico and Mexico.
We own 80% of a value-added service center in Guangzhou, China (“Olin Luotong Metals” or “OLM”); the other 20% is owned by Chinalco Luoyang Copper Co. Ltd. (“Chinalco”). Through Olin Luotong Metals, together with our sales offices in China and Singapore, we supply our products in China and throughout Asia.
Unlike traditional metals companies, in particular those that engage in mining, smelting and refining activities, we are purely a metal converter, fabricator, processor and distributor, and we do not attempt to generate profits from fluctuations in metal prices. Our financial performance is primarily driven by metal conversion economics, not by the underlying movements in the price of copper and the other metals we use. Through our “balanced book” approach (as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Principles Affecting Our Results of Operations —Balanced Book”), we strive to match the timing, quantity and price of our metal sales with the timing, quantity and price of our replacement metal purchases. This practice, along with our toll processing operations and last-in, first-out (“LIFO”) inventory accounting methodology, substantially reduces the financial impact of metal price movements on our earnings and operating margins.

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All of our segments sell to the building and housing market. While demand within this market is affected by new residential housing, existing home sales and commercial construction, all of which are seasonal and dependent on overall economic conditions, the correlation between housing statistics and our sales is not entirely direct. Our key products are typically installed near the completion of construction, meaning there is an inherent lag time compared to housing starts, and sales of our building and housing products can be affected by factors such as housing mix (unit size, unit price point and the mix of multi-family versus single-family construction). Sales of our products can also be impacted by changes in the composition of materials and fixtures used in construction as well as import and export dynamics.
The following charts show the percentage of our shipments by segment, as well as the primary markets for our products and the percentage of shipments. Pounds shipped by market represent management’s estimate of the markets in which our customers participate. Additionally, pounds shipped by market reflect our allocation of Chase Brass shipments to distributors, job shops and forging shops. See Item 1, “Business—Chase Brass.”
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Segments Overview
We have three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster.
 
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Description
 Leading manufacturer, fabricator and converter of specialized copper and brass sheet, strip, foil, tube, and fabricated products
 Leading manufacturer and supplier of brass rod
 Leading processor and distributor of copper and brass products
Key Markets
 Building and Housing
 Building and Housing
 Building and Housing
 
 Automotive
 Transportation
 Automotive
 
 Electronics / Electrical Components
 Electronics / Electrical Components
 Electronics / Electrical Components
 
Munitions
 Industrial Machinery and Equipment
 
 
Coinage
 
 

Further information about our business segments and the geographic areas of our operations can be found in “Note 4, Segment Information.”
Olin Brass
In addition to manufacturing, fabricating and converting specialized copper and brass sheet, strip, foil, tube and fabricated products, the Olin Brass segment also rerolls and forms other alloys such as stainless steel, carbon steel and aluminum. Sheet and strip is generally manufactured from copper and copper-alloy scrap.
Olin Brass manufactures its wide variety of products through four sites in North America. It is not uncommon for Olin Brass to produce 50 different alloys, approximately 30% of which could be high performance alloys (“HPAs”).
Olin Brass’s integrated brass mill in East Alton, Illinois is its main operating facility, which melts metal and produces strip products that are either sold directly to external customers, sold to its affiliate, A.J. Oster, or shipped to Olin Brass’s downstream operations for further value-added processing. Olin Brass’s downstream operations include:

a stamping operation located in East Alton;
a rolling mill in Waterbury, Connecticut with rolling, annealing, leveling, plating and slitting capabilities for various products (“Somers Thin Strip”), including stainless steel thin strip;
a manufacturing facility in Bryan, Ohio specializing in products sold in the automotive and electronics / electrical components markets; and
a manufacturing facility in Cuba, Missouri that produces high frequency welded copper-alloy tube for heat transfer, utility, decorative, automotive and plumbing applications.

Olin Brass’s products are sold to original equipment manufacturers (“OEMs”), other external customers, distributors / rerollers or to its affiliate, A.J. Oster. In 2016, approximately 18% of Olin Brass’s products were shipped to distribution customers, which includes its affiliate A.J. Oster, of which management estimates that approximately 55% were directly associated with the building and housing and automotive sectors. In 2016, approximately 15% of Olin Brass’s domestic copper-based shipments were to A.J. Oster.

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The following chart shows the primary markets for Olin Brass’s products and the percentage of shipments.
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(1)
Approximately 55% of supply chain customer shipments are directly associated with the building and housing and automotive markets according to management estimates. Shipments to A.J. Oster are reflected in the supply chain market and are eliminated in consolidation.
Munitions Market
Olin Brass manufactures products utilized in both the military and commercial munitions markets, such as strip and cups, that are used to produce shot shells, bullet jackets, centerfire, rimfire and small caliber military munitions.
Customers in this market include major munitions producers in the U.S., including those producing small caliber ammunition for the U.S. military. Demand within this market is affected by the U.S. government’s security policies and troop size, as well as consumer demand for firearms and munitions. While munitions demand is predominantly domestic, occasional opportunities arise to supply U.S. alliance partners with these products.
Coinage Market
Olin Brass supplies strip for use in the production of dollar coins, quarters, dimes and nickels. Customers in this market include the United States Mint, for which we are a key supplier contracted into 2017. This long-term contract has typically been renewed as Olin Brass has been a highly regarded and valued supplier to the United States Mint for over 40 years.
The demand within this market is affected by the level of activities in retail transactions, the use of vending machines, and the trends affecting forms of payment.
Automotive Market
Olin Brass manufactures both strip and fabricated products used as electronic and electrical connectors for use in automobiles. These products are made with HPAs, suitable for applications requiring high reliability, high temperature and low insertion force. For example, these electrical connectors, along with lead frames manufactured by us, are used in junction boxes, wiring harnesses, ignition systems, lighting and automotive entertainment systems.

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

The Olin Brass segment sold 18.3 million pounds into non-U.S. markets that primarily serve the building and housing, automotive and electronics / electrical components markets.
Asia
Included within our Olin Brass business, our Asian operations provide service, distribution and sales activities to meet the growing demand for copper alloys in that region. These activities are conducted through two of our subsidiaries, Olin Luotong Metals (“OLM”) in China and GBC Metals Asia Pacific PTE (“GMAP”) in Singapore. These operations source materials from Olin Brass, as well as other copper and brass mills, such as Chinalco and DOWA Metaltech Co. LTD (“Dowa Metaltech”). In 2016, these Asian operations generated $37.1 million of net sales, or 6% of the Olin Brass segment’s net sales. On a pounds basis, our Asian operations sold 9.8 million pounds (4% of the Olin Brass segment’s sales) of product into Asia through OLM and GMAP, primarily into key electronics markets.
Others
The remainder of Olin Brass’s international sales are primarily to Mexico, Canada and European countries and were 8.5 million pounds (3% of the Olin Brass segment’s sales) in 2016.
Chase Brass
Chase Brass primarily manufactures brass rod, including round, hexagonal and other shapes, ranging from 1/4 inch to 4 1/2 inches in diameter. Its customers machine or otherwise process the rod for various applications used in various markets. Brass rod is primarily used for forging and machining products, such as valves and fittings. Key attributes of brass rod include its machinability, corrosion resistance and moderate strength. Brass rod is generally manufactured from copper or copper-alloy scrap and all of Chase Brass’s rod is manufactured at its Montpelier, Ohio facility.
Chase Brass has been able to capitalize on opportunities arising from regulation limiting lead content in potable water plumbing fixtures. The green product portfolio has grown significantly over the past few years as customers switch from leaded to non or low-leaded products in certain applications. We expect increased demand in the building and housing market to drive growth in our green product portfolio, including Eco Brass®, given the enactment of these regulations.

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The following chart shows the primary markets for Chase Brass’s products and the percentage of shipments for each. Note that substantially all of the electronics / electrical components shipments below are associated with the building and housing and transportation markets.
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Building and Housing Market
Chase Brass manufactures brass rod for use in faucets, valves and fittings used in residential and commercial construction.
Chase Brass produces a number of low-lead and lead-free products, or “green portfolio” products, which comply with state laws in California and Vermont as well as federal standards (patterned after legislation enacted in California and Vermont) that became effective in January 2014. This legislation defines the allowed level of lead content in products used in plumbing and drinking water applications. Chase Brass’s Green Dot® rod, Eco Brass® rod and Eco Brass® ingot products are part of the green portfolio, and Chase Brass is the exclusive licensee of the intellectual property rights for their production, sale and distribution in North America. Chase Brass also manufactures other non-patented green portfolio products. Green portfolio products accounted for approximately 21% of pounds shipped by Chase Brass in 2016.
Industrial Machinery and Equipment Market
Chase Brass manufactures brass rod used in industrial valves and fittings. Demand within this market is affected by capital spending levels, U.S. gross domestic product (“GDP”) growth and industrial production growth in the U.S.
Customers in this market include various major diversified manufacturers and a variety of screw machine companies supporting OEMs.
Transportation Market
Chase Brass manufactures brass rod for uses in heavy trucks and automobiles. Specific applications include heavy truck braking systems, tire valves, temperature sensors and various truck and automotive fittings. Demand within this market is affected by levels of transportation activity, levels of maintenance capital spending by transportation companies and the level of commercial truck fleet replacement activity, all of which are affected significantly by overall economic conditions. Customers in this market include major OEMs in the transport industry and customers who support domestic automotive production.

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Electronics / Electrical Components Market
Chase Brass manufactures brass rod used for telecommunication applications, including products such as coaxial connectors and traps and filters for cable television, as well as larger connectors supporting the cell tower industry. Demand within this market is affected by consumer spending, new home construction, and technologies affecting communication devices and methods. Customers within this market include major manufacturers of specialty products for use in home and commercial construction, both of which are very dependent on overall economic conditions. Management believes that a significant portion of shipments in this market segment are directly associated with the building and housing market and transportation markets.
International
Chase Brass primarily supplies products within North America. Chase Brass generated $45.2 million in net sales (9% of the Chase Brass segment’s net sales) to Canada and Mexico in 2016. Sales to Canada and Mexico were 24.9 million pounds (11% of the Chase Brass segment’s sales) in 2016.
A.J. Oster
A.J. Oster is a processor and distributor of primarily copper and copper-alloy sheet, strip and foil, operating six strategically-located service centers in the U.S., Puerto Rico and Mexico. Key A.J. Oster competitive advantages are short lead-times with high reliability, high level of service, small-quantity deliveries and a wide range of high-quality, copper-based products. These capabilities, combined with A.J. Oster’s operations of precision slitting, hot tinning, traverse winding, cutting and special packaging, provide value to a broad customer base.
In 2016, Olin Brass provided A.J. Oster with 51% of its copper-based products. Aurubis AG (“Aurubis”) is A.J. Oster’s second largest supplier after Olin Brass, supplying approximately 30% of A.J. Oster’s copper-based products in 2016. Many of the coils purchased from Olin Brass and Aurubis are full-width and require slitting.

The following chart shows the primary markets for A.J. Oster’s products and the percentage of shipments for each.
 
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Building and Housing Market
A.J. Oster distributes copper-alloy strip and aluminum foil used for products in commercial and residential buildings. The two primary applications are electrical and hardware.
Electrical products are primarily for wiring devices. Other applications include switchgears, switches, controls and circuit breakers. Several of our customers for these products are in Puerto Rico or Mexico. A.J. Oster’s capabilities are well-suited for these geographic locations and the stringent service requirements of the electrical market because A.J. Oster is able to provide customers with high-quality metals, in less-than-truckload quantities, and can deliver products shortly after receiving orders.
Hardware products include products such as faucets, window trim, locksets, hinges and kick plates.
Automotive Market
A.J. Oster distributes copper-alloy strip and aluminum foil used in automobile production. Primary customer products are electrical connectors, automotive trim and heat exchangers.
A.J. Oster’s subsidiary in Queretaro, Mexico is well-positioned to take advantage of the growing number of second-tier automobile component suppliers in Mexico.
Demand within this market is affected by the level of consumer spending on automobiles, which is significantly dependent on overall economic conditions.
Electronics / Electrical Components Market
A.J. Oster distributes copper-alloy strip used for electrical connectors in computers, consumer electronics and automobiles.
The demand within this market is affected by consumer spending and trends in electronics, which may fluctuate significantly as a result of economic conditions.
International
A.J. Oster operates a service center in central Mexico. The facility is located in Queretaro in the center of Mexico’s industrial triangle marked by Mexico City, Monterey and Guadalajara and is easily accessible by highway connections to the U.S.
Automotive sub-suppliers that consume copper-alloy strip are now locating facilities in central Mexico in order to support primary automotive manufacturing.
Net sales from A.J. Oster Mexico were $39.8 million during 2016 (14% of A.J. Oster segment’s net sales). Pounds shipped from A.J. Oster Mexico were 10.4 million and comprised 14% of the A.J. Oster segment’s sales.
Raw Materials and Supply
We manufacture our products from scrap metal (both internally generated and externally sourced) or virgin raw materials. During 2016, 91% of our metal came from scrap metal, and the remainder came from virgin raw materials.
Virgin raw materials, including copper cathode, are purchased at a premium on the London Metal Exchange (“LME”) or Commodities Exchange (“COMEX”) or directly from key dealers that support producers around the world. Although virgin raw materials are more expensive compared to scrap, we use them to produce HPAs and other products that require exact specifications.
Customers
Our customer base is broadly diversified, spanning various North American markets, including building and housing, munitions, automotive, transportation, coinage, electronics / electrical components, industrial machinery and equipment and general consumer markets. In 2016, we sold approximately 14,000 different stock keeping units (“SKUs”) to nearly 1,600 customers.

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Also in 2016, net sales from our foreign entities were $76.9 million, or 6% of our net sales. We have long-term relationships with our customers, many of which are secured through short-term contracts. Our relationships with many of our significant customers have lasted more than 30 years.
All three of our operating segments had customers to whom sales activity constituted more than 10% of net sales during 2016. Olin Brass generated 23% of its total net sales from one customer and 11% of its total net sales from another customer. A.J. Oster generated 18% of its total net sales from one customer. Chase Brass generated 21% of its total net sales from one customer. On a consolidated basis, we did not generate more than 10% of our net sales from any one customer in 2016.
Competition
We compete with other companies on price, service, quality, breadth, and availability of product. We believe we have been able to compete effectively because of our high levels of service, breadth of product offering, knowledgeable and trained sales force, modern equipment, numerous locations, geographic dispersion and economies of scale.
The North American market for brass and copper strip and sheet and brass rod consists of a few large participants and a few smaller competitors for Olin Brass and Chase Brass. A.J. Oster’s competition consists of a number of smaller competitors. Our international competitors are based principally in Europe and Asia.
Our largest competitors in each of the markets in which we operate are the following:
 
Aurubis and PMX Industries, Inc.: manufacturers of copper and copper-alloys in the form of strip, sheet and plate (Olin Brass competitor);
ThyssenKrupp Materials NA, Copper and Brass Sales Division: processor and distributor of copper, brass, stainless and aluminum products; Wieland Metals, Inc.: re-roll mill and service center for copper and copper-alloy strip (A.J. Oster competitor); and
Mueller Industries, Inc.: manufacturer of brass rod (Chase Brass competitor).
We use data published by independent industry associations and management estimates to determine our market share. Using this information, in 2016:
 
Olin Brass accounted for 32% of North American shipments (including shipments to A.J. Oster) of copper and brass alloys in the form of sheet, strip and plate;
A.J. Oster accounted for 35% of North American shipments of copper and brass, sheet and strip products from distribution centers and rerolling facilities; and
Chase Brass accounted for 54% of North American shipments of brass rod, not including imports.
Corporate
Our Corporate expenditures include compensation for corporate executives and officers, corporate office and administrative salaries, and professional fees for accounting, tax and legal services. Corporate also includes interest expense, state and federal income taxes, overhead costs that management has not allocated to the operating segments, share-based compensation expense, gains and losses associated with certain acquisitions and dispositions and the elimination of intercompany sales and balances.
Government Regulation and Environmental Matters
Bactericidal Products
Through its membership in the Copper Development Association Inc. (“CDA”), Olin Brass has completed the required Federal Environmental Protection Agency (“EPA”) and applicable state registration processes that allow it to market its CuVerro® products with certain approved bactericidal claims. Laboratory testing has shown that bactericidal copper touch surfaces made with CuVerro® kill more than 99.9% of bacteria within two hours. We believe that Olin Brass’s copper-based CuVerro® materials are in compliance, in all material respects, with EPA standards for products recognized by the EPA as having bactericidal properties.
In connection with these EPA registrations, the CDA is required to implement a “stewardship” plan that is designed to ensure that bactericidal copper-alloys are properly used and marketed. The stewardship requirement reflects the EPA’s concern that the improper marketing of bactericidal copper-alloys could lead users to mistakenly believe that the use of

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these products is a simple solution to fight infections. The stewardship efforts are intended to emphasize that all marketing statements are consistent with the approved EPA product label, including the need to state clearly that the alloys are intended as a supplement to, but are not a substitute for, standard cleaning and sanitization procedures. These standards also apply to marketing by our customers who use CuVerro® in their products.
Even though the marketing of copper products as bactericidal started in 2008, the manufacturers of such products are still in the process of determining what specific bactericidal claims may be made in compliance with the EPA’s and Federal Insecticide, Fungicide and Rodenticide Act’s (“FIFRA”) requirements. Therefore, there remains some uncertainty when determining whether a particular marketing approach is consistent with the EPA registration requirements. Accordingly, it is possible that we or other manufacturers may be found to be non-compliant by the EPA for current, past or future marketing claims and activities. The EPA can impose administrative, criminal or judicial sanctions and penalties against those violating federal registrations. Any failure by us or our customers who use CuVerro® in their products to comply with FIFRA’s requirements with respect to CuVerro® could therefore expose us to various enforcement actions or other claims or adverse impacts to our reputation. The stewardship program required under the EPA registration is an industry-wide activity, and the actions of other CDA members could jeopardize the marketing of all bactericidal copper products registered through the CDA (including CuVerro®). If the EPA were to determine that the stewardship program is not being implemented effectively, the EPA may initiate a variety of corrective actions, which could adversely affect us and other CDA members, including cancelling all CDA registrations. If the EPA were to initiate an enforcement action that affects us or our customers, it may have a material adverse effect on our ability to market CuVerro® as a bactericidal product.
Lead-free and Low-lead Plumbing Products
New regulations designed to reduce lead content in drinking water plumbing devices provide an opportunity for future growth. Chase Brass is a premier provider of specialized lead-free products and low-lead alloys. Federal legislation in the United States (the Reduction of Lead in Drinking Water Act, which was patterned after legislation enacted in California and Vermont) required the reduction of lead content in all drinking water plumbing devices beginning in January 2014. This legislation presents a significant growth opportunity for Chase Brass. Our Eco Brass® products meet federal, California and Vermont standards and can be used to produce cast, machined and forged faucet parts. We currently supply major faucet, valve and fitting manufacturers who produce multiple products using machined Eco Brass® parts.
Environmental
Our operations are subject to a number of federal, state and local laws and regulations relating to the protection of the environment and to workplace health and safety. In particular, our operations are subject to extensive federal, state and local laws and regulations governing the creation, transportation, use, release and disposal of wastes, air and water emissions, the storage and handling of hazardous substances, environmental protection, remediation, workplace exposure and other matters. Hazardous materials used in our operations include general commercial lubricants, cleaning solvents and cutting oils. Among the regulated activities that occur at some of our facilities are: the accumulation of scrap metal; and the generation of hazardous waste, solid wastes and wastewaters, such as water from burning tables operated at some of our facilities. The generation, storage, and disposal of these wastes are done in accordance with the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and the Resource Conservation and Recovery Act, and we use third-party commercial disposal services as permitted by these laws for the removal and disposal of these wastes. The storage, handling and use of lubricating and cutting oils and small quantities of maintenance-related products and chemicals are also regulated under environmental laws, and the health hazards of these materials are communicated to employees pursuant to the Occupational Safety and Health Act.
In general, our facilities’ operations do not involve the types of emissions of air pollutants, discharges of pollutants to land or surface water, or treatment, storage or disposal of hazardous waste which would ordinarily require federal or state environmental permits. Some of our facilities possess authorizations under the Clean Air Act for air emissions from paints and coatings. At some locations, we also possess hazardous materials storage permits under local fire codes or ordinances for the storage of combustible materials such as oils or paints. At some facilities we possess state or local permits for on-site septic systems. Our cost of obtaining and complying with such permits has not been, and is not anticipated to be, material.
We believe that we are in substantial compliance with all applicable environmental and workplace health and safety laws and do not currently anticipate that we will be required to expend any substantial amounts in the foreseeable future in order to meet such requirements. We have a number of properties located in or near heavy industrial or light industrial use areas; accordingly, these properties may have been contaminated by pollutants which may have migrated from neighboring facilities or have been released by prior occupants for which we may become liable under various laws and regulations. Some of our properties have been affected by releases of cutting oils and similar materials and we are investigating and

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remediating such known contamination pursuant to applicable environmental laws. The costs of these clean-ups have not been material in the past. We are not currently subject to any material claims or notices with respect to clean-up or remediation under CERCLA or similar laws for contamination at our leased or owned properties or at any off-site location. However, we could be notified of such claims in the future. It is also possible that we could be identified by the EPA, a state agency, or one or more third parties as a potentially responsible party under federal or state laws and regulations.
Pursuant to the agreement, dated November 19, 2007, by which we purchased our current operating locations from Olin Corporation, Olin Corporation agreed to retain responsibility for a wide range of liabilities under environmental laws arising out of existing contamination on our properties, and agreed to indemnify us without limitation with respect to these liabilities. Specifically, Olin Corporation retained responsibility for:
 
compliance with all obligations to perform investigations and remedial action required under the Connecticut Real Property Transfer Act at properties in Connecticut;
pending corrective action / compliance obligations under the Federal Resource Conservation and Recovery Act for certain areas of concern at our East Alton, Illinois facility; and
all obligations under environmental laws arising out of 24 additional specifically identified areas of concern on various of our properties.
Olin Corporation also retained complete responsibility for all liabilities arising out of then pending governmental inquiries relating to environmental matters; for “any liability or obligation in connection with a facility of the Business to the extent related to pre-Closing human exposure to Hazardous Materials, including asbestos-containing materials”; and for “any liability or obligation in connection with the off-site transportation or disposal of Hazardous Materials arising out of any pre-Closing operations of the Business.”
Since 2007, Olin Corporation has continued to perform environmental remedial actions on our properties, including the East Alton, Illinois and Waterbury, Connecticut properties, and continues to work closely with us to address matters covered by the indemnity. Because of the Olin Corporation indemnity, we have not been required to engage in any significant environmental cleanup activity on our properties and do not currently have any material reserves established to address environmental remedial requirements.
Employees
The following table shows the composition of our workforce by operating segment and Corporate as of December 31, 2016. 
 
 
Employees
 
% of Total
Olin Brass
 
1,222

 
66
%
A.J. Oster
 
294

 
16
%
Chase Brass
 
319

 
17
%
Corporate
 
22

 
1
%
Total
 
1,857

 
100
%
As of December 31, 2016, 1,130, or approximately 61%, of our employees at various sites were members of unions. We have generally maintained good relationships with all unions and employees, which has been an important aspect of our ability to be competitive in our industry. Generally, our various agreements with unions in the United States have contractual terms which range from 1 to 5 years.
Historically, we have succeeded in negotiating new collective bargaining agreements without a strike and we have not experienced any work stoppages at any of our facilities. In particular, our union agreements governing a substantial portion of our employees at Chase Brass and Olin Brass expire in 2017. We believe we will continue to be able to renew the outstanding collective bargaining agreements upon acceptable terms.
Research and Development
Our staff of scientists in metallurgy and electrochemistry intends to continue to invest in research and development to develop new products and expand our value-added services to meet our customers’ needs.
Our research and development expenditures were not material during 2016, 2015 or 2014.

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

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Available Information
Our website address is http://www.gbcholdings.com. We make available on our website, free of charge, the periodic reports that we file with or furnish to the Securities and Exchange Commission (“SEC”), as well as all amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. We also make available on our website or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, charters for the standing committees of our Board of Directors and other information related to the Company. We are not including the information contained on our website as a part of, or incorporating it by reference into, this report.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information related to issuers that file electronically with the SEC.

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Item 1A. Risk Factors.
We are exposed to various risks as we operate our businesses. To provide a framework to understand our operating environment, we are providing a brief explanation of the more significant risks associated with our businesses. Although we have tried to identify and discuss key risk factors, others could emerge in the future.
Risks Related to Our Business
Our business, financial condition and results of operations or cash flows could be negatively affected by downturns in economic cycles in general or cyclicality in our markets, both inside and outside of the U.S. Our future growth also depends, to a significant extent, on improvements in general economic conditions and in conditions in our markets.
Many of our products are used in industries that are, to varying degrees, cyclical and have historically experienced periodic downturns due to factors such as economic conditions, energy prices, the availability of credit, consumer sentiment, demand and other factors beyond our control. These economic and industry downturns have resulted in diminished product demand and excess capacity for our products. The significant deterioration in economic conditions that occurred during the second half of 2008 and continued into 2009 resulted in disruptions in a number of our markets. Any future economic disruptions may negatively impact our markets or the consumers served by those markets, which would adversely affect our operating results.
Future disruptions in the commercial credit markets may impact liquidity in the global credit market, and we are not able to predict the impact any such worsening conditions would have on our customers in general, and our results of operations specifically. Businesses in one or more of the markets that we serve, or consumers in one or more of the markets that our customers serve, may postpone or choose not to make purchases in response to economic uncertainty, tighter credit, negative financial news, unemployment, interest rates, adverse consumer sentiment and declines in housing prices or other asset values.
A significant amount of our volume is tied to the building and housing sector. If the housing, remodeling and residential and commercial construction markets stagnate or deteriorate, demand from such markets for our products, especially our brass rod products, is likely to be adversely affected. Any recovery in such markets will not necessarily directly correlate with increased sales or profitability. Our key products are typically installed late in the housing construction cycle, meaning there is an inherent lag in volumes, and sales of our building and housing products can be affected by factors such as housing mix (unit size, unit price point and the mix of multi-family versus single-family construction). Sales of our products can also be impacted by the actual timing of housing starts and completions as well as to changes in the materials and fixtures used in construction that may contain fewer copper products or materials and fixtures than were used in the past. In addition, competition from imports and other sources may also dampen the effects of any such recovery on our results of operations.
Similarly, the automotive market has in the past experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions. Demand for vehicles depends largely on the strength of the economy, employment levels, consumer confidence levels, the availability and cost of credit and the cost of fuel. Negative economic developments could reduce demand for new vehicles, causing our customers to reduce their vehicle and automotive component part production in North America.
The coinage and general consumer markets are also affected by economic cycles. Demand for coinage-related products generally increases with the number of cash transactions that occur, and the number of cash transactions generally increases during periods of economic growth. Demand for consumer goods is also very sensitive to economic conditions and drives demand in our electronics / electrical components market.
The munitions market is cyclical and is not correlated to any general economic indicators and thus, has a high degree of volatility.
As a result, cyclicality in economic conditions and in the markets that we serve could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our growth prospects also depend, to a significant extent, on the degree by which general economic conditions and conditions in the markets that we serve continue to improve.

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Failure to maintain our balanced book approach would cause increased volatility in our profitability and our operating results and may result in significant losses.
We use our balanced book approach to substantially reduce the impact of metal price movements, specifically fluctuations in the availability and price of copper scrap and cathode, which represent the largest component of our cost of sales. Such fluctuations can significantly affect our operating margins from our non-toll sales, which are sales for which we assume responsibility for metal procurement and then recover the metal replacement cost from the customer. Non-toll sales represented approximately 75% of our unit sales volume over the last three years. Under our balanced book approach, we seek to match the timing, quantity and price of the metal component of net sales with the timing, quantity and price of replacement metal purchases on all of our non-toll sales. We use a combination of matching price date of shipment terms, firm price terms and derivatives transactions to achieve our balanced book. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Principles Affecting Our Results of Operations—Balanced Book.”
We may not be able to maintain our balanced book approach if our customers become unwilling to bear metal price risk through the matching of price date of shipment terms. We may also not be able to find counterparties for the derivatives transactions entered into in connection with firm price terms, and the cost of those derivatives transactions may increase such that entering into such transactions is no longer cost-effective to us. If we fail to maintain our balanced book approach, we may be forced to accept higher replacement prices, which could generate losses and would increase volatility in our results of operations.

Although we maintain our balanced book approach, metal costs still affect our profitability through “shrinkage” and inventory valuation adjustments.
Shrinkage loss, which is primarily the loss of raw metal that occurs in the melting and casting operations, is an inherent part of a metal fabrication and conversion business. Despite our use of our balanced book approach to mitigate the impact of metal price fluctuations, we must bear the cost of any shrinkage during production, which may increase the volatility of our results of operations. Because we process a large amount of metal in our operations, a small increase in our shrinkage rates can have a significant effect on our margins and profitability. In addition, if metal prices increase, the same amount of shrinkage will have a greater effect on our manufacturing costs and have a more significant negative impact on our margins and profitability.
The market price of metals and related scrap used in production is subject to significant volatility. During periods when open-market prices decline below net book value, we may need to record a provision to reduce the carrying value of our inventory and increase cost of sales. Additionally, the cost of our inventories is primarily determined using the LIFO method. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period. In a period of rising raw material prices, cost of sales expense recognized under LIFO is generally higher than the cash costs incurred to acquire the inventory sold. Conversely, in a period of declining raw material prices, cost of sales recognized under LIFO is generally lower than cash costs incurred to acquire the inventory sold. The impact of LIFO accounting on our financial results may be significant with respect to period-to-period comparisons. During 2016, certain domestic metal inventory quantities were reduced, resulting in a liquidation of LIFO inventory layers carried at higher costs prevailing in prior years as compared with metal prices prevailing in the market at the time of the inventory depletion and the effect of this reduction of inventory increased cost of sales by $1.9 million. See “Management’s Discussion and Analysis of Operating Results and Financial Condition—Key Business Principles Affecting Our Results of Operations —Metal Cost.”
Because our balanced book approach does not reduce the effects of fluctuations in metal prices on our working capital requirements, higher metal prices could have a negative effect on our liquidity.
Our balanced book approach does not reduce the impact of the volatility in metal prices on our working capital requirements. Metal prices impact our investment in working capital because our collection terms with our customers are longer than our payment terms to our suppliers. As a result, when metal prices are rising, even if the number of pounds of metal we process does not change, we tend to use more cash or draw more on our asset-based revolving loan facility (“2016 ABL Facility”) to cover the cash flow delay from material replacement purchase to cash collection. Thus, when metal prices increase, our working capital may be negatively affected as we are required to draw more on our cash or available financing sources to pay for raw materials. As a result, our liquidity may be negatively affected by increasing metal prices. Metal price volatility may also require us to draw on working capital sources more quickly and unpredictably, and therefore at higher cost. See “Management’s Discussion and Analysis of Operating Results and Financial Condition—Key Business Principles Affecting Our Results of Operations—Metal Cost.”

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Limited access to raw materials, infrastructure or fuel could negatively affect our business, financial condition or results of operations or cash flows.
Our ability to fulfill our customer orders in a timely and cost-effective manner depends on our ability to secure a sufficient and constant supply of raw materials and fuel and access to infrastructure adequate to fulfill our business needs. Although we often seek to source our copper from scrap, including internally generated scrap and repurchases of our customers’ scrap, where scrap is either not available or is not appropriate for use, we use virgin raw materials such as copper cathode, which are generally more expensive than scrap. We depend on natural gas for our manufacturing operations and source natural gas through open-market purchases.
We depend on scrap for our operations and acquire our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metals to us. The supply of scrap metal available to us could be adversely impacted at any time due to slowdowns in industrial production or consumer consumption. If an adequate supply of scrap metal is not available to us, we would be unable to use scrap as a source of supply at desired volumes, forcing us to use a larger amount of more expensive virgin raw materials and our results of operations and financial condition would be materially and adversely affected. The acquisition of copper cathode by physically backed copper exchange traded funds and other similar entities may materially decrease or interrupt the availability of copper for immediate delivery in the United States, which could materially increase our cost of copper and copper scrap, result in potential supply shortages, and increase price volatility for copper and copper scrap. All of the above factors may affect our ability to secure the necessary raw materials in a cost-effective manner for production of our products.
We may experience disruptions in the supply of natural gas as a result of delivery curtailments to industrial customers due to extremely cold weather. We may also experience disruptions or increases in cost with respect to our access to water, electrical power, transport and wastewater treatment services and other infrastructure (including those subject to our transition services agreement with the parent of our predecessor). We may also experience other delays or shortages in the supply of raw materials. An inability to find an adequate and timely supply of raw materials or adequate and cost-effective access to infrastructure could have a material adverse effect on our profit margin, and in turn on our business, financial condition, results of operations or cash flows.
Increases in the cost of energy could cause our cost of sales to increase, thereby reducing operating results and limiting our operating flexibility.
In 2016, the cost of energy and utilities represented approximately 6% of our non-metal cost of sales and prices can be volatile. As a result, our energy and utility costs may fluctuate dramatically, and we may not be able to mitigate the effect of higher energy and utility costs on our cost of sales. A substantial increase in energy costs could cause our operating costs to increase and our business, financial condition, results of operations and cash flows may be materially and adversely affected. Although we attempt to mitigate short-term volatility in energy and utility costs through the use of derivatives contracts, we may not be able to eliminate the long-term effects of such cost volatility. Furthermore, in an effort to offset the effect of increasing costs, we may have also limited our potential benefit from declining costs.
Our substantial leverage and debt service obligations may adversely affect our financial condition and restrict our operating flexibility, including our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under our indebtedness.
We are highly leveraged. As of December 31, 2016, our total indebtedness was $316.0 million (net of debt issuance costs). We also had an additional $197.9 million available for borrowing under the 2016 ABL Facility as of that date. Based on the amount of indebtedness outstanding and applicable interest rates at December 31, 2016, our annualized cash interest expense would be $17.0 million, which includes $0.3 million of interest expense related to our capital lease obligations. Additionally, we may potentially borrow under the 2016 ABL Facility, which is a floating-rate obligation, and thus, the related interest expense is subject to increase in the event interest rates were to rise.
Our substantial indebtedness and debt service obligations could have important consequences for investors, including:
 
they may impose, along with the financial and other restrictive covenants under our credit agreements, significant operating and financial restrictions, including our ability to borrow money, dispose of assets or raise equity for our working capital, capital expenditures, dividend payments, debt service requirements, strategic initiatives or other purposes;
they may limit our flexibility in planning for, or reacting to, changes in our operations or business;
we may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and

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they may make us more vulnerable to downturns in our business or the economy.
Any of these consequences could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our indebtedness. In addition, there would be a material adverse effect on our business, financial condition, results of operations and cash flows if we were unable to service our indebtedness or obtain additional financing, as needed.
Covenants under our debt agreements impose operating and financial restrictions. Failure to comply with these covenants could have a material adverse effect on our business, financial condition, results of operations or cash flows.
The agreement governing the 2016 ABL Facility and the agreement covering our term loan facility that matures on July 18, 2023 (“Term Loan B Facility”) contain various covenants that limit or prohibit our ability, among other things, to:
 
incur or guarantee additional indebtedness;
pay dividends on our capital stock or redeem, repurchase, retire or make distributions in respect of our capital stock or subordinated indebtedness or make certain other restricted payments;
make certain loans, acquisitions, capital expenditures or investments;
sell certain assets, including stock of our subsidiaries;
enter into certain sale and leaseback transactions;
create or incur certain liens;
consolidate, merge, sell, transfer or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
engage in certain business activities.
The agreement governing the 2016 ABL Facility also contains a financial covenant that requires us to maintain a fixed charge coverage ratio that is tested whenever excess availability, as defined in such agreement, falls below a certain level. For more information regarding these covenants, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Outstanding Indebtedness.”
The agreement governing the Term Loan B Facility also contains a financial covenant that requires us to maintain a total debt leverage ratio that is tested quarterly.
A violation of covenants may result in default or an event of default under our debt agreements.
Upon the occurrence of an event of default under the agreement governing the 2016 ABL Facility or the Term Loan B Facility, the requisite lenders under the 2016 ABL Facility or the Term Loan B Facility, as applicable, could elect to declare all amounts of such indebtedness outstanding to be immediately due and payable and, in the case of the 2016 ABL Facility, terminate any commitments to extend further credit. If we are unable to repay those amounts, the lenders under such facilities may proceed against the collateral granted to them to secure such indebtedness. Substantially all of our assets are pledged as collateral under the 2016 ABL Facility and the Term Loan B Facility. If the lenders under either facility, as applicable, accelerate the repayment of borrowings, such acceleration would have a material adverse effect on our business, financial condition, results of operations or cash flows. Furthermore, cross-default provisions in the 2016 ABL Facility and the Term Loan B Facility provide that any default under the other facility or other significant debt agreements could trigger a cross-default under the 2016 ABL Facility or the Term Loan B Facility, as applicable. If we are unable to repay the amounts outstanding under these agreements or obtain replacement financing on acceptable terms, which ability will depend in part upon the impact of economic conditions on the liquidity of credit markets, our creditors may exercise their rights and remedies against us and the assets that serve as collateral for the debt, including initiating a bankruptcy proceeding.
Although the terms of the credit agreement governing the 2016 ABL Facility and the Term Loan B Facility contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, which would allow us to borrow additional indebtedness. Additional leverage could have a material adverse effect on our business, financial condition and results of operations and could increase other risks harmful to our financial condition and results of operations.
For a more detailed description on the limitations on our ability to incur additional indebtedness and our compliance with financial covenants, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Outstanding Indebtedness.”

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To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash and the availability of our cash to service our indebtedness 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.
If we do not generate sufficient cash flow from operations to satisfy our debt service obligations, including payments required to be made on the 2016 ABL Facility and the Term Loan B Facility, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments (including the 2016 ABL Facility and the Term Loan B Facility) may restrict us from adopting some of these alternatives, which in turn could exacerbate the effects of any failure to generate sufficient cash flow to satisfy our debt service obligations. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit ratings, which could harm our ability to incur additional indebtedness or refinance our indebtedness on acceptable terms. Furthermore, we might not be able to fulfill our cash needs if one or more of the financial institutions that are lenders under the 2016 ABL Facility were to default on its obligations to provide available borrowings under the 2016 ABL Facility, and such a default could have a material adverse effect on our liquidity and ability to operate our business.
Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance our obligations at all or on commercially reasonable terms, would have an adverse effect, which could be material, on our business, financial condition and results of operations, may restrict our current and future operations, particularly our ability to respond to business changes or to take certain actions, as well as on our ability to satisfy our obligations in respect of the 2016 ABL Facility and the Term Loan B Facility.
If we were to lose order volumes from any of our largest customers, our sales volumes, revenues and cash flows could be reduced.
Our business is exposed to risks related to customer concentration. Our five largest customers were responsible for approximately 30% of our net sales in 2016. A loss of order volumes from, or a loss of industry share by, any major customer could negatively affect our business, financial condition or results of operations by lowering sales volumes, increasing costs and lowering profitability. In addition, adverse economic and market conditions could also harm our business by negatively affecting our customers, which could impair their ability to pay for products they have purchased from our Company. Our balance sheet reflected an allowance for doubtful accounts totaling $0.5 million at December 31, 2016. If adverse economic and market conditions impair the ability of our customers to pay us in the future, our allowance for doubtful accounts and write-offs of accounts receivable from the Company’s customers may increase in the future, which could materially and adversely affect our financial condition and results of operations.
We do not have long-term contractual arrangements with a substantial number of our customers, and our sales volumes and net sales could be reduced if our customers switch some or all of their business with us to other suppliers.
In 2016, a majority of our net sales were generated from customers who do not have long-term contractual arrangements with us, including several of our largest customers. These customers purchase products and services from us on a purchase order basis and may choose not to continue to purchase our products and services. A significant loss of these customers or a significant reduction in their purchase orders could have a material negative impact on our sales volume and business, or cause us to reduce our prices, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our business could be disrupted if our customers shift either their manufacturing or sourcing offshore.
Much of our business depends on maintaining close geographical proximity to our customers because the costs of transporting metals across large distances can be prohibitive. If the general trend in relocating or contracting manufacturing capacity to foreign countries continues, especially those in the automotive parts, electrical connectors, and building and housing components industries, such relocations or contracting may disrupt or end our relationships with some customers and could lead to losing business to foreign competitors. In addition, some customers may seek to source their finished products offshore, thereby also increasing the amount of manufacturing offshore and thereby reducing demand for brass rod in the United States. These risks would increase to the extent we are unable to expand internationally when our customers do so.

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Decreased demand from the United States Mint could have a material adverse effect on our business, financial condition and results of operations.
The United States Mint is a significant customer of Olin Brass. Olin Brass has a contractual arrangement to supply nickel and brass coinage strip to the two United States Mint locations. Our supply agreement with the United States Mint runs through 2017. The United States Mint can also terminate the contract in whole or in part for convenience, and the damages payable to us by the United States Mint for such a termination do not include lost profits. The loss or reduction of any authorized supplier arrangement with the United States Mint for coin manufacture could have a material adverse effect on our business, financial condition and results of operations. In addition, the United States Government contracting and procurement cycle can be affected by the timing of, and delays in, the legislative process. As a result, our net sales and operating income may fluctuate, causing us to occasionally experience declines in net sales or earnings as compared to the immediately preceding quarter, and comparisons of our operating results on a period-to-period basis may not be meaningful.
Additionally, trends in electronic commerce indicate a potential future reduction in demand for coinage strip, which could have a material adverse effect on our business, financial condition and results of operations. The U.S. Treasury department announced in December 2011 a halt in the production of Presidential dollar coins for circulation due to a lack of demand (which is primarily the result of the U.S. continuing the use of the dollar bill).
Although their production will continue for the collectibles market, it is uncertain when their production for circulation will be resumed. This action has adversely impacted our business and is expected to adversely impact our business over the next several years. Further actions to curtail coin production could have an adverse effect on our business, financial condition or results of operations.
Decreased demand from Orbital ATK, Inc. (“ATK”) could have a material adverse effect on our business, financial condition and results of operations.
Currently, a sizeable share of the production of our Olin Brass segment supports ATK, a supplier of munitions to the U.S. Army. ATK uses our product to service its contract with the U.S. Army to supply the U.S. Army’s arsenal located at Independence, Missouri. ATK is under contract with the U.S. Army to supply it with small-caliber ammunition and Olin Brass is under contract to supply ATK. In spite of these contractual arrangements, any decrease in demand from ATK or other disruption of our relationship with ATK could have a material adverse effect on our business, financial condition and results of operations.
Competition in our industry could adversely affect our business, financial condition and results of operations.
We are engaged in a highly competitive industry. Each of our segments competes with a limited number of companies. The Olin Brass segment competes with domestic and foreign manufacturers of copper and brass alloys in the form of strip, sheet and foil. The Chase Brass segment competes with domestic as well as foreign manufacturers of brass rod and beginning in 2013, encountered increased competition from foreign rod suppliers. The A.J. Oster segment primarily competes with distributors, mills and processors of copper and brass products. Furthermore, we believe that domestic sales to customers that are not made by major companies, including us, are fragmented among many smaller companies. In the future, these smaller companies may choose to combine, creating a more significant domestic competitor against our business. We may be required to explore additional initiatives in each of our segments in order to maintain our sales volume at a competitive level. Increased competition in any of the fields in which our segments operate could adversely affect our business, financial condition and results of operations.
Currently, anti-dumping orders impose import duties on copper and brass products from France, Germany, Italy and Japan which allow us and our domestic competitors to compete more fairly against French, German, Italian and Japanese producers in the U.S. copper and brass product market. On March 21, 2012, the International Trade Commission (“ITC”) Commissioners voted to continue anti-dumping orders for brass sheet and strip from Germany, Italy, France and Japan. While domestic manufacturers lobby for the continued extension of these orders, if they expire, import duties on metal products from these countries will be significantly reduced, increasing the ability of such foreign producers to compete with our products domestically. Additionally, on March 15, 2012, the United States-Korea Free Trade Agreement (“KORUS FTA”) became effective, which largely eliminates tariffs on Korean industrial products imported to the United States. The reduction in prices of Korean products resulting from the KORUS FTA has increased the ability of Korean manufacturers to compete with our products and has had a negative effect on our business. Furthermore, the termination of any anti-dumping orders or other changes to international trade regimes could adversely affect our business, financial condition and results of operations.

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Adverse developments in our relationship with our employees could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As of December 31, 2016, we had 1,857 employees, 1,130, or approximately 61%, of whom at various sites were members of unions. The current collective bargaining agreements that are in place are a meaningful determinant of our labor costs and are very important to our ability to maintain flexibility to fulfill our customers’ needs. As we attempt to renew our collective bargaining agreements, labor negotiations may not conclude successfully and, in that case, may result in a significant increase in the cost of labor or may result in work stoppages or labor disturbances, disrupting our operations. Any such cost increases, stoppages or disturbances could have a material adverse effect on our business, financial condition, results of operations and cash flows by limiting plant production, sales volumes and profitability.
Our participation in multi-employer union pension plans may have a material adverse effect on our financial performance.
We are required to make contributions to the IAM National Pension Plan (“IAM Plan”), a multi-employer pension plan that covers certain of our union employees. Our U.S. multi-employer pension plan expense totaled $3.5 million in 2016. Our obligations may be impacted by the funded status of the plan, the plan’s investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions. In addition, if a participating employer becomes insolvent and ceases to contribute to a multiemployer plan, the unfunded obligation of the plan will be borne by the remaining participating employers. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur withdrawal liability to the plan. If, in the future, we choose to withdraw from the multi-employer pension plan in which we participate, we will likely need to record withdrawal liabilities, which could negatively impact our financial performance in the applicable periods.
Our operations are subject to risks of natural disasters, acts of war, terrorism or widespread illness at our domestic and international locations, any one of which could result in a business stoppage and negatively affect our business, financial condition or results of operations.
Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our facilities and transportation for our employees are susceptible to damage from earthquakes and other natural disasters such as fires, floods, hurricanes, tornadoes and similar events. We have facilities located throughout North America, including in Illinois, Ohio, Connecticut, Rhode Island, Missouri, California, Puerto Rico and Mexico, as well as in China. We take precautions to safeguard our facilities, including obtaining insurance and maintaining health and safety protocols. However, a natural disaster, such as a tornado, fire, flood, hurricane or earthquake, could cause a substantial interruption in our operations, damage or destroy our facilities or inventory and cause us to incur additional expenses. The insurance we maintain against natural disasters may not be adequate to cover our losses in any particular case, which would require us to expend significant resources to replace any destroyed assets, thereby harming our financial condition and prospects significantly.
For example, Olin Brass’s manufacturing facilities and A.J. Oster’s California facility are located near geologic fault zones, and therefore are subject to greater risk of earthquakes which could result in increased costs and a disruption in our operations, which could harm our operating results and financial condition significantly. Our facility in East Alton, Illinois is located in a flood zone, and all of our facilities in the Midwestern United States are subject to the risk of tornadoes and damaging winds. Should earthquakes or other catastrophes, such as fires, tornadoes, hurricanes, floods, power outages, communication failures or similar events disable our facilities, we do not have readily available alternative facilities from which we could continue our operations, and any resulting stoppage could have a negative effect on our operating results. Acts of terrorism, widespread illness and war could also have a negative effect at our international and domestic facilities.
Any prolonged disruptions at or failures of our manufacturing facilities and equipment could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our ability to satisfy our customers’ orders in an efficient manner and to effectively manage inventory levels is dependent on the proper operation of our facilities and equipment. On-time delivery and accurate order fulfillment are essential to maintaining customer satisfaction and generating repeat business. To the extent we experience prolonged equipment failures, quality control incidents, damage or disruption due to natural disasters, inclement weather conditions, acts of war, terrorism or widespread illness, temporary facility closures or other disruptions in operations such as a major fire or major equipment breakdown at our manufacturing facilities, our ability to satisfy our customers could be negatively impacted. In addition, we may not have adequate insurance to cover all losses. Furthermore, disruptions in operations of one or more of

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our suppliers could result in production delays. Any of these events or circumstances could materially disrupt our business operations and thereby adversely affect our business, financial condition and results of operations.
In addition, we do not have redundancy in our operations on certain critical pieces of equipment, including the Olin Brass hot and cold mills and Chase Brass extruders. If this equipment were damaged, we would have to make alternative arrangements to replicate these processes, which could be costly and result in manufacturing delays, which could materially adversely affect our business, financial condition and results of operations.
Inclement weather conditions could adversely affect our business, financial condition and results of operations.
Inclement weather conditions in the areas where our facilities are located could have an adverse effect on our business, financial condition and results of operations. Extreme cold, heavy snowfall or other extreme weather conditions over a prolonged period could result in temporary facility closures, disruptions in our access to natural gas, electricity, fuel and other raw materials and delayed shipments of our products. Furthermore, inclement weather conditions also could disrupt the operations of one or more of our suppliers and result in production delays. Any of these events or circumstances could materially disrupt our business operations and thereby adversely affect our business, financial condition and results of operations.
Failure to meet the capital expenditure requirements for the introduction of new products or substantial further increases in the production of existing products could have a material adverse effect on our business, financial condition and results of operations.
Certain of our existing products, such as Eco Brass® and other potential “green portfolio” products, require separate production streams from those used for our other products in order to comply with applicable standards. As a result, in order to meet expected increased demand for such products, we will be required to make additional capital expenditures to modify or expand our facilities. In addition, if we introduce new products in the future, those products may also require modification or expansion of our production facilities. To accommodate any such production changes, we will be required to make additional capital expenditures to expand or modify our facilities. If we are unable to meet our capital expenditure requirements, we may not be able to timely respond to our customers’ needs and may lose their business to our competitors who may be better equipped to meet these needs, which could have a material adverse effect on our business, financial condition and results of operations.
The increased use of substitute materials and miniaturization may adversely affect our business.
In many applications, copper and other commodities may be replaced by other materials such as aluminum, stainless steel, plastic and other materials and the use of copper and other commodities may be reduced by the miniaturization of components. Increased prices of copper could encourage our customers to use substitute materials and / or miniaturization to limit the amount of copper in their products and applications in an attempt to control their overall product costs. For example, historically, there has been discussion over reducing or eliminating copper content in coins in reaction to the rising prices of copper. Such increased use of substitute materials and / or miniaturization could have a material adverse effect on prices and demand for our products.
In order to operate our business successfully, we must meet evolving customer requirements for copper and copper-alloy products and invest in the development of new products.
If we fail to develop or enhance our products to satisfy evolving customer demands, our business, operating results, financial condition and prospects may be harmed significantly. The market for copper and copper-alloy products is characterized by changing technologies, periodic new product introductions and evolving customer and industry standards. Our competitors are continuously searching for more cost-effective alloys and substitutes for copper and copper-alloys, and our current and prospective customers may choose products that might be offered at a lower price than our products. To achieve market acceptance for our products, we must effectively and timely anticipate and adapt to customer requirements and offer products and services that meet customer demands. This strategy may cause us to pursue other technologies or capabilities through acquisitions or strategic alliances. We may experience design, engineering and other difficulties that could delay or prevent the development, introduction or marketing of new products and services. Our failure to successfully develop and offer products or services that satisfy customer requirements may significantly weaken demand for our products and services, which would likely cause a decrease in our net sales and harm our operating results.

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If we fail to implement our business strategy, including our growth initiatives, our business, financial condition, results of operations or cash flows could be adversely affected.
Our future financial performance and success depend in large part on our ability to successfully implement our business strategy. We may not be able to successfully implement our business strategy or be able to continue improving our operating results. In particular, we may not be able to continue to achieve all operating cost savings, further enhance our product mix, expand into selected targeted regions or continue to mitigate our exposure to metal price fluctuations.
The implementation of our business strategy may be affected by a number of factors beyond our control, such as increased competition, legal and regulatory developments, general economic conditions, the increase of operating costs or our ability to introduce new products and end-use applications. Any failure to successfully implement our business strategy could adversely affect our business, financial condition, results of operations or cash flows. We may, in addition, decide to alter or discontinue certain aspects of our business strategy at any time.
Furthermore, we may not be successful in our growth initiatives and may not be able to effectively manage expanded or acquired operations. See “We face a number of risks related to future acquisitions and joint ventures.”
A portion of our net sales is derived from our international operations, which exposes us to certain risks inherent in doing business abroad.
In the aggregate, our international operations accounted for 6% of our net sales in 2016. We have operations in China through Olin Luotong Metals and in Singapore through our subsidiary GBC Metals Asia Pacific PTE. In addition, we have various licensing agreements around the world and our products are distributed globally. We plan to continue to explore opportunities to expand our international operations. Our international operations generally are subject to risks, including:
 
changes in U.S. and international governmental regulations, trade restrictions and laws, including tax laws and regulations;
currency exchange rate fluctuations;
tariffs and other trade barriers;
the potential for nationalization of enterprises or government policies favoring local production;
interest rate fluctuations;
high rates of inflation;
currency restrictions and limitations on repatriation of profits;
differing protections for intellectual property and enforcement thereof;
divergent environmental laws and regulations;
political, economic and social instability;
unfamiliarity with foreign laws and regulations and ability to enforce obligations of foreign counterparties;
difficulties in staffing and managing international operations and labor unrest;
language and cultural barriers;
natural disasters and widespread illness;
geopolitical conditions, such as terrorist attacks, war, or other military action; and
a divergence between the price of copper on the copper exchange in China and the LME, and the COMEX.
The occurrence of any of these events could cause our costs to rise, limit growth opportunities or have a negative effect on our operations and our ability to plan for future periods, and subject us to risks not generally prevalent in North America.
New governmental regulations or legislation, or changes in existing regulations or legislation, may subject us to significant costs, taxes and restrictions on our operations.
Our operations are subject to a wide variety of U.S. federal, state, local and non-U.S. laws and regulations, including those relating to taxation, international trade and competition and firearms.
For example, the Olin Brass segment provides strip and cups to both the military and commercial munitions markets. In 2016, the shipments by Olin Brass to the munitions market accounted for 44% of its total shipments. The private use of firearms is subject to extensive regulation. Recent U.S. federal legislative activities generally seek either to restrict or ban the sale and, in some cases, the ownership of various types of firearms and ammunition. Several states currently have laws in effect similar to that legislation. Any restriction on the use of firearms and ammunition could affect the demand for munitions, and in turn could negatively affect our business, financial condition or results of operations. Moreover, any changes in the government budget or policy over military spending may adversely affect our contracts with customers in the munitions market.

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Changes in U.S. or foreign tax laws, including possibly with retroactive effect, and audits by tax authorities could result in unanticipated increases in our tax expense and affect profitability and cash flows. From time to time, legislative initiatives are proposed in the U.S., such as the repeal of the election to use LIFO or to lower the U.S. corporate tax rate. If the U.S. corporate tax rate were lowered, we would be required to reduce our net deferred tax assets upon enactment of the related tax legislation, with a corresponding material, one-time increase to income tax expense, but our income tax expense and payments would be materially reduced in subsequent years. The cost of our inventories is primarily determined using LIFO. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period. Generally, in a period of rising prices, LIFO recognizes higher costs of goods sold, which both reduces current income and assigns a lower value to the year-end inventory. If the election to use the LIFO method for U.S. federal income tax purposes were repealed, taxpayers that currently use the LIFO method would be required to revalue their beginning LIFO inventory to its first-in, first-out (“FIFO”) value. The repeal of the election to use the LIFO method could result in a substantial cash tax liability, which could adversely impact our liquidity and financial condition. Furthermore, a transition to the FIFO method could result in an increase in the volatility of our earnings, a greater disparity between our earnings and net sales in our financial statements, and an increase in the costs associated with our derivative transactions to mitigate metal price fluctuations.
In addition, any termination or expiration of trade restrictions imposed on copper products by foreign governments could adversely affect our business as such products become freely tradable into the U.S. This may increase competition against our products and adversely affect our business, financial condition or results of operations. See “Competition in our industry could adversely affect our business, financial condition and results of operations.”
We may not be able to sustain the annual cost savings realized as part of our cost-reduction initiatives.
We will continue to undertake productivity and cost-reduction initiatives intended to improve performance and improve operating cash flow. Although we believe that the cost savings we have realized through our efforts so far are permanent reductions, we may not be able to sustain some or all of these cost savings on an annual basis in the future, which could have an adverse effect on our business, financial condition, results of operations and cash flows. Moreover, there can be no assurance that any new initiatives undertaken in the future will be completed or beneficial to us or that any estimated cost savings from such activities will be realized.
Our operations expose our employees to risk of injury or death. We may be subject to claims that are not covered by, or exceed, our insurance. Additional safety measures or rules imposed by regulatory agencies may reduce productivity, require additional capital expenditure or reduce profitability.
Because of the manufacturing activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors, notwithstanding the safety precautions we take. Our operations are subject to regulation by federal, state and local agencies responsible for employee health and safety, including the Occupational Safety and Health Administration, which has from time to time taken various actions with respect to our facilities, including imposing fines for certain isolated incidents. Despite policies and standards that are designed to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future. These types of incidents may not be covered by or may exceed our insurance coverage and may have a material adverse effect on our results of operations and financial condition.
In addition, various regulatory agencies may impose additional safety measures or other rules designed to increase workplace safety. Compliance with such requirements could require additional capital expenditure or cause process changes that could reduce the productivity of the affected facilities, which could increase our costs and reduce our profitability.
Our ability to retain our senior management team is critical to the success of our business, and failure to do so could materially adversely affect our business, financial condition, results of operations and cash flows.
We are dependent on our senior management team to remain competitive in our industry. We have employment contracts or severance agreements with members of our senior management team, including John Wasz, Christopher Kodosky, Scott Hamilton, Kevin Bense, Devin Denner and William Toler. Failure to renew the employment contracts or other agreements of a significant portion of our senior management team could have a material adverse effect on our business, financial condition, results of operations and cash flows. Members of our senior management team are subject to employment conditions or arrangements that permit the employees to terminate their employment without notice. We do not maintain any life insurance policies for our benefit covering our key employees.

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If our senior management team were not able to dedicate adequate time to our business, due to personal or other factors, if we lose or suffer an extended interruption in the services of a significant portion of our senior management team, or if a significant portion of our senior management team were to terminate employment within a short period it could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the market for qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management team, should the need arise.
Rising employee medical costs may adversely affect operating results.
The extent to which our employee medical costs will increase in the future is difficult to assess at this time. In 2016, our costs related to employee health benefits were $20.1 million. Because the implementation of various laws regarding employee medical costs and health insurance, including the Patient Protection and Affordable Care Act of 2010 and other related regulations, is currently in progress, there is some uncertainty as to how these current and future laws and regulations will affect our employee medical and other benefit costs. In addition, the cost of health care has been rising generally over time, and such increases have been in the past and will in the future be unpredictable and at times significant. If we were to incur significant increases in employee medical costs and related items, whether due to such laws and regulations or otherwise, it could adversely impact our operating results.
Environmental costs could decrease our net cash flow and adversely affect our profitability.
Our operations are subject to extensive regulations governing the creation, use, transportation and disposal of wastes and hazardous substances, air and water emissions, remediation, workplace exposure and other environmental matters. The costs of complying with such laws and regulations, including participation in assessments and clean-ups of sites, as well as internal voluntary programs, can be significant and will continue to be so for the foreseeable future. Future environmental regulations could impose stricter compliance requirements on us and the markets that we serve. Additional pollution control equipment, process changes, or other environmental control measures may be needed at some of our facilities to meet future requirements. Additionally, evolving regulatory standards and expectations could result in increased litigation and / or increased costs of compliance with environmental laws, all of which could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
Environmental matters for which we may be liable may arise in the future at our present sites, at previously owned sites, sites previously operated by us, sites owned by our predecessors or sites that we may acquire in the future. Our operations or liquidity in a particular period could be affected by certain health, safety or environmental matters, including remediation costs and damages related to several sites. The properties we own or lease are located in areas with a history of heavy industrial use. See “Business—Government Regulation and Environmental Matters.” The CERCLA established responsibility for clean-up without regard to fault for persons who have released or arranged for disposal of hazardous substances at sites that have become contaminated and for persons who own or operate contaminated facilities. In many cases, courts have imposed joint and several liability on parties at CERCLA clean-up sites. Because a number of our properties are located in or near industrial or light industrial use areas, they may have been contaminated by pollutants which may have migrated from neighboring facilities or have been released by prior occupants. Some of our properties have been affected by releases of cutting oils and similar materials, and we are investigating and remediating such known contamination pursuant to applicable environmental laws. The costs of these clean-ups have not been material in the past. We are not currently subject to any material claims or notices with respect to clean-up or remediation under CERCLA or similar laws for contamination at our leased or owned properties or at any off-site location. However, we cannot rule out the possibility that we could be notified of such claims in the future. It is also possible that we could be identified by the Environmental Protection Agency, a state agency or one or more third parties as a potentially responsible party under CERCLA or under analogous state laws.
On November 19, 2007, we acquired the assets and operations relating to the worldwide metals business of Olin Corporation. Olin Corporation agreed to retain liability arising out of then existing conditions on certain of our properties for any remedial actions required by environmental laws, and agreed to indemnify us for all or part of a number of other environmental liabilities. Since 2007, Olin Corporation has been performing remedial actions at the facilities in East Alton, Illinois and Waterbury, Connecticut, and has been participating in remedial actions at our other properties as well. If Olin Corporation were to stop its environmental remedial activities at our properties, we could be required to assume responsibility for these activities, the cost of which could be material. For additional information concerning the indemnity granted to us by Olin Corporation for environmental liabilities, see “Business—Government Regulation and Environmental Matters.”

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New governmental regulation of greenhouse gas emissions may subject us to significant new costs and restrictions on our operations.
In the past, Congress has considered legislation that would regulate greenhouse gas emissions, including a cap-and-trade system, under which emitters would be required to buy allowances to offset emissions of greenhouse gas. In addition, several states, including states where we have manufacturing plants, are considering various greenhouse gas registration and reduction programs. The EPA has also proposed several comprehensive regulations that would require reductions in greenhouse gas emissions by several types of sources. Certain of our manufacturing plants use significant amounts of energy, including electricity, natural gas and diesel, and certain of our plants emit amounts of greenhouse gas above certain minimum thresholds that are likely to be regulated. Greenhouse gas regulation could increase the price of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to, or the use of, natural gas, require us to purchase allowances to offset our own emissions, require operational changes or the use of new equipment or result in an overall increase in our costs of raw materials, any one of which could significantly increase our costs or capital expenditures, reduce our competitiveness or otherwise negatively affect our business, financial condition or results of operations. It is too early to predict how any potential greenhouse gas regulation may affect us.
We may be subject to litigation that could strain our resources and distract management.
From time to time, we are involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. These suits concern issues including product liability, contract disputes, employee-related matters and personal injury matters. For example, if we were found liable under product liability claims, we could be required to pay substantial monetary damages and see a decrease in demand for our products. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution of these matters as well as future lawsuits could have a material adverse effect on our business, financial condition, results of operations, cash flows or reputation.
Further, even if we successfully defended ourselves against a claim, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend time and resources to defend against these claims, we could face negative publicity or our reputation could otherwise suffer, any of which could result in a decrease in demand for our products or otherwise harm our business.
Failure to achieve and maintain effective internal controls could adversely affect our business and stock price.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting in accordance with accounting principles generally accepted in the U.S. Due to its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. While we continue to evaluate our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. Further, we may be required to expend substantial funds and resources in order to rectify any deficiencies in our internal controls. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor and lender confidence and it could have a material adverse effect on our ability to fund our operations.
Failure to protect, or uncertainty regarding the validity, enforceability or scope of, our intellectual property rights or the expiration of our intellectual property rights could impair our competitive position.
We rely on a combination of patents, trademarks, trade secrets and other intellectual property rights, in addition to contractual rights, to protect the intellectual property we use in our business. Because the intellectual property associated with our products, including Eco Brass® technology, is evolving and rapidly changing, our current intellectual property rights may not protect us adequately. Furthermore, it is possible that our intellectual property rights could be challenged, invalidated, violated or made obsolete by our competitors or third parties, or our pending patent applications may not be granted.
Because the extent to which any new technologies will enjoy intellectual property protection is uncertain, there can be no assurance that we will be able to maintain our competitive position by enforcing intellectual property rights in the future. Our inability to protect our intellectual property adequately for these and other reasons could result in weakened demand for our products and services, which could result in a material adverse effect on our business, financial condition, results of operations or cash flows.

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In addition, our commercial success will continue to depend in part on our ability to make and sell our products or provide our services without infringing the patents or proprietary rights of third parties. We face these risks with respect to intellectual property that we have developed internally, as well as with respect to intellectual property rights we have acquired from third parties. For example, Chase Brass has entered into agreements with Mitsubishi Shindoh pursuant to which Chase Brass has access to and the right to use certain of its technologies including lead-free Eco Brass® rod and the sublicensing of lead-free Eco Brass® ingot. To the extent that Mitsubishi Shindoh fails to adequately protect the technologies upon which we rely, our competitors may be able to use such technologies or develop similar technologies independently.
If the technologies upon which we rely infringe upon the patents or proprietary rights of third parties, we may be unable to continue using such technologies or we may face lawsuits related to our past use of these technologies. Furthermore, our competitors, who have made significant investments in competing technologies or products, may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make or sell our products or provide our services.
If we are unsuccessful in defending against any challenge to our rights to market and sell our products, our rights to use third-party technologies or to provide our services, we may, among other things, be required to:
 
pay actual damages, royalties, lost profits and / or increased damages and the third party’s attorneys’ fees, which may be substantial;
cease the development, manufacture and / or marketing of our products or services that use the intellectual property in question through a court-imposed injunction or settlement agreement;
expend significant resources to modify or redesign our products or other technology or services so that they do not infringe the intellectual property rights of others or to develop or acquire non-infringing technology, which may not be possible; or
obtain licenses to the disputed rights, which could require us to pay substantial upfront fees and future royalty payments and may not be available to us on acceptable terms, if at all.
Even if we successfully defend any infringement claims, the expense, time, delay and burden on management of litigation could prevent us from maintaining or increasing our business. Further, negative publicity could decrease demand for our products and services and cause our revenues to decline, thus harming our operating results significantly.
Finally, for our products that are covered on patent protection, once a patent has expired, the product is generally open to competition. For example, patent protection for the most popular versions of Eco Brass® expires in May 2019. The expiration of such patent could enable other companies to compete more effectively with us by allowing our competitors to make and sell products substantially similar to those we offer. This could negatively impact our ability to produce and sell the associated products, thereby adversely affecting our operations.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology, products and services could be harmed significantly.
We rely on trade secrets, know-how and other proprietary information in operating our business. We seek to protect this information, in part, through the use of confidentiality agreements with employees, consultants, advisors and others who may have access to such proprietary information upon commencement of their relationships with us. Nonetheless, those agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information and prevent their unauthorized use or disclosure. In the event of unauthorized use or disclosure of our trade secrets or proprietary information, these agreements may not provide meaningful protection, particularly for our trade secrets or other confidential information.
The risk that other parties may breach confidentiality agreements or that our trade secrets become known or independently discovered by competitors, could harm us by enabling our competitors, who may have greater experience and financial resources, to copy or use our trade secrets and other proprietary information in the advancement of their products, methods or technologies. The disclosure of our trade secrets would impair our competitive position, thereby weakening demand for our products or services and harming our ability to maintain or increase our customer base.
In addition, to the extent that we do not fulfill our contractual or other obligations to adequately protect the technologies to which we have been granted access by Mitsubishi Shindoh, we could be liable for any resulting harm to its business or could lose further access to this technology, which could harm our business, operating results or financial condition.

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Disruption or failures of our information technology systems could have a material adverse effect on our business.
The operation of the Company’s business depends on the Company’s information technology systems, most of which have not been updated for many years. As a result, our information technology systems are more susceptible to security breaches, operational data loss, general disruptions in functionality, and may not be compatible with new technology. We depend on our information technology systems for the effectiveness of our operations and to interface with our customers, as well as to maintain financial records and accuracy. Disruption or failures of our information technology systems or security breaches could impair our ability to effectively and timely provide our services and products and maintain our financial records, which could damage our reputation and have a material adverse effect on our business. Olin Brass and A.J. Oster began the process of implementing fully integrated enterprise resource planning (“ERP”) systems to replace their current management information systems and plan to implement the systems in a phased approach over the course of the next several years, and implemented the first phase in early fiscal 2017. These implementations may present challenges. Such challenges include, among other things, training of personnel, communication of new rules and procedures, changes in corporate culture, migration of data and the potential instability of the new system. Furthermore, large-scale system implementations are complex and time-consuming projects that are capital intensive and can span several months or even years. Certain of our business and financial processes also may require transformation in order to effectively leverage the ERP system’s benefits. The ERP system implementation may not result in the anticipated improvements and the cost of implementation may outweigh the benefits. There can be no assurance that the ERP system will be successfully implemented, and failure to do so could adversely affect our business, financial condition, results of operations and the effectiveness of our internal controls over financial reporting.
Global Brass and Copper Holdings, Inc. is a holding company and relies on future dividends and other payments, advances and transfers of funds from its subsidiaries to meet its financial obligations and provide cash for any dividends it might pay in the future.
Global Brass and Copper Holdings, Inc. has no direct operations and derives all of its cash flow from its subsidiaries. Because Global Brass and Copper Holdings, Inc. conducts its operations through its subsidiaries, Global Brass and Copper Holdings, Inc. depends on those entities for dividends and other payments to generate the funds necessary to meet its financial obligations, and to pay any dividends with respect to its common stock. Legal and contractual restrictions in the credit agreement governing the 2016 ABL Facility, the Term Loan B Facility and other debt agreements governing current and future indebtedness of Global Brass and Copper Holdings, Inc.’s subsidiaries, as well as the financial condition and operating requirements of Global Brass and Copper Holdings, Inc.’s subsidiaries, may limit the ability of Global Brass and Copper Holdings, Inc. to obtain cash from its subsidiaries. The earnings from, or other available assets of, Global Brass and Copper Holdings, Inc.’s subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable Global Brass and Copper Holdings, Inc.’s to pay any dividends on our common stock. See “Risks Related to an Investment in our Common Stock—Our ability to pay regular dividends to our shareholders is subject to the discretion of our Board of Directors and may be limited by our debt agreements and limitations in Delaware law.”
We face a number of risks related to future acquisitions and joint ventures.
We may continue to seek opportunities for further acquisitions to supplement our operations and for expansion of our international presence, particularly in Asia, through joint ventures.
Acquisitions and joint ventures involve a number of risks which could have an adverse effect on our business, financial condition, results of operations and cash flows, including the following:
 
we may experience adverse short-term effects on our operating results;
we may be unable to successfully and rapidly integrate the new businesses, personnel and products with our existing business, including financial reporting, management and information technology systems;
we may experience higher than anticipated costs of integration and unforeseen operating difficulties and expenditures, including potential disruption of our ongoing business and distraction of management;
an acquisition may be in a market or geographical area in which we have little experience and could increase the scope, geographic diversity and complexity of our operations;
the acquisition or joint venture formation process may require significant attention by our senior management and the engagement of outside advisors (and the payment of related fees), and proposed acquisitions and joint ventures may not be successfully completed;
we may lose key employees or customers of the acquired company; and
we may encounter unknown contingent liabilities that could be material.

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In addition, we may require additional debt or equity financing for future acquisitions, and such financing may not be available on favorable terms, if available at all. We may not be able to successfully integrate or profitably operate any new business we acquire, and we cannot assure you that any such acquisition will meet our expectations. The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Finally, in the event we decide to discontinue pursuit of a potential acquisition, we will be required to immediately expense all costs incurred in pursuit of the possible acquisition, which may have an adverse effect on our results of operations in the period in which the expense is recognized.
Certain of our operations are conducted through a joint venture which has unique risks.
Certain of our operations are conducted through our joint venture located in China. With respect to our joint venture, we may share ownership and management responsibilities with one or more partners that may not share our goals and objectives. Operating a joint venture requires us to operate the business pursuant to the terms of the agreement that we entered into with our partners, including additional organizational formalities, as well as to share information and decision making. As a result, our investments in joint ventures involve risks that are different from the risks involved in owning facilities and operations independently. These risks include the possibility that our joint ventures or our partners: have economic or business interests or goals that are or become inconsistent with our business interests or goals; are in a position to take action contrary to our instructions, requests, policies or objectives; subject the joint venture to liabilities exceeding those contemplated; take actions that reduce our return on investment; or take actions that harm our reputation or restrict our ability to run our business. Additionally, our ability to sell our interest in a joint venture may be subject to contractual and other limitations. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.
Risks Related to an Investment in Our Common Stock
The trading price of our common stock may be adversely affected if an active trading market in our common stock is not sustained. Our stock price may be volatile, and you may be unable to resell your shares at or above the purchase price or at all.
We cannot predict the extent to which investor interest will sustain an active trading market. The market price of our common stock will be subject to significant fluctuations in response to, among other factors, variations in our operating results and market conditions specific to our industry. If an active public market is not sustained, it may be difficult for you to sell your shares at a price that is attractive to you, or at all.
In addition, volatility in the market price of our common stock may prevent you from being able to sell your common stock at or above the price you paid for your common stock. The market price for our common stock could fluctuate for various reasons, including:
our operating and financial performance and prospects;
the price outlook for copper and copper-alloys;
our quarterly or annual earnings or those of other companies in our or other industries;
conditions that impact demand for our products and services;
future announcements concerning our business or our competitors’ businesses;
our results of operations that vary from those of our competitors;
shrinkage from our processing operations;
the public’s reaction to our press releases, other public announcements and filings with the SEC;
changes in earnings estimates or recommendations by securities analysts who track our common stock;
market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
general market, economic and political conditions;
strategic actions by us or our competitors, such as acquisitions or restructurings;
changes in government and environmental regulation;
changes in accounting standards, policies, guidance, interpretations or principles;
arrival and departure of key personnel;
the number of shares to be publicly traded in the future;
sales of common stock by us, members of our management team or other holders;
adverse resolution of new or pending litigation against us;
business disruptions, costs and future events related to proxy contests or other shareholder activity;
any announcements by third parties of significant claims or proceedings against us;

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changes in general market, economic and political conditions and their effects on global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war, widespread illness and responses to such events; or
any material weakness in our internal control over financial reporting.
These and other factors may lower the market price of our common stock, regardless of our actual operating performance. As a result, our common stock may trade at prices significantly below the price at which it was purchased.
Future sales of shares of our common stock in the public market could cause our stock price to fall significantly even if our business is profitable.
We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions or investments. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions or investments.
We cannot predict the size of future issuance of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition or investment), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
Our ability to pay regular dividends to our shareholders is subject to the discretion of our Board of Directors and may be limited by our debt agreements and limitations in Delaware law.
On November 7, 2013, we announced that our Board of Directors had approved the initiation of a quarterly dividend of $0.0375 per share of our common stock to our stockholders and the Board of Directors has declared a dividend of $0.0375 per share of common stock in every subsequent quarter to date. Any future determination to pay dividends, however, will be at the discretion of the Board of Directors and will be dependent on then-existing conditions, including our financial condition, earnings, legal requirements including limitations in Delaware law, restrictions in our debt agreements, including those governing the 2016 ABL Facility and the Term Loan B Facility, that limit our ability to pay dividends to stockholders, our strategic opportunities and other factors the Board of Directors deems relevant. The Board of Directors may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. At this time, the agreement governing the 2016 ABL Facility and the agreement governing the Term Loan B Facility generally restrict or limit the payment of dividends to shareholders. The agreement governing the Term Loan B Facility includes a “restricted payments” basket based on Consolidated Net Income (as defined in the agreement). It increases based on 50% of Consolidated Net Income (as so defined) and decreases by 100% of Consolidated Net Loss (as so defined). The basket may be negative or insufficient to pay dividends. For the foregoing reasons, you will not be able to rely on dividends to receive a return on your investment. Accordingly, if you purchase shares, realization of a gain on your investment may depend on the appreciation of the price of our common stock, which may never occur.
Provisions in our charter and bylaws and provisions of Delaware law may delay or prevent our acquisition by a third party, which might diminish the value of our common stock.
The amended and restated certificate of incorporation and amended and restated bylaws of Global Brass and Copper Holdings, Inc. contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of the Board of Directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. The provisions include, among others:
a prohibition on actions by written consent of the stockholders;
removal of directors only for cause;
vacancies on the Board of Directors may be filled only by the Board of Directors;
no cumulative voting;
advance notice requirements for stockholder proposals and director nominations; and
supermajority approval requirement for an amendment of the amended and restated certificate of incorporation or amended and restated bylaws.

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Section 203 of the Delaware General Corporation Law may affect the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. Global Brass and Copper Holdings, Inc. has elected in its amended and restated certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law. Nevertheless, the amended and restated certificate of incorporation contains provisions that have the same effect as Section 203 of the Delaware General Corporation Law.
The provisions of the amended and restated certificate of incorporation and amended and restated bylaws of Global Brass and Copper Holdings, Inc. and the ability of the Board of Directors to create and issue a new series of preferred stock or implement a stockholder rights plan could discourage potential takeover attempts and reduce the price that investors might be willing to pay for shares of our common stock in the future, which could reduce the market price of our common stock.
If securities analysts do not publish research or reports about our company, or if they issue unfavorable commentary about us or our industry or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock depends in part on the research and reports that third-party securities analysts publish about our company and our industry. One or more analysts could downgrade our common stock or issue other negative commentary about our company or our industry. In addition, we may be unable or be slow to attract research coverage. Alternatively, if one or more of these analysts cease coverage of our company, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our common stock could decline.
Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
The Board of Directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by its stockholders. Such preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of common stock. The potential issuance of preferred stock may delay or prevent a change in control of Global Brass and Copper Holdings, Inc., discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our common stock.


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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “projects,” “may,” “would,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make or may make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements contained in this report are based upon information available to us on the date of this report.
Important factors that could cause actual results to differ materially from our expectations, which we refer to as “cautionary statements,” are disclosed under the “Risk Factors” section in Item 1A in this annual report on Form 10-K. All forward-looking information in this report and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results include, but are not limited to: 

general economic conditions affecting the markets in which our products are sold;
our ability to implement our business strategies, including acquisition activities;
our ability to maintain business relationships with our customers on favorable terms;
our ability to continue implementing our balanced book approach to substantially reduce the impact of fluctuations in metal prices on our earnings and operating margins;
shrinkage from processing operations and metal price fluctuations, particularly copper;
the condition of various markets in which our customers operate, including the housing and commercial construction industries;
the impact of a loss in customer volume or demand or a shift by customers of their manufacturing or sourcing offshore;
our ability to compete effectively with existing and new competitors;
limitations on our ability to purchase raw materials, particularly copper;
fluctuations in commodity and energy prices and costs;
our ability to maintain sufficient liquidity as commodity and energy prices rise;
the effects of industry consolidation or competition in our business lines;
operational factors affecting the ongoing commercial operations of our facilities, including technology failures, catastrophic weather-related damage, regulatory approvals, permit issues, unscheduled blackouts, outages or repairs or unanticipated changes in energy costs;
operational factors affecting the ongoing commercial operations of our facilities resulting from inclement weather conditions;
supply, demand, prices and other market conditions for our products;
our ability to accommodate increases in production to meet demand for our products;
our ability to continue our operations internationally and the risks applicable to international operations;
government regulations relating to our products and services, including new legislation relating to derivatives and the elimination of the dollar bill and EPA regulations regarding the registration and marketing of bactericidal copper products;
our ability to maintain effective internal control over financial reporting;
our ability to realize the planned cost savings and efficiency gains as part of our various initiatives;
our ability to successfully execute acquisitions and joint ventures;
workplace safety issues;
our ability to retain key employees;
adverse developments in our relationship with our employees or the future terms of our collective bargaining agreements;
the impact of our substantial indebtedness, including the effect of our ability to borrow money, fund working capital and operations and make new investments;
rising employee medical costs;
environmental costs and our exposure to environmental claims;

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our exposure to product liability claims;
our ability to successfully manage litigation;
our ability to maintain cost-effective insurance policies;
our ability to maintain the confidentiality of our proprietary information, to protect the validity, enforceability or scope of our intellectual property rights and manage litigation regarding our intellectual property rights;
litigation regarding our intellectual property rights could affect us and harm our business;
fluctuations in interest rates; and
restrictive covenants in our indebtedness that may adversely affect our operational flexibility.
We caution you that the foregoing list of factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. Accordingly, investors should not place undue reliance on those statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.


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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table summarizes our major facilities as of December 31, 2016:
Entity
 
Operation
 
Location
 
Owned or
Leased
 
Products
Corporate
 
Corporate Headquarters
 
Schaumburg, Illinois
 
Leased
 
N/A
Olin Brass segment
 
Mill Products
 
East Alton, Illinois
 
Owned (1)
 
Copper-based strip
Clad copper & copper-alloy strip
 
 
Fabricated Products
 
East Alton, Illinois
 
Owned (1)
 
Stamped & drawn copper-based parts
 
 
Fineweld Tube
 
Cuba, Missouri
 
Owned
 
Welded copper-alloy tube
 
 
Bryan Metals
 
Bryan, Ohio
 
Owned
 
Copper-based strip
 
 
 
 
 
 
 
 
Copper-based strip and foil
 
 
Somers Thin Strip
 
Waterbury, Connecticut
 
Owned
 
Stainless steel light gauge strip
 
 
Olin Luotong Metals
 
Guangzhou, China
 
Owned building; 50-year lease on land
 
Copper-based strip
 
 
Olin Brass
Headquarters
 
Louisville, Kentucky
 
Leased
 
N/A
Chase Brass segment
 
Manufacturing
 
Montpelier, Ohio
 
Owned
 
Copper-based rod
 
 
Warehouse
 
Los Angeles, California
 
Leased
 
Copper-based rod
A.J. Oster segment
 
Processing and Distribution
 
Warwick, Rhode Island
 
Leased
 
Copper-alloy strip, aluminum foil, aluminum strip, specialty stainless steel strip and specialty rod
 
 
Processing and Distribution
 
Alliance, Ohio
 
Owned
 
 
 
Processing and Distribution
 
Carol Stream, Illinois
 
Owned
 
 
 
Processing and Distribution
 
Yorba Linda, California
 
Leased
 
 
 
Processing and Distribution
 
Caguas, Puerto Rico
 
Owned
 
 
 
Processing and Distribution
 
Queretaro, Mexico
 
Owned
 
 
 
A.J. Oster
Headquarters
 
Warwick, Rhode Island
 
Leased
 
N/A
(1) Certain utility infrastructure at the East Alton, Illinois facility is leased by Olin Brass from Olin Corporation.
Pursuant to a 2007 transition services agreement, Olin Corporation supplies Olin Brass with natural gas, water, steam and waste water disposal, among other things, at Olin Brass’s East Alton, Illinois facility. According to the transition services agreement, Olin Corporation has agreed to provide utility services until Olin Corporation ceases operations at its East Alton, Illinois facility, at which time Olin Brass has the option to acquire the utilities infrastructure at fair market value. The transition services agreement renewed automatically in November 2016 and automatically renews for one-year terms thereafter subject to termination by either party upon one year’s notice.
Item 3. Legal Proceedings.
We are currently and from time to time involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business, none of which management currently believes are, or will be, material to our business.
Item 4. Mine Safety Disclosures.
Not applicable.

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PART II
Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Holders of Record
Our common stock is traded on the New York Stock Exchange (ticker symbol BRSS). As of February 21, 2017, we had approximately 77 holders of record of our common stock.
Market Information for Common Stock
The high and low selling prices per share of our common stock, as well as the cash dividend declared per share of our common stock, for the quarters during 2016 and 2015 were as follows:
 
 
2016
 
First
Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
High
$
25.31

  
$
28.80

  
$
30.11

  
$
35.00

Low
18.97

  
23.43

  
26.72

  
23.85

Cash dividends declared
0.0375

  
0.0375

  
0.0375

  
0.0375

 
 
 
 
 
 
 
 
 
2015
 
First
Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
High
$
15.94

  
$
18.90

  
$
21.43

  
$
24.05

Low
12.30

  
14.46

  
15.96

  
19.88

Cash dividends declared
0.0375

  
0.0375

  
0.0375

  
0.0375

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

The payment of dividends in the future will be at the discretion of our Board of Directors and will depend on a number of factors, including our financial and operating results, financial position, anticipated cash requirements and restrictions contained in the agreements governing our asset-based revolving loan facility, which matures on July 19, 2021 (“2016 ABL Facility”) and our term loan facility, which matures on July 18, 2023 (“Term Loan B Facility”). Currently, we have significant availability under our credit agreements to pay dividends consistent with past practice and future expectations. We can give no assurance that dividends will be paid in the future. See Note 11, “Financing,” of our consolidated financial statements, which are included elsewhere in this report, for further discussion of these restrictive covenants.
Issuer Purchases of Equity Securities
None.


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Performance Graph

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

The following graph shows a comparison from May 23, 2013 (the date our common stock commenced trading on the New York Stock Exchange) through December 31, 2016 of the cumulative total return for our common stock, the Russell 2000 Index (“Total Market Index”) and the S&P SmallCap 600 Index—Materials (“Materials Index”). The graph assumes that $100 was invested at the market close on May 23, 2013 in the common stock of Global Brass and Copper Holdings, Inc., the Total Market Index and the Materials Index and data assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
 
brss-123120_chartx57621a02.jpg

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Item 6. Selected Financial Data.
Set forth below is selected historical consolidated financial data of our business as of the dates and for the periods indicated. The selected historical consolidated financial data for the years ended December 31, 2016, 2015 and 2014 and as of December 31, 2016 and 2015 have been derived from our consolidated financial statements included elsewhere in this report. The selected historical consolidated financial data as of December 31, 2014, 2013 and 2012 and for the years ended December 31, 2013 and 2012 have been derived from our consolidated financial statements not included in this report.
The selected historical consolidated financial data should be read in conjunction with the information about the limitations on comparability of our financial results, including as a result of acquisitions. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 1A, “Risk Factors,” and our consolidated financial statements and related notes included in Item 8 to this report. 
(in millions, except per share data)
Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
1,338.5

 
$
1,506.2

 
$
1,711.4

 
$
1,758.5

 
$
1,650.5

Cost of sales
(1,156.9
)
 
(1,335.9
)
 
(1,546.8
)
 
(1,576.2
)
 
(1,467.3
)
Gross profit
181.6

 
170.3

 
164.6

 
182.3

 
183.2

Selling, general and administrative expenses (1)
(82.8
)
 
(83.2
)
 
(76.9
)
 
(110.8
)
 
(92.7
)
Operating income
98.8

 
87.1

 
87.7

 
71.5

 
90.5

Interest expense
(26.2
)
 
(39.1
)
 
(39.6
)
 
(39.8
)
 
(39.7
)
Loss on extinguishment of debt
(23.4
)
 
(3.1
)
 

 

 
(19.6
)
Gain on sale of investment in joint venture

 
6.3

 

 

 

Other income (expense), net
0.2

 
0.2

 
(0.5
)
 
(0.3
)
 
(0.1
)
Income before provision for income taxes and equity income
49.4

 
51.4

 
47.6

 
31.4

 
31.1

Provision for income taxes
(16.6
)
 
(15.9
)
 
(16.6
)
 
(22.2
)
 
(19.2
)
Income before equity income
32.8

 
35.5

 
31.0

 
9.2

 
11.9

Equity income, net of tax

 
0.3

 
1.1

 
1.5

 
1.0

Net income
32.8

 
35.8

 
32.1

 
10.7

 
12.9

Net income attributable to noncontrolling interest
(0.6
)
 
(0.2
)
 
(0.4
)
 
(0.3
)
 
(0.4
)
Net income attributable to Global Brass and Copper Holdings, Inc.
$
32.2

 
$
35.6

 
$
31.7

 
$
10.4

 
$
12.5

Per Share Data:
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share (2)
$
0.1500

 
$
0.1500

 
$
0.1500

 
$
0.0375

 
$
7.5793

Basic net income attributable to Global Brass and Copper Holdings, Inc. per common share
$
1.50

 
$
1.67

 
$
1.50

 
$
0.49

 
$
0.59

Diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share
$
1.49

 
$
1.66

 
$
1.49

 
$
0.49

 
$
0.59

Number of common shares used in basic per share calculations
21.4

 
21.3

 
21.2

 
21.1

 
21.1

Number of common shares used in diluted per share calculations
21.6

 
21.4

 
21.3

 
21.2

 
21.1

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash
$
88.2

 
$
83.5

 
$
44.6

 
$
10.8

 
$
13.9

Total assets
582.6

 
557.2

 
566.3

 
537.7

 
490.3

Total debt (3)
316.0

 
343.1

 
371.4

 
369.5

 
377.1

Total liabilities
487.4

 
496.5

 
540.3

 
541.1

 
538.1

Total equity (deficit)
95.2

 
60.7

 
26.0

 
(3.4
)
 
(47.8
)
(1)
For the years ended December 31, 2013 and 2012, includes non-cash profits interest compensation expense of $29.3 million and $19.5 million, respectively. We did not record any non-cash profits interest compensation expense in 2016, 2015 or 2014.
(2)
In 2016, 2015, 2014 and 2013, we declared dividends of $3.3 million, $3.2 million, $3.2 million and $0.8 million, respectively, to the Company’s stockholders. In 2012, we used a portion of the net proceeds from the issuance of senior secured notes to pay a $160.0 million distribution to Halkos, the sole stockholder of the Company prior to its initial public offering in May 2013.
(3)
Consists of long-term debt, capital lease obligations and current maturities of long-term debt (presented net of discount and net of deferred financing fees incurred in connection with the issuance of debt).

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Readers should refer to the information presented under the caption “Risk Factors” for risk factors that may affect our future performance. The following discussion and analysis of financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this report. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in the sections entitled “Risk Factors” and “Cautionary Statements Concerning Forward-Looking Statements” included elsewhere in this report.
Overview
Our Company
Global Brass and Copper Holdings, Inc. (“Holdings,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware on October 10, 2007. Holdings, through its wholly-owned principal operating subsidiary, Global Brass and Copper, Inc. (“GBC”), commenced commercial operations on November 19, 2007 through the acquisition of the metals business from Olin Corporation. The majority of our operations are managed through three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster. We also have a Corporate entity which includes certain administrative costs and expenses and the elimination of intercompany balances.
We are a leading value-added converter, fabricator, processor and distributor of specialized non-ferrous products including a wide range of sheet, strip, foil, rod, tube and fabricated metal component products. While we primarily process copper and copper alloys, we also reroll and form certain other metals such as stainless steel, carbon steel and aluminum. Using processed scrap, virgin metals and other refined metals, we engage in metal melting and casting, rolling, drawing, extruding, welding and stamping to fabricate finished and semi-finished alloy products. Key attributes of copper and copper alloys are conductivity, corrosion resistance, strength, malleability, cosmetic appearance and bactericidal properties.
Our products are used in a variety of applications across diversified markets, including the building and housing, munitions, automotive, transportation, coinage, electronics / electrical components, industrial machinery and equipment and general consumer markets. We access these markets through direct mill sales, our captive distribution network and third-party distributors. We hold the exclusive production and distribution rights in North America for a lead-free brass rod product, which we sell under the Green Dot® and Eco Brass® brand names. The vertical integration of Olin Brass’s manufacturing capabilities and A.J. Oster’s distribution capabilities allows us to access customers with a wide variety of volume and service needs.
We service nearly 1,600 customers in 28 countries across four continents. We employ approximately 1,850 people and operate 11 manufacturing facilities and distribution centers across the United States (“U.S.”), Puerto Rico and Mexico.
We own 80% of a value-added service center in Guangzhou, China (“Olin Luotong Metals” or “OLM”); the other 20% is owned by Chinalco Luoyang Copper Co. Ltd. (“Chinalco”). Through Olin Luotong Metals, together with our sales offices in China and Singapore, we supply our products in China and throughout Asia.
Unlike traditional metals companies, in particular those that engage in mining, smelting and refining activities, we are purely a metal converter, fabricator, processor and distributor, and we do not attempt to generate profits from fluctuations in metal prices. Our financial performance is primarily driven by metal conversion economics, not by the underlying movements in the price of copper and the other metals we use. Through our “balanced book” approach, we strive to match the timing, quantity and price of our metal sales with the timing, quantity and price of our replacement metal purchases. This practice, along with our toll processing operations and last-in, first-out (“LIFO”) inventory accounting methodology, substantially reduces the financial impact of metal price movements on our earnings and operating margins.
Our Operating Segments
We operate through three reportable operating segments: Olin Brass, Chase Brass and A.J. Oster.
Our Olin Brass segment is the leading manufacturer, fabricator and converter of specialized copper and brass sheet, strip, foil, tube and fabricated components in North America. While primarily processing copper and copper alloys, the segment also rerolls and forms other metals such as stainless steel, carbon steel and aluminum. Olin Brass’s products are used in

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five primary markets: munitions, coinage, automotive, building and housing and electronics / electrical components. In 2016, Olin Brass sold approximately 15% of its domestic copper-based products to A.J. Oster.
Chase Brass is a leading manufacturer of brass rod in North America. Chase Brass primarily manufactures brass rod, including round and other shapes, ranging from 1/4 inch to 4 1/2 inches in diameter. The key attributes of brass rod include its machinability, corrosion resistance and moderate strength, making it especially suitable for forging and machining products such as valves and fittings. Brass rod is generally manufactured from copper or copper-alloy scrap. Chase Brass produces brass rod used in production applications which can be grouped into four primary markets: building and housing, transportation, electronics / electrical components and industrial machinery and equipment.
A.J. Oster is a processor and distributor primarily of copper and copper-alloy sheet, strip and foil. A.J. Oster operates six strategically-located service centers in the United States, Puerto Rico and Mexico. Each A.J. Oster service center reliably provides a broad range of high quality products at quick lead-times in small quantities. These capabilities, combined with A.J. Oster’s operations of precision slitting, hot tinning, traverse winding, cutting and special packaging, provide value to a broad customer base. A.J. Oster’s products are used in three primary markets: building and housing, automotive and electronics / electrical components. In 2016, 51% of A.J. Oster’s brass and copper material requirements were supplied by our Olin Brass segment.
All three segments generate revenue from product sales and earn a premium margin over the cost of metal as a result of our metal conversion, value-added processing, and service capabilities.
Corporate and other includes compensation for corporate executives and officers, corporate office and administrative salaries, and professional fees for accounting, tax and legal services. Corporate and other also includes interest expense, state and federal income taxes, overhead costs that management has not allocated to the operating segments, share-based compensation expense, gains and losses associated with certain acquisitions and dispositions and the elimination of intercompany sales and balances.
Formation and Acquisition of the Worldwide Metals Business of Olin Corporation
On October 10, 2007, the Company was formed by affiliates of KPS Capital Partners, L.P. (“KPS”) as an acquisition vehicle to acquire the worldwide metals business of Olin Corporation, which was completed on November 19, 2007. The transaction was accounted for under the purchase method of accounting, and the assets and liabilities of the business were recorded at fair value at the acquisition date.
At the time of the transaction, the fair market value of the net assets acquired exceeded the purchase price in the acquisition. This resulted in a bargain purchase, and we reduced the value of all identified intangible assets and other noncurrent assets, including the acquired property, plant and equipment, to zero in the opening balance sheet as of the acquisition date. Accordingly, our fixed assets reflect only post-acquisition capital investments, and our cost of sales and selling, general and administrative expense, depending on the nature and use of the underlying asset, includes depreciation only on capital investments made after the acquisition date.
Recent Transactions
2016 Refinancing
On July 18, 2016, we entered into a long-term credit agreement that matures on July 18, 2023 (the “Term Loan B Credit Agreement” and the loans thereunder, the “Term Loan B Facility”).
The Term Loan B Facility provides for borrowings of $320.0 million. Amounts outstanding under the Term Loan B Facility bear interest at a rate per annum equal to, at our option, either (1) 3.00% to 3.25% subject to a total net leverage ratio pricing grid set forth in the Term Loan B Credit Agreement plus an Alternate Base Rate (as defined in the Term Loan B Credit Agreement) or (2) 4.00% to 4.25% subject to a total net leverage ratio pricing grid set forth in the Term Loan B Credit Agreement plus the Adjusted LIBO Rate (as defined in the Term Loan B Credit Agreement). At December 31, 2016, amounts outstanding under the Term Loan B Facility accrued interest at a rate of 5.25%.
The Term Loan B Credit Agreement requires mandatory prepayments based on various events and circumstances as are customary in such agreements. In addition, starting on December 31, 2017, we are subject to a 50% excess cash flow sweep, subject to step-downs to 25% and 0% depending on the total net leverage ratio from time to time. We may, however, voluntarily prepay outstanding loans under the Term Loan B Facility at any time. In connection with the Term Loan B Facility, commencing on December 30, 2016, we must make quarterly payments of $0.8 million with the balance expected to be due on July 18, 2023.

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On July 18, 2016, we also entered into a credit agreement with a syndicate of lenders that matures on July 19, 2021 (the “ABL Credit Agreement” and the facility thereunder, the “2016 ABL Facility”). The 2016 ABL Facility is an asset-based revolving loan facility that provides for borrowings of up to the lesser of $200.0 million or the borrowing base, in each case less outstanding loans and letters of credit.
Amounts outstanding, if any, under the 2016 ABL Facility bear interest at a rate per annum equal to, at our option, either (1) 0.25% to 0.75% subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus an Alternate Base Rate (as defined in the ABL Credit Agreement) or (2) 1.25% to 1.75% subject to an average quarterly availability pricing grid set forth in the ABL Credit Agreement plus the Adjusted LIBO Rate (as defined in the ABL Credit Agreement). Unused amounts under the 2016 ABL Facility incur an unused line fee of 0.375% or 0.25% per annum (depending on the percentage of aggregate revolving exposure), payable in arrears on a quarterly basis.
Purchases and Redemption of Senior Secured Notes
Prior to obtaining the Term Loan B Credit Agreement and the ABL Credit Agreement, our debt facilities consisted of our 9.50% senior secured notes due 2019 (“Senior Secured Notes”) and a former asset-based loan facility (“ABL Facility”).
During 2016, we purchased in the open market an aggregate of $40.0 million principal amount of our then existing Senior Secured Notes for an aggregate purchase price of $42.5 million, plus accrued interest. On July 18, 2016, we used a portion of the proceeds from our Term Loan B Facility to redeem the remaining $305.3 million principal amount outstanding of our Senior Secured Notes. As part of this refinancing and in accordance with the indenture governing the Senior Secured Notes (“Indenture”), we called the notes at a redemption price of 104.75% plus accrued interest, and we terminated the related Indenture.
We recognized a loss on the extinguishment of debt in the year ended December 31, 2016 of $23.4 million, which includes a premium of $17.0 million and the write-off of $6.4 million of unamortized debt issuance costs for both the Senior Secured Notes and the former ABL Facility. No amounts were outstanding under the former ABL Facility at the time of termination.
For additional information regarding the purchases of Senior Secured Notes and the 2016 Refinancing, see Note 11, “Financing,” of our consolidated financial statements, which are included elsewhere in this report.
Key Business Principles Affecting Our Results of Operations
LIFO Accounting
The metals component of inventories that is valued on last-in, first-out (“LIFO”) basis comprises approximately 70% of total inventory at December 31, 2016 and 2015, respectively. The impact of LIFO accounting on our financial results may be significant with respect to period-to-period comparisons depending on the fluctuations in our inventory levels. During 2016, 2015 and 2014, certain domestic metal inventory quantities were reduced, resulting in a liquidation of LIFO inventory layers. The effect of this reduction increased cost of sales by $1.9 million, $0.1 million and $0.6 million in 2016, 2015 and 2014, respectively.
Metal Cost
We are a leading, value-added converter, fabricator, processor and distributor of specialized non-ferrous products in North America. We generate our profits from the conversion, manufacturing and fabrication of metal into end products, and not by taking advantage of fluctuations in the price of copper and other metals. Our business model uses various methods to substantially reduce the financial impact of fluctuations in metal prices, such that our operating margins are largely unaffected by trends in metal prices. Nevertheless, fluctuations in metal prices will impact the total amount of our net sales, the cost of shrinkage loss, the impact of LIFO liquidations (as previously discussed) and our working capital requirements.
Shrinkage loss, which is primarily the loss of metal that occurs in the melting and casting operations, is an inherent part of any metal casting process. While the shrinkage loss rate is very low relative to the total volume of metal cast, the cost of the shrinkage loss and its impact on financial performance increases as metal prices increase.
Over the last three years, approximately 25% of our sales volumes were made on a toll basis where our customers supply us with the metal and we charge them a processing or conversion fee to melt the metal and convert it into a finished product. For metal processed on a non-toll basis, we procure and own the metal until we sell it to the customer, whereby we charge them not only a conversion fee but also a metal replacement fee. For these non-toll sales, we use our balanced book

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approach, discussed below, to substantially reduce the impact of metal price movements on earnings and operating margins.
Metal prices also impact our investment in working capital because our collection terms with our customers are longer than our payment terms to our suppliers. Therefore, when metal prices increase, even if the number of pounds processed does not change, our working capital requirements will also increase. When metal prices fall, the opposite occurs.
Balanced Book
The majority of our sales volume is from non-toll customers. To substantially reduce the financial impact of metal price volatility on earnings and operating margins on these non-toll sales, we use a balanced book approach to hedge the impact of metal price fluctuations. The balanced book approach minimizes the financial impact of metal price movements in the period between date of order and date of shipment by matching the timing, quantity and price of the metal cost recovery component of net sales made on a non-toll basis with the timing, quantity and price of the replacement metal purchases. For any non-toll sale, we seek to achieve our balanced book through one of the following three mechanisms:
Metal sales and replacement purchases on “price date of shipment” terms, meaning that metal sale price to the customer and the purchase price for replacement metal from a supplier are set on the date of shipment. The customer bears the risk of metal price changes from the date of order to the date of shipment.
Metal sales and replacement purchases on a “firm price basis,” meaning that metal sale price to the customer are fixed on the order date, and a matching replacement purchase at a fixed price is established with a metal supplier. The supplier therefore bears the risk of metal price changes from the date of order to the date of shipment.
Metal sales on a firm price basis in circumstances where a matching firm price replacement purchase is unavailable: in this situation, we execute a forward purchase on “price date of shipment” terms by entering into a financial derivative transaction in the form of a forward purchase contract. The impact of price changes from date of order to the date of shipment on the previously required metal replacement purchase is offset by gains or losses on the derivative contract. The derivative counterparty bears the risk of metal price changes from the date of order to the date of shipment.
In 2016, approximately 60% of our non-toll sales volumes (45% of our total unit shipments) were conducted with price date of shipment terms. All other non-toll unit sales volumes were conducted with firm price replacement purchases or price date of shipment replacement purchases plus a derivative contract.
Metal Derivatives
As discussed above, we use derivative contracts in support of our balanced book approach. These derivative contracts are not designated as hedges for accounting purposes and are recorded at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). Thus, we include the unrealized and realized gains and losses on these derivatives within cost of sales in our consolidated statements of operations.
Industry Dynamics and Demand for Our Products
Demand for our product is driven predominantly by six markets: 1) building and housing, 2) munitions, 3) automotive, 4) electronics / electrical components, 5) coinage and 6) industrial machinery and equipment.
Building and Housing
According to our estimates, we expect U.S. housing starts and U.S. existing home sales to increase 6.6% and 4.3% annually, respectively, from 2016 through 2019.
We also expect continued growth for lead-free plumbing products in our green portfolio products, including Eco Brass®. We intend to continue our efforts to build key, strategic partnerships with our customers in the building and housing market to help drive growth.
Demand within this market is affected by new residential housing, existing home sales and commercial construction, all of which are significantly dependent on overall economic conditions. In addition, the correlation between housing statistics and our sales is not entirely direct as products containing our metal are typically installed near the completion of construction. Thus, there is an inherent lag time compared to housing starts. Sales of our products to customers in the building and housing market can be also affected by factors such as housing mix (single family versus multi-family

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homes), unit size and unit price point. Sales of our products can also be impacted by changes and trends in the composition of materials and fixtures used in construction.
Munitions
In 2014, our customers began destocking their munitions inventories and thus, Olin Brass’s munitions volumes decreased in 2015 as these efforts continued. In 2016, we saw improved volumes in this market, but were still approximately 5% below the average annual munitions volumes in the 2012-2014 period. We expect a longer-term normalized run rate that is at or slightly above these historical 2012-2014 average annual volumes.
We remain focused on managing the factors within our control from a volume standpoint and we are encouraged by the continued improvements in quality and on-time performance at Olin Brass.
Automotive
The automotive market is dependent on the level of consumer spending on automobiles, which is significantly dependent on overall economic conditions, replacement needs, and the amount of electrical components contained within automobiles. According to our estimates, North American light vehicle production is expected to grow by 1.5% annually from 2016 through 2019.
Particularly within Olin Brass and A.J. Oster, we are implementing pricing strategies that focus on pricing our products: to earn a return commensurate with cost complexity required to produce them, to earn an appropriate return on the assets used to produce them, and to earn an appropriate return in relation to other competitive offerings. We believe these pricing strategies will better position us in the long-term.
Electronics / Electrical Components
Customers use our products to manufacture electronics / electrical components in a wide range of applications, from medical devices to computers to aviation components, and demand is largely correlated to general economic activity and technological developments.
Coinage
As has been the case from time to time for over 40 years, Olin Brass renewed its long-term contract with the U.S. Mint in 2012 to extend the supply agreement into 2017. We would expect to earn a similar renewal in 2017. Demand for coinage is directly tied to consumer transactions and coinage demand has improved in the last three years as a result of an overall increase in demand, as well as due to the U.S. Mint replenishing coin inventories which had become too low.
Industrial Machinery and Equipment (“IM&E”)
Sales in this market primarily lie within Chase Brass. IM&E volumes decreased in both 2015 and 2016 as compared to each previous year due to softness in the oil and gas, metals and mining, and agricultural industries, as well as competition from imported parts.
Industry Dynamics Affecting Growth Opportunities
Regarding demand for copper and copper-alloy sheet, strip and plate (“SSP”), there are a number of growth opportunities that could increase the demand for SSP products, including our CuVerro® bactericidal products. Olin Brass completed the federal and state registration processes necessary to market its CuVerro® materials as having bactericidal properties. It has also registered more than 30 component manufacturers to market products made with CuVerro®.
Legislation to replace the one-dollar paper notes with dollar coins keeps receiving attention in Congress, most recently by the reintroduction of the Unified Savings and Accountability Act (“USA Act”) in July 2015. Among other matters, the USA Act brings added focus and support to replace the one dollar note with the dollar coin. We anticipate a significant increase in the size of the coinage market if the U.S. transitions to the dollar coin and eliminates the one-dollar paper note.
Regarding demand for brass rod, we anticipate volume growth in our green products portfolio from the building and construction market resulting from the need for plumbing devices to be compliant with national potable water regulations.
Finally, the North American market may be affected by certain factors related to the supply of brass and copper, including imported rod and finished parts. Therefore, competition from offshore suppliers could become more significant in the future if certain factors change. Historically these factors have included foreign trade agreements, competition,

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antidumping orders, foreign exchange rate fluctuations, domestic capacity and pricing levels, as well as costs in the import supply chain.
Management’s View of Performance
In addition to the results reported in accordance with accounting principles generally accepted in the United States of America, (“US GAAP”), we also report “adjusted sales,” “adjusted gross profit,” “adjusted selling, general and administrative expenses,” “adjusted EBITDA” and “adjusted diluted earnings per common share,” all of which are non-GAAP financial measures as defined below.
Adjusted sales, adjusted gross profit, adjusted selling, general and administrative expenses, adjusted EBITDA and adjusted diluted earnings per common share may not be comparable to similarly titled measures presented by other companies and are not intended as alternatives to any other measure of performance in conformity with US GAAP.
You should therefore not place undue reliance on adjusted sales, adjusted gross profit, adjusted selling, general and administrative expenses, adjusted EBITDA, adjusted diluted earnings per common share, or any ratios calculated using them. The most comparable US GAAP-based measure for each respective non-GAAP financial measure can be found in our consolidated financial statements and the related notes thereto included elsewhere in this report.
Net sales and adjusted sales
Net sales is the most directly comparable US GAAP measure to adjusted sales, which represents the value-added premium we earn over our conversion and fabrication costs. Adjusted sales is defined as net sales less the metal cost of products sold. We use adjusted sales on a consolidated basis to monitor the revenues that are generated from our value-added conversion and fabrication processes excluding the effects of fluctuations in metal costs. We believe that adjusted sales supplements our US GAAP results because it provides a more complete understanding of the results of our business, and we believe it is useful to our investors and other parties for these same reasons.
Net sales is reconciled to adjusted sales as follows:
 
Year Ended
December 31,
 
Change:
2016 vs. 2015
 
Change:
2015 vs. 2014
(in millions, except per pound values)
2016
 
2015
 
2014
 
Amount
 
Percent
 
Amount
 
Percent
Pounds shipped (a)
520.8

 
511.9

 
520.4

 
8.9

 
1.7
 %
 
(8.5
)
 
(1.6
)%
Net sales
$
1,338.5

 
$
1,506.2

 
$
1,711.4

 
$
(167.7
)
 
(11.1
)%
 
$
(205.2
)
 
(12.0
)%
Metal component of net sales
(796.3
)
 
(971.9
)
 
(1,168.8
)
 
175.6

 
(18.1
)%
 
196.9

 
(16.8
)%
Adjusted sales
$
542.2

 
$
534.3

 
$
542.6

 
$
7.9

 
1.5
 %
 
$
(8.3
)
 
(1.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales per pound
$
2.57

 
$
2.94

 
$
3.29

 
$
(0.37
)
 
(12.6
)%
 
$
(0.35
)
 
(10.6
)%
less: Metal component of net sales per pound
1.53

 
1.90

 
2.25

 
(0.37
)
 
(19.5
)%
 
(0.35
)
 
(15.6
)%
Adjusted sales per pound
$
1.04

 
$
1.04

 
$
1.04

 
$

 
 %
 
$

 
 %
Average copper price per pound (b)
$
2.20

 
$
2.51

 
$
3.12

 
$
(0.31
)
 
(12.4
)%
 
$
(0.61
)
 
(19.6
)%
(a)Amounts exclude quantity of unprocessed metal sold.
(b)Copper prices reported by the Commodity Exchange (“COMEX”).
2016 compared to 2015
Net sales decreased by $167.7 million, or 11.1%, primarily the result of a $175.6 million decline in the metal cost recovery component due to decreased metal prices and less sales of unprocessed metals (combined $189.7 million), partially ameliorated by increased volumes ($24.0 million). Adjusted sales increased by $7.9 million due to increased volumes as the result of increased demand in the munitions and building and housing markets, partially offset by lower demand in the coinage, industrial machinery and equipment and transportation markets. Average selling prices also decreased slightly due to increased concentration of sales to lower margin customers and increased mix of sales in generally lower priced markets.

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2015 compared to 2014
Net sales decreased by $205.2 million, or 12.0%, primarily due to decreased metal prices ($133.0 million) and a decline in sales of unprocessed metal ($56.9 million). Adjusted sales decreased by $8.3 million, primarily due to decreased volume as a result of lower demand in the munitions market partially offset by increased demand in the coinage market.
Gross profit and adjusted gross profit
Gross profit is the most directly comparable US GAAP measure to adjusted gross profit. Adjusted gross profit is defined as gross profit less items excluded from the calculation of adjusted EBITDA. We believe that adjusted gross profit supplements our US GAAP results because it provides a more complete understanding of the results of our business, and we believe it is useful to our investors and other parties for these same reasons. We believe adjusted gross profit represents a meaningful presentation of the financial performance of our core operations, in order to provide period-to-period comparisons that are more consistent and more easily understood.
Gross profit is reconciled to adjusted gross profit as follows:
 
Year Ended
December 31,
 
Amount change:
(in millions)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Total gross profit
$
181.6

 
$
170.3

 
$
164.6

 
$
11.3

 
$
5.7

Unrealized (gain) loss on derivative contracts (a)
(3.1
)
 
(0.6
)
 
3.0

 
(2.5
)
 
(3.6
)
LIFO liquidation loss (gain)
1.9

 
0.1

 
0.6

 
1.8

 
(0.5
)
Lower of cost or market adjustment to inventory (b)
(1.7
)
 
6.6

 
0.2

 
(8.3
)
 
6.4

Restructuring and other business transformation charges

 
0.4

 
0.1

 
(0.4
)
 
0.3

Depreciation expense
12.9

 
12.0

 
10.2

 
0.9

 
1.8

Adjusted gross profit
$
191.6

 
$
188.8

 
$
178.7

 
$
2.8

 
$
10.1

(a)
We use our balanced book approach, which includes derivative contracts, to substantially reduce the impact of metal price fluctuations on operating margins. We also use derivative contracts to reduce uncertainty and volatility related to energy and utility costs.
(b)
2016 amounts represent net recoveries of previous charges as market prices for certain non-copper metals increased. For 2015 and 2014, the amounts represent lower of cost or market charges for the write down of domestic, non-copper metal inventory.
2016 compared to 2015
Gross profit increased by $11.3 million, or 6.6%, and benefited $8.3 million from a reduction in lower of cost or market charges and favorable fluctuations ($2.5 million) in unrealized gains / losses on derivative contracts. Adjusted gross profit increased by $2.8 million (1.5%) due to increased volumes, partially offset by a negative impact from the aforementioned shift in sales towards less profitable customers and markets. Additionally, while gross profit was unfavorably impacted by the one-time production costs incurred as a result of the production outage, these were more than offset by productivity improvements leading to an overall decrease in production costs.
2015 compared to 2014
Gross profit increased by $5.7 million, or 3.5%, primarily due to increased production yields and productivity improvements. Adjusted gross profit increased by $10.1 million, predominantly due to the aforementioned yield and productivity improvements.
Selling, general and administrative expenses and adjusted selling, general and administrative expenses
Selling, general and administrative expenses are the most directly comparable US GAAP measure to adjusted selling, general and administrative expenses. Adjusted selling, general and administrative expenses is defined as selling, general and administrative expenses less items excluded from the calculation of adjusted EBITDA. We believe that adjusted selling, general and administrative expenses supplement our US GAAP results because it provides a more complete understanding of the results of our business, and we believe it is useful to our investors and other parties for these same reasons. We believe adjusted selling, general and administrative expenses represent a meaningful presentation of the

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financial performance of our core operations, in order to provide period-to-period comparisons that are more consistent and more easily understood.
Selling, general and administrative expenses is reconciled to adjusted selling, general and administrative expenses as follows:
 
Year Ended
December 31,
 
Amount change:
(in millions)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Total selling, general and administrative expenses
$
82.8

 
$
83.2

 
$
76.9

 
$
(0.4
)
 
$
6.3

Specified legal / professional expenses
(1.2
)
 
(2.8
)
 
(4.3
)
 
1.6

 
1.5

Share-based compensation expense
(6.9
)
 
(4.2
)
 
(1.7
)
 
(2.7
)
 
(2.5
)
Restructuring and other business transformation charges

 
(0.5
)
 
(0.3
)
 
0.5

 
(0.2
)
Depreciation and amortization expense
(2.0
)
 
(1.6
)
 
(2.1
)
 
(0.4
)
 
0.5

Adjusted selling, general and administrative expenses
$
72.7

 
$
74.1

 
$
68.5

 
$
(1.4
)
 
$
5.6

2016 compared to 2015
Selling, general and administrative expenses decreased by $0.4 million (0.5%) and adjusted selling, general and administrative expenses decreased by $1.4 million (1.9%), primarily due to lower employee and employee related costs ($3.1 million), partially offset by an increase in outside services. Additionally, selling, general and administrative expenses were unfavorably impacted by an increase in share-based compensation expense and favorably impacted by decreased professional fees. We have made significant progress in reducing professional fees for accounting, tax, legal and consulting services incurred in our early years as a public company and thus, in 2017, these costs will no longer be an adjustment for purposes of calculating adjusted selling, general and administrative expenses. In 2016, adjusted selling, general and administrative expenses would have been $1.2 million greater and adjusted EBITDA (defined hereafter) would have decreased by this same amount had we not adjusted for these expenses.
2015 compared to 2014
Selling, general and administrative expenses increased by $6.3 million, or 8.2%, primarily due to higher incentive compensation expenses related to improved performance. Adjusted selling, general and administrative expenses increased by $5.6 million, again due to the aforementioned incentive compensation fluctuations.
Net income and adjusted EBITDA
Net income attributable to Global Brass and Copper Holdings, Inc. is the most directly comparable US GAAP measure to adjusted EBITDA.
Adjusted EBITDA is defined as net income attributable to Global Brass and Copper Holdings, Inc., plus interest, taxes, depreciation and amortization (“EBITDA”) adjusted to exclude the following:
unrealized gains and losses on derivative contracts in support of our balanced book approach;
unrealized gains and losses associated with derivative contracts related to energy and utility costs;
the impact associated with lower of cost or market adjustments to inventory;
gains and losses due to the depletion of a LIFO layer of inventory;
share-based compensation expense;
loss on extinguishment of debt;
income accretion related to Dowa Olin Metal Corporation (the “Dowa Joint Venture”);
restructuring and other business transformation charges;
specified legal and professional expenses; and
certain other items.
We believe adjusted EBITDA represents a meaningful presentation of the financial performance of our core operations, because it provides period-to-period comparisons that are more consistent and more easily understood. We also believe it is an important supplemental measure that is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
Adjusted EBITDA is the key metric used by our Chief Operating Decision Maker to evaluate the segment performance in a way that we believe reflects our core operating performance, and in turn, incentivize members of management and certain employees. For example, we use adjusted EBITDA per pound in order to measure the effectiveness of the balanced book

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approach in reducing the financial impact of metal price volatility on earnings and operating margins, and to measure the effectiveness of our business transformation initiatives in improving earnings and operating margins.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP.
We compensate for these limitations by using adjusted EBITDA along with other comparative tools, together with US GAAP measurements, to assist in the evaluation of operating performance. Such US GAAP measurements include operating income and net income.
Net income attributable to Global Brass and Copper Holdings, Inc. is reconciled to adjusted EBITDA as follows:
 
Year Ended
December 31,
 
Amount change:
(in millions)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Net income attributable to Global Brass and Copper Holdings, Inc.
$
32.2

 
$
35.6

 
$
31.7

 
$
(3.4
)
 
$
3.9

Interest expense
26.2

 
39.1

 
39.6

 
(12.9
)
 
(0.5
)
Provision for income taxes
16.6

 
15.9

 
16.6

 
0.7

 
(0.7
)
Depreciation expense
14.8

 
13.5

 
12.2

 
1.3

 
1.3

Amortization expense
0.1

 
0.1

 
0.1

 

 

Unrealized (gain) loss on derivative contracts (a)
(3.1
)
 
(0.6
)
 
3.0

 
(2.5
)
 
(3.6
)
LIFO liquidation loss (gain) (b)
1.9

 
0.1

 
0.6

 
1.8

 
(0.5
)
Loss on extinguishment of debt (c)
23.4

 
3.1

 

 
20.3

 
3.1

Non-cash accretion of income of Dowa Joint Venture (d)

 
(0.2
)
 
(0.7
)
 
0.2

 
0.5

Specified legal / professional expenses (e)
1.2

 
2.8

 
4.3

 
(1.6
)
 
(1.5
)
Lower of cost or market adjustment to inventory (f)
(1.7
)
 
6.6

 
0.2

 
(8.3
)
 
6.4

Share-based compensation expense (g)
6.9

 
4.2

 
1.7

 
2.7

 
2.5

Restructuring and other business transformation charges (h)

 
0.9

 
0.4

 
(0.9
)
 
0.5

Adjusted EBITDA
$
118.5

 
$
121.1

 
$
109.7

 
$
(2.6
)
 
$
11.4

(a)
Represents unrealized gains and losses on derivative contracts.
(b)
Calculated based on the difference between the base year LIFO carrying value and the metal prices prevailing in the market at the time of inventory depletion.
(c)
Represents the loss on extinguishment of debt recognized in connection with the open market purchases and refinancing of our former senior secured notes (“Senior Secured Notes”) and asset-based revolving loan facility (“ABL Facility”).
(d)
As a result of the application of purchase accounting in connection with the November 2007 acquisition, no carrying value was initially assigned to our equity investment in our Dowa Joint Venture. This adjustment represents the accretion of equity in our Dowa Joint Venture at the date of the acquisition over a 13-year period (i.e., the estimated useful life of the technology and patents of the joint venture). In 2015, we sold our investment in the Dowa Joint Venture.
(e)
Represents selected professional fees for accounting, tax, legal and consulting services incurred as a public company that exceed our expected long-term requirements. 
(f)
Represents the impact of lower of cost or market adjustments to domestic, non-copper metal inventory.
(g)
Represents compensation expense resulting from stock compensation awards to certain employees and our Board of Directors.
(h)
Restructuring and other business transformation charges in 2015 and 2014 represent severance charges at Olin Brass.
2016 compared to 2015
Net income attributable to Global Brass and Copper Holdings, Inc. decreased by $3.4 million, or 9.6% mainly due to the increase in the loss on extinguishment of debt and the fact that the prior year included a gain on the sale of our joint venture, partially offset by the aforementioned increase in gross profit and decreased interest expense, as described later herein.

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Excluding the $6.3 million gain on the sale of our joint venture in 2015, adjusted EBITDA increased $3.7 million in 2016. Despite the 2016 production outage at Olin Brass, which required us to outsource some production activities at increased costs, productivity and yield improvements resulted in a decrease in overall manufacturing costs even as volumes increased almost two percent. Adjusted EBITDA also benefited from an overall increase in volumes despite volumes being more concentrated in lower priced markets and customers. Last, adjusted EBITDA benefited from the aforementioned decrease in adjusted selling, general and administrative expenses.
2015 compared to 2014
Net income attributable to Global Brass and Copper Holdings, Inc. increased by $3.9 million, or 12.3%, primarily due to an increase in gross profit and the gain on the sale of our joint venture, partially offset by an increase in selling, general and administrative expenses and the loss on extinguishment of debt, as described elsewhere in this report.
Adjusted EBITDA increased by $11.4 million, or 10.4%, due to decreased manufacturing conversion costs of $11.2 million and the gain on the sale of our joint venture of $6.3 million, partially offset by an increase of $5.3 million in employee compensation and related costs.
Diluted earnings per common share and adjusted diluted earnings per common share
Diluted income per common share decreased by $0.17 in 2016 and increased by $0.17 in 2015 as compared to the previous year for each, largely due to the fluctuations in net income. Diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share is the most directly comparable US GAAP measure to adjusted diluted earnings per common share.
Adjusted diluted earnings per common share is defined as diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share adjusted to remove the per share impact of the add backs to EBITDA in calculating adjusted EBITDA.
We believe adjusted diluted earnings per common share represents a meaningful presentation of the financial performance of our consolidated results because it provides period-to-period comparisons that are more consistent and more easily understood. We also believe it is an important supplemental measure that is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
Adjusted diluted earnings per share is a key metric used to evaluate the Company’s performance, and in turn, incentivize members of management and certain employees.
We believe that adjusted diluted earnings per common share supplements our US GAAP results to provide a more complete understanding of the results of our business, and we believe it is useful to our investors and other parties for these same reasons.
Diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share is reconciled to adjusted diluted earnings per common share as follows:
 
Year Ended
December 31,
 
Amount change:
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Diluted net income attributable to Global Brass and
Copper Holdings, Inc. per common share
$
1.49

 
$
1.66

 
$
1.49

 
$
(0.17
)
 
$
0.17

Unrealized (gain) loss on derivative contracts
(0.15
)
 
(0.03
)
 
0.14

 
(0.12
)
 
(0.17
)
Loss on extinguishment of debt
1.08

 
0.14

 

 
0.94

 
0.14

Non-cash accretion of income of Dowa Joint Venture

 
(0.01
)
 
(0.03
)
 
0.01

 
0.02

Specified legal / professional expenses
0.06

 
0.13

 
0.20

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

 
0.01

 
(0.39
)
 
0.30

LIFO liquidation loss (gain)
0.09

 
0.01

 
0.03

 
0.08

 
(0.02
)
Share-based compensation expense
0.32

 
0.19

 
0.08

 
0.13

 
0.11

Restructuring and other business transformation charges

 
0.05

 
0.01

 
(0.05
)
 
0.04

Tax impact on above adjustments (a)
(0.45
)
 
(0.25
)
 
(0.16
)
 
(0.20
)
 
(0.09
)
Adjusted diluted earnings per common share
$
2.36

 
$
2.20

 
$
1.77

 
$
0.16

 
$
0.43

(a)
Calculated based on our estimated tax rate.

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

 
100.0
 %
 
$
1,506.2

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

 
(13.4
)%
Gross profit
181.6

 
13.6
 %
 
170.3

 
11.3
 %
 
11.3

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

 
(0.5
)%
Operating income
98.8

 
7.4
 %
 
87.1

 
5.8
 %
 
11.7

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

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

Gain on sale of investment in joint venture

 
 %
 
6.3

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

 
 %
 
0.2

 
 %
 

 
 %
Income before provision for income taxes and equity income
49.4

 
3.7
 %
 
51.4

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

 
2.5
 %
 
35.5

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

 
 %
 
0.3

 
 %
 
(0.3
)
 
(100.0
)%
Net income
32.8

 
2.5
 %
 
35.8

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

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

 
2.4
 %
 
$
35.6

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

 
8.9
 %
 
$
121.1

 
8.0
 %
 
$
(2.6
)
 
(2.1
)%

(a)See “Management’s View of PerformanceNet income and adjusted EBITDA.”
N/M - not meaningful
The following discussions present an analysis of our results of operations for 2016 as compared to 2015. See “Management’s View of Performance” for discussions of net sales, adjusted sales, gross profit, adjusted gross profit, selling, general and administrative expenses, adjusted selling, general and administrative expenses, net income attributable to Global Brass and Copper Holdings, Inc., adjusted EBITDA, diluted net income attributable to Global Brass and Copper Holdings, Inc. per common share and adjusted diluted earnings per common share. These discussions should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

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Table of Contents

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

 
$
35.5

 
$
(11.1
)
Amortization of debt discount and issuance costs
2.0

 
2.8

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

 
1.0

 
(0.1
)
Total interest expense
$
26.2

 
$
39.1

 
$
(12.9
)

(a)Includes fees related to letters of credit and unused line of credit fees.
Interest expense decreased by $12.9 million primarily due to lower average interest rates and lower borrowings under our debt facilities as we bought back an aggregate of $69.7 million of Senior Secured Notes in the open market during the latter half of 2015 and the first half of 2016. Additionally, in July of 2016, we refinanced the remaining $305.3 million of 9.5% Senior Secured Notes with a new $320.0 million Term Loan B Facility, which accrued interest at a rate of 5.25% during the second half of 2016. Lastly, we capitalized interest relating to the construction of long-term assets in the amount of $1.1 million, $0.2 million and $0.2 million in 2016, 2015 and 2014, respectively.

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

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

 
260.0

 
0.5

 
0.2
 %
Chase Brass
222.7

 
218.9

 
3.8

 
1.7
 %
A.J. Oster
75.6

 
73.1

 
2.5

 
3.4
 %
Corporate (b)
(38.0
)
 
(40.1
)
 
2.1

 
5.2
 %
Total
520.8

 
511.9

 
8.9

 
1.7
 %
Net sales
 
 
 
 
 
 
 
Olin Brass
$
629.6

 
$
721.9

 
$
(92.3
)
 
(12.8
)%
Chase Brass
502.7

 
544.1

 
(41.4
)
 
(7.6
)%
A.J. Oster
282.7

 
293.3

 
(10.6
)
 
(3.6
)%
Corporate (b)
(76.5
)
 
(53.1
)
 
(23.4
)
 
(44.1
)%
Total
$
1,338.5

 
$
1,506.2

 
$
(167.7
)
 
(11.1
)%
Adjusted EBITDA
 
 
 
 
 
 
 
Olin Brass
$
49.8

 
$
48.3

 
$
1.5

 
3.1
 %
Chase Brass
68.0

 
68.9

 
(0.9
)
 
(1.3
)%
A.J. Oster
18.4

 
15.8

 
2.6

 
16.5
 %
Total adjusted EBITDA of operating segments
136.2

 
133.0

 
3.2

 
2.4
 %
Corporate and other (c)
(17.7
)
 
(11.9
)
 
(5.8
)
 
48.7
 %
Total consolidated adjusted EBITDA
$
118.5

 
$
121.1

 
$
(2.6
)
 
(2.1
)%
 
(a)Amounts exclude quantity of unprocessed metal sold.
(b)Amounts represent intercompany eliminations.
(c)2015 includes a $6.3 million gain on the sale of investment in joint venture
See Note 4, “Segment Information,” of our consolidated financial statements, which are included elsewhere in this report, for a reconciliation of adjusted EBITDA of segments to income before provision for income taxes and equity income.
The following discussions present an analysis of our results by segment for 2016 as compared to 2015. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Olin Brass
Net sales decreased by $92.3 million as the metal cost recovery component decreased by $89.9 million due mostly to decreased metal prices ($84.2 million). Adjusted sales decreased by $2.4 million due to unfavorable product mix changes ($3.2 million) as volumes were more concentrated in munitions and less in coinage. This decrease was partially ameliorated by increased volumes ($0.8 million). Volumes increased in the munitions market and decreased in the coinage market, all due to underlying demand.
Adjusted EBITDA increased by $1.5 million, primarily due to improvements in productivity and decreased selling, general and administrative expenses, especially those related to employee and employee related expenses. These results included one-time costs incurred as a result of the production outage and the impact of unfavorable changes in product mix noted above.
Chase Brass
Net sales decreased by $41.4 million as the metal cost recovery component declined by $38.7 million due to lower metal prices ($46.1 million), partially offset by increased volumes ($7.4 million). Adjusted sales decreased by $2.7 million, which was the result of decreased pricing ($5.1 million), partially ameliorated by improved volumes ($2.4 million). Pricing

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decreased both as a result of increased competition and increased volumes with customers secured under longer term contracts.
Volumes increased in the building and housing market and decreased in the transportation and industrial machinery and equipment markets, all due to underlying demand.
Adjusted EBITDA decreased by $0.9 million predominantly due to the decreased pricing, which was nearly offset by increased volumes, decreased manufacturing conversion costs, and decreased employee and employee related costs.
A.J. Oster
Net sales decreased by $10.6 million, as the metal cost recovery component declined by $23.8 million due to lower metal prices ($29.4 million), partially offset by increased volumes ($5.6 million). Adjusted sales increased by $13.2 million due to the impact of increased selling prices ($8.8 million) and increased volume ($4.4 million). A.J. Oster continues to pass on certain price increases from its sister company Olin Brass. Both entities are focusing on pricing their products in order to earn a return that better reflects the complexity of the products being produced and the assets used to produce them.
Volumes increased primarily due to increased demand in the electronics / electrical components markets due to underlying demand.
Adjusted EBITDA increased by $2.6 million, due to the impact of increased selling prices and increased volumes, which were partially offset by increased pricing from Olin Brass and increased selling, general and administrative expenses, particularly those related to employee and employee related costs.

Results of Operations
Consolidated Results of Operations for the Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014.
 
Year ended December 31,
 
Change:
2015 vs. 2014
(in millions)
2015
 
% of Net Sales
 
2014
 
% of Net Sales
 
Amount
 
Percent
Net sales
$
1,506.2

 
100.0
 %
 
$
1,711.4

 
100.0
 %
 
$
(205.2
)
 
(12.0
)%
Cost of sales
(1,335.9
)
 
88.7
 %
 
(1,546.8
)
 
90.4
 %
 
210.9

 
(13.6
)%
Gross profit
170.3

 
11.3
 %
 
164.6

 
9.6
 %
 
5.7

 
3.5
 %
Selling, general and administrative expenses 
(83.2
)
 
5.5
 %
 
(76.9
)
 
4.5
 %
 
(6.3
)
 
8.2
 %
Operating income
87.1

 
5.8
 %
 
87.7

 
5.1
 %
 
(0.6
)
 
(0.7
)%
Interest expense
(39.1
)
 
2.6
 %
 
(39.6
)
 
2.3
 %
 
0.5

 
(1.3
)%
Loss on extinguishment of debt
(3.1
)
 
0.2
 %
 

 
 %
 
(3.1
)
 
N/A

Gain on sale of investment in joint venture
6.3

 
0.4
 %
 

 
 %
 
6.3

 
N/A

Other income (expense), net
0.2

 
 %
 
(0.5
)
 
 %
 
0.7

 
(140.0
)%