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EX-23.2 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - GLOBAL BRASS & COPPER HOLDINGS, INC.d367030dex232.htm
Table of Contents

As filed with the Securities and Exchange Commission on November 13, 2012

Registration No. 333-177594

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

GLOBAL BRASS AND COPPER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3350   06-1826563

(State or other jurisdiction of

incorporation or organization)

 

(Primary Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

475 N. Martingale Road Suite 1050

Schaumburg, IL 60173

(847) 240-4700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Scott B. Hamilton

General Counsel

Global Brass and Copper Holdings, Inc.

475 N. Martingale Road Suite 1050

Schaumburg, IL 60173

(847) 240-4700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Lawrence G. Wee

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019

(212) 373-3000

 

LizabethAnn R. Eisen

Andrew J. Pitts

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, New York 10019-7475

(212) 474-1000

 

 

Approximate date of commencement of proposed sale to the public: As promptly as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer  ¨   Accelerated filer  ¨   Non-accelerated filer   þ   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

Common Stock, $0.01 par value per share

  $150,000,000   $17,190

 

 

(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Registration fee previously paid in connection with the initial filing of the registration statement.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. November 13, 2012.

 

            Shares

LOGO

GLOBAL BRASS AND COPPER HOLDINGS, INC.

Common Stock

 

 

This is an initial public offering of shares of common stock of Global Brass and Copper Holdings, Inc. All of the             shares to be sold in this public offering will be sold by the selling stockholder identified in this prospectus. Global Brass and Copper Holdings, Inc. will not receive any proceeds from this offering.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $             and $            . We intend to apply to list our common stock on the New York Stock Exchange under the symbol “BRSS”.

 

 

See “Risk Factors” on page 21 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share    Total  

Initial public offering price

   $                $            

Underwriting discount

   $                $            

Proceeds, before expenses, to the selling stockholder

   $                $            

To the extent that the underwriters sell more than             shares of common stock, the underwriters have the option to purchase up to an additional             shares from the selling stockholder at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2012.

 

Goldman, Sachs & Co.   Morgan Stanley

 

 

Prospectus dated                     , 2012.


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

PROSPECTUS SUMMARY

     1   

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

     15   

RISK FACTORS

     21   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     48   

USE OF PROCEEDS

     50   

DIVIDEND POLICY

     51   

CAPITALIZATION

     52   

DILUTION

     53   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     54   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     57   

BUSINESS

     109   

MANAGEMENT

     133   

COMPENSATION DISCUSSION AND ANALYSIS

     141   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     165   

PRINCIPAL AND SELLING STOCKHOLDER

     166   

DESCRIPTION OF CAPITAL STOCK

     167   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     173   

SHARES ELIGIBLE FOR FUTURE SALE

     175   

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS

     177   

UNDERWRITING

     181   

LEGAL MATTERS

     186   

EXPERTS

     186   

AVAILABLE INFORMATION

     186   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

Through and including                         , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 

 

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Unless otherwise specified or the context requires otherwise:

The term “Global Brass and Copper Holdings” refers to Global Brass and Copper Holdings, Inc. and not to any of its subsidiaries;

The term “Global Brass and Copper” refers to Global Brass and Copper, Inc., the principal operating subsidiary of Global Brass and Copper Holdings, and not to any of its subsidiaries or direct or indirect parent companies;

The terms “we,” “us,” “our,” “GBC” and the “Company” refer collectively to Global Brass and Copper Holdings, its subsidiaries and its predecessors;

The term “KPS” refers to KPS Capital Partners, LP; and

The term “Halkos” refers to Halkos Holdings, LLC, the current owner and direct parent of Global Brass and Copper Holdings. Halkos is the selling stockholder in this offering.

The use of these terms is not intended to imply that Halkos, Global Brass and Copper Holdings and Global Brass and Copper or its predecessors are not separate and distinct legal entities.

Amounts and percentages appearing in this prospectus have been rounded to the amounts shown for convenience of presentation. Accordingly, the total of each column of amounts may not be equal to the total of the relevant individual items.

 

 

Industry and Market Data

This prospectus includes industry data that we obtained from periodic industry publications and internal company surveys. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. In addition, this prospectus includes market share and industry data that we prepared primarily based on our knowledge of the industry and industry data. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position relative to our competitors are approximated and based on the above-mentioned third-party data and internal analysis and estimates and have not been verified by independent sources. Unless otherwise noted, all information regarding our market share is based on the latest available data. Information herein based on management’s belief or estimate is based upon management’s experience working in, and knowledge of, the metals industry, as well as management’s review of public disclosure of other participants in the metals industry and information provided by industry associations.

Trademarks

This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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PROSPECTUS SUMMARY

This summary highlights material information appearing elsewhere in this prospectus. Because this is a summary, it may not contain all of the information that you should consider before investing in the common stock of Global Brass and Copper Holdings, par value $0.01 per share, which we refer to as the “common stock”, and you should carefully read this entire prospectus, including our consolidated financial statements and related notes and the information presented under the caption “Risk Factors”.

Our Company

We are a leading, value-added converter, fabricator, distributor and processor of specialized copper and brass products in North America. We engage in metal melting and casting, rolling, drawing, extruding and stamping to fabricate finished and semi-finished alloy products from processed scrap, copper cathode and other refined metals. Our products include a wide range of sheet, strip, foil, rod, tube and fabricated metal component products that we sell under the Olin Brass, Chase Brass and A.J. Oster brand names. Our products are used in a variety of applications across diversified end markets, including the building and housing, munitions, automotive, transportation, coinage, electronics/electrical components, industrial machinery and equipment and general consumer end markets. We access these end markets through direct mill sales, our captive distribution network and third-party distributors. We believe the diversity of our product portfolio, the breadth of our value-added customer services, our vertical integration and our technical expertise underpin the long-standing relationships we have with our broad customer base. Over the past three years, we have significantly enhanced our profitability and operational flexibility, which we believe positions us to benefit from growth in customer demand across the majority of the key end markets we service as macroeconomic conditions improve. In addition, we expect to capitalize on new market and product growth opportunities, which we are currently pursuing.

We service over 1,700 customers in 29 countries across 5 continents. We employ approximately 1,900 people and operate 11 manufacturing facilities and distribution centers across the United States, Puerto Rico and Mexico to service our North American customers. Through our 80% owned joint venture in China and our 50/50 joint venture in Japan, together with sales offices in China and Singapore, we supply our products in China and throughout Asia, where we believe we are positioned to take advantage of the region’s expanding copper and brass strip market. We service our European customers through distribution arrangements in the United Kingdom and Germany.

Our leading market positions in each of our operating segments allow us to achieve attractive operating margins. Our strong operating margins are a function of four key characteristics of our business: (1) we earn a premium margin over the cost of metal because of our value-added processing capabilities, patent-protected technologies, and first-class service; (2) we have strategically shifted our product portfolio toward value-added, higher margin products; (3) we have created a lean cost structure through durable fixed and variable cost reductions, process improvements, and workforce flexibility initiatives; and (4) we employ our “balanced book” approach to substantially reduce the financial impact of metal price volatility on our earnings and operating margins. We have undertaken substantial cost reduction activities since our formation in 2007, which have reduced our fixed costs, improved our net working capital balances, and improved our competitive positioning which has increased operating margins.

Our financial performance is primarily driven by metal conversion economics, not by the underlying movements in the price of the metal we use. Through our balanced book approach, we

 

 

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match the timing, quantity and price of our metal sales with the timing, quantity and price of our replacement metal purchases. This practice substantially reduces the financial impact of metal price movements on our earnings and operating margins.

For the year ended December 31, 2011, we shipped 510.0 million pounds of products, and we generated net sales of $1,779.1 million, adjusted sales (as defined in note 4 under “Summary Historical Consolidated Financial Data”) of $530.3 million, net income attributable to Global Brass and Copper Holdings, Inc. of $55.9 million and Consolidated Adjusted EBITDA (as defined in note 5 under “Summary Historical Consolidated Financial Data”) of $122.6 million. Our U.S. operations generated 95% of our total net sales in the year ended December 31, 2011. The following charts show our pounds shipped by our three operating segments and our pounds shipped by key end market for the year ended December 31, 2011.

For the year ended December 31, 2011:

 

LOGO

 

 

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Segments Overview

We have three operating segments: Olin Brass, Chase Brass and A.J. Oster.

 

   LOGO    LOGO    LOGO

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 distributor and processor of copper and brass products

  

•    #1 North American Position (by 2011 pounds shipped)

  

•    #1 or #2 North American Position (by 2011 pounds shipped)

  

•    #1 North American Position (by 2011 pounds shipped)

                

Key

Products /

Services

  

•    Produces 59 copper-based alloys, including 15 high performance alloys (“HPAs”), which provide superior strength, conductivity and formability

  

•    Produces nine brass alloys which provide superior strength and corrosion resistance, sold under the Blue Dot® brass rod brand name

  

•    Network of strategically located distribution centers, providing inventory management, distribution and value-added metal processing services to customers

  

•    Over the past 3 years, approximately 15% to 20% of Olin Brass’s copper-based products have been sold to A.J. Oster

  

•    Holds exclusive rights for the production and sale of lead-free brass rod in North America, sold under the Green Dot™ rod and Eco Brass® alloy brand names

  

•    Over the past 3 years, approximately 70% to 80% of A.J. Oster’s copper-based products have been sourced from Olin Brass

  

•    Products sold throughout the U.S., Puerto Rico, Mexico, Asia and Europe

  

•    Products sold throughout the U.S., Mexico and Canada

  

•    Products sold throughout the U.S., Puerto Rico and Mexico

                

Key End

Markets

  

•    Munitions, Automotive, Coinage, Building and Housing, Electronics/Electrical Components

  

•    Building and Housing, Transportation, Electronics/Electrical Components, Industrial Machinery and Equipment

  

•    Building and Housing, Automotive, Electronics/Electrical Components

                

Operations

  

•    4 strategically located sites in the U.S. and 1 in China

  

•    1 strategically located manufacturing site and 1 warehouse facility in the U.S.

  

•    4 strategically located sites in the U.S., 1 in Puerto Rico and 1 in Mexico

  

•    Marketing and sales joint venture office in Japan

 

•    Sales office in Singapore

 

•    1,281 employees; 1,245 in the U.S. and 36 in Asia each as of June 30, 2012

  

•    298 employees as of June 30, 2012

  

•    270 employees as of June 30, 2012

 

 

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Our Competitive Strengths

Leading Market Positions and Diverse Product Mix.    We believe we have leading market positions in the industry sectors served by each of our three operating segments. Management estimates that our strategically located plants represent approximately 40% of North American capacity for copper and copper-alloy sheet, strip and plate (“SSP”) and brass rod production, supplying our customers with over 16,000 stock keeping units (“SKUs”). We believe our customers value our ability to provide a diverse range of products, many of which are exclusively offered by us. For example, at Olin Brass, we produce 59 alloys (including 15 HPAs), which, management estimates, based on available market information, is nearly twice as many types of alloys as produced by our closest competitor. Additionally, through Chase Brass, we have the exclusive production and sales rights for Eco Brass® rod and control the licensing of Eco Brass® ingot in North America. This “lead-free” alloy was designed to meet the manufacturing needs of our customers and can be used to make products that comply with both Federal and state standards for maximum allowable lead content in potable water systems as well as the widely accepted NSF-14 industry performance standard applicable to fittings for the cross-linked PEX piping that is increasingly used in residential water delivery applications. Compared with our major competitors’ “lead-free” and “low-lead” products, our analysis, based in part on laboratory tests commissioned by the Company, shows Eco Brass® also offers superior corrosion resistance. Our leading market positions and scale also enable us to negotiate favorable arrangements with our suppliers. Given our extensive asset base and production capacity, as well as our current utilization rate and that of the industry, we believe it would require a significant investment to become a substantial participant in the industry, and any such investment might not yield attractive returns for a significant period of time.

Long-Term Customer Relationships Across Diverse End Markets.    Each of our three operating segments benefits from the long-standing relationships we maintain with our diverse customer base, many of whom we have served for more than 30 years and are among the largest and most recognized companies in their respective industries. In 2011, we sold our products to over 1,700 customers, with no single customer accounting for more than 8% of our consolidated net sales. Our relationships are built on our ability to provide high quality product in varying quantities at attractive prices and in a timely manner, meeting the product needs of our customers. Our geographic proximity to certain of our key clients facilitates our consistent execution. For example, Olin Brass has a facility co-located with a key munitions customer. Additionally, our proximity to the U.S. Army’s Lake City army ammunition plant makes us an attractive choice for indirect munitions supplies to the United States government.

Significant Operating Leverage and Cash Flow Generation.    Our broad customer base encompasses a wide range of end markets. We expect greater demand for our products and value-added services as economic conditions improve in the end markets we serve. We believe we are well positioned to satisfy increased demand for our products and value-added services, and to generate strong cash flows, earnings growth and returns on invested capital. Additionally, our low fixed cost position, balanced book approach and low capital expenditure requirements allow us to generate substantial cash flows. Specifically:

 

   

During the first half of 2012, we operated at approximately 60-65% capacity utilization across our portfolio of facilities. As such, we have available operating capacity which we can bring online quickly to respond to increased demand for our products and value-added services;

 

   

We believe we can increase production at our facilities with minimal change in our fixed costs and without significant additional capital investment;

 

   

We have the financial capacity and balance sheet strength to meet the working capital requirements that would accompany production increases in response to growing customer demand.

 

 

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Our low fixed cost position and balanced book approach has allowed us to generate substantial cash flows. For the fiscal years ended December 31, 2009, 2010 and 2011, we generated net cash provided by operating activities of $10.7 million, $69.4 million and $64.8 million, respectively. For the six months ended June 30, 2012, we generated net cash provided by operating activities of $30.3 million.

 

   

We have low capital expenditure requirements. Our total capital expenditures as a percentage of our adjusted sales have ranged from approximately 2% to 4% for the last three fiscal years.

Flexible, Lean Cost Structure with Limited Legacy Liabilities.     Approximately 75% of our cost structure consists of variable metal costs, for which we use our balanced book approach to substantially reduce the financial impact of metal price volatility on our earnings and operating margins. Since our formation in 2007, we have implemented various cost reduction initiatives and workforce flexibility programs focused on reducing our fixed and non-metal variable costs. We believe the largely automated nature of our operations at our Chase Brass manufacturing facility contributes to low manufacturing and selling, general and administrative costs. Additionally, at Olin Brass’s East Alton manufacturing facility we benefit from a limited number of job classifications for our employees, which provides us with the flexibility to increase the number of potential tasks per employee and to staff the facility based on production volumes. Finally, we do not have defined benefit pension obligations, retiree healthcare obligations or other significant legacy liabilities. These above factors have allowed us to create a lean, flexible cost structure, which in combination with our balanced book approach, our product portfolio and our value-added services, should position us to achieve strong operating margins going forward.

Balanced Book Approach to Substantially Reduce Metal Price Exposure.    Our business model is principally based on the conversion and fabrication of the metal we purchase into finished and semi-finished alloy products. Our financial performance is driven by metal conversion economics (i.e., the prices we charge for our products and value-added services and our ability to control our operating costs); we do not seek to profit from movements in underlying metal prices. Through our balanced book approach, we match the timing, quantity and price of our metal sales with the timing, quantity and price of our replacement metal purchases. Our balanced book approach allows us to substantially reduce the financial impact of metal price volatility on our earnings and operating margins.

Over the last three years (and since our formation in 2007), we have consistently improved our Consolidated Adjusted EBITDA per pound, a metric that management monitors to assess our profitability and operating efficiency, from $0.10 per pound for the year ended December 31, 2008 to $0.25 per pound for the six months ended June 30, 2012.

Net income (loss) attributable to Global Brass and Copper Holdings, Inc. per pound was $(0.03) and $0.09 for the six months ended June 30, 2012 and June 30, 2011, respectively. Net loss per pound for the six months ended June 30, 2012 reflects a non-cash profits interest compensation charge of $19.5 million and a loss on extinguishment of debt of $19.6 million. Net income (loss) attributable to Global Brass and Copper Holdings, Inc. per pound was $0.11, $0.07, $0.02 and $(0.11) for the years ended December 31, 2011, 2010, 2009 and 2008, respectively. Net income attributable to Global Brass and Copper Holdings, Inc. per pound was $1.01 for the successor period from October 10, 2007 to December 31, 2007, and net income per pound of our predecessor was $0.07 for the predecessor period from January 1, 2007 to November 18, 2007.

 

 

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The following chart presents our historical Consolidated Adjusted EBITDA(1) per pound versus copper prices from 2007 to June 30, 2012:

 

LOGO

 

Source: Copper prices from the London Metal Exchange reported by Bloomberg

 

(1) See note 5 to “Summary Historical Consolidated Financial Data” for the calculation of Consolidated Adjusted EBITDA and a reconciliation to net income (loss) attributable to Global Brass and Copper Holdings, Inc., which is the most directly comparable U.S. GAAP financial measure to Consolidated Adjusted EBITDA.

 

(2) We acquired the worldwide metals business of Olin Corporation on November 19, 2007. As a result, the 2007 fiscal year is composed of a predecessor period from January 1, 2007 to November 18, 2007 (represented by “2007(P)” in the chart above), and a successor period from the date of our formation, October 10, 2007, to December 31, 2007 (represented by “2007(S)”) in the chart above. We had no material operations or assets prior to November 19, 2007. Data for the period from January 1, 2007 to November 18, 2007 are based on books and records provided to us by Olin Corporation in connection with the acquisition, we believe were prepared on a basis consistent with Olin Corporation’s accounting policies and procedures and have not been subject to an audit or review. Data for the predecessor period of 2007 are not prepared using our accounting policies and procedures, do not reflect the application of purchase accounting (which has been applied to the successor period financial statements) and also do not reflect the allocation of Olin Corporation selling, general and administrative expenses to the metals business unit. We believe that the unaudited financial information for the predecessor period of 2007 may be useful to investors for purposes of illustrating trends in our business. Although we have no reason to believe that the unaudited financial information for the predecessor period of 2007 is materially deficient, there is a risk that this unaudited financial information may contain errors that might have been detected in a review or audit process or might have been different if prepared in accordance with our policies and procedures instead of those of Olin Corporation. See note 5 to “Summary Historical Consolidated Financial Data” and note (a) to the reconciliation table contained in such note and “Risk Factors—Risks Related to Our Business—You should not place undue reliance on the selected financial and other information of our predecessor as of November 18, 2007 and for the period from January 1, 2007 to November 18, 2007, which are summarized in this prospectus”.

 

(3) For the six months ended June 30, 2012.

Experienced and Proven Management Team.    Since our formation in 2007, we have assembled a world-class, highly experienced management team, which combines our predecessor’s legacy experience with new team members who have many years of relevant industry experience. The members of our senior management team have, on average, over 24 years of metals industry experience. Since our formation, our senior management team has implemented a new business strategy and successfully transformed the cost structure of the business. Our management team has also instilled a culture that promotes performance excellence with a strong focus on driving profitability and, as a direct result, our operational and financial performance has improved significantly since 2007.

 

 

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Our Growth Strategy

Participate in Demand Recovery When Economic Conditions Strengthen.    Our premium products and services have allowed us to achieve leading positions across a number of attractive end markets. In addition, we maintain strong relationships with a diverse set of customers across those end markets. As U.S. macroeconomic conditions continue to improve, we expect to see increased activity in many of our key end markets, especially building and housing, automotive, coinage and industrial machinery and equipment, which we expect will drive increased demand for our products and services. We believe that our available production capacity will allow us to effectively and efficiently respond to increasing demand.

Capitalize on Growth Opportunities for Our Existing Products and Services.    We believe there are opportunities to expand the supply of our existing products and services in several key high-value end markets. Examples include:

 

   

Lead-free and Low-lead Plumbing Products.    New regulations designed to reduce lead content in drinking water plumbing devices provide a key opportunity for future growth. Chase Brass is a premier provider of specialized lead-free products and low-lead alloys. Recently enacted Federal legislation in the United States (the Reduction of Lead in Drinking Water Act, which was patterned after legislation enacted in California and Vermont) will require 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.

 

   

Transition to the Dollar Coin.    On September 20, 2011, the Currency Optimization Innovation and National Savings Act, or “COINS Act”, was introduced in the U.S. House of Representatives, which is intended to modernize the U.S. currency system by replacing $1 notes with $1 coins and result in average savings of $184 million per year (based on 2011 Government Accountability Office estimates). On January 31, 2012, the COINS Act was also introduced in the U.S. Senate. Despite a recently announced substantial reduction in $1 coin production over the next couple of years, we anticipate a significant increase in the size of the coinage market if the U.S. transitions to the $1 coin and eliminates the dollar bill. As a certified supplier to the United States Mint, we expect to capture a material portion of this new demand.

Pursue New Growth Opportunities.    We have identified a number of important trends in key growth markets which we believe will drive significant incremental growth for our company, including:

 

  Ÿ  

Anti-microbial Applications.    Olin Brass is well positioned to become a leader in commercializing anti-microbial copper products. The U.S. Environmental Protection Agency (“EPA”) recently recognized that copper is inherently capable of neutralizing potentially harmful viruses and bacteria and began accepting registrations of copper-alloys with anti-microbial properties. Olin Brass manufactures several such registered alloys, and we believe there is significant opportunity for us to expand our customer base to include companies that develop copper products for use in the healthcare, food service, heating, ventilation and air conditioning industries, replacing stainless steel and aluminum. Olin Brass has completed the Federal and state registration processes necessary to market its CuVerro materials as having anti-microbial properties.

 

   

Renewable Energy Applications:    Renewable energy is a fast growing and attractive sector, with significant long-term growth potential. Copper, copper-alloy and brass products are used in renewable energy technologies, including lithium batteries and solar power applications such as photovoltaic cells. We believe increasing demand for renewable energy applications will be a key opportunity for further growth.

 

 

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In addition, we plan to continue to identify opportunities to extend our existing range of products and services through ongoing investment in technology research and development through our Materials Research Laboratory. The Materials Research Laboratory is a world-renowned copper-alloy research, manufacturing and production innovation lab and is responsible for numerous patents held by our Company and also by our customers. The Materials Research Laboratory was instrumental in developing patented products such as CopperBond®, CopperBond® XTF, and other unique foil products such as C7025 for computer disk drives.

Pursue Strategic Opportunities to Expand Our Business.    The North American copper and brass distribution industry includes numerous small, regional players. We believe future industry consolidation and possible strategic acquisitions in key growth markets, notably Asia, will provide opportunities to increase our presence in these markets and to create shareholder value. In addition, we may pursue, strategic acquisition and/or partnership opportunities to increase the breadth and distribution of our product portfolio and metal distribution services in the future.

 

 

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Organizational Structure

The chart below is a summary of our organizational structure as of June 30, 2012. All entities depicted are currently (and will be following this offering) wholly-owned subsidiaries, except for Global Brass and Copper Holdings which is currently a wholly-owned subsidiary of Halkos. Halkos is selling all of the Global Brass and Copper Holdings shares that will be sold in this offering.

 

LOGO

Industry Overview

North American Copper and Copper-alloy SSP and Rod.    Improvements in the financial and economic markets since 2008 and 2009 have encouraged a rebound in demand for copper and copper-alloy SSP and rod, primarily driven by greater activity in the building and housing and automotive end markets. During the softening housing market in 2007 and the ensuing economic downturn in 2008 and 2009, demand for SSP and rod products deteriorated significantly. However, prior to the economic downturn, demand for SSP and rod products in North America had been relatively stable over the period from 2001 to 2007.

While the recovery from the recent economic downturn has been uneven and at times slower than desired, as economic conditions improve and activity in key end markets strengthens, we anticipate that demand for copper and copper-alloy SSP and rod products will increase. We also expect to see a greater shift in demand toward low-lead and lead-free copper and brass products driven by new government regulation, such as the Reduction of Lead in Drinking Water Act. This regulatory shift represents a significant growth opportunity for North American manufacturers of lead-free materials, many of whom, including us, are already experiencing increased demand for high quality, lead-free and low-lead products. In addition, we believe that there are a number of growth opportunities that could create significant incremental demand for copper and copper-alloy SSP products, including coinage, anti-microbial fixtures, and renewable energy applications (such as lithium batteries and solar applications).

 

 

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Distribution Centers.    Metal distribution centers and processors play a critical supply-chain role between metal production mills and end-users, especially between mills that manufacture large volumes and end-users who require smaller volumes, inventory management and processing services. The North American copper and brass distribution industry includes several large players, including us, and many smaller participants. We believe a large distribution business with a low fixed-cost structure will generally benefit from economies of scale, a more robust distribution network, a more diversified product portfolio and the ability to provide higher-quality, value-added services relative to smaller competitors. In addition, a distribution center with greater scale can typically operate on shorter lead times and provide on-time delivery and smaller quantities of a wide variety of products. Over the longer term, we believe the role of the metal distribution industry will become increasingly important as both primary metal producers and end-users look to outsource their metal processing and inventory management needs to value-added metal distribution centers. We anticipate smaller competitors will consolidate over time in order to remain competitive.

Global Supply of SSP and Alloy Rod Products.    North American SSP and alloy rod consumers have historically developed long-term supply relationships with domestic SSP and alloy rod manufacturers and suppliers that offer a broad range of high quality products, that are able to respond quickly to product orders, and that provide on-time, frequent delivery in small batch sizes. Accordingly, our management believes North American consumer demand has largely been satisfied by North American SSP and alloy rod producers. Offshore supply of SSP and alloy rod products has historically contributed a small proportion of total North American supply.

Competition.    We compete with other companies on price, service, quality and availability of products. We believe we have been able to compete effectively because of our high levels of service, broad-based inventory, knowledgeable and trained sales force, modern equipment, strategically located facilities, geographic dispersion, operational economies of scale and sales volume.

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 and a number of smaller competitors for A.J. Oster.

Based on available market data, we believe the largest competitors to each of our operating segments in the markets in which we operate are the following:

 

   

Olin Brass: Aurubis and PMX Industries, Inc.; manufacturing of copper and copper-alloys in the form of strip, sheet and plate

 

   

Chase Brass: Mueller Industries, Inc.; manufacturing of brass rod

 

   

A.J. Oster: ThyssenKrupp Materials NA, Copper and Brass Sales Division; distribution and processing of copper, brass, stainless and aluminum products

Based on the data published by Copper Development Association Inc., Copper and Brass Servicecenter Association, Inc. (both independent industry associations) and management estimates, as of December 31, 2011, the Olin Brass segment accounted for 34.5% of North American shipments (including shipments to A.J. Oster) of copper and brass alloys in the form of strip, sheet and plate; the Chase Brass segment accounted for 47.4% of North American shipments of brass rod; and the A.J. Oster segment accounted for 54.5% of North American shipments of copper and brass, sheet and strip products from distribution centers.

 

 

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Recent Transactions

Issuance of the Senior Secured Notes and the Refinancing of the Term Loan Facility

On June 1, 2012, we completed a refinancing, which included the issuance of $375.0 million in aggregate principal amount of 9.50% Senior Secured Notes due 2019 (the “Senior Secured Notes”) by Global Brass and Copper, Inc. The Senior Secured Notes are guaranteed by Global Brass and Copper Holdings, Inc. and substantially all of Global Brass and Copper’s existing and future wholly-owned U.S. subsidiaries. The Senior Secured Notes are secured by a senior-priority security interest in our fixed assets and by a junior-priority security interest in our accounts receivable and inventory.

We used a portion of the proceeds from the Senior Secured Notes to repay in full the $266.5 million of principal outstanding under our prior $315.0 million five-year senior term loan facility (the “Term Loan Facility”), which we refer to as the “Term Loan Refinancing.” In the Term Loan Refinancing, we paid our lenders a total of $275.5 million, including the $266.5 million of principal, an early repayment premium of $8.0 million and accrued and unpaid interest of $1.0 million, and we recognized a $19.6 million loss on extinguishment of debt.

Amendment of the ABL Facility

Concurrently with the issuance of the Senior Secured Notes and the Term Loan Refinancing on June 1, 2012, we amended the agreement governing our $150.0 million asset-based revolving loan facility (the “2010 ABL Facility”, and, as currently amended, the “ABL Facility”) to:

 

   

increase the commitments under the facility to $200.0 million;

 

   

extend the maturity of the ABL Facility to June 1, 2017;

 

   

permit the Transactions (as defined below);

 

   

lower the applicable margin and unused line fee under the ABL Facility;

 

   

permit us to make additional acquisitions, investments, restricted payments, asset sales and debt incurrences if certain conditions are satisfied;

 

   

increase the inventory loan limit for the borrowing base;

 

   

adjust certain reporting requirements and collateral audit requirements to make them less restrictive; and

 

   

reduce the excess availability threshold which requires us to test our fixed charge coverage ratio covenant.

We refer to these amendments collectively as the “ABL Amendment”.

Distribution to Halkos

In connection with the offering of the Senior Secured Notes, the Term Loan Refinancing and the ABL Amendment, we used a portion of the net proceeds of the issuance of the Senior Secured Notes, together with cash on hand, to make a cash distribution of $160.0 million to Halkos, which we refer to as the “Parent Distribution”. Halkos distributed the proceeds of the Parent Distribution pro rata to its equityholders (which include certain of our officers and directors) in accordance with the terms of its operating agreement.

We refer to the Term Loan Refinancing, the ABL Amendment and the Parent Distribution collectively as the “Transactions”.

 

 

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Risk Factors

An investment in shares of our common stock involves risks. Below is a summary of certain key risk factors that you should consider in evaluating an investment in shares of our common stock. This list is not exhaustive. Please read the full discussion of these risks and other risks described under the caption “Risk Factors” beginning on page 21 of this prospectus.

 

   

downturns or cyclical economic conditions affecting the markets in which our products are sold, including the housing and commercial construction markets;

 

   

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;

 

   

limitations on our ability to access raw materials, particularly copper;

 

   

fluctuations in commodity and energy prices and costs;

 

   

our ability to maintain sufficient liquidity as commodity and energy prices rise;

 

   

our ability to continue our operations internationally and the risks applicable to international operations;

 

   

our ability to continue to comply with the covenants in our debt agreements and service our indebtedness;

 

   

government regulations relating to our products and services, including new legislation relating to derivatives and the elimination of the dollar bill; and

 

   

our ability to remediate any material weaknesses in our internal control over financial reporting as we become subject to public company requirements.

Global Brass and Copper Holdings

Global Brass and Copper Holdings was incorporated in Delaware on October 10, 2007. Global Brass and Copper Holdings acquired the worldwide metals business of Olin Corporation on November 19, 2007. The principal executive offices of Global Brass and Copper Holdings are located at 475 N. Martingale Road, Suite 1050, Schaumburg, IL 60173, and the telephone number is (847) 240-4700.

We also maintain an internet site at http://www.gbcholdings.com. Our website and the information contained in that website or connected to that website will not be deemed to be incorporated into this prospectus or the registration statement of which this prospectus forms a part, and you should not consider it part of this prospectus or rely on any such information in making your decision whether to purchase our common stock.

 

 

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KPS Capital Partners, LP and Halkos Holdings, LLC

KPS Capital Partners, LP is a leading middle market private equity firm with $2.7 billion of assets under management. KPS seeks to realize significant capital appreciation through controlling equity investments in manufacturing and industrial companies going through a period of transition. The KPS investment strategy is based upon partnering with top management teams to materially and permanently improve the operations of a company, and then growing the company, either organically or through strategic acquisitions. The KPS investment strategy and its portfolio companies are described in detail at the KPS website: www.kpsfund.com. The KPS website and the information contained in that website or connected to that website will not be deemed to be incorporated into this prospectus or the registration statement of which this prospectus forms a part, and you should not consider it part of this prospectus or rely on any such information in making your decision whether to purchase our common stock.

KPS Special Situations Fund II, L.P., KPS Special Situations Fund II (A), L.P., KPS Special Situations Fund III, L.P. and KPS Special Situations Fund III (A), L.P. (collectively, the “KPS Funds”) are affiliates of KPS and are the majority members of Halkos Holdings, LLC. Halkos owns all of the outstanding shares of Global Brass and Copper Holdings prior to this offering and is the selling stockholder.

 

 

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The Offering

 

Common stock offered

               shares, all of which are being offered by the selling stockholder.

Underwriters’ option to purchase additional common stock from the selling stockholder

   Up to             shares.

Shares of our common stock to be outstanding immediately following this offering

               shares.

Use of proceeds

   All of the shares being offered in this offering are being offered by the selling stockholder. We will not receive any proceeds in this offering.

Dividends

   We do not currently anticipate paying any dividends on our common stock in the foreseeable future. See “Dividend Policy”.

Principal Stockholders

   Upon completion of this offering Halkos will continue to own more than 50% of the voting stock of Global Brass and Copper Holdings. We currently intend to avail ourselves of the controlled company exemptions under the rules of the New York Stock Exchange.

Lock-up Agreements

   The selling stockholder and the officers and directors of Global Brass and Copper Holdings will be subject to customary lockup agreements with a duration of 180 days. See “Underwriting”.

Listing

   We intend to apply to list our common stock on The New York Stock Exchange under the trading symbol “BRSS”.

Other Information About This Prospectus

Except as otherwise indicated, all information in this prospectus:

 

   

assumes no exercise of the underwriters’ option to purchase additional shares;

 

   

reflects a     -to-1 stock split, which we refer to as the “stock split,” which became effective on             ;

 

   

does not give effect to             shares of our common stock issuable upon the exercise of outstanding options as of             ; and

 

   

does not give effect to shares of common stock reserved for future issuance under our Global Brass and Copper Holdings, Inc. 2012 Omnibus Equity Incentive Plan, which we refer to as the “2012 Plan”.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

Set forth below is summary historical consolidated financial data of our business, as of the dates and for the periods indicated. The summary historical consolidated financial data as of June 30, 2012 and for the six months ended June 30, 2012 and 2011 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements, and in the opinion of our management, reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the results for those periods. The results for any interim period are not necessarily indicative of the results that may be expected for a full year. The summary historical consolidated financial data as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

The summary 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 “Selected Historical Consolidated Financial Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Six Months Ended June 30,     Year Ended December 31,  
     2012     2011     2011(7)      2010      2009  
    

(in millions, except share, per share and per pound data)

 

Statements of Operations Data:

            

Net sales

   $ 860.4      $ 966.2      $ 1,779.1       $ 1,658.7       $ 1,140.9   

Cost of sales

     763.9        871.8        1,582.9         1,497.9         1,048.2   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     96.5        94.4        196.2         160.8         92.7   

Selling, general and administrative expenses

     55.9        35.3        69.4         68.9         62.1   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Operating income

     40.6        59.1        126.8         91.9         30.6   

Third party interest expense

     19.9        20.7        40.0         22.6         11.3   

Related party interest expense(1)

                           2.5         6.8   

Loss on extinguishment of debt

     19.6                                 

Other expense (income), net

     0.7        (0.8     0.4         0.8         0.1   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income before provision for income taxes and equity income

     0.4        39.2        86.4         66.0         12.4   

Provision for income taxes

     7.3        14.8        31.2         26.1         2.5   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income before equity income

     (6.9     24.4        55.2         39.9         9.9   

Equity income, net of tax

     0.5        0.3        0.9         1.5           
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income

     (6.4     24.7        56.1         41.4         9.9   

Less: Net income attributable to noncontrolling interest

     0.2        0.2        0.2         0.5         0.1   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income attributable to Global Brass and Copper Holdings, Inc.

   $ (6.6   $ 24.5      $ 55.9       $ 40.9       $ 9.8   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income per common share (in thousands)(2)

  

$

(66.25

  $ 245.14      $ 558.63       $ 408.84       $ 98.27   

Pro forma (loss) income per common share (in thousands)(3)

   $ (107.41   $ 195.74      $ 459.83         N/A         N/A   

Number of common shares used in per share calculations(2)

     100        100        100         100         100   

 

 

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     Six Months Ended
June 30,
    Year Ended December 31,  
     2012     2011         2011(7)             2010             2009      
    

(in millions, except share, per share and per pound data)

 

Cash flow data:

          

Cash flows provided by operating activities

   $ 30.3      $ 32.4      $ 64.8      $ 69.4      $ 10.7   

Cash flows used in investing activities

     (7.2     (9.7     (22.3     (11.9     (12.0

Cash flows (used in) provided by financing activities

     (60.3  

 

(1.4

    (8.3     (49.6     1.3   

Other data:

          

Pounds shipped

     258.4        270.9        510.0        554.1        463.9   

Adjusted sales(4)

   $ 268.5      $ 276.4      $ 530.3      $ 538.8      $ 427.6   

Adjusted sales per pound shipped

   $ 1.04      $ 1.02      $ 1.04      $ 0.97      $ 0.92   

Consolidated Adjusted EBITDA(5)

   $ 63.4      $ 63.8      $ 122.6      $ 98.6      $ 55.7   

Consolidated Adjusted EBITDA per pound shipped

   $ 0.25     

$

0.24

  

  $ 0.24      $ 0.18      $ 0.12   

Total capital expenditures

   $ 7.2      $ 9.7      $ 22.4      $ 11.9      $ 12.2   

 

     As of June 30,     As of December 31,  
     2012     2011(7)     2010     2009  
           (in millions)              

Balance Sheet Data:

        

Cash

   $ 12.2      $ 49.5      $ 15.5      $ 7.8   

Total assets

     538.5        547.3        529.3        489.9   

Total debt(6)

     425.7        303.6        306.2        295.4   

Total liabilities

     605.6        465.2        502.1        465.5   

Total (deficit) equity

     (67.1     82.2        27.2        24.4   

 

(1) Represents interest on the related party term loan credit facility described in “Certain Relationships and Related Party Transactions”.
(2) Does not give effect to the planned     -for-1 stock split to be effected prior to this offering.
(3) We used a portion of the net proceeds of the Senior Secured Notes offering that we completed on June 1, 2012 to make the Parent Distribution. Our pro forma (loss) income per common share reflects (an increase) a reduction in our net (loss) income attributable to the interest expense incurred on the portion of the Senior Secured Notes that were used to fund the Parent Distribution. Assuming an interest rate of 9.50%, which is the actual interest rate of the Senior Secured Notes, and a statutory U.S. federal income tax rate of 35%, had the Parent Distribution been completed on January 1, 2011, our net (loss) income would have (increased) decreased by $(4.1) million, $4.9 million, and $9.9 million, respectively, to $(10.7) million, $19.6 million, and $46.0 million, respectively, for the six-month periods ended June 30, 2012 and 2011 and the year ended December 31, 2011, respectively. The pro forma (loss) income per share does not give effect to the planned     -for-1 stock split to be effected prior to this offering.

 

 

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(4) Adjusted sales is a non-GAAP financial measure. For more information regarding adjusted sales, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures—Adjusted Sales”. Adjusted sales is defined as net sales less the metal component of net sales. Adjusted sales represents the value-added revenue we derive from our conversion and fabrication operations. Management uses 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, reflecting our toll sales and our balanced book approach for other sales. We believe that presenting adjusted sales is informative to investors because it shows our ability to generate revenue from conversion and fabrication. The following table shows a reconciliation of net sales to adjusted sales:

 

     Six Months Ended
June 30,
     Year Ended December 31,  
     2012      2011      2011      2010      2009  
                  

(in millions)

        

Net sales

   $ 860.4       $ 966.2       $ 1,779.1       $ 1,658.7       $ 1,140.9   

Metal component of net sales

     591.9         689.8         1,248.8         1,119.9         713.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted sales

   $ 268.5       $ 276.4       $ 530.3       $ 538.8       $ 427.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(5) Consolidated EBITDA and Consolidated Adjusted EBITDA are non-GAAP financial measures. For more information regarding our EBITDA-based measures, including their limitations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures—EBITDA-Based Measures”.

We define Consolidated EBITDA as net income (loss) attributable to Global Brass and Copper Holdings, Inc., adjusted to exclude interest expense, provision for (benefit from) income taxes and depreciation and amortization expense. We also present Segment EBITDA elsewhere in this prospectus.

We use Consolidated EBITDA only to calculate Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA is Consolidated EBITDA, further adjusted to exclude extraordinary gains from the bargain purchase that occurred in the acquisition of the worldwide metals business of Olin Corporation, realized and unrealized gains and losses related to the collateral hedge contracts that were required under the asset-based revolving loan facility that we entered into at the time we acquired the worldwide metals business of Olin Corporation in November 2007 (the “2007 ABL Facility”), unrealized gains and losses on derivative contracts in support of our balanced book approach, unrealized gains and losses associated with derivative contracts related to electricity and natural gas costs, non-cash gains and losses due to lower of cost or market adjustments to inventory, non-cash LIFO-based gains and losses due to the depletion of a LIFO layer of metal inventory with lower base year costs, non-cash compensation expense related to payments made to members of our management by our parent, Halkos, loss on extinguishment of debt, non-cash income accretion related to the joint venture with Dowa Holdings Co. Ltd. (“Dowa”), KPS management fees, restructuring and other business transformation charges, specified legal and professional expenses and certain other items. We also present Segment Adjusted EBITDA elsewhere in this prospectus.

We present the above-described EBITDA-based measures because we consider them important supplemental measures and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Nevertheless, our EBITDA based measures may not be comparable to similarly titled measures presented by other companies.

We present Consolidated Adjusted EBITDA as a supplemental measure of our performance because we believe it represents a meaningful presentation of the financial performance of our core operations, without the impact of the various items excluded, in order to provide period-to-period comparisons that are more consistent and more easily understood. Measures similar to Consolidated Adjusted EBITDA, including “EBITDA” (as defined in the agreement governing the ABL Facility) and “Adjusted EBITDA” (as defined in the indenture governing the Senior Secured Notes), are used to determine compliance with various financial covenants and tests.

Management uses Consolidated Adjusted EBITDA per pound in order to measure the effectiveness of the balanced book approach in reducing the financial impact of metal price volatility on earnings and operating margins, and to measure the effectiveness of our business transformation initiatives in improving earnings and operating margins. In addition, Segment Adjusted EBITDA is the key metric used by our chief operating decision maker to evaluate the business performance of our company in comparison to budgets, forecasts and prior year financial results, providing a measure that management believes reflects our core operating performance. For a full description of Segment Adjusted EBITDA, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures”.

 

 

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Below is a reconciliation of net income (loss) attributable to Global Brass and Copper Holdings, Inc. to Consolidated EBITDA and Consolidated Adjusted EBITDA:

 

    Successor    

 

  Predecessor  
    Six Months
Ended
June 30,
    Year Ended December 31,     Period from
October 10 to
December 31,
   

 

  Period from
January 1 to
November 18,
 
    2012     2011         2011         2010     2009     2008     2007(a)    

 

  2007(a)  
               

(in millions)

            

Net income (loss) attributable to Global Brass and Copper Holdings, Inc.

  $ (6.6   $ 24.5      $ 55.9      $ 40.9      $ 9.8      $ (68.8   $ 60.0          $ 44.0   

Interest expense

    19.9        20.7        40.0        25.1        18.1        20.0        1.2              

Provision for (benefit from) income taxes

    7.3        14.8        31.2        26.1        2.5        (45.5     (0.1         0.4   

Depreciation expense

    3.1        2.1        4.5        2.8        1.7        0.4                   30.6   

Amortization expense

    0.1        0.1        0.2        0.2        0.2        0.2                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Consolidated EBITDA

  $ 23.8      $ 62.2      $ 131.8      $ 95.1      $ 32.3      $ (93.7   $ 61.1          $ 75.0   

Extraordinary gain from bargain purchase(b)

                                       (2.9     (60.0           

Loss (gain) on derivative contracts(c)

    (1.2     0.4        0.6        12.8        21.7        (19.9     (2.4         0.5   

Loss from lower of cost or market adjustment(d)

                                       170.9                     

Impact of inventory basis adjustment(e)

                                (4.1                         

(Gain) loss from LIFO layer depletion(f)

                  (15.2     (21.0     0.5                          (22.2

Non-cash accretion of income of Dowa joint venture(g)

    (0.4     (0.4     (0.7     (0.7     (0.7     (0.7                  

Loss on extinguishment of debt(h)

    19.6                                                        

Non-cash Halkos profits interest compensation expense(i)

    19.5        0.3        0.9        3.5                                   

Management fees(j)

    0.5        0.5        1.0        1.0        1.0        1.0                     

Restructuring and other business transformation charges(k)

                         6.1        1.9        5.0                     

Specified legal/professional expenses(l)

 

 

 

 

1.1

 

  

 

 

 

 

0.8

 

  

    4.2        1.8        3.1        0.4                     

Other adjustments(m)

    0.5     

 

 

 

 

  

                                             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Consolidated Adjusted EBITDA

  $ 63.4      $ 63.8      $ 122.6      $ 98.6      $ 55.7      $ 60.1      $ (1.3       $ 53.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (a) We acquired the worldwide metals business of Olin Corporation on November 19, 2007. As a result, the 2007 fiscal year is composed of a predecessor period from January 1, 2007 to November 18, 2007, and a successor period from the date of our formation, October 10, 2007, to December 31, 2007. We had no material operations or assets prior to November 19, 2007. Data for the period from January 1, 2007 to November 18, 2007 are based on books and records provided to us by Olin Corporation in connection with the acquisition, which we believe were prepared on a basis consistent with Olin Corporation’s accounting policies and procedures and have not been subject to an audit or review. Data for the predecessor period of 2007 are not prepared using our accounting policies and procedures, do not reflect the application of purchase accounting (which has been applied to the successor period financial statements) and also do not reflect the allocation of Olin Corporation selling, general and administrative expenses to the metals business unit. We believe that the unaudited financial information for the predecessor period of 2007 may be useful to investors for purposes of illustrating trends in our business. Although we have no reason to believe that the unaudited financial information for the predecessor period of 2007 is materially deficient, there is a risk that this unaudited financial information may contain errors that might have been detected in a review or audit process or might have been different if prepared in accordance with our policies and procedures instead of those of Olin Corporation. See“Risk Factors—Risks Related to Our Business—You should not place undue reliance on the selected financial and other information of our predecessor as of November 18, 2007 and for the period from January 1, 2007 to November 18, 2007, which are summarized in this prospectus”. The allocation of Olin Corporation selling, general and administrative expenses to the metals business unit would decrease EBITDA for 2007 by the amount of such allocation.

 

 

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  (b) The fair market value of the net assets acquired in our acquisition of the worldwide metals business of Olin Corporation exceeded the purchase price, resulting in a bargain purchase event. In accordance with GAAP, the excess fair value was allocated as a reduction to the amounts that otherwise would have been assigned to all of the acquired long-term assets. The remaining excess fair value was recorded as a one-time non-taxable extraordinary gain of $60.0 million in the successor period from October 10, 2007 (inception) to December 31, 2007 and $2.9 million in the year ended December 31, 2008.

 

  (c) Represents realized and unrealized gains and losses related to the collateral hedge that was required under our 2007 ABL Facility and is no longer required under the ABL Facility, unrealized gains and losses on derivative contracts in support of our balanced book approach and unrealized gains and losses associated with derivative contracts with respect to electricity and natural gas costs. No additional gains and losses with respect to the collateral hedge will be incurred in any subsequent periods. The following table summarizes the loss (gain) on derivative contracts:

 

    Successor          Predecessor  
    Six Months
Ended
June 30,
    Year Ended December 31,     Period from
October 10 to
December 31,
         Period from
January 1 to
November 18,
 
    2012     2011     2011     2010     2009     2008     2007          2007  

Collateral hedge

  $      $      $      $ 4.6      $ 30.8      $ (26.6   $ (5.2       $   

Other

    (1.2     0.4        0.6        8.2        (9.1     6.7        2.8            0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Loss (gain) on derivative contracts

  $ (1.2   $ 0.4      $ 0.6      $ 12.8      $ 21.7      $ (19.9   $ (2.4       $ 0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

  (d) In the year ended December 31, 2008, we recorded a $170.9 million non-cash charge for the revaluation of inventory from the prevailing metal prices at the time of the acquisition in November 2007 (reflecting a copper price of $3.00 per pound), to the significantly lower metal prices as of December 31, 2008 (reflecting a copper price of $1.52 per pound).

 

  (e) Our foreign operations are accounted for on a FIFO basis. The $4.1 million adjustment represents the difference between our foreign entities’ replacement cost of metal included in net sales in the year ended December 31, 2009 and the carrying value of our metal inventory at December 31, 2008 that was recognized in cost of sales in 2009 in accordance with the FIFO basis cost recognition.

 

  (f) 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.

 

  (g) As a result of the application of purchase accounting in connection with the November 19, 2007 acquisition, no carrying value was initially assigned to our equity investment in our joint venture with Dowa. This adjustment represents the accretion of equity in our joint venture with Dowa at the date of the acquisition over a 13-year period (which represents the estimated useful life of the technology and patents of the joint venture). See note 7 to our audited consolidated financial statements, which are included elsewhere in this prospectus.

 

  (h) Represents the loss on extinguishment of debt recognized in connection with the Term Loan Refinancing. See “Prospectus Summary—Recent Transactions—Issuance of the Senior Secured Notes and the Refinancing of the Term Loan Facility”.

 

  (i) Non-cash Halkos profits interest compensation expense for the six months ended June 30, 2012 represents dividend payments made by Halkos to members of our management that resulted in a non-cash compensation charge in connection with the Parent Distribution in June 2012. See “Prospectus Summary—Recent Transactions—Distribution to Halkos” and “Certain Relationships and Related Party Transactions”.

Non-cash Halkos profits interest compensation expense for the six months ended June 30, 2011, the year ended December 31, 2011 and the year ended December 31, 2010 represents a portion of the dividend payments made by Halkos to members of our management that resulted in a non-cash compensation charge in connection with the refinancing transaction that occurred in August 2010. See note 14 to our unaudited condensed consolidated financial statements and note 17 to our audited consolidated financial statements, which are included elsewhere in this prospectus.

 

  (j) Represents annual management fees payable to affiliates of KPS. We expect to pay KPS or its affiliates an amount in cash equal to $     million, the aggregate amount of the remaining payments due under the management agreement upon termination of the agreement at the closing of this offering. See “Certain Relationships and Related Party Transactions”.

 

  (k) Restructuring and other business transformation charges for the year ended December 31, 2010 included $3.2 million in severance charges to certain employees at Olin Brass, $0.5 million incurred for labor and productivity consultants in connection with operations at the Somers Thin Strip facility and $2.4 million in charges for excess and obsolete material associated with our exit and our share reduction in negative and low-margin product lines.

 

 

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Restructuring and other business transformation charges for the year ended December 31, 2009 included $0.7 million in fees incurred for labor and productivity consultants in connection with operations at the Olin Brass East Alton, Illinois casting plant, rolling mill and fabrication and cupping operation and $1.2 million in severance charges associated with the reorganization of Olin Brass’s senior management.

Restructuring and other business transformation charges for the year ended December 31, 2008 included $5.0 million in fees incurred for labor and productivity consultants in connection with operations at the Olin Brass East Alton, Illinois casting plant, rolling mill and fabrication and cupping operation and $1.4 million in integration expenses associated with the January 2008 asset acquisition from Bolton Metal Products Company, partially offset by a $1.4 million gain associated with the sale of a redundant A.J. Oster distribution facility.

 

  (l) Specified legal/professional expenses for the six months ended June 30, 2012 included $1.1 million of professional fees for accounting, tax, legal and consulting services related to this offering.

Specified legal/professional expenses for the six months ended June 30, 2011 included $2.0 million of professional fees for accounting, tax, legal and consulting services related to this offering and $0.9 million of expense incurred relating to a waiver obtained from our lenders under the Term Loan Facility and the 2010 ABL Facility. Partly offsetting this was income of $2.0 million from a favorable legal settlement related to a product liability lawsuit in which we were named as a third-party defendant. The waiver fee paid related to a waiver from the lenders under our Term Loan Facility and the 2010 ABL Facility for a technical restatement of the financial statements of Global Brass and Copper, Inc. previously delivered and an additional waiver because the consolidated financial statements of Global Brass and Copper, Inc. for the year ended December 31, 2010 could not be delivered within the prescribed time period as a result of the restatement.

Specified legal/professional expenses for the year ended December 31, 2011 included $3.8 million of professional fees for accounting, tax, legal and consulting services related to this offering and $0.9 million of expense incurred relating to a waiver obtained from our lenders under the Term Loan Facility and the 2010 ABL Facility, $0.9 million of expense related to an abandoned contemplated acquisition, and $0.6 million of expense related to the October 2011 amendment of our Term Loan Facility and 2010 ABL Facility. Partly offsetting this was income of $2.0 million from a favorable legal settlement related to a products liability lawsuit in which we were named as a third-party defendant. The waiver fee paid related to a waiver from lenders under our Term Loan Facility and the 2010 ABL Facility for a technical restatement of the financial statements of Global Brass and Copper, Inc. previously delivered and an additional waiver because the consolidated financial statements of Global Brass and Copper, Inc. for the year ended December 31, 2010 could not be delivered within the prescribed time period as a result of the restatement. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Outstanding Indebtedness—The ABL Facility” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting”.

Specified legal/professional expenses for the year ended December 31, 2010 included legal and consulting fees of $0.8 million associated with the successful defense of two assumed predecessor company liabilities, $0.9 million of professional fees incurred in connection with preparations for the August 18, 2010 refinancing of our 2007 ABL Facility and other future financings and $0.1 million associated with regulatory and compliance matters.

Specified legal/professional expenses for the year ended December 31, 2009 included legal and consulting fees of $2.4 million associated with a proposed acquisition that was not completed and $0.7 million associated with regulatory and compliance matters.

Specified legal/professional expenses for the year ended December 31, 2008 included legal and consulting fees of $0.4 million associated with a proposed acquisition that was not completed.

 

  (m) Represents a call premium of $0.5 million as a result of a voluntary prepayment of $15.0 million on the Term Loan Facility in April 2012.

 

(6) Consists of long-term debt, related party debt and current maturities of long-term debt.

 

(7) During September 2011, we identified an error relating to the accounting surrounding workers’ compensation insurance. The financial information as of and for the year ended December 31, 2011 reflects an immaterial out-of-period adjustment with respect to the accounting surrounding self-insured workers’ compensation. The financial information presented with respect to prior periods does not reflect the adjustment, because any such adjustment would have been immaterial. See Note 2 to our audited consolidated financial statements for the year ended December 31, 2011, which are included elsewhere in this prospectus.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before investing in our common stock or deciding whether you will or will not participate in this offering. Any of the following risks could materially and adversely affect our business, financial condition, results of operations or cash flows. In such a case, you may lose all or part of your original investment.

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 end 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 end 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 resulted in disruptions in a number of our end markets, and prospects for improvements in U.S. and global economic conditions as well as in those end markets remain uncertain. Any future economic disruptions may also negatively impact our end markets or the consumers served by those end markets, which would adversely affect our operating results.

Future disruptions in the commercial credit markets may impact liquidity in the global credit market as greatly as, or even more than, in recent years, 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 end markets that we serve, or consumers in one or more of the end 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.

In particular, the historically cyclical and volatile building and housing sector in the U.S. has not yet recovered from the downturn that began in 2007. If the housing, remodeling and residential and commercial construction markets continue to stagnate or deteriorate further, demand from such markets for our products, especially our brass rod products, is expected to continue to be adversely affected.

Similarly, the automotive end market has 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. Further 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 end 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 end market.

 

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As a result, cyclicality in economic conditions and in the end 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 end markets that we serve improve in the future.

Failure to maintain our balanced book approach would cause increased volatility in our profitability and our operating results and may result in significant losses.

Copper scrap and cathode are subject to significant cyclical price fluctuations. The availability and price of copper scrap and cathode depend on a number of factors outside our control, including general economic conditions, international demand for metal and internal recycling activities by primary copper producers and other consumers of copper. The cost of copper scrap and cathode represents the largest component of our cost of sales.

We use our balanced book approach to substantially reduce the impact of metal price movements on 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 77.2% of our net sales during the year ended December 31, 2011. 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 Factors Affecting Our Results of Operations—Balanced Book”.

We may not be able to maintain our balanced book 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. Those risks may increase during periods of very high copper prices or increased volatility in those prices.

If we fail to effectively maintain our balanced book, our profitability will be significantly affected by fluctuations in metal costs and our ability to recoup metal costs through product pricing. As a result, the volatility of our results of operations would increase dramatically. Furthermore, if we are unable to maintain our balanced book approach, we will potentially replace metal at a different price than the price recovered from the customer, generating a loss in circumstances where the replacement price is higher than the price recovered from the customer.

Although we maintain our balanced book approach, metal costs still affect our profitability through “shrinkage”.

Shrinkage loss, which is primarily the loss of raw metal that occurs between the casting furnace and rolling 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.

 

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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. In 2011, the spread between our receivable collection cycle and purchase payment cycle was approximately 19 days. 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 the 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 Factors Affecting Our Results of Operations—Metal Cost”.

Limited access to raw materials 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. 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. In periods of low metal prices, suppliers may elect to hold scrap waiting for higher prices. In addition, the slowdown in industrial production and consumer consumption in the U.S. during the economic crisis reduced, and is expected to continue to reduce, the supply of scrap metal available to us, and the scrap supply may be subject to the activities of speculators. If an adequate supply of scrap metal is not available to us, we would be unable to recycle metals 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. Furthermore, with the rapid growth of the economy of China, the demand for certain raw materials has increased significantly while the supply of such raw materials may not have increased correspondingly. This 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 other delays or shortages in the supply of raw materials. If we are unable to obtain adequate, cost efficient or timely deliveries of required raw materials and fuel, we may be unable to manufacture sufficient quantities of products on a timely basis. This could cause us to lose sales, incur additional costs, delay new product introductions or harm our reputation in the end markets that we serve. In addition, our ability to find metal is dependent on an adequate and timely supply of raw materials. An inability to find an adequate and timely supply of raw materials could have a material adverse effect on our profit margin, and in turn on our business, financial condition, results of operations or cash flows.

 

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Increases in the cost of energy could cause our cost of sales to increase, thereby reducing operating results and limiting our operating flexibility.

In 2011, the cost of energy and utilities represented approximately 7% of our non-metal cost of sales. The prices of natural gas and electricity can be particularly volatile. As a result, our natural gas and electricity costs may fluctuate dramatically, and we may not be able to mitigate the effect of higher natural gas and electricity 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 natural gas and electricity 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 June 30, 2012, our total indebtedness was $425.7 million. We also had an additional $148.6 million available for borrowing under the ABL Facility as of that date. Based on the amount of indebtedness outstanding and applicable interest rates at June 30, 2012, our annualized cash interest expense would be $37.1 million, $1.5 million of which represents interest expense on floating-rate obligations (and thus is subject to increase in the event interest rates were to rise), prior to any consideration of the impact of interest rate derivative contracts.

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

 

   

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 significant 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 ABL Facility and the indenture governing the Senior Secured Notes contain various covenants that limit or prohibit our ability, among other things, to:

 

   

incur or guarantee additional indebtedness;

 

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pay dividends on our capital stock or redeem, repurchase, retire or make distributions in respect of our capital stock or subordinated indebtedness or make certain other restricted payments;

 

   

make certain loans, acquisitions, capital expenditures or investments;

 

   

sell certain assets, including stock of our subsidiaries;

 

   

enter into certain sale and leaseback transactions;

 

   

create or incur certain liens;

 

   

consolidate, merge, sell, transfer or otherwise dispose of all or substantially all of our assets;

 

   

enter into certain transactions with our affiliates; and

 

   

engage in certain business activities.

The agreement governing the ABL Facility also contains a financial covenant that requires us to maintain a fixed charge coverage ratio that is tested whenever excess availability, as defined in such agreement, falls below a certain level. The fixed charge coverage ratio, as defined in the agreement, requires us to maintain a minimum ratio of “EBITDA” (as defined in the agreement governing the ABL Facility) to the amount of our fixed charges for the twelve consecutive months prior to the date on which the ratio is tested. The agreement governing the ABL Facility also requires excess availability to remain above a certain level to avoid default. For more information regarding these covenants, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Covenant Compliance” and “Description of Certain Indebtedness—ABL Facility”.

As of June 30, 2012, we were in compliance with all of the covenants contained in our debt agreements. A violation of covenants may result in default or an event of default under our debt agreements. Upon the occurrence of an event of default under the agreement governing the ABL Facility or the indenture governing the Senior Secured Notes, the requisite lenders under the ABL Facility or the requisite noteholders under the indenture could elect to declare all amounts of such indebtedness outstanding to be immediately due and payable and, in the case of the 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 ABL Facility and to secure the Senior Secured Notes. If the lenders or noteholders, as applicable, accelerate the repayment of borrowings, such acceleration would have a material adverse effect on our business, financial condition, results of operations or cash flows. Furthermore, cross-default provisions in the ABL Facility mean that any default under the indenture governing the Senior Secured Notes or other significant debt agreements could trigger a cross-default under the ABL Facility. 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 ABL Facility and the indenture governing the Senior Secured Notes 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 and could increase the risks described in “—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”.

 

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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—Covenant Compliance” and “Description of Certain Indebtedness”.

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.

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

If we do not generate sufficient cash flow from operations to satisfy our debt service obligations, including payments required to be made on the ABL Facility and the Senior Secured Notes, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our 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 ABL Facility and the Senior Secured Notes) may restrict us from adopting some of these alternatives, which in turn could exacerbate the effects of any failure to generate sufficient cash flow to satisfy our debt 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.

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 ABL Facility and the Senior Secured Notes.

Because some of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing short-term interest rates, we are vulnerable to interest rate increases.

As of June 30, 2012, we had $50.7 million outstanding under the ABL Facility, which amount bears interest at rates that fluctuate with changes in certain prevailing short-term interest rates. Assuming a consistent level of debt, a 100 basis point change in the interest rate on the indebtedness under our ABL Facility would have increased or decreased the annual interest payments required to be made by us under the ABL Facility by $0.5 million. We use derivative financial instruments, mainly interest rate caps, to manage a portion of the potential impact of our interest rate risk. To some extent, derivative financial instruments can protect against increases in interest rates, but they do not provide complete protection over the long term. If interest rates increase dramatically, we could be unable to service our debt, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

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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 19.4% of our net sales for the year ended December 31, 2011. No one customer accounted for more than 8% of those net sales. 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, during the economic downturn since 2008, 15 of our approximately 1,700 customers have become involved in bankruptcy or insolvency proceedings and have defaulted on their obligations to us. Our balance sheet reflected an allowance for doubtful accounts totaling $2.1 million at December 31, 2011 and $7.9 million at December 31, 2010. Similar incidents in the future 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.

During the fiscal year ended December 31, 2011, a majority of our net sales were generated from customers who do not have long-term contractual arrangements with us. These customers purchase products and services from us on a purchase order basis and may choose not to continue to purchase our products and services. 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 their manufacturing 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 manufacturing capacity to foreign countries continues, especially those in the automotive parts industry, such relocations may disrupt or end our relationships with some customers and could lead to losing business to foreign competitors. These risks would increase to the extent we are unable to expand internationally when our customers do so.

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, accounting for 17.9% of Olin Brass’ net sales in 2011. Olin Brass has a contractual arrangement to supply nickel and brass coinage strip to multiple 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. Further, it is uncertain whether the COINS Act will be adopted, and if it would be adopted, when and how it would be implemented. As a result, even if the COINS Act is adopted, we may not benefit if its implementation is delayed.

 

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Additionally, the U.S. Treasury department announced in December 2011 a halt in the production of Presidential $1 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 is expected to adversely impact our business over the next several years and further actions to curtail coin production could have an adverse effect on our business, financial condition or results of operations.

Following trends in electronic commerce, the United States Mint in the future may reduce its output of coinage and thus reduce its demand for coinage strip. A reduction in demand for coinage strip could have a material adverse effect on our business, financial condition and results of operations.

Decreased demand from Alliant Techsystems (“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 small-caliber ammunition through September 2019, 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, foil and plate, the Chase Brass segment competes with domestic as well as foreign manufacturers of brass rod, and the A.J. Oster segment primarily competes with distributors, mills and processors of copper and brass products. In particular, 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 allows 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 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 may increase the ability of Korean manufacturers to compete with our products. The increased competition resulting from the KORUS FTA, 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 June 30, 2012, we had 1,872 employees, 1,087, or approximately 58%, of whom 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. As of June 30, 2012, there were nine unions representing employees in the Olin Brass segment (eight representing employees at the East Alton, Illinois facility and one representing employees of Bryan Metals, LLC), two representing employees of the A.J. Oster segment (one representing employees of A.J. Oster Foils, LLC and another representing employees of A.J.O. Global Services Mexico S.A. de C.V.) and one representing employees of the Chase Brass segment. On July 14, 2012, employees at the Olin Brass Somers Thin Strip facility elected a union representative, and the election was certified by the National Labor Relations Board on July 27, 2012. The collective bargaining agreement with the eight unions that represent employees at the East Alton facility of Olin Brass expires in November 2013. The collective bargaining agreement covering union-represented employees of Chase Brass expires in June 2013, and the collective bargaining agreement covering union-represented employees of A.J. Oster Foils expires in January 2014. The collective bargaining agreement covering union-represented employees of A.J.O. Global Services Mexico S.A. de C.V. has an indeterminate term, with a review of wages every year and a review of benefits every other year. The collective bargaining agreement with the union-represented employees of Bryan Metals, LLC is effective through September 30, 2014. 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. See “Business—Employees” for a discussion of our collective bargaining agreements.

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, Mexico, China and Japan. 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

 

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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 or other disruptions such as a major fire at our manufacturing facilities, our ability to satisfy our customers could be negatively impacted, and if, as a result, customer satisfaction decreased, this would have a material adverse effect on our business, financial condition, results of operations and cash flows.

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.

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 “green portfolio” products, require separate production facilities 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

 

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and copper-alloy products is characterized by changing technologies, periodic new product introductions and evolving customer and industry standards. Eco Brass® and other products in our “green portfolio” are examples of new products based on new technologies that have been developed as a result of evolving customer and industry standards. Our competitors are continuously searching for more cost-effective alloys and substitutes for copper and copper-alloys, including products in our “green portfolio”. 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. In addition, if our competitors introduce products and/or services based on new or alternative technologies, our existing and future products and/or services could become obsolete, which would also weaken demand for our products or services, thereby decreasing our net sales and harming our operating results.

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 5% of our net sales in 2011. We have operations in China through Olin Luotong Metals (GZ) Corporation (“Olin Luotong Metals”), an 80%-owned joint venture with Chinalco Luoyang Copper Co. Ltd. (“Chinalco”) in Singapore through our subsidiary, GBC Metals Asia Pacific PTE, and in Japan through our 50/50 joint venture with Dowa Holdings Co. Ltd (“Dowa”). We also have distribution arrangements in the United Kingdom and Germany. 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;

 

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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;

 

   

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 London Metal Exchange, or LME, and the Commodity Exchange, or 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 the fiscal year ended December 31, 2011, the shipments by Olin Brass to the munitions end market accounted for 40.3% 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. Several states currently have laws in effect similar to that legislation. Any restriction on the use of firearms 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 end market.

The cost of our inventories is primarily determined using the last-in, first-out (“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. 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. The Department of the Treasury’s “General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals” contains a proposal to repeal the election to use the LIFO method for U.S. Federal income tax purposes. According to the proposal, taxpayers that currently use the LIFO method would be required to revalue their beginning LIFO inventory to its first-in, first-out (“FIFO”) value in the first taxable year beginning after December 31, 2012. As of

 

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June 30, 2012, if the FIFO method had been used instead of the LIFO method, our inventories would have been $149.5 million higher than the value reflected in our June 30, 2012 balance sheet. This increase in the carrying value of inventory would result in a one-time increase in taxable income of $93.4 million after taking into consideration total current differences in book-to-tax valuations of inventory, which would be taken into account ratably over ten years, beginning with the first taxable year beginning after December 31, 2012. 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 from foreign manufacturers will increase if current anti-dumping orders expire and our sales volumes and profit margins could be adversely affected”.

We may not be able to sustain the annual cost savings realized as part of our recent cost- reduction initiatives.

Since our formation in 2007, we have undertaken, and will continue to undertake, productivity and cost-reduction initiatives intended to improve performance and improve operating cash flow. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Information, Acquisition, Business Transformation and Refinancing”. 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.

 

 

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Our ability to retain our senior management team is critical to the success of our business, and failure to do so could materially adversely affect our business, financial condition, results of operations and cash flows.

We are dependent on our senior management team to remain competitive in our industry. We have employment contracts or severance agreements with members of our senior management team, including John Walker, Robert Micchelli, John Wasz, Devin Denner and Daniel Becker. 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. See “Compensation Discussion and Analysis—Employment Arrangements with Named Executive Officers”. We do not maintain any life insurance policies for our benefit covering our key employees.

If our senior management team were not able to dedicate adequate time to our business, due to personal or other factors, if we lose or suffer an extended interruption in the services of a significant portion of our senior management team, or if a significant portion of our senior management team were to terminate employment within a short period it could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the market for qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management team, should the need arise.

Rising employee medical costs may adversely affect operating results.

The potential of rising employee medical costs are difficult to assess at this time. During the year ended December 31, 2011, our expenses related to employee health benefits were an aggregate of $15.0 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 significant uncertainty as to how these current and future laws and regulations will affect our employee medical and other benefit costs. Therefore, we may incur significant increases in these costs that could reduce 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 end 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 Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, established responsibility for

 

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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 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”.

New governmental regulation of greenhouse gas emissions may subject us to significant new costs and restrictions on our operations.

Recently, Congress has considered legislation that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to buy allowances to offset emissions of greenhouse gas. In addition, several states, including states where we have manufacturing 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 and natural gas, 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. While future greenhouse gas regulation appears likely, it is too early to predict how this 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. 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.

 

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We may face product liability claims that are costly and create adverse publicity.

If any of the products that we sell cause harm to any of our customers, we could be exposed to product liability lawsuits. 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. Further, even if we successfully defended ourselves against this type of 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.

New derivatives legislation could have an adverse impact on our ability to use derivative contracts to manage risks associated with our business and on the cost of our derivative contracts.

We use over-the-counter, or OTC, derivatives products to manage our metal commodity price risks and our interest rate risks. Recent legislation adopted by Congress increases regulatory oversight of OTC derivatives markets and imposes restrictions on certain derivative transactions, which could affect the use of derivatives in hedging transactions. Final regulations defining the scope of this legislation and the extent to which different types of market participants will be subject to the legislation have not yet been adopted. If final regulations subject us to heightened capital or margin requirements or otherwise increase our costs, directly or indirectly through costs passed on to us by our trading counterparties, of entering into OTC derivatives transactions, they could have an adverse effect on our ability to hedge risks associated with our business and on the cost of maintaining our derivative contracts.

We have had material weaknesses in the past and currently have a material weakness in our internal control over financial reporting. If one or more material weaknesses persist, or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

As a public company, we will be required to comply with the standards adopted by the Public Company Accounting Oversight Board in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, regarding internal control over financial reporting. Prior to becoming a public company, we have not been required to comply with the requirements of Section 404. We will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. Further, our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal control over financial reporting until the year following our first annual report required to be filed with the SEC. Once it is required to do so, our independent registered public accounting firm may issue an adverse report in the event that they conclude that our internal control over financial reporting is not effective.

The process of becoming compliant with Section 404 may divert internal resources and will take a significant amount of time and effort to complete. We may experience higher than anticipated operating expenses, as well as increased independent registered public accounting firm fees during the implementation of these changes and thereafter. Completing documentation of our internal control system and financial processes, remediation of control deficiencies and management testing of internal controls will require substantial effort by us. While we have begun the process of evaluating our internal control over financial reporting, we are in the early phases of our review and may not be able to complete our review until after this offering is completed.

In connection with the 2010 audit of our financial statements, we and our independent auditor identified three material weaknesses in our internal control over financial reporting. A material

 

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weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. These material weaknesses related to our accounting for joint ventures, income tax matters, and physical inventory quantity record keeping. The material weaknesses related to our accounting for joint ventures and for income tax matters were remediated as of December 31, 2011. We have implemented mitigating controls in response to the material weakness related to our physical inventory quantity record keeping, and as a result, as of December 31, 2011, this deficiency did not rise to the level of a material weakness but remains subject to continued ameliorative measures.

In connection with the 2011 audit of our financial statements, we and our independent auditor identified the following material weakness in our internal control over financial reporting:

Allowance for doubtful accounts. We did not maintain effective controls over the accuracy of our allowance for doubtful accounts. Specifically, methodologies supporting management’s estimates were not maintained, which contributed to the control design deficiency surrounding our not using all available information prior to the issuance of our financial statements. In addition, the controls surrounding the review of the account reconciliations for the allowance for doubtful accounts were not effective. These control deficiencies resulted in audit adjustments to our allowance for doubtful accounts and related financial disclosures in the fourth quarter of 2011. Additionally, these control deficiencies, in the aggregate, could result in a misstatement of the aforementioned account and disclosure that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that these control deficiencies, in the aggregate, constitute a material weakness.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting” for further discussion of this material weakness.

We have begun the process of evaluating our internal control over financial reporting, and we are in the early phases of our review. We cannot predict the outcome of our review at this time. During the course of the review, we may identify additional control deficiencies, which could give rise to other material weaknesses in addition to those previously identified. We may also find that our previous and planned remediation measures have not been successful to the extent we expected, if at all. As a result, our ability to report our financial results on a timely and accurate basis may be adversely affected, we may be subject to sanctions or investigations by regulatory authorities, and investors may lose confidence in our financial information, which in turn could adversely affect the market price of Global Brass and Copper Holdings’ common stock.

You should not place undue reliance on the selected financial and other information of our predecessor as of November 18, 2007 and for the period from January 1, 2007 to November 18, 2007, which are summarized in this prospectus.

The selected financial and other information of our predecessor as of November 18, 2007 and for the period from January 1, 2007 to November 18, 2007 has been derived from books and records that were provided to us by Olin Corporation in the acquisition of the worldwide metals business of Olin Corporation and has not been subject to a review or audit by us or any independent registered public accounting firm. There is a risk that this unaudited financial information may contain errors that might have been detected in a review or audit process or might have been different if prepared in accordance with our policies and procedures instead of those of Olin Corporation. Therefore, all of the predecessor financial information contained in this prospectus may not be reflective of our predecessor’s true historical financial information as of the dates presented and for the periods presented. Any differences between the financial information presented as of such dates and for the periods presented in this prospectus and the relevant actual historical financial information may be material.

 

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In addition, the selected financial and other information of our predecessor for the period from January 1, 2007 to November 18, 2007 and as of November 18, 2007 was prepared using an accounting basis that is different from that used to prepare the successor’s consolidated financial statements. The predecessor financial and other information for the period from January 1, 2007 to November 18, 2007 do not reflect the application of purchase accounting for our November 19, 2007 acquisition of the worldwide metals business from Olin Corporation, and such information for the period from January 1, 2007 to November 18, 2007 also does not reflect the allocation of Olin Corporation selling, general and administrative expenses to the metals business unit. We have only limited knowledge regarding the predecessor financial information, including the accounting policies under which the predecessor financial information was prepared. As is customary in such circumstances, we relied on contractual representations, warranties and indemnities of Olin Corporation, as seller, relating to the predecessor financial information. Based on these representations and warranties, we believe that the predecessor financial information was prepared on a GAAP basis and consistent with Olin Corporation’s accounting policies and procedures, but do not have access to records or personnel of Olin Corporation that would confirm this or provide the basis for any greater detail about the accounting basis used to prepare the predecessor financial information. Such information may not be comparable to the successor’s consolidated financial statements. Accordingly, you are cautioned not to place undue reliance on the selected financial and other information of our predecessor included in this prospectus.

Increasing costs of insurance may adversely impact our results of operations.

While we are insured against certain claims, including in respect of general liability, property damage (including natural disasters and fire), equipment damage and injury to our personnel, our insurance may not cover all of the claims to which we may become subject, and future coverage of such claims may not be available on commercially reasonable terms, if at all. If we are unable to obtain adequate insurance coverage, substantial property or equipment damage, personal injury or other claims could materially impact our earnings and cash flows. Continued increases in insurance costs, additional coverage restrictions or unavailability of certain insurance products and other factors could increase our operating costs and further increase our exposure to natural disasters and other causes of catastrophic loss, as well as personal injury and other claims.

Failure to protect, or uncertainty regarding the validity, enforceability or scope of, our intellectual property rights could impair our competitive position.

Our products are covered by a variety of proprietary rights that are important to our competitive position and success. 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. 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. However, it is possible that our intellectual property rights could be challenged, invalidated or violated. Our pending patent applications may not be granted or, if granted, the resulting patent may be challenged or invalidated by our competitors or by other third parties. Despite our efforts to protect our proprietary rights, third parties may attempt to copy or otherwise obtain and use our intellectual property without our authorization. In addition, monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain the steps we take to protect our intellectual property will prevent infringement or identify all unauthorized users of our intellectual property.

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. Furthermore, our competitors independently may develop similar or improved technologies that limit the value of our intellectual property or design

 

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around patents issued to us. If competitors or third parties are able to use our intellectual property or are able to successfully challenge, circumvent, invalidate or render unenforceable our intellectual property, we likely would lose a significant portion of our competitive advantage in the market for products covered by such intellectual property. We may not be successful in securing or maintaining proprietary or patent protection for the technology used in our products and services, and protection that is secured may be challenged and possibly lost. We may have to prosecute unauthorized uses of our intellectual property and the expense, time, delay and burden on management of such litigation could prevent us from maintaining or increasing our business. 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.

In addition, we have entered into agreements with Mitsubishi Shindoh pursuant to which we have access to and the right to use certain of its technologies. To the extent that Mitsubishi Shindoh faces challenges to its intellectual property rights in its technologies, it could have an adverse effect on our ability to market our products and/or services that incorporate those technologies, which would result in a decline in our net sales.

We could become subject to litigation regarding intellectual property rights, which could harm our business significantly.

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, pursuant to a license agreement, we have access to and the right to use certain technologies owned by Mitsubishi Shindoh. To the extent that Mitsubishi Shindoh has failed to adequately protect the technologies upon which we rely or if these technologies 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. In addition, 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.

 

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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. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. Our agreements with employees also provide that any inventions conceived by the individual in the course of rendering services to us are our exclusive property. 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.

To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our proposed products, disputes may arise as to the proprietary rights to such information, which may not be resolved in our favor. 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.

Disruption or failures of our information technology systems could have a material adverse effect on our business.

Our information technology systems 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 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.

Our liquidity, financial condition and ability to operate our business could be adversely affected by the failure of financial institutions to fulfill their commitments under committed credit facilities.

The ABL Facility is an asset-based revolving loan facility with a maximum availability of $200.0 million, subject to a borrowing base calculation. We may request an increase in the maximum commitments, at our option and under certain circumstances, of up to $50.0 million. If one or more of the financial institutions that are lenders under the ABL Facility were to default on its obligations to provide available borrowings under the ABL Facility, such a default could have a material adverse effect on our liquidity, and we might not be able to fulfill our cash needs using other sources, which could have a material and adverse effect on our financial condition and ability to operate our business.

 

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Global Brass and Copper Holdings 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 has no direct operations and derives all of its cash flow from its subsidiaries. Because Global Brass and Copper Holdings conducts its operations through its subsidiaries, Global Brass and Copper Holdings 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 ABL Facility, the indenture governing the Senior Secured Notes and other debt agreements governing current and future indebtedness of Global Brass and Copper Holdings’ subsidiaries, as well as the financial condition and operating requirements of Global Brass and Copper Holdings’ subsidiaries, may limit the ability of Global Brass and Copper Holdings to obtain cash from its subsidiaries. The earnings from, or other available assets of, Global Brass and Copper Holdings’ subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable Global Brass and Copper Holdings to pay any dividends on our common stock. See “—Risks Related to an Investment in Our Common Stock and this Offering—We do not intend to pay dividends in the foreseeable future”.

We face a number of risks related to future acquisitions and joint ventures.

We have made investments to expand and streamline our business, including our acquisition in January 2008 of the North American order book, customer list and certain other assets of Bolton Metal Products Company. We will continue to seek opportunities for further acquisitions to supplement our operations and for expansion of our international presence, particularly in Asia, through joint ventures.

Acquisitions and joint ventures involve a number of risks which could have an adverse effect on our business, financial condition, results of operations and cash flows, including the following:

 

   

we may experience adverse short-term effects on our operating results;

 

   

we may be unable to successfully and rapidly integrate the new businesses, personnel and products with our existing business, including financial reporting, management and information technology systems;

 

   

we may experience higher than anticipated costs of integration and unforeseen operating difficulties and expenditures, including potential disruption of our ongoing business and distraction of management;

 

   

an acquisition may be in a market or geographical area in which we have little experience and could increase the scope, geographic diversity and complexity of our operations;

 

   

the acquisition or joint venture formation process may require significant attention by our senior management and the engagement of outside advisors (and the payment of related fees), and proposed acquisitions and joint ventures may not be successfully completed;

 

   

we may lose key employees or customers of the acquired company; and

 

   

we may encounter unknown contingent liabilities that could be material.

In addition, we may require additional debt or equity financing for future acquisitions, and such financing may not be available on favorable terms, if available at all. We may not be able to successfully integrate or profitably operate any new business we acquire, and we cannot assure you that any such acquisition will meet our expectations. The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations.

 

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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.

Risks Related to an Investment in Our Common Stock and this Offering

Our controlling stockholder may have interests that conflict with the interests of other stockholders.

Halkos will own     % of our common stock (    % if the underwriters’ option to purchase additional shares is exercised in full) after this initial public offering. Through Halkos, KPS will have the ability to elect substantially all of the members of the board of directors of Global Brass and Copper Holdings (the “Board of Directors”) and make decisions relating to fundamental corporate actions. The directors generally will have the authority to make decisions affecting our capital structure, including the issuance of additional shares of stock, additional debt and declaration of dividends, will be able to select our management team, determine our corporate and management policies and authorize or prevent transactions that require approval of the Board of Directors or majority of stockholders of Global Brass and Copper Holdings, such as joint ventures or acquisitions, subject to certain restrictions as set forth in the agreement governing the ABL Facility or the indenture governing the Senior Secured Notes or future credit facilities. These decisions could enhance KPS’s equity investment while involving risks to the interests of other stockholders. In addition, KPS has engaged, and may in the future continue to engage, in transactions with us. See “Certain Relationships and Related Party Transactions”.

As a “controlled company” within the meaning of the NYSE’s corporate governance rules, we will qualify for, and intend to rely on, exemptions from certain NYSE corporate governance requirements. As a result, holders of our common stock may not have the same degree of protection as that afforded to stockholders of companies that are subject to all of the NYSE’s corporate governance requirements.

Following this offering, we will be a “controlled company” within the meaning of the NYSE’s corporate governance rules as a result of the ownership position and voting rights of KPS, through Halkos, upon completion of this offering. A “controlled company” is a company of which more than 50% of the voting power is held by an individual, group or another company. More than 50% of our voting power will be held by KPS, through Halkos, after completion of this offering. As a controlled company we may elect not to comply with certain NYSE corporate governance rules that would otherwise require the Board of Directors to have a majority of independent directors and our compensation and nominating and governance committees to be comprised entirely of independent directors, have written charters addressing such committee’s purpose and responsibilities and perform an annual evaluation of such committee. Accordingly, holders of our common stock will not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements and the ability of our independent directors to influence our business policies and affairs may be reduced.

Our directors who have relationships with KPS may have conflicts of interest with respect to matters involving our company.

Following this offering, five of our eight non-executive directors will be affiliated with KPS. These persons will have fiduciary duties to Global Brass and Copper Holdings and in addition will have duties to KPS. In addition, our amended and restated certificate of incorporation will provide that no officer or director of us who is also an officer, director, employee or other affiliate of KPS or an officer, director or employee of an affiliate of KPS will be liable to us or our stockholders for breach of any fiduciary duty

 

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by reason of the fact that any such individual directs a corporate opportunity to KPS or its affiliates instead of us, or does not communicate information regarding a corporate opportunity to us that such person or affiliate has directed to KPS or its affiliates. As a result, such circumstances may entail real or apparent conflicts of interest with respect to matters affecting both us and KPS, whose interests, in some circumstances, may be adverse to ours. In addition, as a result of KPS’ indirect ownership interest, conflicts of interest could arise with respect to transactions involving business dealings between us and KPS or its affiliates, including potential business transactions, potential acquisitions of businesses or properties, the issuance of additional securities, the payment of dividends by us and other matters.

There has been no prior public market for our common stock, and the trading price of our common stock may be adversely affected if an active trading market in our common stock does not develop. Our stock price may be volatile, and you may be unable to resell your shares at or above the offering price or at all.

Prior to this offering, there has been no public market for our common stock, and an active trading market may not develop or be sustained upon the completion of this offering. We cannot predict the extent to which investor interest will lead to the development of an active trading market in shares of our common stock or whether such a market will be sustained. The initial public offering price of our common stock offered in this prospectus will be determined through our negotiations with the underwriters and may not be indicative of the market price of the common stock after this offering. See “Underwriting”. The market price of our common stock after this offering 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 does not develop or is not sustained, it may be difficult for you to sell your shares at a price that is attractive to you, or at all.

The price of our common stock may fluctuate significantly and you could lose all or part of your investment.

Our stock price may be volatile. 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 Securities and Exchange Commission;

 

   

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;

 

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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 after this offering;

 

   

sales of common stock by us, Halkos, members of our management team or other holders;

 

   

adverse resolution of new or pending litigation against us;

 

   

any announcements by third parties of significant claims or proceedings against us;

 

   

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.

See “—Risks Related to Our Business”. 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 public offering price.

Furthermore, in recent years the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price and materially affect the value of your investment.

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.

Upon the completion of this offering we will have             outstanding shares of common stock. Of these shares, the shares of common stock offered in this prospectus will be freely tradable without restriction in the public market, unless purchased by our affiliates. We expect that the remaining             outstanding shares of our common stock will become available for resale in the public market as shown in the chart below. Our officers, directors, Halkos and the holders of substantially all of our outstanding shares of common stock have signed lock-up agreements pursuant to which they have agreed not to sell, transfer or otherwise dispose of any of their shares for 180 days after the date of this prospectus, subject to specified exceptions. The underwriters may, in their sole discretion and without notice, release the restrictions on all or any portion of the common stock subject to lock-up agreements. The underwriters are entitled to waive the lock-up provisions at their discretion prior to the expiration dates of such lock-up agreements.

Immediately following the completion of this offering, shares of our common stock will become available for resale in the public market as follows:

 

Number of Shares

   Percentage    

Date of Availability for Resale into the Public Market

                Upon effectiveness of this prospectus
                        days after the date of this prospectus, of which             shares are subject to holding period, volume and other restrictions under Rule 144

As restrictions on resale end, the market price of our common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.

 

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These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities. Following this offering, we intend to file a registration statement under the Securities Act of 1933, registering shares of our common stock reserved for issuance under our 2012 Plan, and we will enter into an investor rights agreement under which we will grant demand and piggyback registration rights to KPS and certain members of management. See “Shares Eligible for Future Sale” for a more detailed description of the shares that will be available for future sale upon completion of this offering.

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.

We do not intend to pay dividends in the foreseeable future.

For the foreseeable future, we intend to retain any earnings to finance our business and pay down our indebtedness, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends 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, restrictions in our debt agreements, including those governing the ABL Facility and the Senior Secured Notes, that limit our ability to pay dividends to stockholders and other factors the Board of Directors deems relevant. At this time, the agreement governing the ABL Facility and the indenture governing the Senior Secured Notes generally restrict or limit the payment of dividends to shareholders. See “Dividend Policy”, “Description of Certain Indebtedness” and “Description of Capital Stock—Capital Stock—Common Stock”. 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 in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

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, which we intend to adopt prior to the completion of this offering, will 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;

 

   

a classified board consisting of three classes;

 

   

removal of directors only for cause;

 

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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.

For more information, see “Description of Capital Stock”. The provisions of the amended and restated certificate of incorporation and amended and restated bylaws of Global Brass and Copper Holdings, the significant common stock ownership of Halkos 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 will depend 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 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.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented or to be implemented by the SEC and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing and the costs we incur for such purposes may strain our resources. We expect these rules and regulations to increase our legal and financial compliance costs, divert management’s attention to ensuring compliance and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. We have hired a number of people to assist with the enhanced requirements of being a public company but still need to hire more people for that purpose. In addition, these laws and regulations could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, these laws and regulations could make it more difficult for us to attract and retain qualified persons to serve on the Board of Directors, its board committees or as its executive officers and may divert management’s attention. Furthermore, if Global Brass and Copper Holdings is unable to satisfy its obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action.

 

 

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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, 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 prospectus 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 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 prospectus are based upon information available to us on the date of this prospectus.

Important factors that could cause actual results to differ materially from our expectations, which we refer to as “cautionary statements”, are disclosed under “Risk Factors” and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. All forward-looking information in this prospectus 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:

 

   

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 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;

 

   

our ability to maintain business relationships with our customers on favorable terms;

 

   

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;

 

   

supply, demand, prices and other market conditions for our products;

 

   

our ability to accommodate increases in production to meet demand for our products;

 

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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;

 

   

our ability to remediate existing material weaknesses in our internal control over financial reporting and maintain effective internal control over financial reporting as we become subject to public company requirements;

 

   

our ability to realize the planned cost savings and efficiency gains as part of our various initiatives;

 

   

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;

 

   

rising employee medical costs;

 

   

environmental costs;

 

   

our exposure to product liability claims;

 

   

our ability to maintain cost-effective insurance policies;

 

   

our ability to maintain the confidentiality of our proprietary information and to protect the validity, enforceability or scope of our intellectual property rights;

 

   

our limited experience managing and operating a public company;

 

   

our ability to service our substantial indebtedness;

 

   

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 prospectus 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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USE OF PROCEEDS

All of the shares of common stock to be sold in this offering, including those subject to the underwriters’ option to purchase additional shares, will be sold by the selling stockholder. We will not receive any proceeds from this offering. We expect that $             million of the proceeds from this offering (based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover of this prospectus ($             million if the underwriters’ option to purchase additional shares is exercised)) will be paid to members of our management. For additional information, see “Certain Relationships and Related Party Transactions”.

 

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DIVIDEND POLICY

We do not currently anticipate paying any dividends on our common stock in the foreseeable future, although we have made limited dividend payments to shareholders within the past two years. See “Certain Relationships and Related Party Transactions” for details on our recent dividend payments. Any future determination as to our dividend policy will be made at the discretion of the Board of Directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements, including those governing the ABL Facility and the Senior Secured Notes, that limit our ability to pay dividends to stockholders and other factors the Board of Directors deems relevant. Furthermore, because we are a holding company with no operations of our own, any dividend payments would depend on the cash flow of our subsidiaries. The terms of our credit agreement governing the ABL Facility and the indenture governing the Senior Secured Notes generally restrict or limit our subsidiaries’ ability to pay cash dividends to us, so the amount of cash that will be available to us to pay dividends may be limited. See “Risk Factors—Risks Related to an Investment in Our Common Stock and this Offering—We do not intend to pay dividends in the foreseeable future”.

 

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CAPITALIZATION

The following table sets forth cash and capitalization of Global Brass and Copper Holdings, Inc. as of June 30, 2012:

 

   

on a historical basis; and

 

   

on an as-adjusted basis to give effect to this offering.

This table should be read together with “The Offering”, “Use of Proceeds”, “Selected Historical Consolidated Financial Data”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, in each case, included elsewhere in this prospectus.

 

     As of June 30, 2012  
     Historical     As Adjusted  
     (in millions)  

Cash

   $ 12.2      $                
  

 

 

   

 

 

 

Total long-term debt:

    

ABL Facility(1)

   $ 50.7      $     

Senior Secured Notes

     375.0     
  

 

 

   

 

 

 

Total debt

   $ 425.7      $     
  

 

 

   

 

 

 

Stockholders’ deficit:

    

Common stock(2)(3)

         

Additional paid-in capital

         

Accumulated deficit

     (67.6  

Accumulated other comprehensive income, net of tax

     1.8     

Receivable from stockholder

     (4.6  
  

 

 

   

 

 

 

Total Global Brass and Copper Holdings, Inc. stockholders’ deficit

     (70.4  

Noncontrolling interest

     3.4     
  

 

 

   

 

 

 

Total deficit

   $ (67.1   $     
  

 

 

   

 

 

 

Total capitalization

   $ 358.6      $     
  

 

 

   

 

 

 

 

(1) The ABL Facility matures in June 2017 and has a maximum committed principal amount of $200.0 million, for which we may request an increase at our option under certain circumstances by up to $50.0 million. Outstanding borrowings under the ABL Facility bear interest at a rate equal to LIBOR plus a margin of 2.0% to 2.5% or the prime rate plus a margin of 1.0% to 1.5%. As of June 30, 2012, outstanding borrowings under the ABL Facility accrued interest at a rate of 2.91%. Availability under the ABL Facility is based on a formula that is based on inventory and accounts receivable, subject to various adjustments and capped at the committed principal amount. As of June 30, 2012, maximum availability under the ABL Facility was $200.0 million, and remaining availability was $148.6 million, giving effect to $50.7 of outstanding borrowings and to $0.7 million of outstanding letters of credit. For more information, please see “Description of Certain Indebtedness—ABL Facility”.

 

(2)              shares authorized;              shares issued and outstanding, reflective of the planned     -to-1 stock split to be effected prior to this offering.

 

(3) Upon consummation of this offering, there will be options to purchase              shares of our common stock issuable upon the exercise of options outstanding under the 2012 Plan.

 

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DILUTION

All of the shares of common stock to be sold in this offering, including those subject to the underwriters’ option to purchase additional shares, will be sold by the selling stockholder. The common stock to be sold by the selling stockholder is common stock that is currently issued and outstanding. Accordingly, there will not be any dilution to our existing stockholder or new investors.

 

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SELECTED HISTORICAL CONSOLIDATED 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 as of June 30, 2012 and for the six months ended June 30, 2012 and 2011 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements, and in the opinion of our management, reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the results for those periods. The results for any interim period are not necessarily indicative of the results that may be expected for a full year. The selected historical consolidated financial data for the years ended December 31, 2011, 2010 and 2009 and as of December 31, 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated financial data as of December 31, 2009, 2008 and 2007 and for the year ended December 31, 2008 and the period from October 10, 2007 (date of inception) to December 31, 2007 have been derived from our audited consolidated financial statements not included in this prospectus.

We were formed on October 10, 2007 in order to acquire the assets and operations relating to the worldwide metals business of Olin Corporation. On November 19, 2007, we completed the acquisition and commenced operations separate from our predecessor under control of KPS and with a different management team implementing a new business strategy and cost structure. Our historical financial data for periods prior to November 19, 2007 (our predecessor periods) were prepared on the historical cost basis of accounting that existed prior to our acquisition of the worldwide metals business of Olin Corporation. Our historical financial statements for periods ending subsequent to November 19, 2007 (our successor periods) have been prepared on a new basis of accounting, reflecting adjustments made as a result of the application of purchase accounting in connection with the acquisition. As a result, our financial information for the successor periods are not necessarily comparable to that for the predecessor periods.

Our predecessor financial and other information as of November 18, 2007 and for the period from January 1, 2007 to November 18, 2007 have been derived from books and records that were provided to us by Olin Corporation in the acquisition of the worldwide metals business of Olin Corporation and have not been subject to a review or audit by us or our independent registered public accounting firm, since such procedures would be impracticable at this time, given that the management of the worldwide metals business of Olin Corporation during such period is not available to us or our independent registered public accounting firm. Olin Corporation’s independent auditors have not performed any procedures with respect to the inclusion of any such financial and other information in this prospectus. Although we have no reason to believe that the unaudited financial information for the predecessor period of January 1, 2007 to November 18, 2007 is materially deficient, there is a risk that this unaudited financial information may contain errors that might have been detected in a review or audit process or might have been different if prepared in accordance with our policies and procedures instead of those of Olin Corporation. The selected financial and other information of our predecessor for the period from January 1, 2007 to, and as of, November 18, 2007 was prepared by management of the predecessor using an accounting basis that is different from that used to prepare the successor’s consolidated financial statements. The selected financial and other information of our predecessor for the period from January 1, 2007 to November 18, 2007 were not prepared using our accounting policies and procedures, do not reflect the application of purchase accounting for our November 19, 2007 acquisition of the worldwide metals business from Olin Corporation and such information for the period from January 1, 2007 to November 18, 2007 also does not reflect the allocation of Olin Corporation selling, general and administrative expenses to the metals business unit. We are unable to determine whether any other differences exist, since we do not have access to the relevant personnel or records of Olin Corporation. Such predecessor financial information may not be comparable to our consolidated financial statements after such period. See “Risk Factors—Risks Related to Our Business—You should not place undue reliance on the selected financial and other information of our predecessor as of November 18, 2007 and for the period from January 1, 2007 to November 18, 2007, which are summarized in this prospectus”.

 

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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Successor          Predecessor(1)  
(in millions, except share
and per share data)
  Six Months Ended
June 30,
    Year Ended December 31,     Period from
October 10 to
December 31,
         Period from
January 1 to
November 18,
 
    2012     2011     2011(2)     2010     2009     2008     2007(3)          2007(4)  

Statements of Operations Data:

                   

Net sales

  $ 860.4      $ 966.2      $ 1,779.1      $ 1,658.7      $ 1,140.9      $ 2,008.3      $ 189.8          $ 1,960.1   

Cost of sales

    763.9        871.8        1,582.9        1,497.9        1,048.2        1,876.2        183.5            1,870.8   

Lower of cost or market adjustment

                                       170.9                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total cost of sales

    763.9        871.8        1,582.9        1,497.9        1,048.2        2,047.1        183.5            1,870.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Gross profit (loss)

    96.5        94.4        196.2        160.8        92.7        (38.8     6.3            89.3   

Selling, general and administrative expenses

    55.9        35.3        69.4        68.9        62.1        60.9        5.4            45.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Operating income (loss)

    40.6        59.1        126.8        91.9        30.6        (99.7     0.9            44.2   

Third party interest expense(5)

    19.9        20.7        40.0        22.6        11.3        15.9        0.5              

Related party interest expense(5)

                         2.5        6.8        4.1        0.7              

Loss on extinguishment of debt

    19.6                                                        

Other (income) expense, net

    0.7        (0.8     0.4        0.8        0.1        (1.9     (0.1         (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) before provision for (benefit from) income taxes and equity income

    0.4        39.2        86.4        66.0        12.4        (117.8     (0.2         44.4   

Provision for (benefit from) income taxes

    7.3        14.8        31.2        26.1        2.5        (45.5     (0.1         0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) before equity income

    (6.9     24.4        55.2        39.9        9.9        (72.3     (0.1         44.0   

Equity income, net of tax

    0.5        0.3        0.9        1.5               0.6        0.1              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) before extraordinary item

    (6.4     24.7        56.1        41.4        9.9        (71.7                44.0   

Extraordinary item: Gain on valuation of assets in excess of purchase price

                                       2.9        60.0              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net income (loss)

    (6.4     24.7        56.1        41.4        9.9        (68.8     60.0            44.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Less: Net income attributable to noncontrolling interest

    0.2        0.2        0.2        0.5        0.1                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net income (loss) attributable to Global Brass and Copper Holdings, Inc.(5)

  $ (6.6   $ 24.5      $ 55.9      $ 40.9      $ 9.8      $ (68.8   $ 60.0          $ 44.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Per Share Data(6):

                   

Cash dividends declared per common share

  $ 1,600,000      $      $      $ 425,000      $      $           

Income (loss) per common share (in thousands)(6)

  $ (66.25   $ 245.14      $ 558.63      $ 408.84      $ 98.27      $ (688.42        

Pro forma (loss) income per common share (in thousands)(7)

  $ (107.41   $ 195.74      $ 459.83        N/A        N/A        N/A           

Number of common shares used in share calculations

    100        100        100        100        100        100           
 
    Successor   Predecessor  
(in millions)   As of
    June 30,    
    As of
December 31,
  As of
November 18,
 
    2012         2011             2010             2009             2008             2007              2007  

Balance Sheet Data:

                 

Cash

  $ 12.2      $ 49.5      $ 15.5      $ 7.8      $ 8.0      $ 17.3          $ 4.3   

Total assets

    538.5        547.3        529.3        489.9        431.5        691.9            689.0   

Total debt(8)

    425.7        303.6        306.2        295.4        290.8        408.6            0.0   

Total liabilities

    605.6        465.2        502.1        465.5        417.3        610.3            151.3   

Total (deficit) equity

    (67.1     82.2        27.2        24.4        14.2        81.6            537.7   

 

(1)

Certain amounts of the predecessor have been reclassified to conform to the presentation used by the successor. The selected financial and other information of our predecessor for the period from January 1, 2007 to, and as of, November 18, 2007 was prepared by management of the predecessor using an accounting basis that is different from that used to prepare the successor’s consolidated financial statements. The selected financial and other information of our predecessor for the period from January 1, 2007 to November 18, 2007 were not prepared using our accounting policies and procedures, do not reflect the application of purchase accounting for our November 19, 2007 acquisition of the worldwide metals business from Olin Corporation, and such information for the period from January 1, 2007 to November 18, 2007 also does not reflect the allocation of Olin Corporation selling, general and administrative expenses to the metals business unit. We are unable to determine whether any other differences exist, since we do not have access to

 

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the relevant personnel or records of Olin Corporation. Such predecessor financial information may not be comparable to our consolidated financial statements after such period. See “Risk Factors—Risks Related to Our Business—You should not place undue reliance on the selected financial and other information of our predecessor, as of November 18, 2007 and for the period from January 1, 2007 to November 18, 2007, which are summarized in this prospectus”.

(2) During September 2011, we identified an error relating to the accounting surrounding workers’ compensation insurance. The financial information as of and for the year ended December 31, 2011 reflects an immaterial out-of-period adjustment with respect to the accounting surrounding self-insured workers’ compensation. The financial information presented with respect to prior periods does not reflect the adjustment, because any such adjustment would have been immaterial. See Note 2 to our audited consolidated financial statements for the year ended December 31, 2011, which are included in this prospectus.
(3) Although the inception of Global Brass and Copper Holdings was October 10, 2007, it had no material operations or assets until the completion of the acquisition of the worldwide metals business of Olin Corporation on November 19, 2007.
(4) Data for the predecessor period from January 1 to November 18, 2007 do not reflect the allocation of Olin Corporation selling, general and administrative expenses to the metals business unit of Olin Corporation.
(5) On August 18, 2010, we refinanced the Term Loan Facility, which resulted in an increase in our interest expense. The proceeds from the Term Loan Facility were used to repay the existing related party term loan facility and the existing asset-based loan facility and to fund a cash distribution of $42.5 million to Halkos. After giving effect to these transactions, in each case as if they had occurred on January 1, 2010, our interest expense, net income attributable to Global Brass and Copper Holdings, Inc. and income per share for the year ended December 31, 2010 would have been $38.5 million, $32.8 million and $327.70 per share (in thousands), respectively. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Outstanding Indebtedness—The Term Loan Facility”.
(6) Per share data has not been provided for predecessor periods because such amounts are not meaningful due to the difference in equity capitalization between the predecessor and the successor.
(7) We used a portion of the net proceeds of the Senior Secured Notes offering that we completed on June 1, 2012 to make the Parent Distribution. Our pro forma (loss) income per common share reflects (an increase) a reduction in our net (loss) income attributable to the interest expense incurred on the portion of the Senior Secured Notes that were used to fund the Parent Distribution. Assuming an interest rate of 9.50%, which is the actual interest rate of the Senior Secured Notes, and a statutory U.S. federal income tax rate of 35%, had the Parent Distribution been completed on January 1, 2011, our net (loss) income would have (increased) decreased by $(4.1) million, 4.9 million, and $9.9 million, respectively, to $(10.7) million, $19.6 million, and $46.0 million, respectively, for the six-month periods ended June 30, 2012 and 2011 and the year ended December 31, 2011, respectively. The pro forma (loss) income per share does not give effect to the planned     -for-1 stock split to be effected prior to this offering.
(8) Consists of long-term debt, related party debt and current maturities of long-term debt.

 

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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 Historical Consolidated Financial Data”, “Summary Historical Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. 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 prospectus.

Overview

Our Business

We are a leading value-added converter, fabricator, distributor and processor of specialized copper and brass products in North America. We offer a broad range of products, and we sell our products to multiple distinct end markets including the building and housing, munitions, automotive, transportation, coinage, electronics/electrical components, industrial machinery and equipment and general consumer end markets. Unlike other metals companies who may engage in mining, smelting and refining activities, we are purely a metal converter, fabricator, distributor and processor and do not attempt to generate profits from fluctuations in metal prices. We engage in melting and casting, rolling, drawing, extruding and stamping to manufacture finished and semi-finished alloy products from processed scrap, copper cathode and other refined metals. We participate in two distinct segments of the fabrication value chain: sheet, strip, foil, tube and plate and alloy rod.

For the year ended December 31, 2011, we sold 510.0 million pounds of products, compared to 554.1 million pounds and 463.9 million pounds in 2010 and 2009, respectively, and we generated net sales of $1,779.1 million and adjusted sales of $530.3 million. In 2010, we generated net sales of $1,658.7 million and adjusted sales of $538.8 million, and in 2009, we generated net sales of $1,140.9 million and adjusted sales of $427.6 million.

For the six months ended June 30, 2012 we sold 258.4 million pounds of products, compared to 270.9 million pounds for the six months ended June 30, 2011 and we generated net sales of $860.4 million and adjusted sales of $268.5 million. For the six months ended June 30, 2011, we generated net sales of $966.2 million and adjusted sales of $276.4 million.

Our leading market positions in each of our operating segments allow us to achieve attractive operating margins. Our strong operating margins are a function of four key characteristics of our business: (1) we earn a premium margin over the cost of metal because of our value-added processing capabilities, patent-protected technologies, and first-class service; (2) we have strategically shifted our product portfolio toward value-added, higher margin products; (3) we have created a lean cost structure through fixed and variable cost reductions, process improvements, and workforce flexibility initiatives; and (4) we employ our balanced book approach to substantially reduce the financial impact of metal price volatility on our earnings and operating margins. We have undertaken substantial cost reduction activities since our formation in 2007, which have reduced our fixed costs, improved our net working capital balances and improved our competitive positioning while increasing operating margins.

 

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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 and converter of copper and copper-alloy 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 and carbon steel. Olin Brass’s products are used in five primary end markets: building and housing, munitions, automotive, coinage, and electronics/electrical components. For the past three years ended December 31, 2011, between 15% and 20% of Olin Brass’s products have been sold to A.J. Oster.

Chase Brass is a leading North American manufacturer of brass rod. The segment principally produces brass rod in sizes ranging from 1/4 inch to 4.5 inches in diameter. The key attributes of brass rod include its machinability, corrosion resistance and moderate strength, making it ideal for forging and machining products such as valves and fittings. Chase Brass produces brass rod used in production applications which can be grouped into four end markets: building and housing, transportation, electronics/electrical components and industrial machinery and equipment.

Our A.J. Oster segment is a leading copper-alloy distributor and processor. The segment, through its family of metal service centers, is strategically focused on satisfying its customers’ needs for brass and copper strip and other products, with a high level of service, quality and flexibility by offering customization and just-in-time delivery. Our value-added processing services include precision slitting and traverse winding to provide greater customer press up-time, hot air level tinning for superior corrosion resistance and product enhancements such as edging and cutting. Important A.J. Oster end markets include building and housing, automotive and electronics/electrical components (primarily for housing and commercial construction). For the past three years ended December 31, 2011, between 70% and 80% of A.J. Oster’s material requirements have been 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 value-added processing and metal conversion capabilities and first-class service. Our financial performance is driven by metal conversion economics, not by the underlying movements in the price of the metal we use. In all three segments, most of the risk of changes in the metal cost of the products we make is borne by our customers or third parties rather than by us.

We also have a Corporate and Other segment, which includes certain administrative costs and expenses that management has not allocated to our operating segments. These costs include compensation for corporate executives and officers, corporate office and administrative salaries, and professional fees for accounting, tax and legal services. The Corporate and Other segment also includes derivative gains and losses on the collateral hedge contracts required by our 2007 ABL Facility before it was refinanced on August 18, 2010, interest expense, and state and federal income taxes.

Financial Information, Acquisition, Business Transformation and Refinancing

On October 10, 2007, Global Brass and Copper Holdings was formed by affiliates of KPS as an acquisition vehicle to acquire the worldwide metals business of Olin Corporation. Prior to the date of acquisition, Global Brass and Copper Holdings had no material assets or operations. Post–acquisition, Global Brass and Copper Holdings has been a holding company and has had no business operations or material assets other than its ownership of 100% of the outstanding equity interests of Global Brass and Copper.

 

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Acquisition of the Worldwide Metals Business of Olin Corporation

On November 19, 2007, we acquired Olin Corporation’s worldwide metals business. 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.

The fair market value of the net assets acquired exceeded the purchase price in the acquisition, resulting in a bargain purchase event. In accordance with GAAP at the time of the transaction, the excess fair value was allocated as a reduction to the amounts that otherwise would have been assigned to all of the acquired long-term assets. The remaining excess fair value was recorded as a one-time non-taxable extraordinary gain of $60.0 million in the period from November 19, 2007 to December 31, 2007 and $2.9 million in the year ended December 31, 2008.

As a result of the bargain purchase event, all identified intangible assets and other non-current assets, including the acquired property, plant and equipment, were recorded at a zero value on our opening balance sheet as of the acquisition date. Accordingly, our fixed assets reflect only post-acquisition capital investments, and our cost of sales includes depreciation only on capital investments made after the acquisition date. As we execute on our growth strategy and additional capital investment is made, we expect that the depreciation component of our cost of sales will increase.

Business Transformation

After the acquisition in November 2007, we implemented a series of transformative initiatives, which have resulted in a significant improvement in our financial performance despite the economic downturn that began in late 2008. Compared to 2007, our unit volume has declined from 650.8 million pounds to 510.0 million pounds in 2011, a decrease of 140.8 million pounds or 21.6%. Despite this decline in volume and associated loss of revenue, we generated $55.9 million of net income attributable to Global Brass and Copper Holdings, Inc. and $122.6 million of Consolidated Adjusted EBITDA for the year ended December 31, 2011, compared to $104.0 million of net income attributable to Global Brass and Copper Holdings, Inc. (which includes a $60.0 million extraordinary gain related to purchase accounting) and $52.0 million of Consolidated Adjusted EBITDA (which adjusts to exclude that extraordinary gain) for the combined year ended December 31, 2007. The improvements in Consolidated Adjusted EBITDA have been primarily driven by the following:

 

   

a new five-and-one-half year collective bargaining agreement ratified by eight of the unions at Olin Brass’s principal facility in June 2008, which significantly reduced the number of job classifications, and provided Olin Brass with the ability to adjust staffing levels in line with production volume. We do not have any defined benefit pension and retiree health care obligations under the collective bargaining agreement and we do not offer a defined benefit pension or retiree health care benefits to our salaried workforce;

 

   

establishment of three independent business units with clear objectives and accountability for financial performance;

 

   

cash cost reductions from an approximately 20% reduction of salaried employee headcount;

 

   

acquisition of the order book, customer list and other assets of Bolton’s North American operations in January 2008;

 

   

increased margins from price increases and rationalization of our product mix to focus resources on products that provide attractive margins and growth opportunities;

 

   

inventory reductions of 58.2 million pounds, or 39.5%, from 147.2 million at November 19, 2007 to 89.0 million pounds at December 31, 2011, reducing working capital needs; and

 

   

closing certain facilities at A.J. Oster and consolidating operations.

 

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The net result of the transformation is a company with higher margins, lower costs and lower working capital requirements. As of December 31, 2011, we had reduced our breakeven point by 46.6% since the acquisition date. Breakeven is defined as the volume level at which contribution margin (adjusted sales less variable conversion costs) equals the total of fixed manufacturing overhead and selling, general and administrative expenses (excluding the various items that are excluded from Consolidated Adjusted EBITDA). In an economic upturn, these factors in combination with our available production capacity should enable us to capitalize on increased demand for our products and services, which will drive profitable growth.

Refinancing Activities

On August 18, 2010, we completed a refinancing in which we replaced a then-existing $380.0 million asset-based revolving loan facility, which we refer to as the “2007 ABL Facility,” with a new $150.0 million four-year asset-based revolving loan facility, which we refer to as the “2010 ABL Facility,” and the $315.0 million Term Loan Facility. We used a portion of the proceeds from the refinancing to repay an existing $60.0 million collateralized term loan from an affiliate of KPS and fund a $42.5 million dividend to Halkos. In June 2012, in the ABL Amendment, we amended and extended the 2010 ABL Facility to mature on June 1, 2017 and increased the commitments under the facility to $200.0 million, which we refer to as the “ABL Facility.” In June 2012, in connection with the Term Loan Refinancing, Global Brass and Copper, Inc. issued the Senior Secured Notes, used the net proceeds to repay all outstanding amounts under the Term Loan Facility and made a $160.0 million cash distribution to Halkos. See “Prospectus Summary—Recent Transactions.”

The August 2010 refinancing significantly reduced our reliance on asset-based borrowing for long-term financing, and reduced the risk to our ability to borrow in support of long-term financing requirements due to a decline in metal prices. The 2007 ABL Facility served two purposes—first, to finance the acquisition of the worldwide metals business of Olin Corporation in November 2007 and second, to finance subsequent working capital requirements. Under this prior financing structure, a drop in metal prices could have reduced the borrowing base to a level that would have required us to repay and refinance borrowings related to the initial acquisition. Following the August 2010 refinancing, our long-term asset investment has been financed by term debt (first the Term Loan Facility and now the Senior Secured Notes), the size of which is fixed and therefore independent of metal prices, and the ABL Facility is used primarily to finance working capital requirements.

Key Factors Affecting Our Results of Operations

Metal Cost

We are a leading, value-added converter, fabricator, distributor and processor of specialized copper and brass products in North America. Our profitability is primarily driven by the value-added from the manufacturing and fabrication of metal products, and not by fluctuations in the price of metal. 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 metal price trends. Nevertheless, metal price fluctuations will impact the total amount of our net sales, the cost of shrinkage loss and our working capital requirements.

We sell our products on a “toll” and “non-toll” basis. For sales on a toll basis, our customer purchases the metal, and we charge the customer a fee for fabrication and conversion. For sales on a non-toll basis, we assume responsibility for metal procurement and then recover the metal replacement cost from the customer. During the year ended December 31, 2011, 77.2% of our unit sales volume was on a non-toll basis. For sales on a non-toll basis, we use our balanced book approach, discussed below, to substantially reduce the impact of metal price movements on earnings and operating margins.

 

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Shrinkage loss, which is primarily the loss of raw material that occurs between the casting furnace and slab rolling operations, is an inherent part of our metal casting process. While the shrinkage loss rate is very low relative to the total volume of metal casting, the cost of the shrinkage loss and its impact on financial performance increases as metal prices increase.

Metal prices will also impact our investment in working capital because our collection terms with our customers are longer than our payment terms to our suppliers, so when metal prices increase, even if the number of pounds processed does not change, our working capital requirements will also increase. In 2011, the spread between our receivable collection cycle and purchase payment cycle was approximately 19 days. As a result, when metal prices are rising, we tend to draw more on the ABL Facility to cover the cash flow delay between material replacement purchase and cash collection. When metal prices fall, we replace our metal at a lower cost than the metal content of cash collections and generally reduce our use of the ABL Facility. We believe that our cash flow from operations, supplemented with cash available under the ABL Facility, will provide sufficient liquidity to meet our needs in the current metal price environment.

Balanced Book

Most of our net sales are non-toll sales. During the fiscal year ended December 31, 2011, non-toll sales accounted for 77.2% of our volume. To substantially reduce the financial impact of metal price volatility on earnings and operating margins, we use our balanced book approach for non-toll sales to offset forward metal sales with forward metal purchases. Using our balanced book approach, we seek to minimize 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 component of net sales made on a non-toll basis with the timing, quantity and price of the replacement metal purchases. Our balanced book approach has improved the consistency of our margins despite underlying copper price volatility.

For any non-toll sale we 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 prices and the metal replacement prices 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, so all fluctuations in metal costs are passed through to the customer.

 

   

Metal sales and replacement purchases on a “firm price basis”, meaning that metal sale prices 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 purchase is unavailable. In this situation, we execute a forward purchase on “price date of shipment” terms and enter 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.

Price date of shipment transactions accounted for approximately 70% of non-toll unit sales volume in the year ended December 31, 2011. Firm price basis transactions that are supported with either firm price replacement purchases or price date of shipment replacement purchases plus a derivative contract accounted for the remaining approximately 30% of non-toll volume for the year ended December 31, 2011.

 

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Metal Cost Hedging and ABL Facility Collateral Hedge

In the ordinary course of business, we use derivative contracts in support of our balanced book approach. These derivative contracts are not accounted for as hedges but are recorded at fair value in accordance with ASC Topic 820. Unrealized and realized gains and losses are reported in cost of sales.

The agreement governing the 2010 ABL Facility eliminated the collateral hedge requirement that was in the agreement governing the facility being refinanced at the time and required that we lock-in the accumulated mark to market loss recorded in the third quarter of 2010 of $32.8 million as of August 18, 2010 such that there would be no further net mark-to-market gains or losses. This was accomplished by taking an offsetting hedge position, in this case a purchase position of matching quantity and maturity, to offset the sold position required under the original agreement. Metal price fluctuations from August 18, 2010 to the hedge maturity date resulted in offsetting mark-to-market impacts on the original collateral hedge sold position and on the offsetting purchase position.

Other Initiatives

We have also implemented the following initiatives to improve margins, increase profitability and reduce working capital requirements:

 

   

market-driven product mix improvements;

 

   

management-led product portfolio enhancements;

 

   

management-led productivity and production enhancements; and

 

   

establishment of more rigid business rules resulting in improved pricing across our product portfolio.

Company Outlook

Prior to the economic downturn beginning in 2007, demand for SSP and rod products in North America had been relatively stable, with the SSP market averaging consumption of 1.1 billion pounds per annum from 2001 to 2007, and the rod market averaging 835 million pounds per annum from 2001 to 2007. Compared to 2009, total industry demand for brass strip increased in 2010 by 21% from 714 million pounds to 864 million pounds, and total industry demand for brass rod increased by 23% from 446 million pounds to 549 million pounds. Most recently, total North American demand for brass strip decreased by 6% from 864 million pounds in 2010 to 808 million pounds in 2011, and total industry demand for brass rod remained constant at 549 million pounds in 2010 and 2011. While the 2011 total demand statistics reflect some recovery from 2009 levels, they still do not match levels of demand prior to the recession. The recovery from the recent economic downturn has been uneven and at times slower than desired, but when general U.S. economic conditions improve, we expect to see growth in demand for copper and copper-alloy SSP products increase from 2011 and first half of 2012 levels toward pre-recession historic levels. A return to pre-recession historic levels would provide us with significant growth opportunities and increased profitability given our much lower breakeven point.

Demand for our product is driven predominantly by five sectors: building and housing, munitions, automotive, electrical/electronic and coinage. The building and housing sector, as measured by new housing starts, has been very depressed since 2008, with an average of approximately 583,000 units annually during 2009-2011 compared to an average of 1,760,000 per annum from 2001-2007. The sector remained weak during 2011, and depletion of excess housing inventory has been proceeding slowly. Although training requirements for troops and demand by U.S. citizens for sporting and self defense contribute to stability in the munitions sector, this sector has been experiencing reduced demand in recent months. The automotive sector is dependent on the level of consumer spending and replacement needs. Automotive demand is also below historical averages, with average auto sales of

 

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11.50 million units per annum during 2009-2011 compared to an average of 16.69 million per annum from 2001-2007. Electrical/electronic end uses include a wide range of applications, from medical to computers to aviation, and demand is largely correlated to general economic activity. Coinage is directly tied to consumer transactions and has been severely depressed since 2008 as well.

We believe that in addition to the growth that we expect to experience upon a return to more normalized levels of demand, there are a number of growth opportunities that could create a considerable increase in demand, for copper and copper-alloy SSP products, including anti-microbial products and renewable energy applications (such as lithium batteries and solar applications). Olin Brass has completed the Federal and state registration processes necessary to market its CuVerro materials as having anti-microbial properties. Additionally, on September 20, 2011 and January 31, 2012, the COINS Act was introduced in the U.S. House of Representatives and the U.S. Senate, respectively, which is intended to modernize the U.S. currency system by replacing $1 notes with $1 coins. Despite a recently announced substantial reduction in $1 coin production over the next couple of years, we anticipate a significant increase in the size of the coinage market if the U.S. transitions to the $1 coin.

The Federal Reduction of Lead in Drinking Water Act has mandated the use of lead-free and low-lead conduits to supply drinking water, beginning in January 2014. This regulatory shift represents a significant growth opportunity for North American manufacturers of lead-free and low-lead materials made from brass rod. Management anticipates this regulatory change to accelerate the increasing demand for high-quality, lead-free and low-lead products occurring because of existing state regulations.

In our distribution business, we anticipate further rationalization to occur given the amount of excess processing capacity that exists across the United States. Management also anticipates that more SSP sales will be made through distributors as end users work to mitigate the increased costs associated with financing their working capital needs (which are driven, in part, by high metal prices). Finally, management believes North American consumer demand has largely been satisfied by North American SSP and rod producers. Offshore supply of a narrow range of SSP and alloy rod products has historically represented a small proportion of total North American supply. On March 21, 2012, the ITC Commissioners voted to continue antidumping orders for brass sheet and strip from Germany, Italy, France, and Japan.

Non-GAAP Measures

In addition to the results reported in accordance with U.S. GAAP, we have provided information regarding “Consolidated EBITDA”, “Segment EBITDA”, “Consolidated Adjusted EBITDA”, “Segment Adjusted EBITDA”, and “Adjusted sales”.

EBITDA-Based Measures

We define Consolidated EBITDA as net income (loss) attributable to Global Brass and Copper Holdings, Inc., adjusted to exclude interest expense, provision for (benefit from) income taxes and depreciation and amortization expense. Segment EBITDA is defined by us as income (loss) before provision for (benefit from) income taxes, equity income, adjusted to exclude interest expense and depreciation and amortization expense, in each case, to the extent such items are attributable to such segment.

We use Consolidated EBITDA only to calculate Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA is Consolidated EBITDA, further adjusted to exclude extraordinary gains from the bargain purchase that occurred in the acquisition of the worldwide metals business of Olin Corporation,

 

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realized and unrealized gains and losses related to the collateral hedge contracts that were required under our 2007 ABL Facility, unrealized gains and losses on derivative contracts in support of our balanced book approach, unrealized gains and losses associated with derivative contracts related to electricity and natural gas costs, non-cash gains and losses due to lower of cost or market adjustments to inventory, non-cash LIFO-based gains and losses due to the depletion of a LIFO layer of metal inventory, non-cash compensation expense related to payments made to members of our management by our parent, Halkos, loss on extinguishment of debt, non-cash income accretion related to the joint venture with Dowa, KPS management fees, restructuring and other business transformation charges, specified legal and professional expenses and certain other items.

We use Segment EBITDA only to calculate Segment Adjusted EBITDA. Segment Adjusted EBITDA is Segment EBITDA, further adjusted to exclude unrealized gains and losses on derivative contracts in support of our balanced book approach, unrealized gains and losses associated with derivative contracts related to electricity and natural gas costs, non-cash gains and losses due to lower of cost or market adjustments to inventory, non-cash LIFO-based gains and losses due to the depletion of a LIFO layer of metal inventory, non-cash compensation expense related to payments made to certain employees by our parent, Halkos, loss on extinguishment of debt, and non-cash income accretion related to the joint venture with Dowa, in each case, to the extent such items are attributable to the relevant segment.

We present the above-described EBITDA-based measures because we consider them important supplemental measures and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Nevertheless, our EBITDA-based measures may not be comparable to similarly titled measures presented by other companies.

We present Consolidated Adjusted EBITDA as a supplemental measure of our performance because we believe it represents a meaningful presentation of the financial performance of our core operations, without the impact of the various items excluded, in order to provide period-to-period comparisons that are more consistent and more easily understood. Management uses Consolidated Adjusted EBITDA per pound in order to measure the effectiveness of the balanced book approach in reducing the financial impact of metal price volatility on earnings and operating margins, and to measure the effectiveness of our business transformation initiatives in improving earnings and operating margins. In addition, Segment Adjusted EBITDA is the key metric used by our chief operating decision-maker to evaluate the business performance of our company in comparison to budgets, forecasts and prior-year financial results, providing a measure that management believes reflects our core operating performance. Measures similar to Consolidated Adjusted EBITDA, namely “EBITDA” (as defined in the agreement governing the ABL Facility) and “Adjusted EBITDA” (as defined in the indenture governing the Senior Secured Notes), are used in the agreements governing the ABL Facility and the Term Loan Facility to determine compliance with various financial covenants and tests.

Our EBITDA-based measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 

   

they do not reflect every expenditure, future requirements for capital expenditures or contractual commitments;

 

   

they do not reflect the significant interest expense or the amounts necessary to service interest or principal payments on our debt;

 

   

they do not reflect income tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate;

 

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although depreciation and amortization are eliminated in the calculation of EBITDA-based measures, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and our EBITDA-based measures do not reflect any costs of such replacements or improvements;

 

   

they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

 

   

segment-based measures do not reflect the elimination of intercompany transactions, including those between Olin Brass and A.J. Oster;

 

   

they do not reflect limitations on our costs related to transferring earnings from our subsidiaries to us; and

 

   

other companies in our industry may calculate these measures differently from the way we do, limiting their usefulness as comparative measures.

We compensate for these limitations by using our EBITDA-based measures along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income (loss), net income (loss), cash flows from operations and other cash flow data. We have significant uses of cash, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in our EBITDA-based measures.

Our EBITDA-based measures are not intended as alternatives to net income (loss) as indicators of our operating performance, as alternatives to any other measure of performance in conformity with GAAP or as alternatives to cash flow provided by operating activities as measures of liquidity. You should therefore not place undue reliance on our EBITDA-based measures or ratios calculated using those measures. Our GAAP-based measures can be found in our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

Adjusted Sales

Adjusted sales is defined as net sales less the metal component of net sales. Net sales is the most directly comparable GAAP measure to adjusted sales. Adjusted sales represents the value-added premium we earn over our conversion and fabrication costs. Management uses 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, reflecting our toll sales and our balanced book approach for non-toll sales. We believe that adjusted sales supplements our 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. Adjusted sales may not be comparable to similarly titled measures presented by other companies and is not a measure of operating performance or liquidity defined by GAAP.

 

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Results of Operations

Consolidated Results of Operations for the Six Months Ended June 30, 2012, Compared to the Six Months Ended June 30, 2011.

 

    Six Months
Ended
June 30,
2012
    % of
Net
Sales
    Six Months
Ended
June 30,
2011
    % of
Net
Sales
    Change:
2012 vs. 2011
 
(in millions)           Amount     Percent  

Net sales

  $ 860.4        100.0   $ 966.2        100.0   $ (105.8     (11.0 %) 

Cost of sales

    763.9        88.8     871.8        90.2     (107.9     (12.4 %) 
 

 

 

     

 

 

     

 

 

   

Gross profit

    96.5        11.2     94.4        9.8     2.1        2.2

Selling, general and administrative expenses

    55.9        6.5     35.3        3.7     20.6        58.4
 

 

 

     

 

 

     

 

 

   

Operating income

    40.6        4.7     59.1        6.1     (18.5     (31.3 %) 

Interest expense

    19.9        2.3     20.7        2.1     (0.8     (3.9 %) 

Loss on extinguishment of debt

    19.6        2.3     —          0.0     19.6        n/a   

Other expense (income), net

    0.7        0.1     (0.8     (0.1 %)      1.5        (187.5 %) 
 

 

 

     

 

 

     

 

 

   

Income before provision for income taxes and equity income

    0.4        0.0     39.2        4.1     (38.8     (99.0 %) 

Provision for income taxes

    7.3        0.8     14.8        1.5     (7.5     (50.7 %) 
 

 

 

     

 

 

     

 

 

   

(Loss) income before equity income

    (6.9     (0.8 %)      24.4        2.5     (31.3     (128.3 %) 

Equity income, net of tax

    0.5        0.1     0.3        0.0     0.2        66.7
 

 

 

     

 

 

     

 

 

   

Net (loss) income

    (6.4     (0.7 %)      24.7        2.6     (31.1     (125.9 %) 

Less: Net income attributable to noncontrolling interest

    0.2        0.0     0.2        0.0     —          0.0
 

 

 

     

 

 

     

 

 

   

Net (loss) income attributable to Global Brass and Copper Holdings, Inc.

  $ (6.6     (0.8 %)    $ 24.5        2.5   $ (31.1     (126.9 %) 
 

 

 

     

 

 

     

 

 

   

Consolidated Adjusted EBITDA

  $ 63.4        7.4   $ 63.8        6.6   $ (0.4     (0.6 %) 

Net Sales

Net sales decreased by $105.8 million, or 11.0%, from $966.2 million for the six months ended June 30, 2011 to $860.4 million for the six months ended June 30, 2012. Decreases in metal prices and volume decreased net sales by $66.1 million and $44.5 million, respectively, which were partially offset by an increase in sales prices, which increased net sales by $4.8 million. The sales prices represent the pricing component of adjusted sales, which we define as the excess of net sales over the metal component of net sales.

Volume decreased by 12.5 million pounds, or 4.6%, from 270.9 million pounds for the six months ended June 30, 2011 to 258.4 million pounds for the six months ended June 30, 2012. The decrease in volume was the result of lower demand due to macroeconomic factors and the suspension of the $1 coin production by the United States Mint.

The metal cost recovery component of net sales decreased by $97.9 million, or 14.2%, from $689.8 million for the six months ended June 30, 2011 to $591.9 million for the six months ended June 30, 2012. Per unit metal cost decreased 10.2% and contributed $66.1 million to the decrease in net sales, primarily as a result of a 14.1% decrease in average daily reported copper prices during the six months ended June 30, 2012 as compared to the same period in 2011. Furthermore, lower volume decreased the metal cost recovery component of net sales by $31.8 million.

 

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Adjusted Sales

Adjusted sales, the excess of net sales over the metal component of net sales, decreased by $7.9 million, or 2.9%, from $276.4 million for the six months ended June 30, 2011 to $268.5 million for the six months ended June 30, 2012 primarily due to lower volume. Lower volume contributed $12.7 million to the decrease, which was partially offset by $4.8 million related to improved pricing. Adjusted sales per pound increased in the six months ended June 30, 2012 by 2.0% compared to the same period in 2011, which reflected the negative impact from the suspension of the $1 coin production by the United States Mint.

Adjusted sales is a non-GAAP financial measure. See “—Non-GAAP Measures—Adjusted Sales”. The following table presents a reconciliation of net sales to adjusted sales and net sales per pound to adjusted sales per pound:

 

     Six Months Ended
June 30,
     Change:
2012 vs. 2011
 
(in millions, except per pound values)    2012      2011      Amount     Percent  

Pounds shipped

     258.4         270.9         (12.5     (4.6 %) 

Net sales

   $ 860.4       $ 966.2       $ (105.8     (11.0 %) 

Metal component of net sales

     591.9         689.8         (97.9     (14.2 %) 
  

 

 

    

 

 

    

 

 

   

Adjusted sales

   $ 268.5       $ 276.4       $ (7.9     (2.9 %) 
  

 

 

    

 

 

    

 

 

   

$ per pound shipped

          

Net sales per pound

   $ 3.33       $ 3.57       $ (0.24     (6.7 %) 

Metal component of net sales per pound

     2.29         2.55         (0.26     (10.2 %) 
  

 

 

    

 

 

    

 

 

   

Adjusted sales per pound

   $ 1.04       $ 1.02       $ 0.02        2.0
  

 

 

    

 

 

    

 

 

   

Average reported copper price per pound

   $ 3.67       $ 4.27       $ (0.60     (14.1 %) 

Gross Profit

Gross profit increased by $2.1 million, or 2.2%, from $94.4 million for the six months ended June 30, 2011 to $96.5 million for the six months ended June 30, 2012. Gross profit per pound increased from $0.35 for the six months ended June 30, 2011 to $0.37 for the six months ended June 30, 2012.

Gross profit for the six months ended June 30, 2012 included a gain of $1.2 million related to net unrealized gains on derivative contracts. Gross profit for the six months ended June 30, 2011 included a loss of $0.4 million related to net unrealized losses on derivative contracts. We exclude all such gains and losses in calculating Segment Adjusted EBITDA and Consolidated Adjusted EBITDA. See “—Non-GAAP Measures—EBITDA-Based Measures”.

 

Depreciation expense included in gross profit increased from $2.1 million for the six months ended June 30, 2011 to $3.1 million for the six months ended June 30, 2012. The increase is attributable to an increase in our depreciable asset base from $54.4 million at June 30, 2011 to $74.2 million at June 30, 2012, which resulted from expenditures of $19.8 million made for capital improvements and replacement of equipment acquired from Olin Corporation, which was initially recorded at zero value.

Several other factors contributed to the remaining $1.5 million increase in gross profit. Higher sales prices and lower manufacturing conversion costs contributed $4.8 million and $2.1 million, respectively to the increase in gross profit for the six months ended June 30, 2012 compared to the same period in 2011. These factors were partially offset by the impact of lower volume of $5.4 million for the six months ended June 30, 2012 compared to the same period in 2011.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $20.6 million, or 58.4%, from $35.3 million for the six months ended June 30, 2011 to $55.9 million for the six months ended June 30, 2012. The increase in selling, general and administrative expenses was due primarily to an increase of $19.2 million in non-cash compensation charges for vested profit interest shares due primarily to the Parent Distribution, an increase in the provision for bad debts of $0.2 million, an increase in incentive compensation of $0.5 million, and an increase in other expenses of $1.6 million. These increases were partially offset by a decrease of $0.9 million in professional fees for accounting, tax, legal and consulting services.

Operating Income

Operating income decreased by $18.5 million, or 31.3%, from $59.1 million for the six months ended June 30, 2011 to $40.6 million for the six months ended June 30, 2012 due to the changes in gross profit and selling, general and administrative expenses described above.

Interest Expense

Interest expense decreased by $0.8 million from $20.7 million for the six months ended June 30, 2011 to $19.9 million for the six months ended June 30, 2012. The decrease was primarily due to lower non-cash interest expense associated with the interest rate cap agreements, lower average borrowings on our debt facilities of $319.6 million in 2012 as compared to $325.8 million in 2011 and lower interest rates (a weighted average of 9.89% in the six months ended June 30, 2012 compared to 10.00% in the six months ended June 30, 2011). Partially offsetting the decrease was an increase in amortization of debt discount and debt issuance costs primarily related to the acceleration of amortization attributed to the excess cash flow sweep and voluntary prepayment under the Term Loan Facility made in April 2012.

The following table summarizes the components of interest expense:

 

     Six Months Ended
June 30,
 
(in millions)        2012              2011      

Interest on principal

   $ 16.0       $ 16.4   

Interest rate cap agreements

     0.1         1.4   

Amortization of debt discount and issuance costs

     3.3         2.3   

Other borrowing costs (1)

     0.5         0.6   
  

 

 

    

 

 

 

Interest expense

   $ 19.9       $ 20.7   
  

 

 

    

 

 

 

 

(1) Includes interest on capital lease obligations and fees related to letters of credit and unused line of credit fees

In compliance with the Term Loan Facility, which was paid off and retired in June 2012, we entered into interest rate cap agreements to fix a portion of our variable rate debt. During the six months ended June 30, 2012, the fair value of the interest rate caps declined by $0.1 million, and the decline in fair value was recorded as non-cash interest expense.

Loss on Extinguishment of Debt

In connection with the Term Loan Refinancing, we recognized $19.6 million as loss from extinguishment of debt for the six months ended June 30, 2012. The loss on extinguishment of debt includes the write-off of $7.1 million of unamortized debt issuance costs and $4.9 million of unamortized debt discount as well as $6.4 million of call premium and $0.1 million of professional service fees related to the early termination. Additionally, $1.1 million of costs associated with the issuance of the Senior Secured Notes was expensed as incurred in accordance with ASC 470-50, Modifications and Extinguishments.

 

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Other Expense (Income), Net

We recorded other expense, net of $0.7 million for the six months ended June 30, 2012 compared to other income, net of $0.8 million for the six months ended June 30, 2011. During the six months ended June 30, 2012, the Company recorded in other expense a call premium of $0.5 million as a result of a voluntary prepayment of $15.0 million under the Term Loan Facility in April 2012. During the six months ended June 30, 2011 we recorded income of $2.0 million related to a favorable legal settlement of a product liability lawsuit in which we were named as a third-party defendant. Partially offsetting this was $0.9 million of expense incurred related to a waiver obtained from our lenders under the Term Loan Facility and the 2010 ABL Facility in May 2011. The fee paid related to a waiver for a technical restatement of the financial statements of Global Brass and Copper, Inc. previously delivered and an additional waiver because the consolidated financial statements of Global Brass and Copper, Inc. for the year ended December 31, 2010 could not be delivered within the prescribed time period as a result of the restatement.

Provision for Income Taxes

We recorded a provision for income taxes of $14.8 million for the six months ended June 30, 2011 and $7.3 million for the six months ended June 30, 2012. During the six months ended June 30, 2012, we had pre-tax income of $0.4 million compared to $39.2 million in the same period in 2011. The decline in pre-tax income was primarily the result of the loss on extinguishment of debt of $19.6 million and higher non-cash profit interest compensation of $19.3 million. The effective income tax rate increased from 37.7% for the six months ended June 30, 2011 to 2,498.6% for the six months ended June 30, 2012, primarily as a result of the non-deductible non-cash compensation expense. The following table summarizes the effective income tax rate components for the six months ended June 30, 2012 and 2011, respectively.

 

     For the
Six Months Ended
June 30,
 
         2012             2011      

Statutory provision rate

     35.0     35.0

Permanent differences and other items

    

State tax provision

     3.7     4.2

Section 199 manufacturing credit

     (1.6 %)      (2.7 %) 

Return to provision adjustments/Uncertain tax positions

     (216.8 %)      1.4

Non-deductible non-cash compensation expense (discussed above)

     2,634.9     0.3

Re-rate of deferred taxes

     —          (1.2 %) 

Other discrete items

     42.5     0.4

Other

     0.9     0.3
  

 

 

   

 

 

 

Effective income tax rate

     2,498.6     37.7
  

 

 

   

 

 

 

Equity Income

Equity income, net of tax, increased by $0.2 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Net (Loss) Income Attributable to Global Brass and Copper Holdings, Inc.

Net income attributable to Global Brass and Copper Holdings, Inc. decreased by $31.1 million, or 126.9%, from net income of $24.5 million for the six months ended June 30, 2011 to a net loss of $6.6

 

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million for the six months ended June 30, 2012 due to the loss on extinguishment of debt, non-cash compensation charges for vested profit interest shares and other changes in operating income, partially offset by the decrease in provision for income taxes, as described above.

Consolidated Adjusted EBITDA

Consolidated Adjusted EBITDA decreased by $0.4 million, or 0.6%, from $63.8 million for the six months ended June 30, 2011 to $63.4 million for the six months ended June 30, 2012. The decrease was due to lower volume which negatively impacted Consolidated Adjusted EBITDA by $5.5 million, an increase in incentive compensation of $0.5 million and an increase in other selling, general and administrative expenses of $1.4 million. Substantially offsetting the decrease was the impact of higher sales prices of $4.8 million, lower conversion costs of $2.1 million and other adjustments included in the calculation of Consolidated Adjusted EBITDA of $0.1 million.

Consolidated Adjusted EBITDA is a non-GAAP financial measure. See “—Non-GAAP Measures—EBITDA-Based Measures”.

Below is a reconciliation of net (loss) income attributable to Global Brass and Copper Holdings, Inc. to Consolidated EBITDA and Consolidated Adjusted EBITDA for the six months ended June 30, 2012 and 2011:

 

     Six Months Ended
June 30,
 
(in millions)        2012             2011      

Net (loss) income attributable to Global Brass and Copper Holdings, Inc.

   $ (6.6   $ 24.5   

Interest expense

     19.9        20.7   

Provision for income taxes

     7.3        14.8   

Depreciation expense

     3.1        2.1   

Amortization expense

     0.1        0.1   
  

 

 

   

 

 

 

Consolidated EBITDA

   $ 23.8      $ 62.2   

(Gain) loss on derivative contracts (a)

     (1.2     0.4   

Non-cash accretion of income of Dowa joint venture (b)

     (0.4     (0.4

Loss on extinguishment of debt (c)

     19.6        —     

Non-cash Halkos profits interest compensation expense (d)

     19.5        0.3   

Management fees (e)

     0.5        0.5   

Specified legal/professional expenses (f)

     1.1        0.8   

Other adjustments (g)

     0.5        —     
  

 

 

   

 

 

 

Consolidated Adjusted EBITDA

   $ 63.4      $ 63.8   
  

 

 

   

 

 

 

 

(a) Represents unrealized gains and losses on derivative contracts in support of our balanced book approach and unrealized gains and losses associated with derivative contracts with respect to electricity and natural gas costs.

 

(b) 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 joint venture with Dowa. This adjustment represents the accretion of equity in our joint venture with Dowa at the date of the acquisition over a 13-year period (which represents the estimated useful life of the technology and patents of the joint venture). See note 5 to our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus.

 

(c) Represents the loss on the extinguishment of debt recognized in connection with the Term Loan Refinancing.

 

(d) The 2012 amount represents dividend payments made by Halkos to members of our management that resulted in a non-cash compensation charge in connection with the Parent Distribution in June 2012.

The 2011 amount represents a portion of the dividend payments made by Halkos to members of our management that resulted in a non-cash compensation charge in connection with the refinancing transaction that occurred in August 2010. See note 14 to our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus.

 

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(e) Represents annual management fees payable to affiliates of KPS. See note 12 to our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus.

 

(f) Specified legal/professional expenses for the six months ended June 30, 2012 included $1.1 million of professional fees for accounting, tax, legal and consulting services related to this offering.

Specified legal/professional expenses for the six months ended June 30, 2011 included $2.0 million of professional fees for accounting, tax, legal and consulting services related to this offering and $0.9 million of expense incurred relating to a waiver obtained from our lenders under the Term Loan Facility and the 2010 ABL Facility. Partly offsetting this was income of $2.0 million from a favorable legal settlement related to a product liability lawsuit in which we were named as a third-party defendant. The waiver fee paid related to a waiver from the lenders under the Term Loan Facility and the 2010 ABL Facility for a technical restatement of the financial statements of Global Brass and Copper, Inc. previously delivered and an additional waiver because the consolidated financial statements of Global Brass and Copper, Inc. for the year ended December 31, 2010 could not be delivered within the prescribed time period as a result of the restatement.

 

(g) Represents a call premium of $0.5 million as a result of a voluntary prepayment of $15.0 million on the Term Loan Facility in April 2012.

Segment Results of Operations

Segment Results of Operations for the Six Months Ended June 30, 2012, Compared to the Six Months Ended June 30, 2011.

 

     Six Months Ended
June 30,
    Change
2012 vs. 2011
 
(in millions)    2012     2011     Amount     Percent  

Pounds shipped

        

Olin Brass

     134.7        143.3        (8.6     (6.0 %) 

Chase Brass

     116.7        117.9        (1.2     (1.0 %) 

A.J. Oster

     35.8        37.3        (1.5     (4.0 %) 

Corporate & other (1)

     (28.8     (27.6     (1.2     4.3
  

 

 

   

 

 

   

 

 

   

Total

     258.4        270.9        (12.5     (4.6 %) 
  

 

 

   

 

 

   

 

 

   

Net Sales

        

Olin Brass

   $ 357.2      $ 423.4      $ (66.2     (15.6 %) 

Chase Brass

     354.9        378.2        (23.3     (6.2 %) 

A.J. Oster

     173.7        193.2        (19.5     (10.1 %) 

Corporate & other (1)

     (25.4     (28.6     3.2        (11.2 %) 
  

 

 

   

 

 

   

 

 

   

Total

   $ 860.4      $ 966.2      $ (105.8     (11.0 %) 
  

 

 

   

 

 

   

 

 

   

Segment Adjusted EBITDA

        

Olin Brass

   $ 23.1      $ 25.4      $ (2.3     (9.1 %) 

Chase Brass

     37.2        35.7        1.5        4.2

A.J. Oster

     10.4        9.1        1.3        14.3
  

 

 

   

 

 

   

 

 

   

Total for operating segments

   $ 70.7      $ 70.2      $ 0.5        0.7
  

 

 

   

 

 

   

 

 

   

 

(1) Amounts represent intercompany eliminations

 

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Below is a reconciliation of income before provision for income taxes and equity income to Segment EBITDA and Segment Adjusted EBITDA:

 

     Six Months Ended
June 30, 2012
     Six Months Ended
June 30, 2011
 
(in millions)    Olin
Brass
    Chase
Brass
     AJ
Oster
     Olin
Brass
    Chase
Brass
     AJ
Oster
 

Income before provision for income taxes and equity income:

   $ 21.5      $ 35.9       $ 10.3       $ 24.3      $ 35.0       $ 9.0   

Interest expense

     —          —           —           —          —           —     

Depreciation expense

     1.7        1.2         0.1         1.3        0.6         0.1   

Amortization expense

     —          0.1         —           —          0.1         —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Segment EBITDA

   $ 23.2      $ 37.2       $ 10.4       $ 25.6      $ 35.7       $ 9.1   

Equity income, net of tax

     0.5        —           —           0.3        —           —     

Net income attributable to non-controlling interest

     (0.2     —           —           (0.2     —           —     

Non-cash accretion of income of Dowa joint venture(1)

     (0.4     —           —           (0.3     —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Segment Adjusted EBITDA

   $ 23.1      $ 37.2       $ 10.4       $ 25.4      $ 35.7       $ 9.1   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 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 joint venture with Dowa. This adjustment represents the accretion of equity in our joint venture with Dowa over a 13-year period (which represents the estimated useful life of the technology and patents of the joint venture). See Note 5 to our unaudited consolidated financial statements, which are included elsewhere in this prospectus.

Olin Brass

Olin Brass net sales decreased by $66.2 million, or 15.6%, from $423.4 million for the six months ended June 30, 2011 to $357.2 million for the six months ended June 30, 2011. The decrease was due to lower metal costs, lower volume and lower sales prices.

Volume decreased by 8.6 million pounds, or 6.0%, from 143.3 million pounds for the six months ended June 30, 2011 to 134.7 million pounds for the six months ended June 30, 2012. The decrease in volume, which contributed $25.5 million to the decrease in net sales, was the result of lower demand due to macroeconomic factors and the suspension of the $1 coin production by the United States Mint.

Lower metal prices combined with slightly lower sales prices resulting from an unfavorable mix due to the suspension of the $1 coin production by the United States Mint, for the six months ended June 30, 2012 accounted for $40.3 million and $0.4 million, respectively, to the decrease in net sales as compared to the same period in 2011.

Segment Adjusted EBITDA of Olin Brass decreased by $2.3 million, from $25.4 million for the six months ended June 30, 2011 to $23.1 million for the six months ended June 30, 2012. The decrease was due primarily to lower volume in 2012 compared to 2011, partially offset by lower conversion costs.

Segment Adjusted EBITDA is a non-GAAP financial measure. See “—Non-GAAP Measures—EBITDA-Based Measures”.

Chase Brass

Chase Brass net sales decreased by $23.3 million, or 6.2%, from $378.2 million for the six months ended June 30, 2011 to $354.9 million for the six months ended June 30, 2012. The decrease was due primarily to lower metal costs, lower volume, and partially offset by higher sales prices.

 

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Volume decreased 1.2 million pounds, or 1.0%, from 117.9 million pounds for the six months ended June 30, 2011 to 116.7 million pounds for the six months ended June 30, 2012. The decrease in volume, which contributed $3.7 million to the decrease in net sales, was due to macroeconomic factors.

Lower metal prices for the six months ended June 30, 2012 contributed $20.7 million to the decrease in net sales as compared to the same period in 2011, which was partially offset by the increase in sales prices of $1.1 million for the six months ended June 30, 2012 compared to the same time period in 2011.

Segment Adjusted EBITDA of Chase Brass increased by $1.5 million, from $35.7 million for the six months ended June 30, 2011 to $37.2 million for the six months ended June 30, 2012. The increase was due primarily to higher sales prices and lower shrinkage costs as a result of lower metal prices, partially offset by lower volume and higher manufacturing conversion costs in the six months ended June 30, 2012 compared to the same period in 2011.

Segment Adjusted EBITDA is a non-GAAP financial measure. See “—Non-GAAP Measures—EBITDA-Based Measures”.

A.J. Oster

A.J. Oster net sales decreased by $19.5 million, or 10.1%, from $193.2 million for the six months ended June 30, 2011 to $173.7 million for the six months ended June 30, 2012. The decrease was due primarily to lower volume and lower metal costs, partially offset by higher sales prices in the six months ended June 30, 2012 compared to the same period in 2011.

Volume decreased by 1.5 million pounds, or 4.0%, from 37.3 million pounds for the six months ended June 30, 2011 to 35.8 million pounds for the six months ended June 30, 2012. The decrease in volume, which decreased net sales by $7.5 million, was the result of lower demand due to macroeconomic factors.

Lower metal prices contributed $13.8 million to the decrease in net sales for the six months ended June 30, 2012 as compared to the same period in 2011. Partially offsetting the decrease was $1.8 million related to higher sales prices.

Segment Adjusted EBITDA of A.J. Oster increased by $1.3 million, from $9.1 million for the six months ended June 30, 2011 to $10.4 million for the six months ended June 30, 2012. The increase was due to higher sales prices, partially offset by the impact of lower volume.

Segment Adjusted EBITDA is a non-GAAP financial measure. See “—Non-GAAP Measures—EBITDA-Based Measures”.

 

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Consolidated Results of Operations for the Year Ended December 31, 2011, Compared to the Year Ended December 31, 2010.

The statement of operations data presented below for the years ended December 31, 2011 and 2010 are derived from our audited consolidated financial statements.

 

     For the Year Ended
December 31,
    Change:
2011 vs. 2010
 
(in millions)    2011      % of Net Sales     2010      % of Net Sales     Amount      Percent  

Net sales

   $ 1,779.1         100.0   $ 1,658.7         100.0   $ 120.4         7.3

Cost of sales

     1,582.9         89.0     1,497.9         90.3     85.0         5.7
  

 

 

      

 

 

      

 

 

    

Gross profit

     196.2         11.0     160.8         9.7     35.4         22.0

Selling, general and administrative expenses

     69.4         3.9     68.9         4.2     0.5         0.7
  

 

 

      

 

 

      

 

 

    

Operating income

     126.8         7.1     91.9         5.5     34.9         38.0

Third party interest expense

     40.0         2.2     22.6         1.4     17.4         77.0

Related party interest expense

     —           0.0     2.5         0.2     (2.5      -100.0

Other expense, net

     0.4         0.0     0.8         0.0     (0.4      -50.0
  

 

 

      

 

 

      

 

 

    

Income before provision for income taxes and equity income

     86.4         4.9     66.0         4.0     20.4         30.9

Provision for income taxes

     31.2         1.8     26.1         1.6     5.1         19.5
  

 

 

      

 

 

      

 

 

    

Income before equity income

     55.2         3.1     39.9         2.4     15.3         38.3

Equity income, net of tax

     0.9         0.1     1.5         0.1     (0.6      -40.0
  

 

 

      

 

 

      

 

 

    

Net income

     56.1         3.2     41.4         2.5     14.7         35.5

Less: Net income attributable to noncontrolling interest

     0.2         0.0     0.5         0.0     (0.3      -60.0
  

 

 

      

 

 

      

 

 

    

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

   $ 55.9         3.1   $ 40.9         2.5   $ 15.0         36.7
  

 

 

      

 

 

      

 

 

    

Consolidated Adjusted EBITDA

   $ 122.6         6.9   $ 98.6         5.9   $ 24.0         24.3

Net Sales

Net sales increased by $120.4 million, or 7.3%, from $1,658.7 million for the year ended December 31, 2010 to $1,779.1 million for the year ended December 31, 2011. Increases in metal prices and sales prices increased net sales by $218.0 million and $34.4 million, respectively, which were partially offset by a decrease in volume which decreased net sales by $132.0 million. The sales prices represent the pricing component of adjusted sales, which we define as the excess of net sales over the metal component of net sales.

Volume decreased by 44.1 million pounds, or 8.0%, from 554.1 million pounds for the year ended December 31, 2010 to 510.0 million pounds for the year ended December 31, 2011. The decrease in

 

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volume was the result of lower demand due to macroeconomic factors and our continued efforts to rationalize our product mix in order to provide optimal margins and growth opportunities.

The metal cost recovery component of net sales increased by $128.9 million, or 11.5%, from $1,119.9 million for the year ended December 31, 2010 to $1,248.8 million for the year ended December 31, 2011. Per unit metal cost increased 21.3% and contributed $218.0 million to the increase in net sales, primarily as a result of a 16.6% increase in average daily reported copper prices during the year ended December 31, 2011 as compared to the same period in 2010. Lower volume partially offset the increase in the metal cost recovery component of net sales by $89.1 million.

Adjusted Sales

Adjusted sales, the excess of net sales over the metal component of net sales, decreased by $8.5 million, or 1.6%, from $538.8 million for the year ended December 31, 2010 to $530.3 million for the year ended December 31, 2011. Lower volume contributed $42.9 million to the decrease, which was partially offset by $34.4 million related to improved pricing and the rationalization of product mix. Adjusted sales per pound increased in 2011 by 7.2% compared to 2010.

Adjusted sales is a non-GAAP financial measure. See “—Non-GAAP Measures—Adjusted Sales”. The following table presents a reconciliation of net sales to adjusted sales and net sales per pound to adjusted sales per pound:

 

     For the Year Ended
December 31,
     Change:
2011 vs. 2010
 
(in millions, except per pound values)    2011      2010      Amount     Percent  

Pounds shipped

     510.0         554.1         (44.1     (8.0 %) 

Net sales

   $ 1,779.1       $ 1,658.7       $ 120.4        7.3

Metal component of net sales

     1,248.8         1,119.9         128.9        11.5
  

 

 

    

 

 

    

 

 

   

Adjusted sales

   $ 530.3       $ 538.8       $ (8.5     (1.6 %) 
  

 

 

    

 

 

    

 

 

   

$ per pound shipped

          

Net sales per pound

   $ 3.49       $ 2.99       $ 0.50        16.7

Metal component of net sales per pound

     2.45         2.02         0.43        21.3
  

 

 

    

 

 

    

 

 

   

Adjusted sales per pound

   $ 1.04       $ 0.97       $ 0.07        7.2
  

 

 

    

 

 

    

 

 

   

Average reported copper price per pound

   $ 4.00       $ 3.43       $ 0.57        16.6

Gross Profit

Gross profit increased by $35.4 million, or 22.0%, from $160.8 million for the year ended December 31, 2010 to $196.2 million for the year ended December 31, 2011. Gross profit per pound increased from $0.29 for the year ended December 31, 2010 to $0.38 for the year ended December 31, 2011.

Gross profit for the year ended December 31, 2011 included a loss of $0.6 million related to net unrealized losses on derivative contracts. Gross profit for the year ended December 31, 2010 includes a loss of $12.8 million related to collateral hedge contracts required under our 2007 ABL Facility and net unrealized losses on other derivative contracts. We exclude all such losses in calculating Segment Adjusted EBITDA and Consolidated Adjusted EBITDA. See “—Non-GAAP Measures—EBITDA-Based Measures”.

Gross profit for the years ended December 31, 2011 and 2010 also reflect the reduction of inventory quantities and a decrement in the base LIFO layer, which is carried at a copper price of $1.52

 

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per pound and is significantly below weighted-average replacement costs of $4.00 and $3.43 per pound for the years ended December 31, 2011 and 2010, respectively. Gross profit for the year ended December 31, 2011 included a LIFO gain of $15.2 million, compared to a LIFO gain of $21.0 million in the year ended December 31, 2010. We exclude the above items in calculating Adjusted EBITDA and Consolidated Adjusted EBITDA. See “—Non-GAAP Measures—EBITDA-Based Measures”.

Depreciation expense included in gross profit increased from $2.8 million for the year ended December 31, 2010 to $4.6 million for the year ended December 31, 2011. The increase is attributable to an increase in our depreciable asset base from $44.5 million at December 31, 2010 to $67.1 million at December 31, 2011, which resulted from expenditures of $22.4 million in 2011 made for capital improvements and replacement of equipment acquired from Olin Corporation, which was initially recorded at zero value.

Several other offsetting factors contributed to the remaining $30.8 million increase in gross profit in 2011. Higher sales prices, lower manufacturing conversion costs, lower shrinkage costs, and lower restructuring and other business transformation charges in the year ended December 31, 2011 contributed $34.4 million, $6.6 million, $2.4 million, and $3.6 million, respectively, to the increase in gross profit. The $3.6 million in restructuring and other business transformation charges recorded in 2010 related to a provision for excess and obsolete inventory resulting from rationalization of our product mix, severance costs related to a reduction in force and fees paid to labor and productivity consultants. These factors were partially offset by the impact of lower volume in the year ended December 31, 2011 of $16.2 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $0.5 million, or 0.7%, from $68.9 million for the year ended December 31, 2010 to $69.4 million for the year ended December 31, 2011. The increase in selling, general and administrative expenses was due primarily to an increase of $3.8 million in professional fees for accounting, tax, legal and consulting services, $2.6 million due to an organizational realignment of certain departments that were previously recorded in cost of sales, $1.2 million of expenses incurred with the establishment of an office located in Louisville, Kentucky, and increases in other expenses of $1.0 million. Partially offsetting the increase was a decrease in non-cash compensation charges for vested profit interest shares of $2.6 million and a decrease in the provision for bad debts of $5.5 million resulting from lower estimated losses as well as our entry into a credit insurance policy which limits our potential losses.

Operating Income

Operating income increased by $34.9 million, or 38.0%, from $91.9 million for the year ended December 31, 2010 to $126.8 million for the year ended December 31, 2011 due to the changes in gross profit and selling, general and administrative expenses described above.

Interest Expense

Interest expense increased by $14.9 million from $25.1 million for the year ended December 31, 2010 to $40.0 million for the year ended December 31, 2011. The increase was due to higher interest rates (a weighted average of 10.26% per annum during 2011 compared to 7.14% per annum during 2010) primarily due to the agreement governing the Term Loan Facility entered into as part of the August 18, 2010 refinancing as well as higher average borrowings on our debt facilities of $319.0 million in 2011 as compared to $313.0 million in 2010. After giving effect to the refinancing as if it had occurred on January 1, 2010, our interest expense for the year ended December 31, 2010 would have been $38.5 million.

 

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The following table summarizes the components of interest expense:

 

     For the Year Ended,
December 31,
 
(in millions)        2011             2010      

Interest on principal

   $ 32.7      $ 22.3   

Interest rate cap agreements

     1.9        (0.8

Amortization of debt discount and issuance costs

     4.7        2.3   

Capitalized interest

     (0.6     —     

Other borrowing costs(1)

     1.3        1.3   
  

 

 

   

 

 

 

Interest expense

   $ 40.0      $ 25.1   
  

 

 

   

 

 

 

 

(1) Includes interest on letters of credit, unused line of credit fees and capital lease obligations.

In compliance with the Term Loan Facility, we entered into interest rate cap agreements to fix a portion of our variable rate debt. During the year ended December 31, 2011, the fair value of the interest rate caps declined by $1.9 million, and the decline in fair value was recorded as non-cash interest expense. The increase in amortization expense was primarily due to the refinancing on August 18, 2010, which resulted in amortization of capitalized costs associated with the refinancing as described in “—Financial Information, Acquisition, Business Transformation and Refinancing—Refinancing” above.

Other Expense, Net

We recorded other expense, net of $0.4 million for the year ended December 31, 2011 compared to $0.8 million for the year ended December 31, 2010. During the year ended December 31, 2011, we recorded income of $2.0 million related to a favorable legal settlement of a products liability lawsuit in which we were named as a third-party defendant. Partially offsetting this was $0.9 million of expense incurred relating to a waiver obtained from our lenders under the Term Loan Facility and the 2010 ABL Facility in May 2011 and $0.6 million of expense related to the October 2011 amendment of the Term Loan Facility and 2010 ABL Facility. The fee paid related to a waiver for a technical restatement of the financial statements of Global Brass and Copper, Inc. previously delivered and an additional waiver because the consolidated financial statements of Global Brass and Copper, Inc. for the year ended December 31, 2010 could not be delivered within the prescribed time period as a result of the restatement. For more information, see “—Liquidity and Capital Resources—Outstanding Indebtedness—The ABL Facility” and “—Internal Control over Financial Reporting”.

Provision for Income Taxes

Income tax expense increased by $5.1 million, from $26.1 million for the year ended December 31, 2010 to $31.2 million for the year ended December 31, 2011. The increase was due to higher income before provision for income taxes and equity income of $86.4 million for the year ended December 31, 2011 as compared to $66.0 million for the year ended December 31, 2010. The effective income tax rate decreased from 39.6% for the year ended December 31, 2010 to 36.2% for the year ended December 31, 2011. This decrease was due to a lower state effective tax rate, a lower non-deductible non-cash compensation expense, as well as an increase in the Section 199 manufacturing deduction, which is a tax deduction available to certain U.S. firms engaged in domestic manufacturing operations. The increase in the Section 199 manufacturing deduction was driven by the increase in the applicable deduction rate from 6% for the year ended December 31, 2010 to 9% for the year ended December 31, 2011.

 

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The following table summarizes the effective income tax rate components for the years ended December 31, 2011 and 2010, respectively.

 

     For the Year Ended
December 31,
 
         2011             2010      

Statutory provision rate

     35.0     35.0

Permanent differences and other items

    

State tax provision

     3.7     5.7

Section 199 manufacturing credit

     (2.3 %)      (1.5 %) 

Incremental tax effects of foreign earnings

     0.2     0.3

Return to provision adjustments

     (1.0 %)      (2.1 %) 

Non-deductible non-cash compensation(1)

     0.4     1.8

Other

     0.2