make it more difficult for us to satisfy our financial obligations;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;
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adversely affect the terms under which suppliers provide goods and services to us;
limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we compete; and
place us at a competitive disadvantage compared to our competitors that have less debt.
In addition, if we are unable to meet our debt service obligations and pay our expenses, we may be forced to reduce or delay business activities and capital expenditures, sell assets, obtain additional debt or equity capital, restructure or refinance all or a portion of our debt before maturity or take other measures. Such measures may materially adversely affect our business. If these alternative measures are unsuccessful, we could default on our obligations, which could result in the acceleration of our outstanding debt obligations and could have a material adverse effect on our business, results of operations and financial condition.
In addition, a portion of our indebtedness is, and our future indebtedness may be, subject to variable rates of interest, exposing us to interest rate risk. See “Item 10. Additional Information—C. Material Contracts.” If interest rates increase, our debt service obligations on the variable rate indebtedness would increase, resulting in a reduction of our net income that could be significant, even though the principal amount borrowed would remain the same.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indentures and agreements governing our existing indebtedness do not fully prohibit us or our subsidiaries from doing so. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.
The terms of our indebtedness contain covenants that restrict our current and future operations, and a failure by us to comply with those covenants may materially adversely affect our business, results of operations and financial condition.
The agreements governing our existing indebtedness contains, and the agreements governing any future indebtedness we may incur would likely contain, a number of financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. These include, without limitation, restrictions on our ability to, among other things: (i) incur or guarantee additional debt; (ii) pay dividends and make other restricted payments and investments; (iii) create or incur certain liens; (iv) make certain loans, acquisitions or investments; (v) engage in sales of assets and subsidiary stock; (vi) enter into transactions with affiliates; (vii) transfer all or substantially all of our assets or enter into merger or consolidation transactions; and (viii) enter into sale and lease-back transactions.
In addition, thePan-U.S. ABL Facility for our Ravenswood, and Muscle Shoals, and Bowling Green sites provides that at any time during which borrowing availability thereunder is below 10% of the aggregate commitments under thePan-U.S. ABL Facility, we will be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 and a minimum Borrower EBITDA Contribution of 25%, in each case calculated on a trailing twelve-month basis. “Borrower EBITDA Contribution” means, for any period, the ratio of (x) the combined EBITDA of the borrowers under thePan-U.S. ABL Facility and their subsidiaries for such period, to (y) the consolidated EBITDA of the Company and its subsidiaries for such period.
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A failure to comply with our debt covenants could result in an event of default that, if not cured or waived, could have a material adverse effect on our business, results of operations and financial condition. If we default under our indebtedness, we may not be able to borrow additional amounts and our lenders could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees, to be due and payable, or take other remedial actions. Our indebtedness also contains cross-default provisions, which means that if an event of default occurs under certain material indebtedness, such event of default may trigger an event of default under our other indebtedness. If our indebtedness were to be accelerated, we cannot assure you that our assets would be sufficient to repay such indebtedness in full and our lenders could foreclose on our pledged assets.
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A deterioration in our financial position or a downgrade of our ratings by a credit rating agency could increase our borrowing costs, lead to our inability to access liquidity facilities, and adversely affect our business relationships.
A deterioration in our financial position or a downgrade of our credit ratings could adversely affect our financing, limit access to the capital or credit markets or our liquidity facilities, or otherwise adversely affect the availability of other new financing on favorable terms or at all, result in more restrictive covenants in agreements governing the terms of any future indebtedness that we incur, increase our borrowing costs, or otherwise impair our business, financial condition and results of operations.
While the terms of our other existing financing arrangements do not require us to maintain a specific credit rating, the commitments of Hitachi Capital America Corp. and Intesa Sanpaolo S.p.A., New York Branch (the “Wise Factoring Purchasers”), under the Wise Factoring Facility (as defined herein) are conditioned on, among other things, (i) Constellium’s corporate credit rating not having been withdrawn by either Standard & Poor’s or Moody’s or downgraded belowB- by Standard & Poor’s and B3 by Moody’s, and (ii) there not having occurred a material adverse change in the business condition, operations, or performance of Wise Alloys Funding II LLC, since renamed Constellium Muscle Shoals Funding II LLC, (the “New Wise RPA”), Wise Alloys LLC, since renamed Constellium Muscle Shoals LLC (“Wise Alloys”Muscle Shoals”), or Constellium Holdco II B.V (“Holdco II”).International. See “Item 10. Additional Information—C. Material Contracts—Wise Factoring Facilities.” If Constellium’s corporate credit rating is withdrawn by either Standard & Poor’s or Moody’s or downgraded belowB- by Standard & Poor’s and B3 by Moody’s, or a material adverse changeof these conditions occurs, in the business condition, operations or performance of the New Wise RPA Seller, Wise Alloys, or Holdco II, a condition precedent to the obligation of the Wise Factoring Purchasers under the Wise Factoring Facility to purchase receivables from the New Wise RPA Seller will not be satisfied, and all purchases under the Wise Factoring Facility will become uncommitted. If the Wise Factoring Facility is not extended, refinanced or replaced, Wise’s cash collections from customers will be on longer terms than currently funded through the Wise Factoring Facility. As a result, the Company’s liquidity could meaningfully decrease, causing the Company to have insufficient liquidity to operate its business and service its indebtedness, unless another source of liquidity is identified.
A deterioration of our financial position or a downgrade of our credit ratings for any reason could also increase our borrowing costs and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. As discussed above, we enter into various forms of hedging arrangements against currency, interest rate or metal price fluctuations and trade metal contracts on the LME. Financial strength and credit ratings are important to the availability and pricing of these hedging and trading activities. As a result, any downgrade of our credit ratings may make it more costly for us to engage in these activities, and changes to our level of indebtedness may make it more difficult or costly for us to engage in hedging and trading activities in the future.
Our existing, and any future, variable rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.
A portion of our indebtedness is, and our future indebtedness may be, subject to variable rates of interest, exposing us to interest rate risk. See “Item 10. Additional Information—C. Material Contracts.” If interest rates increase, our debt service obligations on the variable rate indebtedness would increase, resulting in a reduction of our net income that could be significant, even though the principal amount borrowed would remain the same.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. Although there can be no assurances, we believe that the cash provided by our operations will be sufficient to provide for our
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cash requirements for the foreseeable future. However, our ability to satisfy our obligations will depend on our future operating performance and financial results, which will be subject, in part, to factors beyond our control, including interest rates and general economic, financial and business conditions. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an
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amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If we are unable to generate sufficient cash flow to service our debt, we may be required to:
refinance all or a portion of our debt;
obtain additional financing;
sell some of our assets or operations;
reduce or delay capital expenditures and acquisitions;
reduce or delay our research and development efforts; or
revise or delay our strategic plans.
If we are required to take any of these actions, it could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt instruments.
Our historical financial information presented in this report may not be representative of future results, our relatively short history operating as a standalone company may pose some challenges and we have incurred and will continue to incur increased costs and demands upon resources as a result of being a public company.
Due to inherent uncertainties of our business, the historical financial information does not necessarily indicate what our results of operations, financial position, cash flows or costs and expenses will be in the future as past performance is not necessarily an indicator of future performance. In addition, we have a relatively short history operating as a standalone company which may pose some operational challenges to our management. We incur significant legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Exchange Act and regulations regarding internal control over financial reporting, as well as compliance with NYSE requirements. Our management is required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We evaluate and monitor developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs as rules and regulations change. Our reporting and other compliance obligations as a public company may place a significant strain on our management, operational and financial resources and systems for the foreseeable future which may divert management’s attention from running our core business or otherwise materially adversely affect our operating results.
If we do not adequately maintain and continue to evolve our financial reporting and internal controls (which could result in higher operating costs), we may be unable to accurately report our financial results or prevent fraud.
We will need to continue to improve existing, and implement new, financial reporting and management systems, procedures and controls to manage our business effectively and support our growth in the future. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures and controls, or the obsolescence of existing financial control systems, could harm our ability to accurately forecast sales demand and record and report financial and management information on a timely and accurate basis.
We could also suffer a loss of confidence in the reliability of our financial statements if our independent registered public accounting firm reports a material weakness in our internal controls, if we do not develop and
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maintain effective controls and procedures or if we are otherwise unable to deliver timely and reliable financial information. Any loss of confidence in the reliability of our financial statements or other negative reaction to our failure to develop timely or adequate disclosure controls and procedures or internal controls could result in a decline in the trading price of our ordinary shares. In addition, if we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets and the price of our ordinary shares may be materially adversely affected.
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Risks Related to Our Corporate Structure and Ownership of our Ordinary Shares
We are a foreign private issuer under the U.S. securities laws and within the meaning of the New York Stock Exchange (“NYSE”) rules. As a result, we qualify for and rely on exemptions from certain corporate governance requirements and may rely on other exemptions available to us in the future.
As a “foreign private issuer,” as such term is defined in Rule 405 under the Securities Act of 1933, as amended (the “Securities Act”), we are permitted to follow our home country practice in lieu of certain corporate governance requirements of the NYSE, including the NYSE requirements that (i) a majority of the board of directors consists of independent directors; (ii) the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and (iii) the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.NYSE. Foreign private issuers are also exempt from certain U.S. securities law requirements applicable to U.S. domestic issuers, including the requirement to file quarterly reports on Form10-Q, to distribute a proxy statement pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the solicitation of proxies for shareholder meetings, and Section 16 filings.
We rely on the exemptions for foreign private issuers and follow Dutch corporate governance practices in lieu of some of the NYSE corporate governance rules specified above.rules. We currently rely on exemptions from the requirements set out in (i), (ii) and (iii) above, but in the future, we may change whatthe home country corporate governance practices we follow, and, accordingly, which exemptions we rely on from the NYSE requirements. So long as we qualify as a foreign private issuer, you may not have the same protections applicable to companies that are subject to all of the NYSE corporate governance requirements.
If we were to lose our status as a foreign private issuer or otherwise not be considered a foreign private issuer, the regulatory and compliance costs to the Company could be significantly more than the costs we occurincur as a foreign private issuer. We would be required to file periodic reports, including audited financial statements, and registration statements on U.S. domestic issuer forms with the SEC, including proxy statements pursuant to Section 14 of the Exchange Act. These SEC disclosure requirements are more detailed and extensive than the forms available to a foreign private issuer. Furthermore, if we were not a foreign private issuer, we would be required to meet such filing requirements on a more abbreviated timetable than is applicable to our current filings with the SEC. In addition, our directors, executive officers and 10% owners would become subject to insider short-swing profit disclosure and recovery rules under Section 16 of the Exchange Act. We could also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers. In addition, we would lose our ability to rely upon exemptions from certain NYSE corporate governance requirements that are available to foreign private issuers. In particular, within six months of losing our foreign private issuer status we would be required to have a majority of independent directors and a nominating/corporate governance committee and a compensation committee comprised entirely of independent directors, unless other exemptions are available under the NYSE rules. Any of these changes would likely increase our regulatory and compliance costs and expenses, which could have a material adverse effect on our business, financial condition and results of operations.
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If we fail to meet the continuing listing requirements to maintain the listing of our ordinary shares on the NYSE, our ordinary shares could be delisted by the NYSE prior to any voluntary delisting.
Our ordinary shares are currently listed on the NYSE under the symbol “CSTM” (we voluntarily delisted our ordinary shares from Euronext Paris on February 2, 2018). We must meet continuing listing requirements to maintain the listing of our ordinary shares on the NYSE. If we fail to meet certain listing standards on the NYSE, our ordinary shares may be subject to delisting after the expiration of the period of time, if any, that we are allowed for regaining compliance. We may also voluntarily delist our ordinary shares from the NYSE under certain circumstances. There can be no assurance that our ordinary shares will remain listed on the NYSE. Any delisting of our ordinary shares could adversely affect a shareholder’s ability to dispose, or obtain quotations as to the market value, of such shares and the market price and liquidity of such ordinary shares.
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We do not comply with all the provisions of the Dutch Corporate Governance Code, which could affect your rights as a shareholder.
We are subject to the Dutch Corporate Governance Code, which applies to all Dutch companies listed on a regulated market, whether in the Netherlands or elsewhere, including the NYSE. The Dutch Corporate Governance Code contains principles and best practice provisions for boards of directors, shareholders and general meetings of shareholders, financial reporting, auditors, disclosure, compliance and enforcement standards. The Dutch Corporate Governance Code is based on a “comply or explain” principle. Accordingly, companies are required to disclose in their annual reports, filed in the Netherlands, whether they comply with the provisions of the Dutch Corporate Governance Code and, if they do not comply with those provisions, to give the reasons for such noncompliance. The principles and best practice provisions apply to the board (relating to, among other matters, the board’s role and composition, conflicts of interest and independence requirements, board committees and remuneration), shareholders and the general meeting of shareholders (for example, regarding anti-takeover protection and obligations of a company to provide information to its shareholders), and financial reporting (such as external auditor and internal audit requirements). We have decided not to comply with a number of the provisions of the Dutch Corporate Governance Code because such provisions conflict, in whole or in part, with the corporate governance rules of the NYSE and U.S. securities laws that apply to our company whose ordinary shares are traded on the NYSE, or because such provisions do not reflect best practices of global companies listed on the NYSE. This may affect your rights as a shareholder and you may not have the same level of protection as a shareholder in a Dutch company that fully complies with the Dutch Corporate Governance Code. See “Item 16G. Corporate Governance—Dutch Corporate Governance Code.”
The market price of our ordinary shares may fluctuate significantly, and you could lose all or part of your investment.
The market price of our ordinary shares may be influenced by many factors, some of which are beyond our control and could result in significant fluctuations, including: (i) the failure of financial analysts to cover our ordinary shares, changes in financial estimates by analysts or any failure by us to meet or exceed any of these estimates; (ii) actual or anticipated variations in our operating results; (iii) announcements by us or our competitors of significant contracts or acquisitions; (iv) the recruitment or departure of key personnel; (v) regulatory and litigation developments; (vi) developments in our industry; (vii) future sales of our ordinary shares; and (viii) investor perceptions of us and the industries in which we operate.
In addition, the stock market in general has experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities, securities class action litigation has been instituted against these companies. If any such litigation is instituted against us, it could materially adversely affect our business, results of operations and financial condition.
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Sales of substantial amounts of our ordinary shares in the public market, or the perception that these sales may occur, could cause the market price of our ordinary shares to decline.
Sales of substantial amounts of our ordinary shares in the public market, or the perception that these sales may occur, could cause the market price of our ordinary shares to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. In addition, the sale of our ordinary shares by our officers and directors in the public market, or the perception that such sales may occur, could cause the market price of our ordinary shares to decline.
Prior to the completion of our IPO in May 2013, we amended our memorandum and articles of association (the “Amended and Restated Articles of Association”) to provide authorization to issue up to 400,000,000 Class A ordinary shares. Since August 18, 2015, the date of our effective Amended and Restated Articles of Association, our authorized capital amounts to €8,000,000 and consists of 400,000,000 Class A ordinary shares. On November 3, 2017, we sold 28,750,000 Class A ordinary shares in an underwritten public offering pursuant to an Underwriting Agreement (the “Underwriting Agreement”), dated as of October 31, 2017, by and among the Company, Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc., as representatives of the underwriters named therein. A total of 134,510,623 Class A ordinary shares are outstanding as of December 31, 2017.
We may issue ordinary shares or other securities from time to time as consideration for, or to finance, future acquisitions and investments or for other capital needs. We cannot predict the size of future issuances of our
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shares or the effect, if any, that future sales and issuances of shares would have on the market price of our ordinary shares. If any such acquisition or investment is significant, the number of ordinary shares or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial and may result in additional dilution to our shareholders. We may also grant registration rights covering ordinary shares or other securities that we may issue in connection with any such acquisitions and investments.
Any shareholder acquiring 30% or more of our voting rights may be required to make a mandatory takeover bid or be subject to voting restrictions.
Under Dutch law, if a party directly or indirectly acquires control of a Dutch company, all or part of whose shares are admitted to trading on a regulated market, that party may be required to make a public offer for all other shares of the company (mandatory takeover bid). “Control” is defined as the ability to exercise, whether or not in concert with others, at least 30% of the voting rights at a general meeting of shareholders. Controlling shareholders existing before an offering are generally exempt from this requirement, unless their controlling interest drops below 30% and then increases again to 30% or more. The purpose of this requirement is to protect the interests of minority shareholders. Any shareholder acquiring 30% or more of our voting rights may be limited in its ability to vote on our ordinary shares.
Provisions of our organizational documents and applicable law may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their ordinary shares or to make changes in our board of directors.
Several provisions of our Amended and Restated Articles of Association and the laws of the Netherlands could make it difficult for our shareholders to change the composition of our board of directors, thereby preventing them from changing the composition of our management. In addition, the same provisions may discourage, delay or prevent a merger, consolidation or acquisition that shareholders may consider favorable. Provisions of our Amended and Restated Articles of Association impose various procedural and other requirements, which could make it more difficult for shareholders to effect certain corporate actions. These anti-takeover provisions could substantially impede the ability of our shareholders to benefit from a change in control and, as a result, may materially adversely affect the market price of our ordinary shares and your ability to realize any potential change of control premium.
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Our general meeting of shareholders has empowered our board of directors to issue shares and restrict or exclude preemptive rights on those shares for a period of five years. Accordingly, an issue of new shares may make it more difficult for a shareholder to obtain control over our general meeting of shareholders.
In addition, because certain of our products may have applications in the defense sector, we may be subject to rules and regulations in France and other jurisdictions that could impede or discourage a takeover or other change in control of Constellium or its subsidiaries. In particular, Constellium supplies aluminium alloy products, such as plates, sheets, profiles, tubes and castings, and related services and research and development (“R&D”) activities in connection with aerospace and defense programs in France. As a result, a controlling investment in Constellium or certain of its French subsidiaries, or the purchase of assets constituting a business that produces products or provides services with applications in the defense sector, by a company or individual that is considered to be foreign ornon-resident in France may be subject to the French Monetary and Financial Code, which requires prior authorization of the French Ministry of Economy.
The rights of our shareholders may be different from the rights of shareholders governed by the laws of U.S. jurisdictions.
Our corporate affairs are governed by our Amended and Restated Articles of Association and by the laws governing companies incorporated in the Netherlands. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions. In the performance of its duties, our board of directors is required by Dutch law to consider the interests of our company, its shareholders, its employees and other stakeholders, in all cases with due observation of the principles of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a shareholder. See “Item 16G. Corporate Governance—Dutch Corporate Governance Code.”
Although shareholders have the right to approve legal mergers or demergers, Dutch law does not grant appraisal rights to a company’s shareholders who wish to challenge the consideration to be paid upon a domestic legal merger or demerger of a company. In addition, if a third party is liable to a Dutch company, under Dutch law shareholders generally do not have the right to bring an action on behalf of the company or to bring an action on their own behalf to recover damages sustained as a result of a decrease in value, or loss of an increase in
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value, of their stock. Only in the event that the cause of liability of such third party to the company also constitutes a tortious act directly against such shareholder and the damages sustained are permanent, may that shareholder have an individual right of action against such third party on its own behalf to recover damages. The Dutch Civil Code provides for the possibility to initiate such actions collectively. A foundation or an association whose objective, as stated in its articles of association, is to protect the rights of persons having similar interests, may institute a collective action. The collective action cannot result in an order for payment of monetary damages but may result in a declaratory judgment (verklaring voor recht), for example, declaring that a party has acted wrongfully or has breached a fiduciary duty. The foundation or association and the defendant are permitted to reach (often on the basis of such declaratory judgment) a settlement that provides for monetary compensation for damages. A designated Dutch court may declare the settlement agreement binding upon all the injured parties with anopt-out choice for an individual injured party. An individual injured party, within the period set by the court, may also individually institute a civil claim for damages if such injured party is not bound by a collective agreement.
The provisions of Dutch corporate law and our Amended and Restated Articles of Association have the effect of concentrating control over certain corporate decisions and transactions in the hands of our board of directors. As a result, holders of our shares may have more difficulty in protecting their interests in the face of actions by members of the board of directors than if we were incorporated in the United States.
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United States civil liabilities may not be enforceable against us.
We are incorporated under the laws of the Netherlands and substantial portions of our assets are located outside the United States. In addition, certain directors, officers and experts named herein reside outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or such other persons residing outside the United States, or to enforce outside the United States judgments obtained against such persons in U.S. courts in any action, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. In addition, it may be difficult for investors to enforce, in original actions brought in courts in jurisdictions located outside the United States, rights predicated upon the U.S. federal securities laws.
There is no treaty between the United States and the Netherlands for the mutual recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not be enforceable in the Netherlands unless the underlying claim isre-litigated before a Dutch court. However, under current practice, the courts of the Netherlands may be expected to render a judgment in accordance with the judgment of the relevant U.S. court, provided that such judgment (i) is a final judgment and has been rendered by a court which has established its jurisdiction on the basis of internationally accepted grounds of jurisdictions, (ii) has not been rendered in violation of elementary principles of fair trial, (iii) is not contrary to the public policy of the Netherlands, and (iv) is not incompatible with (a) a prior judgment of a Netherlands court rendered in a dispute between the same parties, or (b) a prior judgment of a foreign court rendered in a dispute between the same parties, concerning the same subject matter and based on the same cause of action, provided that such prior judgment is not capable of being recognized in the Netherlands. It is uncertain whether this practice extends to default judgments as well.
Based on the foregoing, there can be no assurance that U.S. investors will be able to enforce against us or members of our board of directors, officers or certain experts named herein who are residents of the Netherlands or countries other than the United States any judgments obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal securities laws.
In addition, there is doubt as to whether a Dutch court would impose civil liability on us, the members of our board of directors, our officers or certain experts named herein in an original action predicated solely upon
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the U.S. federal securities laws brought in a court of competent jurisdiction in the Netherlands against us or such members, officers or experts, respectively.
If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our ordinary shares depends in part on the research and reports that securities or industry analysts publish about us, our business or our industry. We may have limited research coverage by securities and industry analysts. If no significant securities or industry analysts cover our company, the trading price for our shares could be adversely affected. In the event that one or more of the analysts who cover us downgrade our stock, our share price could decline. If one or more of these analysts, or those who currently cover us, ceases to cover us or fails to publish regular reports on us, interest in the purchase of our shares could decrease, which could cause our stock price or trading volume to decline.
Our plan to convert the Company into aSocietas Europaea and transfer our corporate seat from the Netherlands to France is subject to various risks and uncertainties, including shareholder approval, and may not be completed in accordance with the expected plans or at all.
We announced in July 2017 that we intend to move our corporate seat to France and close our Amsterdam office (the “Corporate Seat Transfer”). The Corporate Seat Transfer is intended to enable us to reorganize in a
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manner that would, among other things, reduce costs and simplify our corporate structure. See “Item 4. Information on the Company—B. Business Overview—Recent Developments—Plan to Transfer Corporate Seat to France.”
The Corporate Seat Transfer is subject to shareholder approval. Pursuant to governing law, two separate shareholder approvals are required for the conversion from its present form, a Dutch public company orNaamloze Vennootschap (“NV”), into a European public company (Societas Europaea or “SE”) and for the Corporate Seat Transfer. We are required to obtain shareholder approval for, first, the conversion into an SE and, second, the transfer of the corporate seat to France. The holding of the first shareholder meeting can only take place at the end of the negotiations with the employee representative body known as the Special Negotiation Body (the “SNB”), with which we are negotiating the involvement of our European employees within the proposed SE corporate form, the duration and results of which are not entirely within our control. If we do not obtain both of the required shareholder approvals we will not be able to consummate the Corporate Seat Transfer or realize the anticipated benefits.
We are continuing to evaluate the requirements for effectuating such conversion and transfer, and it is possible that adverse impacts of such requirements on our Company or failure to obtain required approvals could delay or prevent the completion of such plans or could cause us to materially modify or abandon such plans. If the Corporate Seat Transfer is not approved or successfully completed, we will continue to be governed by Dutch law.
We may not achieve the anticipated benefits from the Corporate Seat Transfer.
If approved by our shareholders and implemented by management, the Corporate Seat Transfer may not result in the expected benefits. A variety of factors, some of which are outside the control of the Company, could result in the actual benefits that we realize from the Corporate Seat Transfer to be materially different from those we currently expect. Any failure or delay in the implementation of the Corporate Seat Transfer may reduce the expected benefits from such transaction, which could have an adverse effect on our results of operations. In such event, we may not be able to reduce our corporate cost structure and benefit from additional potential tax savings to the extent we expect would be possible as a public limited liability company governed by the laws of France.
If the Corporate Seat Transfer is completed, we may be exposed to the risk of future adverse changes in French law which may have an adverse effect on our results of operations.
If the Corporate Seat Transfer is approved and completed, we will be a public limited liability company registered under and governed by the laws of France and our revised articles of association will be amended to conform to French corporate law. As a result, the Company would be subject to the risk of future changes in French law (including French corporate and tax law), which could have adverse effects on our results of operations.
The rights of shareholders after the Corporate Seat Transfer, if approved and completed, will not be the same as the rights of the shareholders at present.
We are currently subject to Dutch statutory rules governing public limited liability companies. If the Corporate Seat Transfer is approved and completed, we will be a public limited liability company registered under the laws of France and the rights of holders of our securities will be governed by French corporate law and our revised articles of association, as amended to conform to French corporate law. Due to differences between Dutch and French law, and differences between our constituent documents before and after implementing the Corporate Seat Transfer, your rights as a shareholder would change and may be limited if the Corporate Seat Transfer is approved and completed.
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Risks Related to Taxation
Increases or decreases in income tax rates, changes in income tax laws, additional income tax liabilities due to unfavorable resolution of tax audits and challenges to our tax position could have a material adverse impact on our financial results.
We operate in multiple tax jurisdictions and believe that we file our tax returns in compliance with the tax laws and regulations of these jurisdictions. Various factors determine our effective tax rate and/or the amount we are required to pay, including changes in or interpretations of tax laws and regulations in any given jurisdiction or global- andEU-based initiatives such as the Action Plan on Base Erosion and Profit Shifting (“BEPS”) of the Organization for EconomicCo-operation and Development (the “OECD”) and the EUAnti-Tax Avoidance Directive (EU/2016/1164 as amended by EU/2017/952)952, the “ATAD”) which aim among other things to address tax avoidance by multinational companies, changes in geographical allocation of income and expense, our ability to use net operating loss and other tax attributes, and our evaluation of our deferred tax assets that requires significant judgment. The current incorporation into domestic tax law of the OECD principles related to BEPS included in the final reports released by the OECD as well as the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS signed in Paris on June 7, 2017 could increase administrative efforts within the Company and impact existing structures. Furthermore, the European Commission published a corporate reform package proposal on October 25, 2016 including three new proposals that aim at(i) re-launching the Common Consolidated Corporate Tax Base (“CCCTB”) which is a single set of rules to compute companies’ taxable profits in the EU, (ii) avoiding loopholes associated with profit-shifting for tax between EU countries andnon-EU countries, and (iii) providing new dispute resolution rules to relieve problems with double taxation for businesses. Changes to our effective tax rate could materially adversely affect our financial position, liquidity, results of operations and cash flows.
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In addition, due to the size and nature of our business, we are subject to ongoing reviews by taxing authorities on various tax matters, including challenges to positions we assert on our income tax and withholding tax returns. We accrue income tax liabilities and tax contingencies based upon our best estimate of the taxes ultimately expected to be paid after considering our knowledge of all relevant facts and circumstances, existing tax laws and regulations, our experience with previous audits and settlements, the status of current tax examinations and how the tax authorities and courts view certain issues. Such amounts are included in income taxes payable, othernon-current liabilities or deferred income tax liabilities, as appropriate, and updated over time as more information becomes available or on the basis of the lapse of the statute of limitation. We record additional tax expenseexpenses or reduce tax expenses in the period in which we determine that the recorded tax liability is less than or in excess of the ultimate assessment we expect. We are currently subject to audit and review in a number of jurisdictions in which we operate, and further audits may commence in the future.
The Company is incorporated under the laws of the Netherlands and on this basis is subject to Dutch tax laws as a Dutch resident taxpayer. In July 2017, we announced the Corporate Seat Transfer. In anticipation of the envisaged Corporate Seat Transfer, the Company is in the process of executinghas executed certain restructuring steps including amongst others the establishment of a French branch which is engaged in holding activities.activities and is the head of our French tax consolidated group. We believe that, until completion of the Corporate Seat Transfer, because of the manner in which we conduct our business, the Company remains resident only in the Netherlands and has a French branch, which is subject to French taxes for the operations attributable to this branch. The Company will in principle have to continue filing on an annual basis a Dutch corporate income tax return following the Corporate Seat Transfer. As we anticipate that the Company will not have a permanent establishment in the Netherlands following the Corporate Seat Transfer and as we anticipate that the double tax treaty between the Netherlands and France will on that basis allocate taxation rights with respect to any income of the Company to France, this could possibly be a nil return. We have approached the tax authorities in the Netherlands (“Dutch Revenue”) to apply for a tax ruling confirming that for book years starting after the Corporate Seat Transfer this filing requirement will stop. The Company also believes that the Corporate Seat Transfer does not trigger a Dutch corporate income tax cost as the Company may not have assets and/or liabilities that include hidden taxable reserves and/or goodwill and the
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Company has tax losses which couldoff-set corporate income tax due, if any. Following the transfer of its corporate seat to France, if effectuated, the Company will become subject to the laws of France. See “Item 4. Information on the Company—B. Business Overview—Recent Developments—Plan to Transfer Corporate Seat to France” and the risk factors below for a discussion of the Corporate Seat Transfer and the risks related thereto.
However, ifIf our tax position were successfully challenged by applicable tax authorities, or if there were changes in the tax laws, tax treaties, or the interpretation or application thereof (which could in certain circumstances have retroactive effect) or in the manner in which we conduct our business, this could materially adversely affect our financial position.
We may not be able to make use of the remittance reduction with retroactive effect.
Currently, for Dutch dividend withholding tax purposes, we may be able to use the remittance reduction with respect to dividends received by Holdco II from our qualifying foreign subsidiaries. However, on the basis of a conclusion of the Advocate General to the Court of Justice of the European Union (CJEU), the Dutch Cabinet has announced emergency remedial measures in the event the CJEU were to follow this conclusion about the ‘per element’ approach, which may also have an impact on the remittance reduction. The emergency remedial measures mean that, with retroactive effect to 11:00 a.m. on October 25, 2017, some Dutch corporate income tax and dividend withholding tax rules, such as the remittance reduction, will also have to be applied in domestic relationships as if there is no fiscal unity. At present, there is still uncertainty about how the remedial measures will exactly be implemented and when. However, there is a risk that we can no longer make use of the remittance reduction with retroactive effect to 11:00 a.m. on October 25, 2017 in relation to dividends that are received by Holdco II from our qualifying foreign subsidiaries.
We may have to withhold Dutch withholding taxes on interest payments starting in 2019.
The new Dutch government has—as part of a coalition agreement published on October 10, 2017—announced that it may start levying withholding taxes on interest payments to “low tax jurisdictions.” At this stage no legislative proposal has been published yet. The Annex to the published coalition agreement suggests that such withholding taxes on interest may at the earliest be levied as from 2023.
If we pay dividends after the Corporate Seat Transfer, we may need to withhold Dutch dividend withholding tax on any dividends payable to Dutch resident holders of our ordinary shares,non-Dutch resident holders of ordinary shares with a taxable presence in the Netherlands and holders of our shares from which the identity cannot be assessed upon a payment of a dividend.
After the Corporate Seat Transfer, if effectuated, our dividends paid on our ordinary shares generally should be subject to French dividend withholding tax and not to Dutch dividend withholding tax on the basis of the double tax treaty between the Netherlands and France. However, Dutch dividend withholding tax may be required to be withheld from any such dividends paid, if and when paid to Dutch resident holders of our ordinary shares (andnon-Dutch resident holders of our ordinary shares that have a permanent establishment in the Netherlands to which the ordinary shares are attributable). We have approached Dutch Revenue to apply for a tax ruling confirming that no withholding of any Dutch dividend tax is applicable to any dividends paid by us after the Corporate Seat Transfer. Should we not obtain the tax ruling from Dutch Revenue, we will be required to identify our shareholders in order to assess whether there are Dutch resident holders of our ordinary shares ornon-Dutch resident holders of our ordinary shares with a permanent establishment in the Netherlands to which the ordinary shares are attributable in respect of which Dutch dividend tax has to be withheld on dividends paid after the Corporate Seat Transfer. Such identification may not always be possible in practice. If the identity of our shareholders cannot be assessed upon a payment of dividend after the Corporate Seat Transfer, withholding of both French and Dutch dividend withholding tax from such dividend may occur. This could adversely affect the value of our ordinary shares.
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We may have to pay Dutch dividend withholding tax and Dutch corporate income tax upon the conversion of the Company from an NV into an SE.
As part of the Corporate Seat Transfer, the Company will be converted from an NV into an SE. Dutch dividend withholding tax may be required to be paid upon the conversion in case such conversion should be considered a deemed liquidation for Dutch dividend withholding tax purposes. Similarly, if the conversion would be considered a deemed liquidation, income may be recognized that could trigger a Dutch corporate income tax costs. We believe Dutch Revenue should—also taking into account statements made during the legislative history—not have compelling reasons to apply the deemed liquidation rule in our case as the envisaged conversion is based on the EU Council Regulation on the Statute for an European Company rather than on the Dutch Civil Code. Should the conversion nevertheless be considered a deemed liquidation, we or our shareholders may be faced with Dutch dividend withholding tax for the balance between the fair market value of our ordinary shares and the amount of the fiscally recognizedpaid-up share capital on such ordinary shares. As mentioned, if the conversion nevertheless would be considered a deemed liquidation, income may be recognized. The Company believes that such income should not trigger a Dutch corporate income tax cost as the Company may not have assets and/or liabilities that include hidden taxable reserves and/or goodwill and the Company has tax losses which couldoff-set corporate income tax due, if any. We have approached Dutch Revenue to apply for a tax ruling confirming that no Dutch dividend withholding tax or Dutch corporate income tax is triggered upon the conversion.
After the Corporate Seat Transfer, dividends paid on our ordinary shares will be subject to French withholding tax on dividends.
Under French law, dividends paid by a French corporation, as the Company would be after the completion of the Corporate Seat Transfer, tonon-residents of France are generally subject to French withholding tax at a rate of (i) 12.8% for payments to individuals, (ii) 15% for payments tonot-for-profit organizations whose head office is located in a member State of the European Union or in another State party to the European Economic Area Agreement which has entered into a convention on administrative assistance with France to fight tax evasion and fraud, and (iii) 30% until December 31, 2019, 28% as from January 1, 2020, 26.5% as from January 1, 2021, 25% as from January 1, 2022, for payments to legal persons or organizations other than those mentioned at (ii). The withholding tax rate is increased to 75% for dividends paid by a French corporation in anon-cooperative State or territory within the meaning of Article238-0 A of the FTC.
Under theFrance-U.S. Treaty, the rate of French withholding tax on dividends paid to an eligible U.S. holder who is a U.S. resident as defined pursuant to the provisions of theFrance-U.S. Treaty and whose ownership of the ordinary shares is not effectively connected with a permanent establishment or fixed base that such U.S. holder has in France, may be reduced to 15% (or 5% if such U.S. holder is a corporation and owns directly or indirectly at least 10% of the share capital of the issuing company).
The impact of recent U.S. Tax reform is uncertain.
New U.S. federal tax legislation (commonly referred to as “The Tax Cuts and Jobs Act”) was enacted in December 2017. This legislation made significant changes to the U.S. Internal Revenue Code, many of which are highly complex and may require interpretations and implementing regulations. As a result, we may incur meaningful expenses (including professional fees) as the new legislation is implemented. The expected impact of certain aspects of the legislation is unclear and subject to change.
French tax legislation may restrict the deductibility, for French tax purposes, of all or a portion of the interest on our indebtedness incurred in France, thus reducing the cash flow available to service our indebtedness.
French tax provisions restricting the deductibility of interest by reference to the French tax group’ EBITDA
Under Article 212 § IIarticle 223 B bis of the French Tax Code (tax code général des impôts(“FTC”) (the “FTC”which implemented article 4 of the EUAnti-Tax Avoidance Directive EU/2016/1164 of 12 July 2016 (“ATAD Directive”), deduction of net financial expenses incurred by a French tax group is allowed up to a maximum amount which depends on whether the said French tax group is deemed thinly-capitalized or not.
A French tax group is deemed thinly-capitalized for a financial year when the average amount of the sums left or made available during such financial year to member companies of the French tax group by related companies that are not members of the French tax group (subject to certain adjustments) exceeds 1.5 times the total shareholders’ equity of the French tax group.
| a) | In the case where the French tax group is not deemed thinly-capitalized, deduction of the net financial expenses borne by the French tax group is allowed up to the greater of (i) €M 3.0 and (ii) 30% of the French tax group’s EBITDA (subject to certain safe-harbor rules). |
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| b) | In the case where the French tax group is deemed thinly-capitalized (subject to certain safe-harbor rules) deduction of the net financial expenses borne by the French tax group is allowed up the sum of |
| - | the amount of the net financial expenses borne by the French tax group multiplied by the ratio R of (x) the debt of the French tax group towards unrelated parties plus 1.5 times the total shareholders’ equity over (y) the total debt of the French tax group, up to the greater of (i) €M 3.0 and (ii) 30% of the French tax group’s EBITDA, multiplied by the ratio R; and |
| - | the amount of the net financial expenses borne by the French tax group multiplied by 1 – ratio R, up to the greater of (i) €M1.0 and (ii) 10% of the French tax group’s EBITDA, multiplied by 1 – ratio R. |
Disallowed interest and unused interest capacity can be carried forward, subject to certain limitations.
Similar interest deduction limitations apply to the French companies that are not part of a French tax group.
French tax provisions restricting the deductibility of interest paid on loans grantedto shareholders
Interest paid by a related party or on loans granted by a third partycompanies that are guaranteed by a
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related party (a “Third Party Assimilated to a Related Party”) may be subject to certain limitations pursuantFrench corporate income to French thin-capitalization rules.
These thin-capitalization rules could apply at the level of the Issuer’s French subsidiaries for any amount of the proceeds of the Notes (as defined below) used by the Issuer to grant intragroup loans to such subsidiaries as well as, more generally, in respect of any loans contracted by the Issuer’s French subsidiaries from any related party or Third Party Assimilated to a Related Party. As from the effective date of the Corporate Seat Transfer, these rules would also apply in respect of any loans contracted by the Issuer from any related party or Third Party Assimilated to a Related Party.
It should also be noted that interest paid by an entity to itstheir shareholders are only tax deductible up to the rate referred to in ArticleArticle 39-1-3 of the FTC (i.e. the annual average of the average effective floating rates on bank loans to companies with an initial maturity exceeding two years). By exception, Article 212§ I-a) of the FTC provides that interest incurred on loans granted by a related party is deductible up to the rate referred to in Article39-1-3 of the FTC or, if higher, up to the rate that the borrowing entitycompany could have obtained from independent financial credit institutions in similar circumstances. These rules could apply (i) at
French tax provisions restricting the level of the Issuer’s French subsidiaries for any intragroup loans granted to such subsidiaries from any related party and (ii) to the Issuer as from the effective date of the Corporate Seat Transfer.
In addition, Article 209 § IX of the FTC provides for a limitation of tax deductibility of financial expenses incurred in relationinterest paid to the acquisition of shares that benefit from the participation-exemption regime, provided at Article 219 I aquinquiesrelated parties of the FTC, by a French company if the company is not able to demonstrate, under conditions further specified at Article 209 § IX, that (i) the decisions relating to such acquired shares are actually taken by the company having acquired them and (ii) where control or influence is exercised over the acquired company, such control or influence is exercised by the acquiring company.
Moreover, Article 212 bis of the FTC provides for a general limitation of deductibility of net financial charges, subject to certain exceptions. Adjusted net financial charges incurred by French companies that are subject to French corporate income tax and are not members of a consolidated French tax group are deductible from their taxable result only up to 75% of their amount, to the extent that such companies’ financial charges (net of financial income) are at least equal to €3.0 million in a given fiscal year. Under Article 223 B bis of the FTC, special computation rules apply to companies that belong to French tax consolidated groups. These rules which currently apply in respect of interest on loans borne by the Issuer’s French subsidiaries would become applicable to the Issuer as from the effective date of the Corporate Seat Transfer.
Pursuant to Article 212 I (b) of the FTC, if the lender is a related party to the borrower within the meaning of Article 39.12§ I-b) of the FTC, the French borrower shalldebtor must demonstrate, at the French tax authorities’ request, that the lenderinterest paid to a foreign related party is for the current fiscal year and with respectsubject to the concerned interest,condition that the lender is subject to income tax in anon such interest, the amount thatof which is at least equal to 25% of the corporate income taxwhich would be due on such interest if the lender was established in France, determined under standard French tax rules. Accordingly, our ability to deduct interest payments in respect of any loans contracted by the Issuer’s French subsidiaries, or the Issuer as from the effective date of the Corporate Seat Transfer, from any related party would also depend on the tax treatment of the interest payments at the level of the person to which they are made.
We expect the French restrictions on interest deduction to be amended at the latest by January 1, 2024 pursuant to the EUAnti-Tax Avoidance Directive EU/2016/1164 of 12 July 2016 (“ATAD Directive”) providing, among other things, for a limitation of deductibility of net interest expenses to an amount of 30% of the taxpayer’s earnings before interest, tax, depreciation and amortization excludingtax-exempt income (adjusted EBITDA), it being noted that net financial expenses may in any case be deductible up to a maximum amount of €3.0 million in a given fiscal year. The detailed implementation of such new rules in France remains largely unknown, including whether these rules will replace existing French limitation regimes or be added in full or in part to them.
Finally, onOn February 22, 2017, the Council of the European Union adopted the EU Directive EU/2017/952 of May 29, 2017, (“ATAD 2 Directive”), amending the ATAD Directive, which, inter alia, extends the scope of
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the ATAD Directive to hybrid mismatches involving third countries, which would be applicable as from January 1, 2020, except for certain of its provisions which would be applicable as from January 1, 2022.
The above-mentioned tax rules and the ATAD and ATAD 2 Directives (onceDirective, once implemented under French domestic law)law, may limit our ability to deduct interest accrued on our indebtedness incurred in France and may thus increase our tax burden, which could adversely affect our business, financial condition and results of operations, and reduce the cash flow available to service our indebtedness.
Similarly, until the effective date of the Corporate Seat Transfer, the detailed Dutch rules limiting interest deductions and the ATAD and ATAD 2 Directives may limit our ability to deduct interest in the Netherlands and may thus decrease the amount of our Dutch tax losses and increase our tax burden.
Any of the above consequences may have an adverse effect on our results of operations.
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We may be classified as a passive foreign investment company for U.S. federal income tax purposes, which could subject U.S. investors in our ordinary shares to significant adverse U.S. federal income tax consequences.
A foreign corporation will be a passive foreign investment company for U.S. federal income tax purposes (a “PFIC”) in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable “look-through rules,” either (i) at least 75% of its gross income is “passive income,” or (ii) at least 50% of its assets produce or are held for the production of “passive income.” For this purpose, “passive income” generally includes dividends, interest, royalties and rents and certain other categories of income, subject to certain exceptions. We believe that we will not be a PFIC for the current taxable year and that we have not been a PFIC for prior taxable years and we expect that we will not become a PFIC in the foreseeable future, although there can be no assurance in this regard. The determination of whether we are a PFIC is a fact-intensive determination that includes ascertaining the fair market value (or, in certain circumstances, tax basis) of all of our assets on a quarterly basis and the character of each item of income we earn. This determination is made annually and cannot be completed until the close of a taxable year. It depends upon the portion of our assets (including goodwill) and income characterized as passive under the PFIC rules. Accordingly, it is possible that we may become a PFIC due to changes in our income or asset composition or a decline in the market value of our equity. Because PFIC status is a fact-intensive determination, no assurance can be given that we are not, have not been, or will not become, classified as a PFIC.
If we were to be classified as a PFIC in any taxable year, U.S. Holders (as defined in “Item 10. Additional Information—E. Material U.S. Federal Income Tax Consequences”) generally would be subject to special tax rules that could result in materially adverse U.S. federal income tax consequences. Further, investors should assume that a “qualified electing fund” election, which, if made, could serve as an alternative to the general PFIC rules and could reduce any adverse consequences to U.S. Holders if we were to be classified as a PFIC, will not be available because we do not intend to provide U.S. Holders with the information needed to make such an election. Amark-to-market election may be available, however, if our ordinary shares are regularly traded. For more information, see “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Consequences—Passive Foreign Investment Company Consequences” and consult your tax advisor concerning the U.S. federal income tax consequences of acquiring, owning or disposing of our ordinary shares if we are or become classified as a PFIC.
Transactions in our ordinary shares could be subject to the European financial transaction tax, if adopted.
On February 14, 2013, the European Commission adopted a proposal for a directive on a common financial transaction tax (the “FTT”) to be implemented under the enhanced cooperation procedure by several Member States (Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain (the “Participating Member States”) and Estonia. However, Estonia has since stated that it will not participate.
The proposed FTT has a very broad scope and could, if introduced in its current form, apply to certain dealings in our ordinary shares (including secondary market transactions) in certain circumstances. The
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mechanism by which the tax would be applied and collected is not yet known, but if the proposed directive or any similar tax is adopted, transactions in our ordinary shares would be subject to higher costs, and the liquidity of the market for our ordinary shares may be diminished.
Under the 2013 proposals, the FTT could apply in certain circumstances to persons both within and outside of the Participating Member States. Generally, it would apply to certain dealings in our ordinary shares where at least one party is a financial institution, and at least one party is established in a Participating Member State. A financial institution may be, or be deemed to be, “established” in a Participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a Participating Member State, or (b) where the financial instrument which is subject to the dealings is issued in a Participating Member State.
However, the FTT proposal remains subject to negotiation between the Participating Member States. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU Member
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States such as for example the Netherlands may decide to participate and/or certain of the Participating Member States may decide to withdraw. Prospective holders of our ordinary shares are advised to seek their own professional advice in relation to the consequences of the FTT.
Item 4. Information on the Company
| A. | History and Development of the Company |
Constellium Holdco B.V. (formerly known as Omega Holdco B.V.) was incorporated as a Dutch private limited liability company on May 14, 2010.2010 (incorporated and governed under the Dutch Civil Code). Constellium Holdco B.V. was formed to serve as the holding company for various entities comprising the EAP Business, which Constellium acquired from affiliates of Rio Tinto on January 4, 2011 (the “Acquisition”). On May 21, 2013, Constellium Holdco B.V. was converted into a Dutch public limited liability company and renamed Constellium N.V. Any references to Dutch law and the Amended and Restated Articles of Association are references to Dutch law and the articles of association of the Company, respectively, following the conversion. On May 29, 2013, we completed our initial public offering. The articles of association of the Company were last amended and restated on August 18, 2015.
For information on our historical capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Cash Flows—Historical Capital Expenditures.” For information on our capital expenditures currently in process, see “—B. Business Overview—Our Operating Segments.” We expect to finance our capital expenditures currently in process with a combination of internal and external financing sources.
The business address (head office) of Constellium N.V. is Tupolevlaan41-61, 1119 NW Schiphol-Rijk, the Netherlands, and our telephone number is +31 20 654 97 80. The address for our agent for service of process in the United States is Corporation Service Company, 80 State Street, Albany, New York 12207-2543, and its telephone number is (518)433-4740.
| B. | Business Overview |
The Company
Overview
We are a global leader in the design and manufacture of a broad range of innovative rolled and extruded aluminium products, serving primarily the packaging, aerospace and automotiveend-markets. Our business model is to add value by converting aluminium into semi-fabricated and in some instances fabricated products. We believe we are a supplier of choice tosupply numerous blue-chip customers forwith many value-added products withfor performance-critical applications. Our product portfolio generally commands higher margins as compared to less differentiated, more commoditized fabricated aluminium products, such as common alloy coils, paintstock, foilstock and soft alloys for construction and distribution.
As of December 31, 2017,2018, we operated 2326 production facilities, including a facility operated by our joint venture with our partner, UACJ Corporation(Note: in Bowling Green, Kentucky, United States, andJanuary 2019 we acquired our partner’s share in this entity, see Recent Developments), we had 10three administrative centers in Baltimore, Paris and commercial sites, twoZürich, and had three R&D centers and a university technology center in London, United Kingdom.
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centers. Additionally, we are building a new facilityfacilities in San Luis Potosí, Mexico, in response to growing demand for automotive structures in North America. Our facilities are strategically locatedSpain, China and allow usSlovakia to serve our customers on a global basis. The Company had approximately 12,000 employees as of December 31, 2017.automotive structures customers. We believe our portfolio of flexible, integrated and integratedstrategically located facilities is among the most technologically advanced in the industry and that the significant growth investments we have made now leaveposition us well-positionedwell to capture expected demand growth in each of our end markets. It is our view that our established presence in North America, Europe and China combined with more than 50 years of manufacturing experience, quality and innovation, strategically position us to be a leading supplier to our global customer base. The Company had approximately 13,000 employees as of December 31, 2018.
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We seek to sell toend-markets that have attractive characteristics for aluminium, including (i) stability through economic cycles as seen in our North American and European packaging businesses, (ii) rigorous and complex technical requirements as seen in global aerospace and automotive businesses, and (iii) favorable growth fundamentals supported by the vehicle lightweighting trend seen in global automotive business, as forand the growth in electric vehicles.
We have invested capital in a number of attractive growth opportunities including: (i) Auto Body Sheet capabilities in Muscle Shoals, Alabama, in our joint venture in Bowling Green, Kentucky, and in Neuf-Brisach, France, and in Singen, Germany (ii) a pusher furnace in Ravenswood, West Virginia, (iii) Automotive Structures operations in Van Buren, Michigan, White, Georgia and San Luis Potosí, Mexico, (iv) two production lines for battery closure onenclosures for electric vehicles in Gottmadingen, Germany, (v) doubling capabilities for advanced body structure capabilities in Dahenfeld, Germany, (vi) new cast houses and an additional extrusion linecapability in Děčín, Czech Republic and (vii) a number of growth initiatives through R&D and debottlenecking and other growth initiatives. While these investments have attractive return and growth profiles, many of them are still in theramp-up phase and are not yet making significant contributions to our earnings.efforts.
Our unique platform has enabled us to develop a stable and diversified customer base and to enjoy long-standing relationships with our largest customers. Our customer base includes market leading firms in packaging, aerospace, and automotive, such as AB InBev, Ball Corporation, Crown Holdings, Inc., Airbus, Boeing, and several premium automotive OEMs, including BMW AG, Daimler AG and Ford Motor Company. Excluding Muscle Shoals, where the customer base has undergone a strategic shift since 2010, the length of our relationships with our most significant customers approximates on average 25 years, and in some cases reaches more than 40 years, particularly with our packaging and aerospace customers. Generally, we have three- to five-year terms in contracts with our packaging customers, five-year terms in contracts with our largest aerospace customers, and three- to seven-year terms in our “life of a car platform/car model” contracts with our automotive customers. We believe that we are a crucialcritical supplier to many of our customers due to our technological and R&D capabilities as well as the long and complex qualification process required for many of our products. Our core products require close collaboration and, in many instances, joint development with our customers. We believe that this integrated collaboration with our customers for high value-added products reduces substitution risk, supports our competitive position and creates high barriers to entry.
For the years ended December 31, 2018, 2017 and 2016, and 2015, we shipped approximately 1,482 kt, 1,470kt and 1,478kt of finished products, generated revenues of €5,237 million, €4,743 million and €5,153 million, generated net loss of €31 million, net loss of €4 million, net loss of €552 million, and generated the Company’s main key figures were as follows:
| For the years ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
Shipments (kT) | 1,534 | 1,482 | 1,470 | |||||||||
Revenue (in € millions) | 5,686 | 5,237 | 4,743 | |||||||||
Net income/(loss) (in € millions) | 190 | (31 | ) | (4 | ) | |||||||
Adjusted EBITDA (in € millions) | 498 | 448 | 398 | |||||||||
Adjusted EBITDA of €431 million, €377 million and €343 million, respectively. The financial performance for the year ended December 31, 2017 representedis not a 1% increase in shipments, a 10% increase in revenues, a €27 million increase innet loss and a 14% increase inmeasure defined under IFRS. Adjusted EBITDA from the prior year. Please see the reconciliation of Adjusted EBITDAis defined and discussed in “Item 5. Operating and Financial Review and Prospects—Segment Results.”
Our business also features relatively countercyclical cash flows. During an economic downturn, lower demand causes our sales volumes to decrease, which results in a corresponding reduction in our working capital requirements and a positive impact on our operating cash flows. We believe that this helps to drive robust free cash flow through cycles and provides significant downside protection for our liquidity position in the event of a downturn.
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Our objective is to expand our leading position as asupplier-of-choice of high value-added, technologically advanced products in whichwhere we believe that we have a competitive advantage through the following business strategies:
| (i) | High Value-added Product Focus |
We are focused on high-value addedour three strategicend-markets—packaging, aerospace and automotive—in which we have market leading positions and established relationships with many of the main manufacturers. These are also markets where we believe that we can differentiate ourselves through our high value-added and specialty products which make up the majority of our product portfolio. We have made substantial investments to develop unique R&D and technological capabilities, which we believe give us a competitive advantage in designs and innovations. We believe our differentiated products provide significant benefits to our customers in many areas such as weight reduction, higher strength and better formability. In addition, these products typically command higher margins than more commoditized products, and are supplied toend-markets that we believe have highly attractive characteristics and long-term growth trends. We intend to continue to invest in our core markets (automotive, aerospaceR&D and packaging).
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| (ii) | Customer Connectivity |
We aim to deepen our ties with our customers by consistently providingbest-in-class quality products, joint product development projects, market leading supply chain integration, customer technical support and scrap and recycling solutions. We regard our relationships with our customers as partnerships in which we work closely together to utilize our unique R&D and technological capabilities to develop customized solutions in order to facilitatemeet evolving customer requirements. The close collaboration to developbest-in-class and tailored solutions, as well as significant effort and investment to adhere to rigorous qualification procedures, enable us to foster long-term relationships with our customers.
| (iii) | Optimize Margins and Asset Utilization Through Product Portfolio Management |
We believe there are significant opportunities to enhance our profitability through product portfolio management.
| (iv) | Harvesting Returns from Recent Investments |
We have invested capital in a number of attractive growth opportunities. While these investments have attractive return and growth profiles, many of them are still in theramp-up phase and are not yet making a significant contribution to our earnings. We believe the investments we have made now leave us well positioned to capture expected growth in our end markets and to contribute to future earnings.
| (v) | Strict Cost Control and Continuous Improvement |
We believe that there are significant opportunities to improve the services and quality that we provide to our customers and to reduce our operating costs by implementing manufacturing excellence initiatives and other cost reduction initiatives such as our cost reduction initiative, Project 2019. We aim to establishbest-in-class operations and achieve cost reductions by standardizing manufacturing processes and the associated upstream and downstream production elements where possible, while still allowing the flexibility to respond to local market demands.
| (vi) | Increased Financial Flexibility |
We are focused on strict cost control and continuous improvement.
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Recent Developments
Sale of Sierre, Switzerland Plant’s Assets to Novelis
In February 2018, we entered into a binding agreement to sell the North Building Assets at our plant in Sierre, Switzerland to, and to contribute to the plant’s infrastructure on a50-50 basis in a joint venture with, Novelis Inc., which has leased and operated the facility since 2005. We will continue to own and operate our cast houses, plate and extrusion manufacturing plants and other manufacturing assets at Sierre. As part of the transaction, we have agreed to enter into certain long-term production and metal supply agreements with Novelis. The total agreed purchase price for the transaction is €200 million and it is expected to close in the second quarter of 2018, subject to customary closing conditions. Constellium and Novelis have agreed to suspend the arbitration proceedings on the Sierre facility dispute until closing of the transaction.
Plan to Transfer Corporate Seat to France
In line with our initiatives to reduce costs and simplify our corporate structure, we announced the Corporate Seat Transfer in July 2017. In order to effectuate this change, the Company intends to convert its corporate form from an NV to an SE through an amendment to its articles of association, and to take other steps under Dutch and French law to transfer its corporate seat to France. We expect the Corporate Seat Transfer, if completed, will enable us to make our corporate cost structure more efficient and to benefit from more sustainableadvantageous tax treatment. The actions required to implement the Corporate Seat Transfer are subject to shareholder approval and, if approved, we currently expect Corporate Seat Transfer could be completed in the second half of 2018 or shortly thereafter. The conversion from the NV form to the SE form requires, among other things, the creation of an employee representative body, the SNB, to negotiate the involvement of European employees within the SE. The period in which the negotiations can take place is six months (with a possibility to extend for another six months if the parties so agree). If no agreement is reached on the terms of the employee involvement, the “standard rules” for such involvement will apply. We have had a number of SNB meetings in the process of conducting these negotiations.
We are continuing to evaluate other requirements applicable to the conversion to an SE and the transfer of the corporate seat to France under Dutch, French, U.S., and European Union laws and regulations.
In connection with the Corporate Seat Transfer we contributed (the “Holdco II Contribution”) all of our equity interestsshould be completed in Holdco II to Constellium International, our subsidiary recently formed as a société par actions simplifiée organized under the laws of France, in exchange for shares, with such shares being allocated to the French branch of the Company. We expect to cause Holdco II to merge with and into Constellium International, with Constellium International surviving (the “Holdco II Merger”).2019.
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The Corporate Seat Transfer the Holdco II Contribution, and the Holdco II Merger may affect the rights of our shareholders. For more information, seeSee “Item 3. Key Information—D. Risk Factors.”
De-ListingAcquisition of Ordinary Shares from Euronext Paris ExchangeUACJ’s Interest in Bowling Green
Until February 2, 2018, our Class A ordinary shares were listed on bothOn January 10, 2019, pursuant to a purchase agreement with UACJ and its U.S. subsidiary,Tri-Arrows Aluminum Holding Inc. (“TAAH”), we acquired TAAH’s 49% stake in Constellium-UACJ ABS, LLC (“CUA”), for $100 million plus the NYSEassumption of 49% of approximately $80 million of third party debt at CUA. In connection with the agreement with UACJ and Euronext Paris underTAAH, we and TAAH agreed to certain transitional commercial arrangements connected to the symbol “CSTM.” continuing operations and the business, including an agreement for a multiyear supply of cold coils.
Amendment of U.S. ABL Facility
On February 2, 2018,20, 2019, we delisted our ordinary shares from Euronext Paris. For more information, see “Item 3. Key Information—D. Risk Factors—Risks Relatedamended thePan-U.S. ABL Facility to, Our Corporate Structureamong other things, (i) join Constellium Bowling Green LLC as an additional borrower and Ownership of our Ordinary Shares—If we failConstellium Property and Equipment Company LLC as an additional guarantor, (ii) increase the maximum commitments thereunder to meet$350 million, and (iii) make certain changes to the continuing listing requirements to maintain the listing of our ordinary shares on the NYSE, our ordinary shares may be delisted from the NYSE prior to any voluntary delisting.”covenants, terms, and conditions thereof.
Our Operating Segments
Our business is organized into three operating segments:
(i)Packaging & Automotive Rolled Products includes the production of rolled aluminium products in our European and North American facilities. We supply the packaging market with canstock and closure stock for the beverage and food industry, as well as foil stock for the flexible packaging market. In addition, we supply the automotive market with a number of technically sophisticated applications such as ABS and heat exchanger materials.
(ii) Aerospace & Transportation includes the production of rolled aluminium products (and very limited volumes of extruded products) for the aerospace market, as well as rolled products for transport, industry and defenseend-uses in our European and North American facilities.
(iii) Automotive Structures & Industry.
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Table: Overview of Operating Segments (as of December 31, 2017)2018)
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Packaging & Automotive | Aerospace & | Automotive Structures & | ||||
| Manufacturing Facilities1 | 4 (France, Germany, United States) | 6 (France, United States, Switzerland) | 16 (France, Germany, Switzerland, Czech Republic, Slovakia, U.S., Canada, Mexico, China) | |||
Employees (as of December 31, 2018) | • 3,750 | • 4,007 | • 4,559 | |||
| Key Products | • Can Stock
• Can End Stock
• Closure Stock
• Auto Body Sheet
• Rolled Products for Heat Exchangers
• Specialty reflective sheet (Bright) | • Aerospace plates, sheets and extrusions
• Aerospace wing skins
• Plate and sheet for transportation, industry and defense applications | • Automotive structures
• Other extruded products including:
• Soft alloys
• Hard alloys
• Large profiles | |||
| Key Customers | • Packaging: AB InBev, Ball Corporation,Can-Pack, Crown, Amcor, Ardagh Group, Coca-Cola
• Automotive: | • Aerospace: Airbus, Boeing, Bombardier, Dassault, Embraer
• Transportation, Industry, Defense and Distribution: Ryerson, ThyssenKrupp, Amari | • Automotive: Audi, BMW AG, Daimler AG, Porsche, Ford, PSA Group, FCA Group
• Rail: Stadler, CAF | |||
| Select Key Facilities | • Neuf-Brisach (France)
• Singen (Germany)
• Muscle Shoals (Alabama, USA)
• Bowling Green (Kentucky, USA)2 | • Issoire (France)
• Ravenswood (West Virginia, USA)
• Sierre (Switzerland) | • Gottmadingen (Germany)
• Van Buren (Michigan, USA)
• Děčín (Czech Republic)
• Singen (Germany) | |||
% of total Revenue3 (for the twelve months ended December 31, 2018) | 54% | 23% | 23% | |||
% of Adjusted EBITDA4 (for the twelve months ended December 31, 2018) | 49% | 31% | 25% | |||
| 1 | Our 26 manufacturing facilities are located in 24 sites, |
| 2 | Joint venture with UACJ, 51% is owned by Constellium and accounted for under the equity method. On January 10, 2019, Constellium acquired the remaining 49% of the equity in the joint venture. |
| 3 | Holdings & Corporate not included. |
| 4 | The difference between the sum of Adjusted EBITDA for our three segments and the Company’s Adjusted EBITDA is attributable to our fourth segment Holdings and Corporate which is not presented here. |
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The following charts present our revenues by operating segment and geography for the twelve months ended December 31, 2017:
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The following table presents our shipments by product lines:
| (in metric tons) | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||
| 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||
Packaging rolled products | 807 | 856 | 799 | 807 | 856 | |||||||||||||||
Automotive rolled products | 158 | 113 | 196 | 158 | 113 | |||||||||||||||
Specialty and other thin-rolled products | 43 | 44 | 44 | 43 | 44 | |||||||||||||||
Aerospace rolled products | 106 | 118 | 111 | 106 | 118 | |||||||||||||||
Transportation, industry, and other rolled products | 132 | 125 | 135 | 132 | 125 | |||||||||||||||
Automotive extruded products | 109 | 99 | 114 | 109 | 99 | |||||||||||||||
Other extruded products | 127 | 118 | 135 | 127 | 118 | |||||||||||||||
Other | — | (3 | ) | — | — | (3 | ) | |||||||||||||
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Total shipments | 1,482 | �� | 1,470 | 1,534 | 1,482 | 1,470 | ||||||||||||||
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Packaging & Automotive Rolled Products Operating Segment
In our Packaging & Automotive Rolled Products operating segment, we producedevelop and developproduce customized aluminium sheet and coil solutions. Approximately 80% of operating segment volume forFor the year ended December 31, 20172018:
approximately 77% of operating segment volume was in packaging rolled products, which primarily includeincludes beverage and food canstock as well as closure stock and foil stock,
approximately 16%19% of operating segment volume for that period was in automotive rolled products,
and approximately 4% of operating segment volume for that period was in specialty and other thin-rolled products, which include technologically advanced products for the industrial sector. Our Packaging & Automotive Rolled Products operating segment accounted for 54% of revenues and 47%5 of Adjusted EBITDA for the year ended December 31, 2017.
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We are a leading European and North American supplier of canstock and the leading worldwide supplier of closure stock. We are also a major European player in automotive rolled products for Auto Body SheetABS (e.g., closure panels of a car), and for heat exchangers. These products are subject to the exacting requirements and qualification processes of our customers which we consider to provide us with a competitive advantage and to represent a barrier to entry for new competitors. We have a diverse customer base, consisting of many of the world’s largest beverage and food can manufacturers, specialty packaging producers, leading automotive firms and global industrial companies. Our customer base includes AB InBev, Ball Corporation, Crown Holdings, Inc., Ardagh Group S.A.,Can-Pack S.A., Coke,Coca-Cola, Amcor Ltd., VW Group, Daimler AG, Ford, and PSA Group. Our customer contracts in packaging usually have usually a duration of three to five years. Our customer contracts in automotive are usually valid for the lifetime of a model, which is typically sixfive to seven years.
We have two integrated rolling operations located in Europe and one integrated rolling operation in Muscle Shoals, Alabama.the U.S. Neuf-Brisach, our facility on the border of France and Germany, is a fully integrated aluminium recycling, rolling and finishing facility producing both canstock and ABS. Singen, located in Germany, is specialized in high-margin niche applications and has an integrated hot/cold rolling line and high-grade cold mills with special surfaces capabilities that facilitate unique metallurgy and lower production costs. We believe Singen has enhanced our reputation in many product areas, most notably in the area of functional high-gloss surfaces for the automotive, lighting, solar and cosmetic industries, other decorative applications, ABS, closure stock, paintstock and foilstock. Muscle Shoals, Alabama, is a highly focused facility mostly dedicated to canstock rolling and UBC recycling. With the benefitrecycling, and ramping up its ABS cold coils capacity as a result of our automotive readiness investment program, the plant is capableprogram. In addition, at December 31st, 2018, we owned 51% of producing high-quality Auto Body Sheet cold coils.Constellium-UACJ ABS LLC, which operates a finishing line for ABS in Bowling Green, Kentucky (seeRecent Developments).
Our Packaging & Automotive Rolled Products operating segment serves the packaging market which has historically been relatively resilient during periods of economic downturn and has had relatively limited exposure to economic cycles and periods of financial instability. According to CRU International Limited (“CRU”), during the 2008-2009 economic crisis, canstock volumes decreased by 10% in 2009 versus 2007 levels as compared to a 24% decline for flat rolled aluminium products volumes in aggregate during the same period in Europe and by 5% in 2009 versus 2006 as compared to a more than 40% decrease for flat rolled aluminium products volumes in North America. This indicates that demand for beverage cans tends to be less correlated with general economic cycles. In addition, we believe European canstock has an attractive long-term growth outlook due to the following trends:See “—Our Key(i) end-marketEnd-Markets—Rigid growth in beer, soft drinks and energy drinks, (ii) increasing use of cans versus glass in the beer market, (iii) increasing use of aluminium in canstock in the European market, at the expense of steel, and (iv) increasing consumption in Eastern Europe linked to purchasing power growth. The U.S. canstock market on the other hand has seen gradual declines in volumes over the last ten years, mostly due to the decline in carbonated soft drinks consumption, but has recently stabilized as a result of a growth in craft beers and energy drinks consumption. Analysts expect that the growth in aluminium ABS will change the dynamic in the market, with capacity being shifted from canstock to Auto Body Sheet.
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The following table summarizes our volume, revenue and Adjusted EBITDA for our Packaging & Automotive Rolled Products operating segment for the periods presented:
| For the year ended December 31, | For the year ended December 31, | |||||||||||||||||||||||
| (€ in millions, unless otherwise noted) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Packaging & Automotive Rolled Products: | ||||||||||||||||||||||||
Segment Revenues | 2,812 | 2,498 | 2,748 | |||||||||||||||||||||
Segment Revenue | 3,059 | 2,812 | 2,498 | |||||||||||||||||||||
Segment Shipments (kt) | 1,008 | 1,013 | 1,035 | 1,039 | 1,008 | 1,013 | ||||||||||||||||||
Segment Revenues (€/ton) | 2,789 | 2,466 | 2,655 | |||||||||||||||||||||
Segment Revenue (€/ton) | 2,944 | 2,789 | 2,466 | |||||||||||||||||||||
Segment Adjusted EBITDA(1) | 202 | 201 | 183 | 243 | 204 | 204 | ||||||||||||||||||
Segment Adjusted EBITDA(€/ton) | 200 | 199 | 176 | 234 | 202 | 201 | ||||||||||||||||||
Segment Adjusted EBITDA margin | 7 | % | 8 | % | 7 | % | 8 | % | 7 | % | 8 | % | ||||||||||||
| (1) | Adjusted EBITDA is not a measure defined under IFRS. Adjusted EBITDA is defined and discussed in “Item 5. Operating and Financial Review and Prospects—Segment Results.” |
Aerospace & Transportation Operating Segment
Our Aerospace & Transportation operating segment has market leadership positions in technologically advanced aluminium and specialty materialsmaterial products with wide applications across the global aerospace, defense, transportation, and industrial sectors. We offer a wide range of products including plate, sheet, extrusions and a few precision castingcast products which allows us to offer tailored solutions to our customers. We seek to differentiate our products and act as a key partner to our customers through our broad product range, supply-chain solutions, advanced R&D capabilities, extensive recycling capabilities and portfolio of plants with an extensive range of capabilities across Europe and North America. In order to reinforce the competitiveness of our metal solutions, we design our processes and alloys with a view to optimizing our customers’ operations and costs. This includes offering services such as customizing alloys to our customers’ processing requirements, processing short lead time orders and providing vendor managed inventories or tolling arrangements. The
Our most significant facilities in the Aerospace & Transportation operating segment accounted for 25% of our revenues and 31%6 of Adjusted EBITDA for the year ended December 31, 2017.
In 2017, six of our manufacturing facilities produced products that were sold via our Aerospace & Transportation operating segment. Our aerospace plate manufacturing facilities in RavenswoodOperating Segment (Ravenswood (West Virginia, United States)Virginia), Issoire (France) and Sierre (Switzerland)) offer a broad spectrum of plate required by the aerospace industries (alloys, temper, dimensions,pre-machined) and have strong capabilities such as producing some wide and very high gauge plates required for some civil and commercial aerospace programs (civil and commercial).programs.
Downstream aluminium products for the aerospace market require relatively high levels of R&D investment and advanced technological capabilities, and therefore tend to command higher margins compared to more commoditized products. We work in close collaboration with our customers to develop highly engineered solutions to fulfill their specific requirements. For example, we developed Airware®, a lightweight specialty aluminium-lithium alloy, for our aerospace customers to address increasing demand for lighter and more environmentally friendly aircraft.
Aerospace products are typically subject to long development and supply lead times and the majority of our contracts with our largest aerospace customers have a term of five years or longer, which provides visibility on volumes and profitability. In addition, we expect demand for our aerospace products typically correlatesto directly correlate with aircraft backlogs and build rates. As of December 2017,2018, the backlog reported by Airbus and Boeing for commercial aircraft reached 13,12913,450 units on a combined basis, representing approximately eight to nine years of production at current build rates.
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Additionally, aerospace products are generally subject to long qualification periods. Aerospace production sites are regularly audited by external certification organizations including the National Aerospace and Defense Contractors Accreditation Program (“NADCAP”) and/or the International Organization for Standardization. NADCAP is a cooperative organization of numerous aerospace OEMs that defines industry-wide manufacturing
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standards. NADCAP appoints private auditors who grant suppliers like Constellium a NADCAP certification, which customers tend to require. New products or alloys are certified by the OEM that uses the product. Our sites have been qualified by external certification organizations and our products have been qualified by our customers. We are typically able to obtain qualification within 6 months to one year. We believe we are ableyear mainly because: (i) due to obtain such qualifications within that time frame for two main reasons. First, some new product qualifications depend on having older qualifications regarding their alloy, temper or shape which we have already obtained through our long history of working with the main aircraft OEMs. ThisOEMs, we have an existing range of qualifications includesincluding in excess of 100 specifications some ofregarding alloy, temper or shape, which we obtained during programs dating backcan build on to the 1960s. Second, over the course of the decades that we have been working with the aerospace OEMs,obtain new product qualifications; and (ii) we have invested in a number of capital intensive equipment and R&D programs to be able to qualify to the current industry norms and standards.
Besides the aerospace industry, weWe also serve the transportation and defense industries. Our product portfolio in these segments include both standard products as well as specialty products. Standard products typically face higher levels of competition in the marketplace, in the regions that we serve. Specialty products command higher margins and are exposed to less competition. Specialty products are differentiated products, which are engineered to meet specific customer needs and as such have specific properties (e.g., mechanical properties, dimensions, surface aspect, etc.).
The following table summarizes our volume, revenuesrevenue and Adjusted EBITDA for our Aerospace & Transportation operating segment for the periods presented:
| For the year ended December 31, | For the year ended December 31, | |||||||||||||||||||||||
| (€ in millions, unless otherwise noted) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Aerospace & Transportation: | ||||||||||||||||||||||||
Segment Revenues | 1,335 | 1,302 | 1,355 | |||||||||||||||||||||
Segment Revenue | 1,389 | 1,335 | 1,302 | |||||||||||||||||||||
Segment Shipments (kt) | 238 | 243 | 231 | 246 | 238 | 243 | ||||||||||||||||||
Segment Revenues (€/ton) | 5,618 | 5,360 | 5,866 | |||||||||||||||||||||
Segment Revenue (€/ton) | 5,646 | 5,618 | 5,360 | |||||||||||||||||||||
Segment Adjusted EBITDA(1) | 133 | 103 | 103 | 152 | 146 | 118 | ||||||||||||||||||
Segment Adjusted EBITDA(€/ton) | 558 | 425 | 445 | 619 | 614 | 487 | ||||||||||||||||||
Segment Adjusted EBITDA margin | 10 | % | 8 | % | 8 | % | 11 | % | 11 | % | 9 | % | ||||||||||||
| (1) | Adjusted EBITDA is not a measure defined under IFRS. Adjusted EBITDA is defined and discussed in “Item 5. Operating and Financial Review and Prospects—Segment Results.” |
Automotive Structures & Industry Operating Segment
Our Automotive Structures & Industry operating segment produces (i) technologically advanced structures for the automotive industry including crash management systems (“CMS”), body structures, and side impact beams and battery enclosures and (ii) soft and hard alloy extrusions for automotive, road, energy and building and large profiles for rail and industrial applications. We complement our products with a comprehensive offering of downstream technology and services, which includepre-machining, surface treatment, R&D and technical support services. Approximately 46% of the segment volume for the year ended December 31, 20172018 was in automotive extruded products and approximately 54% was in other extruded product applications. Our Automotive Structures & Industry operating segment accounted for 21% of revenues and 28%7 of Adjusted EBITDA for the year ended December 31, 2017.
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We believe that we are one of the largest providers of aluminium automotive crash management systems globallyglobally. We manufacture automotive structural products for some of the largest European and North American car manufacturers supplying the global market, including Daimler AG, BMW AG, VW Group, FCA Group and Ford. We are also a leading supplier of hard alloys for the automotive market and of large structural profiles for rail, industrial and other transportation markets in Europe. We also have a strong presence in soft alloys in France and Germany, with customized solutions for a diverse number of end markets.
Sixteen of our facilities, located in Germany, North America, the Czech Republic, Slovakia, France, Switzerland, China, and Mexico manufacture automotive structuralproducts sold in our Automotive Structures & Industry operating segment. We believe our local presence, downstream services and industry leading cycle times help to ensure
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that we respond to our customer demands in a timely and consistent fashion. Our two integrated remelt and casting centers in Switzerland and the Czech Republic utilize significant amounts of recycled aluminium and help provide security of metal supply. We also operate the largest extrusion press in Western Europe at our Singen facility, which allows us to produce specialized large profile products for someour rail and transportation customers. In addition, we operate a strategic network of the largest European5 soft alloys facilities with strong technical capabilities, across Europe to better serve primarily our automotive and North American car manufacturers supplying a globalindustrial customers as well as customers in other diversified market including Daimler AG, BMW AG, VW Group, FCA Group and Ford. segments.
We are operatingoperate a joint venture, Astrex Inc., which is producingproduces automotive extruded profiles in Ontario, Canada, for our North American operations, and a joint venture, Engley Automotive Structures Co., Ltd., which is currently producing aluminium crash-management systems in China. We also have a strong presence in soft alloys in France and Germany, with customized solutions for a diverse number of end markets.
In July 2016, we announced the opening of a new manufacturing facility in Mexico to produce aluminium automotive structural components. The facility is expected to start production in 2018. We believe that this plant, locatedwe have strong market positions given our R&D and manufacturing capability in San Luis Potosí, will allow ConstelliumAutomotive Structures. Led by our partnership with Brunel University, London we have proprietary alloy and manufacturing technology which enables us to respond to increasing demand for lightweight, high-strength aluminium CMSdeliver differentiated design, engineering and automotive structures for the expanding automotive industry in Mexico. We plan to invest approximately $10 million in the 5,000 sq m facility, which may be expanded to 13,000 sq m in the future to adapt to customers’ supply needs. The San Luis Potosí plant will complement our growing footprint in North America for the fast expanding market of automotive structures. In addition, we opened a new manufacturing facility for automotive structures in Bartow County, GA, which started production in spring 2017. We are currently ramping up production at the facility and expect full production by Q2 2019.
During 2017, we continued the product offering of the new generation of aluminium high-strength alloys for CMS and extruded structural parts for automotive structures and chassis components. Thenew-generation CMS combine the properties of the 6xxx aluminium alloy family—formability, corrosion resistance, energy absorption, recyclability—with high-strength mechanical performance.
Fifteen of our manufacturing and engineering facilities, located in Germany, North America, the Czech Republic, Slovakia, France, Switzerland and China, produce products sold in our Automotive Structures & Industry operating segment. We believe our local presence, downstream services and industry leading cycle times help to ensure that we respondcapabilities to our customer demands in a timelycustomers, and consistent fashion. Our two integrated remelt and casting centers in Switzerland and the Czech Republic provide security of metal supply and contribute to our recycling efforts.accelerate time to market.
The following table summarizes our volume, revenuesrevenue and Adjusted EBITDA for our Automotive Structures & Industry operating segment for the periods presented:
| For the year ended December 31, | For the year ended December 31, | |||||||||||||||||||||||
| (€ in millions, unless otherwise noted) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Automotive Structures & Industry: | ||||||||||||||||||||||||
Segment Revenues | 1,123 | 1,002 | 1,047 | |||||||||||||||||||||
Segment Revenue | 1,290 | 1,123 | 1,002 | |||||||||||||||||||||
Segment Shipments (kt) | 236 | 217 | 212 | 249 | 236 | 217 | ||||||||||||||||||
Segment Revenues (€/ton) | 4,756 | 4,608 | 4,939 | |||||||||||||||||||||
Segment Revenue (€/ton) | 5,181 | 4,756 | 4,608 | |||||||||||||||||||||
Segment Adjusted EBITDA(1) | 119 | 102 | 80 | 125 | 120 | 104 | ||||||||||||||||||
Segment Adjusted EBITDA(€/ton) | 505 | 471 | 380 | 502 | 510 | 480 | ||||||||||||||||||
Segment Adjusted EBITDA margin | 11 | % | 10 | % | 8 | % | 10 | % | 11 | % | 10 | % | ||||||||||||
| (1) | Adjusted EBITDA is not a measure defined under IFRS. Adjusted EBITDA is defined and discussed in “Item 5. Operating and Financial Review and Prospects—Segment Results.” |
For information on the seasonality of our business, see “Item 5. Operating and Financial Review and Prospects—Key Factors Influencing Constellium’s Financial Condition and Results from Operations—Seasonality.”
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Our Industry
Aluminium Sector Value Chain
The global aluminium industry consists of (i) mining companies that produce bauxite, the ore from which aluminium is ultimately derived, (ii) primary aluminium producers that refine bauxite into alumina and smelt alumina into aluminium, (iii) aluminium semi-fabricated products manufacturers, including aluminium casters, extruders and rollers, (iv) aluminium recyclers and remelters and (v) integrated companies that are present across multiple stages of the aluminium production chain.
The priceOur business is primarily focused on rolling and extruding semi-fabricated products for a variety of aluminium, quoted on the LME, is subject to global supply and demand dynamics and can move independently of the costs of its inputs. Producers of primary aluminium have limited ability to manage the volatility of aluminium prices and can experience a high degree of volatility in their cash flows and profitability.value added end markets. We do not smelt aluminium, nor do we participate in other upstream activities such as mining or refining bauxite. We recycle aluminium, both for our own use and as a service to our customers.
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Constellium’s Position in the Aluminium Sector Value Chain
Aluminium value chain
Rolled and extruded aluminium product prices are based generally on the price of metalaluminium (which is quoted on LME) plus a conversion margin (i.e., the cost incurred to convert the aluminium into a semi-finished product). The price of aluminium is not a significant driver of our financial performance, in contrast to the more direct relationship of the price of aluminium tohas on the financial performance of primary aluminium producers. Instead, the financial performance of producers of rolled and extruded aluminium products, such as Constellium, is driven by the dynamics in the end markets that they serve, their relative positioning in those markets and the efficiency of their industrial operations.
There are two main sources of input metal for our aluminium rolled or extruded products:
Slabs or billets we cast from a combination of primary and recycled aluminium. The primary aluminium which is primarilytypically in the form of standard ingot.
Whether primary or recycled, the aluminium is then alloyed and cast into shapes such as:
We buy various types of metal, including primary metalSlabs or billets purchased from smelters in the form of ingots, rolling slabs or extrusion billets, remelted metal from external casthouses (in addition to our own casthouses) in the form of rolling slabs or extrusion billets, production scrap from our customers, and end of life scrap.trading companies.
Primary aluminium, sheet ingot and extrusion billets can generally be purchased at prices set on the LME plus a premium that varies by geographic region on delivery, alloying material, form (ingot or molten metal) and purity.
Recycled aluminium is also an important source of input material and is tied to the LME pricing (typically sold at discounts of up to 25%). Aluminium is indefinitelyinfinitely recyclable and recycling italuminium requires only approximately 5% of the energy required to produce primary aluminium. As a result, in regions where aluminium is widely used, manufacturers and customers are active in setting up collection processes in which used beverage cans and otherend-of-life aluminium products are collected for remelting at purpose-built plants. Manufacturers may also enter into agreements with customers who return recycled process material and pay to have itre-melted and rolled into the same product again.
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