Company Quick10K Filing
Quick10K
Aleris
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-07 Earnings, Regulation FD, Exhibits
8-K 2019-05-08 Earnings, Regulation FD, Exhibits
8-K 2019-03-08 Earnings, Regulation FD, Exhibits
8-K 2019-02-15 Other Events
8-K 2018-11-07 Earnings, Regulation FD, Exhibits
8-K 2018-08-06 Earnings, Regulation FD, Exhibits
8-K 2018-07-26 Enter Agreement, Exhibits
8-K 2018-07-26 Regulation FD, Exhibits
8-K 2018-06-25 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-08 Other Events, Exhibits
8-K 2018-06-04 Regulation FD, Exhibits
8-K 2018-05-29 Regulation FD, Exhibits
8-K 2018-05-22 Other Events
8-K 2018-03-19 Earnings, Regulation FD, Exhibits
EDRG Rokk3R 203
CANN General Cannabis 36
RGIN Regenicin 9
GTBP GT Biopharma 9
LRDC Laredo Oil 6
ALPC Alpha Investment 0
EST Estre Ambiental 0
BMNY Borrowmoney.com 0
RREIO Resource Apartment REIT III 0
NYCR American Realty Capital New York City REIT 0
ARS 2019-06-30
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 ex311-2q1910q.htm
EX-31.2 ex312-2q1910q.htm
EX-32.1 ex321-2q1910q.htm

Aleris Earnings 2019-06-30

ARS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2q1910q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 alerislogoa02a01a01a02a86.jpg
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 333-185443
________________________________________________________________________
 Aleris Corporation
(Exact name of registrant as specified in its charter)
________________________________________________________________________
Delaware
 
27-1539594
(State or other jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
25825 Science Park Drive, Suite 400
Cleveland, Ohio 44122-7392
(Address of principal executive offices) (Zip Code)
(216) 910-3400
(Registrant’s telephone number, including area code)
________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨  No  þ
(Note: Registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 and 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required during the preceding 12 months, had it been subject to such filing requirements.)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨ 
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
þ
 
Smaller reporting company
¨
 
 
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
There were 32,380,867 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of June 30, 2019.
 

                    
1


ALERIS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
June 30, 2019
TABLE OF CONTENTS
 
 
 
 
 
 
Page No.
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements:
 
 
Consolidated Balance Sheet (Unaudited) as of June 30, 2019 and December 31, 2018
 
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
 
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2019 and 2018
 
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Six Months Ended June 30, 2019 and 2018
 
Notes to Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures











                    
2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ALERIS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in millions, except share and per share data)
ASSETS

June 30, 2019

December 31, 2018
Current Assets






Cash and cash equivalents

$
77.2


$
108.6

Accounts receivable, net

394.9


308.8

Inventories

763.0


772.9

Prepaid expenses and other current assets

39.9


62.7

Total Current Assets

1,275.0


1,253.0

Property, plant and equipment, net

1,354.4


1,395.0

Intangible assets, net

31.5


32.5

Deferred income taxes

60.2


60.2

Other long-term assets

74.4


38.7

Total Assets

$
2,795.5


$
2,779.4






LIABILITIES AND STOCKHOLDERS’ EQUITY




Current Liabilities




Accounts payable

$
323.9


$
374.8

Accrued liabilities

192.0


198.1

Current portion of long-term debt

67.9


21.9

Total Current Liabilities

583.8


594.8

Long-term debt

1,917.1


1,906.4

Deferred revenue
 
58.3

 
65.0

Deferred income taxes

6.9


0.9

Accrued pension benefits

161.7


163.7

Accrued postretirement benefits

29.1


29.6

Other long-term liabilities

72.4


46.1

Total Long-Term Liabilities

2,245.5


2,211.7

Stockholders’ Equity




Common stock; par value $.01; 45,000,000 shares authorized; 32,380,867 shares issued at June 30, 2019 and December 31, 2018

0.3


0.3

Preferred stock; par value $.01; 1,000,000 shares authorized; none issued
 

 

Additional paid-in capital

434.3


431.8

Retained deficit

(301.0
)

(292.2
)
Accumulated other comprehensive loss

(167.4
)

(167.0
)
Total Equity

(33.8
)

(27.1
)
Total Liabilities and Equity

$
2,795.5


$
2,779.4



The accompanying notes are an integral part of these unaudited consolidated financial statements.

                    
3


ALERIS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in millions)
 


For the three months ended

For the six months ended
 
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Revenues

$
916.7


$
930.6


$
1,793.7


$
1,732.9

Cost of sales

806.1


829.2


1,605.0


1,569.0

Gross profit

110.6


101.4


188.7


163.9

Selling, general and administrative expenses

53.5


49.9


105.7


100.5

Restructuring charges
 
0.6

 
0.9

 
1.6

 
1.9

(Gains) losses on derivative financial instruments

(18.6
)

21.3


(11.8
)

(12.7
)
Other operating expense, net

0.3


0.3


0.8


1.0

Operating income

74.8


29.0


92.4


73.2

Interest expense, net

40.6


34.7


79.8


68.5

Debt extinguishment costs
 

 
48.9

 

 
48.9

Other expense (income), net

2.2


(11.6
)

2.5


(11.2
)
Income (loss) before income taxes

32.0


(43.0
)

10.1


(33.0
)
Provision for income taxes

7.4


3.9


18.9


9.3

Net income (loss)

$
24.6


$
(46.9
)

$
(8.8
)

$
(42.3
)













Comprehensive income (loss)

$
26.9


$
(77.5
)

$
(9.2
)

$
(52.4
)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

                    
4


ALERIS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
 
 
 
For the six months ended
 
 
June 30, 2019
 
June 30, 2018
Operating activities
 



Net loss
 
$
(8.8
)
 
$
(42.3
)
Adjustments to reconcile net loss to net cash used by operating activities:
 



Depreciation and amortization
 
69.7


68.8

Provision for deferred income taxes
 
5.2


1.8

Stock-based compensation expense
 
2.5


0.7

Unrealized losses (gains) on derivative financial instruments
 
18.9


(13.5
)
Amortization of debt issuance costs
 
4.6


1.3

Loss on extinguishment of debt
 

 
48.9

Non-cash gain
 

 
(11.1
)
Other
 
0.7


2.3

Changes in operating assets and liabilities:
 



Change in accounts receivable
 
(87.6
)

(134.5
)
Change in inventories
 
7.9


(104.0
)
Change in other assets
 
0.9


1.6

Change in accounts payable
 
(40.3
)

41.7

Change in accrued and other liabilities
 
(13.2
)

31.4

Net cash used by operating activities
 
(39.5
)

(106.9
)
Investing activities
 



Payments for property, plant and equipment
 
(53.7
)

(51.5
)
Other
 
(0.2
)


Net cash used by investing activities
 
(53.9
)

(51.5
)
Financing activities
 



Proceeds from revolving credit facilities
 
136.3

 
220.3

Payments on revolving credit facilities
 
(63.8
)
 
(272.7
)
Proceeds from notes and term loans, net of discounts
 

 
1,483.0

Payments on term loan and notes, including premiums
 
(5.5
)
 
(1,286.7
)
Net payments on other long-term debt and finance leases
 
(5.8
)

(5.8
)
Debt issuance costs
 

 
(18.4
)
Net cash provided by financing activities
 
61.2


119.7

Effect of exchange rate differences on cash, cash equivalents and restricted cash
 
(0.1
)

(0.7
)
Net decrease in cash, cash equivalents and restricted cash
 
(32.3
)

(39.4
)
Cash, cash equivalents and restricted cash at beginning of period
 
115.6


108.0

Cash, cash equivalents and restricted cash at end of period
 
$
83.3


$
68.6

 
 
 
 
 
Cash and cash equivalents
 
$
77.2

 
$
65.9

Restricted cash (included in “Prepaid expenses and other current assets”)
 
6.1

 
2.7

Cash, cash equivalents and restricted cash
 
$
83.3

 
$
68.6




The accompanying notes are an integral part of these unaudited consolidated financial statements.

                    
5


ALERIS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in millions)

 
Common stock
 
Additional paid-in capital
 
Retained deficit
 
Accumulated other comprehensive loss
 
Total Equity
Balance at January 1, 2018
$
0.3

 
$
436.3

 
$
(203.4
)
 
$
(140.5
)
 
$
92.7

Net loss

 

 
(42.3
)
 

 
(42.3
)
Other comprehensive loss

 

 

 
(10.1
)
 
(10.1
)
Dividend

 
(11.3
)
 

 

 
(11.3
)
Stock-based compensation activity

 
0.6

 

 

 
0.6

Adoption of accounting standard

 

 
2.8

 

 
2.8

Balance at June 30, 2018
$
0.3

 
$
425.6

 
$
(242.9
)
 
$
(150.6
)
 
$
32.4

 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
$
0.3

 
$
431.8

 
$
(292.2
)
 
$
(167.0
)
 
$
(27.1
)
Net loss

 

 
(8.8
)
 

 
(8.8
)
Other comprehensive loss

 

 

 
(0.4
)
 
(0.4
)
Stock-based compensation activity

 
2.5

 

 

 
2.5

Balance at June 30, 2019
$
0.3

 
$
434.3

 
$
(301.0
)
 
$
(167.4
)
 
$
(33.8
)



The accompanying notes are an integral part of these unaudited consolidated financial statements.


                    
6

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)


1. BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for interim periods contained herein are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The accompanying Consolidated Financial Statements include the accounts of Aleris Corporation and all of its subsidiaries (collectively, except where the context otherwise requires, referred to as “Aleris,” “we,” “us,” “our,” “Company” or similar terms). Aleris Corporation is a holding company and currently conducts its business and operations through its direct wholly owned subsidiary, Aleris International, Inc. and its consolidated subsidiaries. Aleris International, Inc. is referred to herein as “Aleris International.”
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under ASU 2016-13, we will be required to use a current expected credit loss model (CECL) that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates than our current model. This guidance becomes effective for us on January 1, 2020, including the interim periods in the year. We are currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). This guidance requires lessees to put most leases on their balance sheets but recognize expense on the income statement in a manner similar to the previous guidance. We adopted ASU 2016-02 on January 1, 2019 using a modified retrospective approach, applying the standard’s transition provisions at the beginning of the period of adoption. ASU 2016-02 provided for certain practical expedients when adopting the guidance. We elected the package of practical expedients allowing us to not reassess (i) whether any expired or existing contracts are, or contain, leases, (ii) the lease classification for any expired or existing leases or (iii) initial direct costs for any expired or existing leases.
Upon adoption, we recorded operating lease right-of-use assets of $10.8, representing the present value of future lease payments under operating leases with terms of greater than twelve months. We also recorded corresponding operating lease liabilities of $11.5. In addition, the prior capital lease balances of $10.4, $4.0 and $6.2 previously reported in fixed assets, current maturities of long-term debt and long-term debt, respectively, were reclassified into separately classified right-of-use asset and lease obligation accounts. The adoption had no impact on reported net income or loss or retained deficit. See Note 13, “Leases” for additional information.
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
We generate substantially all of our revenue from the manufacture and shipment of aluminum products to our customers. Sales, value add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Revenue is recognized when obligations under the terms of a contract (as defined by Accounting Standards Codification (“ASC”) 606) with our customer are satisfied, which occurs at a point in time when control of the product transfers to the customer. Control may transfer to the customer at various points in the delivery process. In North America, most revenue is recognized at the point of shipment. In Europe and China, the timing of revenue recognition varies depending on individual customer arrangements, and may include point of shipment, delivery to port, final delivery to customer or another point in the delivery process.

                    
7

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

Certain contractual arrangements, primarily with customers in our automotive and heat exchanger end-uses, allow for inventory to be held at a customer’s location or in a third-party warehouse with direct customer access. Title does not transfer to the customer on such inventory until the customer has removed the product for consumption. Under such arrangements, management has concluded that control has passed to the customer upon delivery to the customer’s location or the third-party warehouse if the customer has unrestricted access to the product and the Company has the right to invoice that customer after a specified period of time regardless of whether or not the product has been removed by the customer for production.
The transaction price for our products includes the value of the aluminum in the product plus a conversion fee, or rolling margin, which is the price charged to the customer for conversion of the aluminum raw material to the finished product. Certain customer contracts include volume rebates applied retrospectively to quantities purchased during a specified period. The resulting variable consideration from volume rebates is estimated using the expected value method.
As all customer contracts (as defined by ASC 606) have an original expected duration of less than twelve months, we have applied the practical expedient to the disclosure of the aggregate amount of the transaction price allocated to remaining performance obligations.
Customer payments are due shortly after completion of the performance obligation, on payment terms that are customary for the industry. As all customer payments are due in less than one year, we have not adjusted revenue for the effects of a significant financing component.
The following table discloses the disaggregated revenue from our contracts with customers by major end-use:
 
 
For the three months ended June 30, 2019
 
 
North America
 
Europe
 
Asia Pacific
 
Intra-entity sales
 
Total
Aerospace
 
$

 
$
87.6

 
$
31.3

 
$
(0.3
)
 
$
118.6

Automotive
 
115.7

 
80.8

 

 
(2.7
)
 
193.8

Heat exchanger
 

 
58.3

 

 
(0.3
)
 
58.0

Building and construction
 
212.6

 
25.5

 

 

 
238.1

Truck trailer
 
70.9

 
6.8

 

 

 
77.7

Distribution
 
92.1

 
21.0

 
9.2

 

 
122.3

Regional plate and sheet
 

 
40.6

 

 

 
40.6

Other
 
49.3

 
16.3

 
2.0

 

 
67.6

 
 
$
540.6

 
$
336.9

 
$
42.5

 
$
(3.3
)
 
$
916.7

 
 
For the three months ended June 30, 2018
 
 
North America
 
Europe
 
Asia Pacific
 
Intra-entity sales
 
Total
Aerospace
 
$

 
$
71.9

 
$
24.0

 
$

 
$
95.9

Automotive
 
32.1

 
105.4

 

 
(6.9
)
 
130.6

Heat exchanger
 

 
72.2

 

 

 
72.2

Building and construction
 
237.6

 

 

 

 
237.6

Truck trailer
 
52.7

 

 

 

 
52.7

Distribution
 
144.9

 

 
17.8

 
(0.5
)
 
162.2

Regional plate and sheet
 

 
106.3

 

 

 
106.3

Other
 
57.5

 
15.0

 
0.6

 

 
73.1

 
 
$
524.8

 
$
370.8

 
$
42.4

 
$
(7.4
)
 
$
930.6


                    
8

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

 
 
For the six months ended June 30, 2019
 
 
North America
 
Europe
 
Asia Pacific
 
Intra-entity sales
 
Total
Aerospace
 
$

 
$
177.4

 
$
64.0

 
$
(0.3
)
 
$
241.1

Automotive
 
240.3

 
176.0

 

 
(7.9
)
 
408.4

Heat exchanger
 

 
113.1

 

 
(0.3
)
 
112.8

Building and construction
 
390.4

 
53.2

 

 

 
443.6

Truck trailer
 
133.1

 
14.2

 

 

 
147.3

Distribution
 
170.4

 
42.8

 
20.0

 

 
233.2

Regional plate and sheet
 

 
83.2

 

 

 
83.2

Other
 
96.5

 
24.6

 
3.0

 

 
124.1

 
 
$
1,030.7

 
$
684.5

 
$
87.0

 
$
(8.5
)
 
$
1,793.7

 
 
For the six months ended June 30, 2018
 
 
North America
 
Europe
 
Asia Pacific
 
Intra-entity sales
 
Total
Aerospace
 
$

 
$
142.7

 
$
38.8

 
$

 
$
181.5

Automotive
 
58.9

 
206.8

 

 
(15.9
)
 
249.8

Heat exchanger
 

 
138.2

 

 

 
138.2

Building and construction
 
426.9

 

 

 

 
426.9

Truck trailer
 
96.4

 

 

 

 
96.4

Distribution
 
251.8

 

 
33.6

 
(0.5
)
 
284.9

Regional plate and sheet
 

 
215.4

 

 

 
215.4

Other
 
105.4

 
32.8

 
1.6

 

 
139.8

 
 
$
939.4

 
$
735.9

 
$
74.0

 
$
(16.4
)
 
$
1,732.9

We occasionally receive advance payments to secure product to be delivered in future periods. These advance payments are recorded as deferred revenue, and revenue is recognized as our performance obligations are satisfied throughout the term of the applicable contract. We may also purchase aluminum on our customer’s behalf, sell the unprocessed aluminum to our customer and then process and ship the material, charging a processing fee at the time of shipment. For these arrangements, a single performance obligation exists, and, as a result, amounts invoiced to our customers for the aluminum purchased on their behalf is recorded as deferred revenue until the aluminum is processed and shipped.
The following table details the deferred revenue for which our performance obligations have not been satisfied:
 
 
Total Deferred Revenue
Deferred revenue at January 1, 2019
 
$
81.9

(a)
Payments received
 
6.7

 
Revenue recognized
 
(14.5
)
 
Currency and other
 
0.1

 
Deferred revenue at June 30, 2019
 
$
74.2

(a)
(a) Deferred revenue is included in “Deferred revenue” and “Accrued liabilities” in the Consolidated Balance Sheet.

                    
9

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

3. INVENTORIES
The components of our “Inventories” as of June 30, 2019 and December 31, 2018 are as follows: 
 
 
June 30, 2019
 
December 31, 2018
Raw materials
 
$
288.9

 
$
283.8

Work in process
 
291.4

 
284.5

Finished goods
 
145.3

 
169.1

Supplies
 
37.4

 
35.5

Total inventories
 
$
763.0

 
$
772.9

4. LONG-TERM DEBT
Our debt as of June 30, 2019 and December 31, 2018 is summarized as follows:
 
 
June 30, 2019
 
December 31, 2018
ABL Facility
 
$
325.5

 
$
253.7

First Lien Term Loan due 2023 ("Term Loan Facility"), net of discount and deferred issuance costs of $21.5 and $24.3 at June 30, 2019 and December 31, 2018, respectively
 
1,067.5

 
1,070.2

10.75% Senior Secured Junior Priority Notes due 2023 ("2023 Junior Priority Notes"), net of discount and deferred issuance costs of $6.7 and $7.5 at June 30, 2019 and December 31, 2018, respectively
 
393.3

 
392.5

Exchangeable Notes, net of discount of $0.1 and $0.2 at June 30, 2019 and December 31, 2018, respectively
 
44.7

 
44.6

Zhenjiang Term Loans, net of discount of $0.4 at June 30, 2019 and December 31, 2018
 
154.0

 
157.2

Other
 

 
10.1

Total debt
 
1,985.0

 
1,928.3

Less: Current portion of long-term debt
 
67.9

 
21.9

Total long-term debt
 
$
1,917.1

 
$
1,906.4

The Exchangeable Notes mature in June of 2020, and have been included in “Current portion of long-term debt” in the Consolidated Balance Sheet as of June 30, 2019.
Restricted cash
At June 30, 2019 and December 31, 2018, respectively, $6.1 and $7.0 of cash was restricted for payments of the Zhenjiang Term Loans, all of which was included in “Prepaid expenses and other current assets” in the Consolidated Balance Sheet.
5. COMMITMENTS AND CONTINGENCIES
Environmental Proceedings
Our operations are subject to environmental laws and regulations governing air emissions, wastewater discharges, the handling, storage, disposal and remediation of hazardous substances and wastes and employee health and safety. These laws can impose joint and several liability for releases or threatened releases of hazardous substances upon statutorily defined parties, including us, regardless of fault or the lawfulness of the original activity or disposal. Given the changing nature of environmental legal requirements, we may be required, from time to time, to take environmental control measures at some of our facilities to meet future requirements.
We have been named as a potentially responsible party in certain proceedings initiated pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes and may be named a potentially responsible party in other similar proceedings in the future. It is not anticipated that the costs incurred in connection with the presently pending proceedings will, individually or in the aggregate, have a material adverse effect on our financial position, results of operations or cash flows.

                    
10

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

We are performing operations and maintenance at two Superfund sites for matters arising out of past waste disposal activity associated with closed facilities. We are also under orders to perform environmental remediation by agencies in four states and one non-U.S. country at seven sites.
Our reserves for environmental remediation liabilities totaled $25.1 and $25.6 at June 30, 2019 and December 31, 2018, respectively, and have been classified as “Other long-term liabilities” and “Accrued liabilities” in the Consolidated Balance Sheet. Of the environmental liabilities recorded at June 30, 2019 and December 31, 2018, $11.4 and $11.9, respectively, are subject to indemnification by third parties.
In addition to environmental liabilities, we have recorded asset retirement obligations associated with legal requirements related to the retirement of certain assets. Our total asset retirement obligations were $6.8 at June 30, 2019 and December 31, 2018. The amounts represent the most probable costs of remedial actions. We estimate the costs related to currently identified remedial actions will be paid out primarily over the next 10 years.
Legal Proceedings
We are party to routine litigation and proceedings as part of the ordinary course of business and do not believe that the outcome of any existing proceedings would have a material adverse effect on our financial position, results of operations or cash flows. We have established accruals for those loss contingencies, including litigation and environmental contingencies, for which it has been determined that a loss is probable; none of such loss contingencies is material. For those loss contingencies, including litigation and environmental contingencies, which have been determined to be reasonably possible, an estimate of the possible loss or range of loss cannot be determined because the claims, amount claimed, facts or legal status are not sufficiently developed or advanced in order to make such a determination. While we cannot estimate the loss or range of loss at this time, we do not believe that the outcome of any of these existing proceedings would be material to our financial position, results of operations or cash flows.
6. STOCKHOLDERS EQUITY
The following table shows changes in the number of our issued and outstanding shares of common stock:
 
 
For the six months ended
Issued and outstanding shares of common stock
 
June 30, 2019
 
June 30, 2018
Balance at the beginning of the period
 
32,380,867

 
32,001,318

Issuance associated with vested restricted stock units
 

 
218,210

Balance at the end of the period
 
32,380,867

 
32,219,528

7. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the activity within accumulated other comprehensive loss for the six months ended June 30, 2019:
 
 
Currency translation
 
Pension and other postretirement
 
Total
Balance at January 1, 2019
 
$
(93.3
)
 
$
(73.7
)
 
$
(167.0
)
Current period currency translation adjustments
 
(2.7
)
 
0.4

 
(2.3
)
Amortization of net actuarial losses and prior service costs, net of tax
 

 
1.9

 
1.9

Balance at June 30, 2019
 
$
(96.0
)
 
$
(71.4
)
 
$
(167.4
)

                    
11

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

A summary of reclassifications out of accumulated other comprehensive loss for the six months ended June 30, 2019 is provided below:
Description of reclassifications out of accumulated other comprehensive loss
 
Amount reclassified
Amortization of net actuarial losses and prior service costs (recorded in “Other operating expense, net”)
 
$
(2.2
)
Deferred tax benefit on pension and other postretirement liability adjustments
 
0.3

Losses reclassified into earnings, net of tax
 
$
(1.9
)
8. SEGMENT INFORMATION
We report three operating segments based on the organizational structure that is used by our chief operating decision maker to evaluate performance, make decisions on resource allocation and for which discrete financial information is available. Our operating segments are North America, Europe and Asia Pacific.
Measurement of Segment Income or Loss and Segment Assets
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Consolidated Financial Statements for the year ended December 31, 2018. Our measure of profitability for our operating segments is referred to as segment income. Segment income includes gross profits, segment specific realized gains and losses on derivative financial instruments, segment specific other income and expense, segment specific selling, general and administrative (“SG&A”) expense and an allocation of certain functional SG&A expenses. Segment income excludes provisions for and benefits from income taxes, restructuring items, interest, depreciation and amortization, unrealized and certain realized gains and losses on derivative financial instruments, corporate general and administrative costs, start-up costs, gains and losses on asset sales, currency exchange gains and losses on debt and certain other gains and losses. Intra-entity sales and transfers are recorded at market value. Consolidated cash, restricted cash, net capitalized debt costs, deferred tax assets and assets related to our headquarters offices are not allocated to the segments.

                    
12

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

Reportable Segment Information
The following table shows our revenues and segment income for our reportable segments for the periods presented in our Consolidated Statements of Comprehensive Income (Loss):
Three months ended June 30, 2019
 
North America
 
Europe
 
Asia Pacific
 
Intra-entity Revenues
 
Total
Revenues to external customers
 
$
540.6

 
$
333.6

 
$
42.5

 
 
 
$
916.7

Intra-entity revenues
 

 
3.3

 

 
$
(3.3
)
 

Total revenues
 
$
540.6

 
$
336.9

 
$
42.5

 
$
(3.3
)
 
$
916.7

Segment income
 
$
74.4

 
$
33.1

 
$
9.3

 
 
 
$
116.8

 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2018
 
North America
 
Europe
 
Asia Pacific
 
Intra-entity Revenues
 
Total
Revenues to external customers
 
$
524.8

 
$
363.9

 
$
41.9

 
 
 
$
930.6

Intra-entity revenues
 

 
6.9

 
0.5

 
$
(7.4
)
 

Total revenues
 
$
524.8

 
$
370.8

 
$
42.4

 
$
(7.4
)
 
$
930.6

Segment income
 
$
71.6

 
$
42.3

 
$
6.7

 
 
 
$
120.6

 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2019
 
North America
 
Europe
 
Asia Pacific
 
Intra-entity Revenues
 
Total
Revenues to external customers
 
$
1,030.7

 
$
676.0

 
$
87.0

 
 
 
$
1,793.7

Intra-entity revenues
 

 
8.5

 

 
$
(8.5
)
 

Total revenues
 
$
1,030.7

 
$
684.5

 
$
87.0

 
$
(8.5
)
 
$
1,793.7

Segment income
 
$
131.5

 
$
69.7

 
$
17.7

 
 
 
$
218.9

 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2018
 
North America
 
Europe
 
Asia Pacific
 
Intra-entity Revenues
 
Total
Revenues to external customers
 
$
939.4

 
$
720.0

 
$
73.5

 
 
 
$
1,732.9

Intra-entity revenues
 

 
15.9

 
0.5

 
$
(16.4
)
 

Total revenues
 
$
939.4

 
$
735.9

 
$
74.0

 
$
(16.4
)
 
$
1,732.9

Segment income
 
$
113.1

 
$
70.6

 
$
9.1

 
 
 
$
192.8

The following table reconciles total segment income to “Income (loss) before income taxes” as reported in our Consolidated Statements of Comprehensive Income (Loss):
 
 
For the three months ended
 
For the six months ended
 
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Total segment income
 
$
116.8

 
$
120.6

 
$
218.9

 
$
192.8

Unallocated amounts:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
(35.1
)
 
(34.1
)
 
(69.7
)
 
(68.8
)
Other corporate general and administrative expenses
 
(16.9
)
 
(11.5
)
 
(31.8
)
 
(22.7
)
Restructuring charges
 
(0.6
)
 
(0.9
)
 
(1.6
)
 
(1.9
)
Interest expense, net
 
(40.6
)
 
(34.7
)
 
(79.8
)
 
(68.5
)
Unallocated gains (losses) on derivative financial instruments
 
11.9

 
(20.2
)
 
(19.0
)
 
13.4

Unallocated currency exchange losses
 
(0.7
)
 
(2.5
)
 

 
(1.3
)
Start-up costs
 
(2.6
)
 
(22.9
)
 
(5.9
)
 
(38.9
)
Loss on extinguishment of debt
 

 
(48.9
)
 

 
(48.9
)
Other (expense) income, net
 
(0.2
)
 
12.1

 
(1.0
)
 
11.8

Income (loss) before income taxes
 
$
32.0

 
$
(43.0
)
 
$
10.1

 
$
(33.0
)

                    
13

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

The following table shows our reportable segment assets as of June 30, 2019 and December 31, 2018:
 
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
 
North America
 
$
1,501.5

 
$
1,460.0

Europe
 
760.3

 
736.4

Asia Pacific
 
337.5

 
340.2

Unallocated assets
 
196.2

 
242.8

Total consolidated assets
 
$
2,795.5

 
$
2,779.4

9. STOCK-BASED COMPENSATION
On June 1, 2010, the Board of Directors of Aleris Corporation approved the Aleris Corporation 2010 Equity Incentive Plan (as amended from time to time, the “2010 Equity Plan”). Stock options, restricted stock units and restricted shares have been granted under the 2010 Equity Plan to certain members of management of the Company and directors. All stock options granted have a life not to exceed ten years and generally vest over a period not to exceed four years. Shares of common stock are issued upon stock option exercises from available shares of common stock. The restricted stock units also vest over a period not to exceed four years. A portion of the stock options, as well as a portion of the restricted stock units, may vest upon a change in control event should the event occur prior to full vesting of these awards, depending on the amount of vesting that has already occurred at the time of the event in comparison to the change in our largest stockholders’ overall level of beneficial ownership that results from the event.
During the six months ended June 30, 2019, no stock options or restricted stock units were granted. We recorded stock-based compensation expense of $2.5 for the three and six months ended June 30, 2019, respectively, and $0.3 and $0.7 for the three and six months ended June 30, 2018, respectively.
10. INCOME TAXES
The effective tax rates for the three and six months ended June 30, 2019 and 2018 differed from the federal statutory rate applied to income and losses before income taxes primarily as a result of the mix of income, losses and tax rates between tax jurisdictions, valuation allowances and, for the six months ended June 30, 2019, the results of an examination by a non-U.S. taxing jurisdiction (discussed below).
We have valuation allowances recorded to reduce certain deferred tax assets to amounts that are more likely than not to be realized. The valuation allowances relate to the potential inability to realize our deferred tax assets associated with amortization, net operating losses and interest expense carryforwards in the U.S. and net operating loss carryforwards in non-U.S. jurisdictions. We intend to maintain our valuation allowances until sufficient positive evidence exists (such as cumulative positive earnings and estimated future taxable income) to support their reversal.
As of June 30, 2019, we had $9.2 of unrecognized tax benefits. $8.3 of the gross unrecognized tax benefits, if recognized, would affect the annual effective tax rate. We recognize interest and penalties related to uncertain tax positions within “Provision for income taxes” in the Consolidated Statements of Comprehensive Income (Loss). As of June 30, 2019, we had approximately $1.8 of accrued interest related to uncertain tax positions.
The 2009 through 2017 tax years remain open to examination. During the fourth quarter of 2013, a non-U.S. taxing jurisdiction commenced an examination of our tax returns for the tax years ended December 31, 2012, 2011, 2010 and 2009. During the first quarter of 2019, the non-U.S. taxing jurisdiction proposed certain significant adjustments to the Company’s transfer pricing tax position. The final audit report has not been received as of the end of the quarter. However, the Company expects additional tax of $5.3 along with additional interest of approximately $0.8. Both amounts were expensed in the first quarter of 2019. During the third quarter of 2018, the same jurisdiction notified us regarding an examination of our tax returns for the tax years ended December 31, 2016, 2015, 2014 and 2013.
During the third quarter of 2018, a non-U.S. taxing jurisdiction notified us regarding an examination of our tax returns for the tax years ended December 31, 2016, 2015, 2014 and 2013. This examination was completed in the second quarter with no change.

                    
14

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

During the first quarter of 2019, a non-U.S. taxing jurisdiction notified us regarding an examination of our tax returns for the tax years ended December 31, 2017 and 2016 that is anticipated to be completed within twelve months of the reporting date.
11. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The service cost component of net periodic benefit expense is included in “Operating income,” while all other components of net periodic benefit expense are included in “Other expense (income), net” in the Consolidated Statements of Comprehensive Income (Loss). The components of the net periodic benefit expense are as follows:
 
 
U.S. pension benefits
 
 
For the three months ended
 
For the six months ended
 
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Service cost
 
$
1.1

 
$
1.1

 
$
2.2

 
$
2.2

Interest cost
 
1.6

 
1.4

 
3.2

 
2.9

Amortization of net actuarial losses
 
0.6

 
0.5

 
1.3

 
0.9

Amortization of prior service cost
 
0.1

 
0.1

 
0.1

 
0.1

Expected return on plan assets
 
(2.3
)
 
(2.6
)
 
(4.6
)
 
(5.1
)
Net periodic benefit expense
 
$
1.1

 
$
0.5

 
$
2.2

 
$
1.0

 
 
Non U.S. pension benefits
 
 
For the three months ended
 
For the six months ended
 
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Service cost
 
$
0.6

 
$
0.6

 
$
1.1

 
$
1.3

Interest cost
 
0.5

 
0.5

 
1.1

 
1.0

Amortization of net actuarial losses
 
0.6

 
0.7

 
1.2

 
1.4

Net periodic benefit expense
 
$
1.7

 
$
1.8

 
$
3.4

 
$
3.7

Other Postretirement Benefit Plans
The service cost component of net postretirement benefit expense is included in “Operating income,” while all other components of net postretirement benefit expense are included in “Other expense (income), net” in the Consolidated Statements of Comprehensive Income (Loss). The components of net postretirement benefit expense are as follows:
 
 
For the three months ended
 
For the six months ended
 
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Service cost
 
$
0.1

 
$
0.1

 
$
0.2

 
$
0.2

Interest cost
 
0.3

 
0.2

 
0.6

 
0.5

Amortization of net actuarial gains
 
(0.3
)
 
(0.2
)
 
(0.5
)
 
(0.3
)
Amortization of prior service cost
 
0.1

 
0.1

 
0.1

 
0.1

Net postretirement benefit expense
 
$
0.2

 
$
0.2

 
$
0.4

 
$
0.5

12. DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
We use forward contracts, options and swaps, as well as contractual price escalators, to reduce the risks associated with our metal, natural gas and other supply requirements, as well as fuel costs and certain currency and interest rate exposures. Generally, we enter into master netting arrangements with our counterparties and offset net derivative positions with the same counterparties against amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements in our Consolidated Balance Sheet. For classification purposes, we record the net fair value of each type of derivative position that is expected to settle in less than one year with each counterparty as a net current asset or liability and each type of long-term position as a net long-term asset or liability. As of June 30, 2019, no cash collateral was posted. As

                    
15

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

of December 31, 2018, $0.2 of cash collateral was posted. The amounts shown in the table below represent the gross amounts of recognized assets and liabilities, the amounts offset in the Consolidated Balance Sheet and the net amounts of assets and liabilities presented therein. As of June 30, 2019 and December 31, 2018, there were no amounts subject to an enforceable master netting arrangement or similar agreement that have not been offset in the Consolidated Balance Sheet.
 
 
Fair Value of Derivatives as of
 
 
June 30, 2019
 
December 31, 2018
Derivatives by Type
 
Asset
 
Liability
 
Asset
 
Liability
Metal
 
$
19.4

 
$
(10.6
)
 
$
52.3

 
$
(24.3
)
Energy
 
0.2

 
(1.2
)
 
0.2

 
(1.6
)
Interest rate
 

 

 

 
(0.4
)
Currency
 
0.2

 
(4.9
)
 
0.4

 
(4.5
)
Total
 
19.8

 
(16.7
)
 
52.9

 
(30.8
)
Effect of counterparty netting
 
(10.2
)
 
10.2

 
(23.5
)
 
23.5

Effect of cash collateral
 

 

 

 
0.2

Net derivatives as classified in the balance sheet
 
$
9.6

 
$
(6.5
)
 
$
29.4

 
$
(7.1
)
The fair value of our derivative financial instruments at June 30, 2019 and December 31, 2018 are recorded in the Consolidated Balance Sheet as follows: 
Asset Derivatives
 
Balance Sheet Location
 
June 30, 2019
 
December 31, 2018
Metal
 
Prepaid expenses and other current assets
 
$
9.4

 
$
29.3

Energy
 
Prepaid expenses and other current assets
 
0.2

 
0.1

Total
 
 
 
$
9.6

 
$
29.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives
 
Balance Sheet Location
 
June 30, 2019
 
December 31, 2018
Metal
 
Accrued liabilities
 
$
0.2

 
$

 
 
Other long-term liabilities
 
0.4

 
1.2

Energy
 
Accrued liabilities
 
1.1

 
1.4

 
 
Other long-term liabilities
 
0.1

 

Interest Rate
 
Accrued liabilities
 

 
0.4

Currency
 
Accrued liabilities
 
3.5

 
3.0

 
 
Other long-term liabilities
 
1.2

 
1.1

Total
 
 
 
$
6.5

 
$
7.1

With the exception of the interest rate derivative financial instruments (for which, realized gains are included within “Interest expense, net” in the Consolidated Statements of Operations), both realized and unrealized gains and losses on derivative financial instruments are included within “(Gains) losses on derivative financial instruments” in the Consolidated Statements of Comprehensive Income (Loss). Realized (gains) and losses on derivative financial instruments totaled the following: 
 
 
For the three months ended
 
For the six months ended
 
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Metal
 
$
(8.0
)
 
$
1.0

 
$
(33.1
)
 
$
2.0

Energy
 
0.2

 
(0.2
)
 
0.2

 
(0.3
)
Currency
 
1.2

 
0.2

 
2.2

 
(0.8
)
Interest Rate
 
0.4

 

 
0.5

 


                    
16

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

Metal Hedging
The selling prices of the majority of the orders for our products are established at the time of order entry or, for certain customers, under long-term contracts. As the related raw materials used to produce these orders can be purchased several months or years after the selling prices are fixed, margins are subject to the risk of changes in the purchase price of the raw materials used for these fixed price sales. In order to manage this transactional exposure, future, swaps or forward purchase contracts are purchased at the time the selling prices are fixed. As metal is purchased to fill these fixed price sales orders, future, swaps or forward contracts are then sold. We also maintain a significant amount of inventory on-hand to meet anticipated and unpriced future sales. In order to preserve the value of this inventory, future or forward contracts are sold at the time inventory is purchased. As sales orders are priced, future or forward contracts are purchased. These derivatives generally settle within three months. We can also use call option contracts, which function in a manner similar to the natural gas call option contracts discussed below, and put option contracts for managing metal price exposures. Option contracts require the payment of a premium which is recorded as a realized loss upon settlement or expiration of the option contract. Upon settlement of a put option contract, we receive cash and recognize a related gain if the closing price is less than the strike price of the put option. If the put option strike price is less than the closing price, no amount is paid and the option expires. As of June 30, 2019 we had 154.7 thousand metric tons and 304.5 thousand metric tons of metal buy and metal sell derivative contracts, respectively. As of December 31, 2018, we had 165.0 thousand metric tons and 293.0 thousand metric tons of metal buy and metal sell derivative contracts, respectively.
Energy Hedging
To manage our price exposure for natural gas purchases, we fix the future price of a portion of our natural gas requirements by entering into financial hedge agreements. Under these agreements, payments are made or received based on the differential between the monthly closing price on the New York Mercantile Exchange (“NYMEX”) and the contractual hedge price. We can also use a combination of call option contracts and put option contracts for managing the exposure to increasing natural gas prices while maintaining our ability to benefit from declining prices. Upon settlement of call option contracts, we receive cash and recognize a related gain if the NYMEX closing price exceeds the strike price of the call option. If the call option strike price exceeds the NYMEX closing price, no amount is received and the option expires unexercised. Upon settlement of a put option contract, we pay cash and recognize a related loss if the NYMEX closing price is lower than the strike price of the put option. If the put option strike price is less than the NYMEX closing price, no amount is paid and the option expires unexercised. Option contracts require the payment of a premium which is recorded as a realized loss upon settlement or expiration of the option contract. Natural gas cost can also be managed through the use of cost escalators included in some of our long-term supply contracts with customers, which limits exposure to natural gas price risk. As of June 30, 2019 and December 31, 2018, we had 4.1 trillion and 4.6 trillion of British thermal unit forward buy contracts, respectively.
We use independent freight carriers to deliver our products. As part of the total freight charge, these carriers include a per mile diesel surcharge based on the Department of Energy, Energy Information Administration’s (“DOE”) Weekly Retail Automotive Diesel National Average Price. From time to time we may enter into over-the-counter DOE diesel fuel swaps with financial counterparties to mitigate the impact of the volatility of diesel fuel prices on our freight costs. Under these swap agreements, we pay a fixed price per gallon of diesel fuel determined at the time the agreements were executed and receive a floating rate payment that is determined on a monthly basis based on the average price of the DOE Diesel Fuel Index during the applicable month. The swaps are designed to offset increases or decreases in fuel surcharges that we pay to our carriers. All swaps are financially settled. There is no possibility of physical settlement. As of June 30, 2019 and December 31, 2018, we had 3.5 million gallons and 4.3 million gallons of diesel fuel swap contracts, respectively.
Interest Rate Risk
We are exposed to variable interest rate risk on the Term Loan Facility. We entered into interest rate swaps to fix the LIBOR interest rate on $700.0 the Term Loan Facility for the period of October 31, 2018 through June 28, 2019. As of June 30, 2019, we had no interest rate swaps outstanding.
Currency Hedging
Our aerospace and heat exchanger businesses expose the operating results of our European and Asia Pacific operations to fluctuations in the euro and renminbi as the sales contracts are generally in U.S. dollars while the costs of production are in the local currency. In order to mitigate the risk that fluctuations in currencies may have on our business, we have entered into

                    
17

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

forward currency contracts. As of June 30, 2019 and December 31, 2018, we had euro forward contracts covering a notional amount of €62.6 million and €77.6 million, respectively.
Credit Risk
We are exposed to losses in the event of non-performance by the counterparties to the derivative financial instruments discussed above; however, we do not anticipate any non-performance by the counterparties. The counterparties are evaluated for creditworthiness and risk assessment prior to initiating trading activities with the brokers and periodically throughout each year while actively trading.
Recurring Fair Value Measurements
Derivative contracts are recorded at fair value using quoted market prices and significant other observable inputs. Fair value is defined by ASC 820, “Fair Value Measurements and Disclosures,” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3—Inputs that are both significant to the fair value measurement and unobservable.
We endeavor to use the best available information in measuring fair value. Where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. Such adjustments are generally based on available market evidence and unobservable inputs. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of June 30, 2019 and December 31, 2018, all of our derivative assets and liabilities represent Level 2 fair value measurements.
Other Financial Instruments
The carrying amount, fair values and level in the fair value hierarchy of our other financial instruments at June 30, 2019 and December 31, 2018 are as follows: 
 
 
June 30, 2019
 
December 31, 2018
 
 
Carrying
Amount
 
Fair
Value
 
Level in the Fair Value Hierarchy
 
Carrying
Amount
 
Fair
Value
 
Level in the Fair Value Hierarchy
Cash and cash equivalents
 
$
77.2

 
$
77.2

 
Level 1
 
$
108.6

 
$
108.6

 
Level 1
Restricted cash
 
6.1

 
6.1

 
Level 1
 
7.0

 
7.0

 
Level 1
ABL Facility
 
325.5

 
325.5

 
Level 2
 
253.7

 
253.7

 
Level 2
Term Loan Facility
 
1,067.5

 
1,091.0

 
Level 1
 
1,070.2

 
1,088.2

 
Level 1
2023 Junior Priority Notes
 
393.3

 
419.7

 
Level 1
 
392.5

 
410.1

 
Level 1
Exchangeable Notes
 
44.7

 
60.7

 
Level 3
 
44.6

 
60.7

 
Level 3
Zhenjiang Term Loans
 
154.0

 
154.4

 
Level 3
 
157.2

 
157.6

 
Level 3
The principal amount of the ABL Facility approximates fair value because the interest rate paid is variable and there have been no significant changes in the credit risk of Aleris International subsequent to the borrowings. The fair values of the Term

                    
18

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

Loan Facility and the 2023 Junior Priority Notes were estimated using market quotations. The fair value of Aleris International’s Exchangeable Notes was estimated using a binomial lattice pricing model based on the fair value of our common stock, a risk-free interest rate of 2.0% and 2.6% as of June 30, 2019 and December 31, 2018, respectively, and expected equity volatility of 60% as of June 30, 2019 and December 31, 2018. Expected equity volatility was determined based on historical stock prices and implied and stated volatilities of our peer companies. The principal amount of the Zhenjiang Term Loans approximates fair value because the interest rate paid is variable, is set for periods of six months or less and there have been no significant changes in the credit risk of Aleris Zhenjiang subsequent to the inception of the Zhenjiang Term Loans.
13. LEASES
We have leases for office space, warehousing, vehicles, mobile equipment and certain other equipment in our production facilities. Certain of these lease agreements provide rights to extend or terminate the contract which have been evaluated in estimating the lease term. Most of our lease contracts do not provide a readily determinable implicit rate. For these contracts, our estimated incremental borrowing rate is based on information available at the inception of the lease.
Leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheet. Lease expense for these leases is recognized on a straight-line basis over the term of the lease.
The components of lease expense were as follows:
 
 
For the three months ended
For the six months ended
 
 
June 30, 2019
 
June 30, 2019
Operating lease expense
 
$
1.2

 
$
2.4

 
 
 
 
 
Finance lease expense
 
 
 
 
Amortization of right-of-use assets
 
$
1.3

 
$
2.4

Interest on lease liabilities
 
0.3

 
0.4

Total finance lease expense
 
$
1.6

 
$
2.8

 
 
 
 
 
Short term lease expense
 
$
0.5

 
$
1.1

Supplemental cash flow information related to leases was as follows:
 
 
For the three months ended
 
For the six months ended
 
 
June 30, 2019
 
June 30, 2019
Cash paid for amounts included in the measurement of liabilities:
 
 
 
 
Operating cash flows from operating leases
 
$
(1.3
)
 
$
(2.5
)
Operating cash flows from finance leases
 
(0.3
)
 
(0.4
)
Financing cash flows from finance leases
 
(1.3
)
 
(2.3
)
Right-of-use assets obtained in exchange for lease obligations:
 
 
 
 
Operating leases
 
$
0.4

 
$
2.7

Finance leases
 
15.5

 
16.9


                    
19

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

Supplemental balance sheet information related to leases was as follows:
 
 
June 30, 2019
Operating leases
 
 
Operating lease right-of-use assets (a)
 
$
11.7

 
 
 
Current operating lease liabilities (a)
 
$
4.3

Long-term operating lease liabilities (a)
 
8.0

Total operating lease liabilities
 
$
12.3

 
 
 
Finance leases
 
 
Finance lease right-of-use asset, gross
 
$
33.2

Finance lease right-of-use asset, accumulated amortization
 
(9.3
)
Finance lease right-of-use asset, net (a)
 
$
23.9

 
 
 
Current finance lease liabilities (a)
 
$
4.6

Long-term finance lease liabilities (a)
 
19.6

Total finance lease liabilities
 
$
24.2

 
 
 
Weighted average remaining lease term
 
 
Operating leases
 
3.5 years

Finance leases
 
10.3 years

 
 
 
Weighted average discount rate
 
 
Operating leases
 
5.8
%
Finance leases
 
5.9
%
(a) Operating and finance lease right-of-use assets are included in “Other long-term assets” in the Consolidated Balance Sheet. Current operating and finance lease obligations are included in “Accrued liabilities” in the Consolidated Balance Sheet. Long-term operating and finance lease obligations are included in “Other long-term liabilities” in the Consolidated Balance Sheet.
Maturities of lease liabilities were as follows:
 
 
Operating Leases
 
Finance Leases
Period ending December 31,
 
 
 
 
2019 (excluding the six months ended June 30, 2019)
 
$
2.5

 
$
3.0

2020
 
4.4

 
5.1

2021
 
3.2

 
3.5

2022
 
1.4

 
2.6

2023
 
1.2

 
2.3

Thereafter
 
0.8

 
17.2

Total lease payments
 
13.5

 
33.7

Less imputed interest
 
(1.2
)
 
(9.5
)
Total
 
$
12.3

 
$
24.2

14. POTENTIAL ACQUISITION OF ALERIS CORPORATION
On July 26, 2018, we announced that we entered into a definitive agreement to be acquired by Novelis Inc., a subsidiary of Hindalco Industries Limited, for approximately $2,600.0, including the assumption of the Company’s outstanding

                    
20

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

indebtedness (the “Merger”). The Merger is expected to close in the fourth quarter of calendar year 2019, subject to customary regulatory approvals and closing conditions. There can be no assurance that the Merger will be consummated on the expected timing or at all.
15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Aleris Corporation, the direct parent of Aleris International, and Aleris International’s domestic restricted subsidiaries that guarantee Aleris International’s existing obligation under the Term Loan Facility and the ABL Facility are guarantors of the indebtedness under the 2023 Junior Priority Notes (the “Guarantor Subsidiaries”). Aleris Corporation and each of the Guarantor Subsidiaries have fully and unconditionally guaranteed (subject, in the case of the Guarantor Subsidiaries, to customary release provisions as described below), on a joint and several basis, to pay principal and interest related to the 2023 Junior Priority Notes and Aleris International and each of the Guarantor Subsidiaries are directly or indirectly 100% owned subsidiaries of Aleris Corporation. For purposes of complying with the reporting requirements of Aleris International and the Guarantor Subsidiaries, presented below are condensed consolidating financial statements of Aleris Corporation, Aleris International, the Guarantor Subsidiaries, and those other subsidiaries of Aleris Corporation that are not guaranteeing the indebtedness under the 2023 Junior Priority Notes (the “Non-Guarantor Subsidiaries”). The condensed consolidating balance sheets are presented as of June 30, 2019 and December 31, 2018. The condensed consolidating statements of comprehensive income (loss) are presented for the three and six months ended June 30, 2019 and 2018. The condensed consolidating statements of cash flows are presented for the six months ended June 30, 2019 and 2018.
The guarantee of a Guarantor Subsidiary will be automatically and unconditionally released and discharged under the indenture governing the 2023 Junior Priority Notes in the event of:
any sale of the Guarantor Subsidiary or of all or substantially all of its assets;
a Guarantor Subsidiary being designated as an “unrestricted subsidiary” in accordance with the indenture governing the 2023 Junior Priority Notes;
the release or discharge of a Guarantor Subsidiary from its guarantee under the Term Loan Facility, the ABL Facility or other indebtedness that resulted in the obligation of the Guarantor Subsidiary under the indenture governing the 2023 Junior Priority Notes; and
the requirements for legal defeasance or covenant defeasance or discharge of the indenture governing the 2023 Junior Priority Notes having been satisfied.

                    
21

ALERIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in millions)

 
 
As of June 30, 2019
 
 
Aleris Corporation (Parent)
 
Aleris International, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
23.0

 
$

 
$
55.2