Attached files
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EX-31.2 - EX-31.2 - KAISER ALUMINUM CORP | a54097exv31w2.htm |
EX-32.2 - EX-32.2 - KAISER ALUMINUM CORP | a54097exv32w2.htm |
EX-31.1 - EX-31.1 - KAISER ALUMINUM CORP | a54097exv31w1.htm |
EX-32.1 - EX-32.1 - KAISER ALUMINUM CORP | a54097exv32w1.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
Commission file number 0-52105
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 94-3030279 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
27422 PORTOLA PARKWAY, SUITE 350, | ||
FOOTHILL RANCH, CALIFORNIA | 92610-2831 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code:
(949) 614-1740
(949) 614-1740
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filter, an accelerated
filter, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes þ No o
As of October 15, 2009, there were 20,276,571 shares of the Common Stock of the registrant
outstanding.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
(In millions of dollars, except | ||||||||
share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 34.6 | $ | .2 | ||||
Receivables: |
||||||||
Trade, less allowance for doubtful receivables
of $.8 at September 30, 2009 and at December
31, 2008 |
81.1 | 98.5 | ||||||
Due from affiliate |
| 11.8 | ||||||
Other |
3.0 | 17.5 | ||||||
Inventories |
125.6 | 172.3 | ||||||
Prepaid expenses and other current assets |
93.0 | 128.4 | ||||||
Total current assets |
337.3 | 428.7 | ||||||
Property, plant, and equipment net |
332.0 | 296.7 | ||||||
Net asset in respect of VEBA |
55.2 | 56.2 | ||||||
Deferred tax assets net |
278.0 | 313.3 | ||||||
Other assets |
33.0 | 50.5 | ||||||
Total |
$ | 1,035.5 | $ | 1,145.4 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 49.8 | $ | 52.4 | ||||
Accrued salaries, wages, and related expenses |
32.3 | 41.2 | ||||||
Other accrued liabilities |
32.8 | 113.9 | ||||||
Payable to affiliate |
21.5 | 27.5 | ||||||
Total current liabilities |
136.4 | 235.0 | ||||||
Net liability in respect of VEBA |
16.9 | 14.0 | ||||||
Long-term liabilities |
48.9 | 65.3 | ||||||
Revolving credit facility and other long-term debt |
7.1 | 43.0 | ||||||
209.3 | 357.3 | |||||||
Commitments and contingencies (Note 11) |
||||||||
Stockholders equity: |
||||||||
Common stock, par value $.01, 90,000,000 shares
authorized at both September 30, 2009 and
December 31, 2008; 20,276,571 shares issued and
outstanding at September 30, 2009 and 20,044,913
issued and outstanding at December 31, 2008 |
.2 | .2 | ||||||
Additional capital |
967.0 | 958.6 | ||||||
Retained earnings |
65.8 | 34.1 | ||||||
Common stock owned by Union VEBA subject to
transfer restrictions, at reorganization value,
4,845,465 shares at both September 30, 2009 and
December 31, 2008 |
(116.4 | ) | (116.4 | ) | ||||
Treasury stock, at cost, 572,706 shares at both
September 30, 2009 and December 31, 2008 |
(28.1 | ) | (28.1 | ) | ||||
Accumulated other comprehensive loss |
(62.3 | ) | (60.3 | ) | ||||
Total stockholders equity |
826.2 | 788.1 | ||||||
Total |
$ | 1,035.5 | $ | 1,145.4 | ||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
2
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In millions of dollars, except share and per share amounts) | ||||||||||||||||
Net sales |
$ | 252.0 | $ | 369.2 | $ | 750.0 | $ | 1,181.7 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of products sold: |
||||||||||||||||
Cost of products sold, excluding depreciation,
amortization and other items |
188.3 | 383.7 | 584.2 | 1,044.2 | ||||||||||||
Lower of cost or market inventory write-down |
| | 9.3 | | ||||||||||||
Impairment of investment in Anglesey |
| | 1.8 | | ||||||||||||
Restructuring costs and other charges |
.1 | | 6.4 | | ||||||||||||
Depreciation and amortization |
3.9 | 3.6 | 12.3 | 10.8 | ||||||||||||
Selling, administrative, research and
development, and general |
17.1 | 19.8 | 52.1 | 58.3 | ||||||||||||
Other operating benefits, net |
| (1.4 | ) | (.9 | ) | (1.2 | ) | |||||||||
Total costs and expenses |
209.4 | 405.7 | 665.2 | 1,112.1 | ||||||||||||
Operating income (loss) |
42.6 | (36.5 | ) | 84.8 | 69.6 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(.2 | ) | (.3 | ) | (.6 | ) | (.8 | ) | ||||||||
Other income (expense), net |
.1 | (.2 | ) | | 1.0 | |||||||||||
Income (loss) before income taxes |
42.5 | (37.0 | ) | 84.2 | 69.8 | |||||||||||
Income tax (provision) benefit |
(19.5 | ) | 14.9 | (37.8 | ) | (30.0 | ) | |||||||||
Net income (loss) |
$ | 23.0 | $ | (22.1 | ) | $ | 46.4 | $ | 39.8 | |||||||
Earnings per share Basic (Note 13): |
||||||||||||||||
Net income (loss) per share |
$ | 1.14 | $ | (1.11 | ) | $ | 2.31 | $ | 1.93 | |||||||
Earnings per share Diluted (Note 13): |
||||||||||||||||
Net income (loss) per share |
$ | 1.14 | $ | (1.11 | ) | $ | 2.31 | $ | 1.93 | |||||||
Weighted-average number of common shares outstanding
(000): |
||||||||||||||||
Basic |
19,982 | 19,995 | 19,568 | 20,032 | ||||||||||||
Diluted |
19,982 | 19,995 | 19,568 | 20,032 | ||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
3
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
COMPREHENSIVE INCOME (LOSS)
Common | ||||||||||||||||||||||||||||||||
Stock | ||||||||||||||||||||||||||||||||
Owned by | ||||||||||||||||||||||||||||||||
Union | ||||||||||||||||||||||||||||||||
VEBA | Accumulated | |||||||||||||||||||||||||||||||
Common | Subject to | Other | ||||||||||||||||||||||||||||||
Shares | Common | Additional | Retained | Transfer | Treasury | Comprehensive | ||||||||||||||||||||||||||
Outstanding | Stock | Capital | Earnings | Restriction | Stock | Loss | Total | |||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||
(In millions of dollars, except for shares) | ||||||||||||||||||||||||||||||||
BALANCE, December 31, 2008 |
20,044,913 | $ | .2 | $ | 958.6 | $ | 34.1 | $ | (116.4 | ) | $ | (28.1 | ) | $ | (60.3 | ) | $ | 788.1 | ||||||||||||||
Net income |
| | | 46.4 | | | | 46.4 | ||||||||||||||||||||||||
Foreign currency translation adjustment, net of tax of $0 |
| | | | | | (2.0 | ) | (2.0 | ) | ||||||||||||||||||||||
Comprehensive income |
44.4 | |||||||||||||||||||||||||||||||
Issuance of non-vested shares to employees |
196,829 | | | | | | | | ||||||||||||||||||||||||
Capital distribution by unconsolidated affiliate to its
parent company |
| | (.1 | ) | | | | | (.1 | ) | ||||||||||||||||||||||
Issuance of common shares to employees in lieu of cash
bonus |
15,674 | | .3 | | | | | .3 | ||||||||||||||||||||||||
Issuance of common shares to directors |
3,734 | | .1 | | | | | .1 | ||||||||||||||||||||||||
Issuance of common shares to employees upon vesting of
restricted stock units and performance shares |
21,089 | | | | | | | | ||||||||||||||||||||||||
Cancellation of employee non-vested shares |
(5,668 | ) | | | | | | | | |||||||||||||||||||||||
Cash dividends on common stock |
| | | (14.7 | ) | | | | (14.7 | ) | ||||||||||||||||||||||
Excess tax deficiency upon vesting of non-vested shares
and dividend payment on unvested shares expected to vest |
| | (.1 | ) | | | | | (.1 | ) | ||||||||||||||||||||||
Amortization of unearned equity compensation |
| | 8.2 | | | | | 8.2 | ||||||||||||||||||||||||
BALANCE, September 30, 2009 |
20,276,571 | $ | .2 | $ | 967.0 | $ | 65.8 | $ | (116.4 | ) | $ | (28.1 | ) | $ | (62.3 | ) | $ | 826.2 | ||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
4
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
(In millions of dollars) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 46.4 | $ | 39.8 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Recognition of pre-emergence tax benefits in accordance with fresh start accounting |
| 1.2 | ||||||
Depreciation and amortization (including deferred financing costs of $.5 for the
nine months ended September 30, 2009 and $.2 for the nine months ended September
30, 2008) |
12.8 | 11.0 | ||||||
Deferred income taxes |
35.3 | 22.4 | ||||||
Excess tax deficiency (benefit) upon vesting of non-vested shares and dividend
payment on unvested shares expected to vest |
.1 | (.3 | ) | |||||
Non-cash equity compensation |
8.3 | 8.6 | ||||||
Net non-cash LIFO charges and lower of cost or market inventory write-down |
3.0 | 31.0 | ||||||
Non-cash unrealized (gains) losses on derivative positions |
(49.4 | ) | 6.0 | |||||
Amortization of option premiums |
2.6 | | ||||||
Non-cash impairment charges |
2.1 | | ||||||
Equity in (loss) income of unconsolidated affiliate, net of distributions |
(1.9 | ) | 2.5 | |||||
Loss on disposition of property, plant and equipment |
.1 | .2 | ||||||
Other non-cash changes in assets and liabilities |
4.1 | (.2 | ) | |||||
Changes in assets and liabilities: |
||||||||
Decrease (increase) in trade and other receivables |
31.9 | (21.3 | ) | |||||
Decrease in receivable from affiliate |
11.8 | 9.5 | ||||||
Decrease (increase) in inventories, excluding LIFO charges and lower of cost or
market write-down |
43.7 | (92.9 | ) | |||||
Decrease in prepaid expenses and other current assets |
2.9 | .1 | ||||||
Increase in accounts payable |
.6 | | ||||||
Decrease in other accrued liabilities |
(31.2 | ) | (5.3 | ) | ||||
Decrease in payable to affiliate |
(6.0 | ) | (8.0 | ) | ||||
Increase in accrued income taxes |
.5 | .8 | ||||||
Net cash impact of changes in long-term assets and liabilities |
1.5 | (1.6 | ) | |||||
Net cash provided by operating activities |
119.2 | 3.5 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures, net of change in accounts payable of $3.2 for the nine
months ended September 30, 2009 and $(.1) for the nine months ended September 30,
2008 |
(51.0 | ) | (61.0 | ) | ||||
Decrease (increase) in restricted cash |
18.1 | (3.9 | ) | |||||
Net cash used in investing activities |
(32.9 | ) | (64.9 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings under the revolver credit facility |
99.8 | 55.6 | ||||||
Repayment of borrowings under the revolving credit facility |
(135.8 | ) | (20.9 | ) | ||||
Financing costs |
(1.1 | ) | | |||||
Excess tax (deficiency) benefit upon vesting of non-vested shares and dividend
payment on unvested shares expected to vest |
(.1 | ) | .3 | |||||
Cancellation of common stock to cover employee tax withholding upon vesting of
equity awards |
| (.7 | ) | |||||
Repurchase of common stock |
| (28.1 | ) | |||||
Cash dividend paid to stockholders |
(14.7 | ) | (12.4 | ) | ||||
Net cash used in financing activities |
(51.9 | ) | (6.2 | ) | ||||
Foreign currency impact on cash and cash equivalents |
| | ||||||
Net increase (decrease) in cash and cash equivalents during the period |
34.4 | (67.6 | ) | |||||
Cash and cash equivalents at beginning of period |
.2 | 68.7 | ||||||
Cash and cash equivalents at end of period |
$ | 34.6 | $ | 1.1 | ||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
5
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)
1. Summary of Significant Accounting Policies
This Report should be read in conjunction with the Companys Annual Report on Form 10-K for
the year ended December 31, 2008.
Principles of Consolidation and Basis of Presentation. The consolidated financial statements
include the statements of the Company and its wholly owned subsidiaries. Intercompany balances and
transactions are eliminated. See Note 3 for a description of the Companys accounting for its 49%,
non-controlling ownership interest in Anglesey Aluminium Limited (Anglesey).
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (US
GAAP) for interim financial information and the rules and regulations of the Securities and
Exchange Commission (the SEC). Accordingly, these financial statements do not include all of the
disclosures required by US GAAP for complete financial statements. In the opinion of management,
the unaudited interim consolidated financial statements furnished herein include all adjustments,
all of which are of a normal recurring nature unless otherwise noted, necessary for a fair
statement of the results for the interim periods presented. References to specific US GAAP in this
Report cite topics within the FASB Accounting Standards Codification (ASC). See New Accounting
Pronouncements below for further information regarding the ASC.
Use of Estimates and Assumptions. The preparation of financial statements in accordance with
US GAAP requires the use of estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the
financial statements are published, and the reported amounts of revenues and expenses during the
reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the
preparation of the Companys consolidated financial statements; accordingly, it is possible that
the actual results could differ from these estimates and assumptions, which could have a material
effect on the reported amounts of the Companys consolidated financial position and results of
operation.
Operating results for the nine months ended September 30, 2009 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2009.
Recognition of Sales. Sales are recognized when title, ownership and risk of loss pass to the
buyer and collectability is reasonably assured. A provision for estimated sales returns from and
allowances to customers is made in the same period as the related revenues are recognized, based on
historical experience or the specific identification of an event necessitating a reserve.
From time to time, in the ordinary course of business, the Company may enter into agreements
with customers in which the Company, in return for a fee, agrees to: (i) reserve certain amounts of
its existing production capacity to the customer or (ii) defer an existing customer purchase
commitment into future periods and reserve certain amounts of its expected production capacity in
those periods to the customer. These capacity reservation and deferral agreements may have terms
exceeding one year in length.
Certain of the capacity reservation and deferral agreements provide for periodic, such as
quarterly or annual, billing for the duration of the contract. For capacity reservation
agreements, the Company recognizes revenue ratably over the period of the capacity reservation.
For commitment deferral agreements, the Company recognizes revenue upon the earlier occurrence of:
(i) the related sale of product or (ii) the end of the commitment period. Accordingly, the
Company may recognize revenue prior to billing reservation fees. At September 30, 2009 and
December 31, 2008, the Company had $6.1 and $.1 of unbilled receivables, respectively, included
within Trade receivables on the Companys Consolidated Balance Sheets. In connection with other
capacity reservation and commitment deferral agreements, the Company may collect funds from
customers in advance of the periods for which the production capacity is reserved or commitment is
deferred, in which event the recognition of revenue is deferred until such time as the fee is
earned. Any unearned fees are included within Other accrued liabilities or Long-term liabilities,
as appropriate, on the Companys Consolidated Balance Sheets (see Note 6).
6
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings per Share. ASC 260-10-45-60A defines unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as
participating securities and requires inclusion of such securities in the computation of earnings
per share pursuant to the two-class method. On January 1, 2009, the Company adopted Financial
Accounting Standards Board (FASB) Staff Position, Emerging Issues Task Force 03-6-1, Determining
Whether Instruments Granted in Share-based Payment Transactions are Participating Securities (FSP
EITF 03-6-1), subsequently codified as ASC 260-10-65-2, which mandates the application of the
foregoing principles to all financial statements issued for fiscal years beginning after December
2008 and requires retrospective application. Upon adoption, the Company retrospectively adjusted
its earnings per share data, resulting in a $.06 per share reduction in basic earnings per common
share for the nine months ended September 30, 2008 and a $.02 per share reduction in diluted
earnings per common share for the same period. The retrospective adjustments had no impact on
previously reported basic or diluted earnings per share for the quarter ended September 30, 2008
(see Note 13).
Basic earnings per share is computed by dividing distributed and undistributed earnings
allocable to common shares by the weighted-average number of common shares outstanding during the
applicable period. The shares owned by a voluntary employee beneficiary association (VEBA) for
the benefit of certain union retirees, their surviving spouses and eligible dependents (the Union
VEBA) that are subject to transfer restrictions, while treated in the Consolidated Balance Sheets
as being similar to treasury stock (i.e., as a reduction in Stockholders equity), are included in
the computation of basic shares outstanding in the Statements of Consolidated Income because such
shares were irrevocably issued and have full dividend and voting rights. Diluted earnings per share
is calculated as the more dilutive result of computing earnings per share under: (i) the treasury
stock method or (ii) the two-class method (see Note 13).
Stock-Based Compensation. Stock based compensation is provided to certain employees, directors
and a director emeritus, and is accounted for at fair value, pursuant to the requirements of ASC
718. The Company measures the cost of services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and the number of awards expected to
ultimately vest. The fair value of awards provided to the director emeritus is not material. The
cost of an award is recognized as an expense over the period that the recipient provides service
for the award. The Company has elected to amortize compensation expense for equity awards with
graded vesting using the straight line method. The Company recognized compensation expense for the
quarters ended September 30, 2009 and 2008 of $2.0 and $2.4, respectively, and for the nine months
ended September 30, 2009 and 2008 of $7.3 and $7.5, respectively, in connection with vested awards
and non-vested stock, restricted stock units and stock options (see Note 10).
The Company grants performance shares to executive officers and other key employees. These
awards are subject to performance requirements pertaining to the Companys economic value added
(EVA) performance, measured over a three year performance period. The EVA is a measure of the
excess of the Companys pretax operating income for a particular year over a pre-determined
percentage of the net assets of the immediately preceding year, as defined in the 2008-2010 and
2009-2011 Long-Term Incentive (LTI) programs. The number of performance shares, if any, that will
ultimately vest and result in the issuance of common shares depends on the average annual EVA
achieved for the specified three year performance periods. The fair value of performance-based
awards is measured based on the most probable outcome of the performance condition, which is
estimated quarterly using the Companys forecast and actual results. The Company expenses the fair
value, after assuming an estimated forfeiture rate, over the specified three year performance
periods on a ratable basis. The Company recognized compensation expense for the quarters ended
September 30, 2009 and 2008 of $.2 and $.4, respectively, and for the nine months ended September
30, 2009 and 2008 of $1.0 and $1.1, respectively, in connection with the performance shares.
Realization of Excess Tax Benefits. The Company follows the tax law ordering approach in
assessing the realization of excess tax benefits related to stock-based awards. Under the tax law
ordering approach, realization of excess tax benefits is determined based on the ordering
provisions of the tax law. Current year deductions, which include the tax benefits from current
year stock-based award activities, are used first before using the Companys net operating loss
(NOL) carryforwards from prior years. Under this method, Additional capital would be credited
when an excess tax benefit is realized, creating an additional paid in capital pool, to absorb
potential future tax deficiencies resulting from stock-based award activities. During the nine
months ended September 30, 2009, the
7
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company recorded a reduction of $.1 to a previously recorded excess tax benefit. This
adjustment was reflected as a reduction to Additional capital.
Restructuring Costs and Other Charges. Restructuring costs and other charges include employee
severance and benefit costs, impairment of owned equipment to be disposed of, and other costs
associated with exit and disposal activities. The Company applies the provisions of ASC 420 to
account for obligations arising from such activities. Severance and benefit costs incurred in
connection with exit activities are recognized when the Companys management with the proper level
of authority has committed to a restructuring plan and communicated those actions to employees. For
owned facilities and equipment, impairment losses recognized are based on the fair value less costs
to sell, with fair value estimated based on existing market prices for similar assets. Other exit
costs include costs to consolidate facilities or close facilities, terminate contractual
commitments and relocate employees. A liability for such costs is recorded at its fair value in the
period in which the liability is incurred. At each reporting date, the Company evaluates its
accruals for exit costs and employee separation costs to ensure the accruals are still appropriate.
During the quarter and nine months ended September 30, 2009, the Company recorded $.1 and $6.4,
respectively, of restructuring costs and other charges relating to employee termination and other
personnel costs, and contract termination and other facility-related activities, in connection with
the Companys closure of its Tulsa, Oklahoma extrusion facility, significant reduction of
operations at its Bellwood, Virginia facility, and reduction of personnel in other locations (see
Note 15).
Restricted Cash. The Company is required to keep certain amounts on deposit relating to
workers compensation, derivative contracts, letters of credit and other agreements. Such amounts
totaled $18.7 and $36.8 at September 30, 2009 and December 31, 2008, respectively. Of the
restricted cash balance, $.9 and $1.4 were considered short term and included in Prepaid expenses
and other current assets on the Consolidated Balance Sheets at September 30, 2009 and December 31,
2008, respectively, and $17.8 and $35.4 were considered long term and included in Other assets on
the Consolidated Balance Sheets at September 30, 2009 and December 31, 2008, respectively.
Included in long-term restricted cash were zero and $17.2 of margin call deposits with the
Companys derivative counterparties at September 30, 2009 and December 31, 2008, respectively (see
Note 6).
Trade Receivables and Allowance for Doubtful Accounts. Trade receivables consist of amounts
billed to customers for products sold. Accounts receivable are generally due within 30 days. For
the majority of our receivables, the Company establishes an allowance for doubtful accounts based
upon collection experience and other factors. On certain other receivables where the Company is
aware of a specific customers inability or reluctance to pay, an allowance for doubtful accounts
is established against amounts due to reduce the net receivable balance to the amount the Company
reasonably expects to collect. However, if circumstances change, the Companys estimate of the
recoverability of accounts receivable could be different. Circumstances that could affect the
Companys estimates include, but are not limited to, customer credit issues and general economic
conditions. Accounts are written off once deemed to be uncollectible.
Inventories. Inventories are stated at the lower of cost or market value. Finished products,
work in process and raw material inventories are stated on the last-in, first-out (LIFO) basis.
Other inventories, principally operating supplies and repair and maintenance parts, are stated at
average cost. Inventory costs consist of material, labor and manufacturing overhead, including
depreciation. Abnormal costs, such as idle facility expenses, freight, handling costs and spoilage,
are accounted for as current period charges. During the first quarter of 2009, the Company recorded
an inventory write-down of $9.3 to reflect the market value as of March 31, 2009, in accordance
with ASC 330-10-35, paragraphs 1-12 (see Note 2).
Derivative Financial Instruments. Hedging transactions using derivative financial instruments
are primarily designed to mitigate the Companys exposure to changes in prices for certain of the
products which the Company sells and consumes and, to a lesser extent, to mitigate the Companys
exposure to changes in foreign currency exchange rates and energy prices. The Company does not
utilize derivative financial instruments for trading or other speculative purposes. The Companys
derivative activities are initiated within guidelines established by management and approved by the
Companys Board of Directors. Hedging transactions are executed centrally on behalf of all of the
Companys business segments to minimize transaction costs, monitor consolidated net exposures and
allow for increased responsiveness to changes in market factors.
8
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company recognizes all derivative instruments as assets or liabilities in its balance
sheet and measures those instruments at fair value by marking-to-market all of its hedging
positions at each period-end (see Note 12). The Company does not meet the documentation
requirements for hedge (deferral) accounting under ASC 815-20-25-3. Changes in the market value of
the Companys open derivative positions resulting from the mark-to-market process are reflected in
Cost of products sold, excluding depreciation, amortization and other items.
Concentration of credit risk. Financial arrangements which potentially subject the Company to
concentrations of credit risk consist of metal, currency, natural gas derivative contracts and cash
arrangements related to its cash equivalents. If the market value of the Companys net derivative
positions with the counterparty exceeds a specified threshold, if any, the counterparty is required
to transfer cash collateral in excess of the threshold to the Company. Conversely, if the market
value of the net derivative positions falls below a specified threshold, the Company is required to
transfer cash collateral below the threshold to the counterparty. The Company is exposed to credit
loss in the event of nonperformance by counterparties on derivative contracts used in hedging
activities as well as failure of counterparties to return cash collateral previously transferred to
the counterparties. The counterparties to the Companys derivative contracts are major financial
institutions and the Company has not experienced nonperformance by any of its counterparties.
The Company, in accordance with its loan covenants, places its cash in money market funds with
high credit quality financial institutions which invest primarily in commercial paper of prime
quality, short term repurchase agreements, and U.S. government agency notes. The Company has not
experienced losses on its temporary cash investments.
Fair Value Measurement. The Company applies the provisions of ASC 820 in measuring the fair
value of its derivative contracts. See Note 1 of the Companys Annual Report on Form 10-K for the
year ended December 31, 2008 for definitions of Level 1, 2 and 3 fair value measurements within the
fair value hierarchy. The Companys derivative contracts are valued at fair value using significant
observable and unobservable inputs. Such financial instruments consist of primary aluminum, natural
gas, and foreign currency contracts. The fair values of a majority of these derivative contracts
are based upon trades in liquid markets. Valuation model inputs can generally be verified and
valuation techniques do not involve significant judgment. The fair values of such financial
instruments are generally classified within Level 2 of the fair value hierarchy.
The Company has some derivative contracts that do not have observable market quotes. For these
financial instruments, management uses significant other observable inputs (i.e., information
concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various
factors, such as bid/offer spreads.
The following table presents the Companys assets and liabilities that are measured and
recognized at fair value on a recurring basis classified under the appropriate level of the fair
value hierarchy as of September 30, 2009:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Derivative assets: |
||||||||||||||||
Aluminum swap contracts |
$ | | $ | 2.4 | $ | | $ | 2.4 | ||||||||
Aluminum option contracts |
| 13.5 | | 13.5 | ||||||||||||
Natural gas swap contracts |
| 0.4 | | .4 | ||||||||||||
Midwest premium swap contracts |
| | .3 | .3 | ||||||||||||
Total |
$ | | $ | 16.3 | $ | .3 | $ | 16.6 | ||||||||
Derivative liabilities: |
||||||||||||||||
Aluminum swap contracts |
$ | | $ | (21.9 | ) | $ | | $ | (21.9 | ) | ||||||
Aluminum option contracts |
| (5.7 | ) | | (5.7 | ) | ||||||||||
Pound Sterling forward contract |
| (.3 | ) | | (.3 | ) | ||||||||||
Natural gas swap contracts |
| (1.2 | ) | | (1.2 | ) | ||||||||||
Midwest premium swap contracts |
| | (.3 | ) | (.3 | ) | ||||||||||
Total |
$ | | $ | (29.1 | ) | $ | (.3 | ) | $ | (29.4 | ) | |||||
9
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial instruments classified as Level 3 in the fair value hierarchy represent derivative
contracts in which management has used at least one significant unobservable input in the valuation
model. The following table presents a reconciliation of activity for such derivative contracts on a
net basis:
Level 3 | ||||
Balance at January 1, 2009: |
$ | (1.1 | ) | |
Total realized/unrealized losses included in: |
||||
Cost of goods sold excluding depreciation, amortization and other items |
.8 | |||
Purchases, sales, issuances and settlements |
.3 | |||
Transfers in and (or) out of Level 3 |
| |||
Balance at September 30, 2009 |
$ | | ||
Total gains included in earnings attributable to the change in unrealized
losses relating to derivative contracts still held at September 30, 2009: |
$ | .7 | ||
New Accounting Pronouncements
Recently adopted accounting pronouncements:
Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS No. 168) was
issued in June 2009. SFAS No. 168 establishes the ASC as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial standards in conformity with US GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.
SFAS No. 168 became effective for financial statements issued by the Company for the quarter ended
September 30, 2009. Upon adoption of SFAS No. 168, all then-existing non-SEC accounting and
reporting standards were superseded, with the exception of certain promulgations listed in SFAS No.
168. The adoption of SFAS No. 168 had no effect on the Companys consolidated financial statements,
other than requisite updates to applicable references to US GAAP, which now cite the ASC.
Recently issued accounting pronouncements not yet adopted:
As of the filing of this Report, the Company is not aware of any issued but not yet adopted
accounting pronouncements that, when adopted, are expected to have a material impact on the
Companys financial statements.
2. Inventories
Inventories are stated at the lower of cost or market value. For the Fabricated Products
segment, finished products, work in process and raw material inventories are stated on a LIFO basis
and other inventories, principally operating supplies and repair and maintenance parts, are stated
at average cost. All inventories in the Primary Aluminum segment are stated on the first-in,
first-out (FIFO) basis. Inventory costs consist of material, labor and manufacturing overhead,
including depreciation. Abnormal costs, such as idle facility expenses, freight, handling costs and
spoilage, are accounted for as current period charges.
Inventories consist of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Fabricated Products segment |
||||||||
Finished products |
$ | 40.3 | $ | 52.7 | ||||
Work in process |
48.5 | 57.5 | ||||||
Raw materials |
23.4 | 48.1 | ||||||
Operating supplies and repairs and maintenance parts |
13.3 | 13.2 | ||||||
125.5 | 171.5 | |||||||
Primary Aluminum segment |
||||||||
Primary aluminum |
.1 | .8 | ||||||
$ | 125.6 | $ | 172.3 | |||||
10
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company recorded net non-cash LIFO (charges) benefits of approximately $(6.9) and $6.3
during the quarter and nine months ended September 30, 2009, respectively. The Company recorded net
non-cash LIFO charges of approximately $.7 and $31.3 during the quarter and nine months ended
September 30, 2008, respectively. These amounts are primarily a result of changes in metal prices
and changes in inventory volumes.
With the inevitable ebb and flow of business cycles, non-cash LIFO benefits (charges) will
result when inventory levels and metal prices fluctuate. Further, lower of cost or market
adjustments can occur when metal prices decline and margins compress. At December 31, 2008, due to
the decline in the London Metal Exchange (LME) price of primary aluminum, the Company recorded a
$65.5 lower of cost or market inventory write-down to reflect inventory at market value. During the
first three months of 2009, the Company recorded an additional lower of cost or market inventory
write-down of $9.3 due to the continued decline in the LME price of primary aluminum. There were no
additional lower of cost or market inventory write-downs during the nine months ended September 30,
2009 or 2008.
3. Investment In and Advances To Unconsolidated Affiliate
The Company has a 49%, non-controlling ownership interest in Anglesey, which operated as an
aluminum smelter until September 30, 2009 and commenced remelt and casting of secondary aluminum
products in the fourth quarter of 2009.
Prior to the quarter ended September 30, 2009, the Company accounted for its 49% ownership in
Anglesey using the equity method, under which the Companys equity in income or loss before income
taxes of Anglesey was treated as a reduction or increase in cost of products sold. The income tax
effects of the Companys equity in income or loss was included in the Companys income tax
provision.
For the quarter ended September 30, 2009, Anglesey incurred a significant net loss, primarily
as the result of recording charges for employee redundancy costs in connection with the cessation
of its smelting operations. As a result of such loss and as the
Company did not and is not
obligated to (i) advance any funds to Anglesey, (ii) guarantee any obligations of Anglesey, or
(iii) make any commitments to provide any financial support for Anglesey, the Company suspended the
use of equity method of accounting with respect to its ownership in Anglesey during the quarter
ended September 30, 2009. Accordingly, the Company did not recognize its share of Angleseys net
loss for the quarter ended September 30, 2009, pursuant to ASC 323-10-35. The Company does not
anticipate resuming the use of the equity method of accounting with respect to its investment in
Anglesey unless its share of any future net income of Anglesey equals or is greater than the
Companys share of net losses not recognized during any periods for which the equity method was
suspended. As of the date of filing of this Report, the Company does not anticipate the occurrence
of such event during the next 12 months.
The following table shows a summary of Angleseys selected operating results for the quarters
and nine month periods ended September 30, 2009 and 2008:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 60.1 | $ | 66.3 | $ | 180.1 | $ | 244.5 | ||||||||
Gross (loss) profit |
$ | (125.8 | ) | $ | (13.1 | ) | $ | (122.8 | ) | $ | 4.6 | |||||
Net (loss) income |
$ | (90.8 | ) | $ | (11.2 | ) | $ | (86.7 | ) | $ | .9 | |||||
Companys equity (loss) income (1) |
$ | | $ | (6.9 | ) | $ | | $ | 1.4 | |||||||
(1) | For the quarter ended September 30, 2009, the Company had no equity income, as the Company did not recognize its share of Angleseys losses, due to the suspension of the use of equity method accounting. For the nine months ended September 30, 2009, the Companys recorded equity income is zero due to (i) the suspension of the use of the equity method of accounting during the quarter ended September 30, 2009, and (ii) impairment charges recorded by the Company during the first half of 2009, such that the Companys investment balance remained at zero. See further discussion regarding the Companys accounting for its investment in Anglesey below. |
11
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the quarter and nine months ended September 30, 2008, the Companys equity income
differs from 49% of the summary net income (loss) from Anglesey primarily due to (i) share
based compensation adjustments of $(2.0) and $(.6), respectively, relating to Angleseys
separate reimbursement agreement with its parent (Rio Tinto) under Angleseys share based
award arrangement, and (ii) US GAAP adjustment relating to Angleseys CAROs (defined below
in Note 4) in the amount of $(.3) and $(1.0), respectively.
At December 31, 2008, receivables from Anglesey were $11.8, all of which were received during
the first quarter. No amounts were due from Anglesey at September 30, 2009. At September 30, 2009
and December 31, 2008, payables to Anglesey were $21.5 and $27.5, respectively.
Through the quarter ended September 30, 2009, Anglesey operated under a power agreement that
provided sufficient power to sustain its aluminum reduction operations at near-full capacity. As
the Company previously announced, the power agreement expired at the end of September 2009.
Despite Angleseys efforts to find a sustainable alternative to its power supply needs, no sources
of power were identified to allow for the uninterrupted continuation of smelting operations beyond
the power contract expiration date. Accordingly, Anglesey fully curtailed its smelting operations
as of September 30, 2009. Upon termination of smelting operations, Anglesey commenced remelt and
casting operations in the fourth quarter of 2009, producing secondary aluminum billet.
The Company fully impaired its investment in Anglesey in the fourth quarter of 2008,
concluding that it should not expect to receive any dividends from Anglesey in the foreseeable
future. This determination was made taking into account Angleseys full curtailment of its
smelting operations, which the Company had anticipated as a likely possibility, due to its
inability to obtain affordable power, the cash requirements for redundancy and pension payments,
and the uncertainty with respect to the future of its operations. For the first half of 2009,
based upon the Companys continued assessment of the facts and circumstances, the Company recorded
additional impairment charges of $1.8 relating to its investment in Anglesey, such that the
Companys investment balance remained at zero.
In June, 2008, Anglesey suffered a significant failure in the rectifier yard that resulted in
a localized fire in one of the power transformers. As a result of the fire, Anglesey operated below
its production capacity during the latter half of 2008 until normal production resumed in December
2008 and incurred incremental costs, primarily associated with repair and maintenance costs, as
well as loss of margin due to the outage. Anglesey has property damage and business interruption
insurance that is expected to recover financial losses (net of applicable deductibles). Anglesey
received a partial insurance settlement payment of $20.0 in December 2008 of which $10.0 was
recorded as the Companys equity income. During the first quarter of 2009, Anglesey received
another partial insurance settlement of $8.2, 49% of which (or $4.0) was recorded as the Companys
equity income. The Company fully impaired the value of its share of the insurance proceeds
received by Anglesey in 2008 and during the first quarter of 2009 as reflected in the Companys
equity income, because the Company does not expect to receive any such proceeds through the
distribution of dividends. Anglesey did not receive any insurance settlements during the second or
third quarters of 2009, and the timing and amount of any remaining insurance recovery are
uncertain. The Company currently anticipates that it would not receive any portion of any
remaining Anglesey insurance recoveries, in the form of potential dividends by Anglesey, relating
to the fire.
4. Conditional Asset Retirement Obligations
The Company has conditional asset retirement obligations (CAROs) at several of its
fabricated products facilities. The vast majority of such CAROs consist of incremental costs that
would be associated with the removal and disposal of asbestos (all of which is believed to be fully
contained and encapsulated within walls, floors, ceilings, or piping) at certain of the older
plants if such plants were to undergo major renovation or be demolished. No plans currently exist
for any such renovation or demolition of such facilities and the Companys current assessment is
that the most probable scenarios are that no material CARO will be triggered for 20 or more years.
The Companys estimates and judgments that affect the probability weighted estimated future
contingent cost amounts did not change during the nine months ended September 30, 2009. For the
nine months ended September
12
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
30, 2008, there was a revision to the estimated timing for certain future contingent costs
(recorded during the quarter ended June 30, 2008) that resulted in a $.1 charge to net income in
that period. The Companys results for the quarters ended September 30, 2009 and 2008 each reflect
an accretion of the estimated liability of $.1 (recorded in Cost of products sold). In addition,
the Companys results for the nine months ended September 30, 2009 and 2008 each reflect an
accretion of the estimated liability of $.2 (recorded in Cost of products sold). The estimated fair
value of the CAROs at September 30, 2009 was $3.4.
Anglesey also recorded CAROs of approximately $24.0 in its financial statements in prior
years. The time period over which the fair value of CAROs is estimated under United Kingdom
generally accepted accounting principles (UK GAAP) treatment applied by Anglesey is different
from the time period over which the fair value of CAROs is estimated under the principles of ASC
410-20. As such, the resulting accretion expenses are different under UK GAAP and US GAAP. For the
first six months of 2009, the Company adjusted its equity in earnings of Anglesey to reflect the
impact of applying U.S. GAAP with respect to the Anglesey CAROs by $.6. For the quarter ended
September 30, 2009, the Company recorded no CARO accretion expense relating to Anglesey, as the
result of suspending the equity method of accounting in that quarter (see Note 3). The Company
adjusted its equity in earnings of Anglesey to reflect the impact of applying US GAAP with respect
to the Anglesey CAROs by $.3 for the quarter ended September 30, 2008, and by $1.0 for the nine
months ended September 30, 2008.
For purposes of the Companys fair value estimates with respect to the CAROs, a credit
adjusted risk free rate of 7.5% was used.
5. Property, Plant, and Equipment
The major classes of property, plant, and equipment are as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Land and improvements |
$ | 23.6 | $ | 22.8 | ||||
Buildings |
31.8 | 29.6 | ||||||
Machinery and equipment |
243.3 | 211.0 | ||||||
Construction in progress |
75.3 | 63.3 | ||||||
374.0 | 326.7 | |||||||
Accumulated depreciation |
(42.0 | ) | (30.0 | ) | ||||
Property, plant, and equipment, net |
$ | 332.0 | $ | 296.7 | ||||
The major components of Construction in progress were as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Kalamazoo, Michigan facility (1) |
$ | 61.4 | $ | 23.0 | ||||
Spokane, Washington facility (2) |
1.6 | 19.3 | ||||||
Other (3) |
12.3 | 21.0 | ||||||
Total Construction in progress |
$ | 75.3 | $ | 63.3 | ||||
(1) | The Kalamazoo, Michigan facility is planned to be equipped with two extrusion presses and a remelt operation. Completion of this investment program is expected to occur by early 2010. | |
(2) | Inclusive of the $139 million heat treat plate expansion project at its Trentwood facility in Spokane, Washington | |
(3) | Other construction in progress is spread among most of the Companys manufacturing locations. |
As discussed in Note 15, the Company impaired certain assets in connection with the restructuring
plans to shut down the Tulsa, Oklahoma facility and curtail operations at the Bellwood, Virginia
location.
For the quarter and nine months ended September 30, 2009, the Company recorded depreciation expense
of $3.9 and $12.2, respectively, relating to the Companys operating facilities in its Fabricated
Products segment. For the quarter and nine months ended September 30, 2008, the Company recorded
depreciation expense of $3.6 and $10.8,
13
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respectively, relating to the Companys operating facilities in its Fabricated Products segment. An
immaterial amount of depreciation expense was also recorded in the Companys Corporate segment for
all such periods.
6. Supplemental Balance Sheet Information
Trade Receivables. Trade receivables were comprised of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Billed trade receivables |
$ | 75.8 | $ | 99.2 | ||||
Unbilled trade receivables (Note 1) |
6.1 | .1 | ||||||
81.9 | 99.3 | |||||||
Allowance for doubtful receivables |
(.8 | ) | (.8 | ) | ||||
$ | 81.1 | $ | 98.5 | |||||
Prepaid Expenses and Other Current Assets. Prepaid expenses and other current assets were
comprised of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Current derivative assets (Note 12) |
$ | .6 | $ | 32.2 | ||||
Current deferred tax assets |
83.9 | 84.1 | ||||||
Option premiums paid |
5.1 | 5.3 | ||||||
Short term restricted cash |
.9 | 1.4 | ||||||
Prepaid expenses |
2.5 | 5.4 | ||||||
Total |
$ | 93.0 | $ | 128.4 | ||||
Other Assets. Other assets were comprised of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Derivative assets (Note 12) |
$ | 8.6 | $ | 5.2 | ||||
Option premiums paid |
2.3 | 4.6 | ||||||
Restricted cash |
17.8 | 35.4 | ||||||
Long term income tax receivables |
2.7 | 4.4 | ||||||
Other |
1.6 | .9 | ||||||
Total |
$ | 33.0 | $ | 50.5 | ||||
Other Accrued Liabilities. Other accrued liabilities were comprised of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Current derivative liabilities (Note 12) |
$ | 20.1 | $ | 79.0 | ||||
Current portion of income tax liabilities |
1.0 | 11.8 | ||||||
Accrued income taxes payable and other taxes payable |
2.7 | 1.8 | ||||||
Accrued book overdraft see below |
| 4.0 | ||||||
Accrued annual VEBA contribution |
| 4.9 | ||||||
Accrued freight |
1.7 | 2.1 | ||||||
Environmental accrual |
2.3 | 3.3 | ||||||
Other |
5.0 | 7.0 | ||||||
Total |
$ | 32.8 | $ | 113.9 | ||||
The accrued book overdraft balance at September 30, 2009 and December 31, 2008 represents
uncleared cash disbursements.
Long-term Liabilities. Long-term liabilities were comprised of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Derivative liabilities (Note 12) |
$ | 9.3 | $ | 27.9 |
14
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Income tax liabilities |
12.3 | 10.0 | ||||||
Workers compensation accruals |
16.0 | 15.9 | ||||||
Environmental accruals |
6.2 | 6.3 | ||||||
Asset retirement obligations |
3.5 | 3.3 | ||||||
Other long term liabilities |
1.6 | 1.9 | ||||||
Total |
$ | 48.9 | $ | 65.3 | ||||
7. Secured Debt and Credit Facilities
Secured credit facility and long term debt consisted of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Revolving Credit Facility |
$ | | $ | 36.0 | ||||
Other |
7.1 | 7.0 | ||||||
Total |
7.1 | 43.0 | ||||||
Less Current portion |
| | ||||||
Long-term debt |
$ | 7.1 | $ | 43.0 | ||||
Revolving Credit Facility. At September 30, 2009, the Company had in place a Senior Secured
Revolving Credit Agreement with a group of lenders providing for a $265.0 revolving credit facility
(the Revolving Credit Facility), of which up to a maximum of $60.0 may be utilized for letters of
credit. Under the Revolving Credit Facility, the Company is able to borrow (or obtain letters of
credit) from time to time in an aggregate amount equal to the lesser of a stated amount of $265.0
or a borrowing base comprised of eligible accounts receivable, eligible inventory, and certain
eligible machinery, equipment, and real estate, reduced by certain reserves, all as specified in
the Revolving Credit Facility. The Revolving Credit Facility matures in July 2011, at which time
all principal amounts outstanding thereunder will be due and payable. Borrowings under the
Revolving Credit Facility bear interest at a rate equal to either a base prime rate or LIBOR, at
the Companys option, plus a specified variable percentage determined by reference to the then
remaining borrowing availability under the Revolving Credit Facility. The Revolving Credit Facility
may, subject to certain conditions and the agreement of lenders thereunder, be increased to up to
$275.0 at the request of the Company.
Amounts owed under the Revolving Credit Facility may be accelerated upon the occurrence of
various events of default including, without limitation, the failure to make principal or interest
payments when due and breaches of covenants, representations, and warranties. The Revolving Credit
Facility is secured by a first priority lien on substantially all of the assets of the Company and
certain of its domestic operating subsidiaries that are also borrowers thereunder. The Revolving
Credit Facility places restrictions on the ability of the Company and certain of its subsidiaries
to, among other things, incur debt, create liens, make investments, pay dividends, repurchase
shares, sell assets, undertake transactions with affiliates, and enter into unrelated lines of
business. At September 30, 2009, the Company was in compliance with all covenants contained in the
Revolving Credit Facility.
At September 30, 2009, based on the borrowing base determination in effect as of that date,
the Company had $166.6 available for borrowing and letters of credit under the Revolving Credit
Facility, of which $10.0 supports outstanding letters of credit, leaving $156.6 available for
additional borrowing and letters of credit. There were no borrowings under the Revolving Credit
Facility at September 30, 2009, but the interest rate applicable to any borrowings under Revolving
Credit Facility would have been 4.75% at September 30, 2009.
Other. As of September 30, 2009, the Company had a promissory note obligation (the Note) in
the amount of $7.0 in connection with the purchase of real property of the Los Angeles, California
facility. Interest is payable on the unpaid principal balance of the Note monthly in arrears at the
prime rate, as defined in the Note, plus 1.5%, in no event exceeding 10% per annum. A principal
payment of $3.5 will be due on February 1, 2012 and the remaining $3.5 will be due on February 1,
2013. The Note is secured by a deed of trust on the property. For the nine months ended September
30, 2009, the Company incurred $.3 in interest expense relating to the Note. The interest rate
applicable to borrowings under the Note was 4.75% at September 30, 2009.
8. Income Tax Matters
15
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Tax Benefit (Provision). The benefit (provision) for income taxes for the quarters and nine
month periods ended September 30, 2009 and 2008 consisted of:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Domestic |
$ | (18.4 | ) | $ | 13.6 | $ | (37.4 | ) | $ | (25.2 | ) | |||||
Foreign |
(1.1 | ) | 1.3 | (.4 | ) | (4.8 | ) | |||||||||
Total |
$ | (19.5 | ) | $ | 14.9 | $ | (37.8 | ) | $ | (30.0 | ) | |||||
The income tax provision for the nine months ended September 30, 2009 was $37.8, or an effective
tax rate of 44.9%. The difference between the effective tax rate and the projected blended
statutory tax rate was primarily related to the impact of a non-deductible compensation expense,
resulting in an increase to the income tax rate of approximately 4.6%.
Deferred Income Taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
At December 31, 2008, the Company had $879 of net operating loss (NOL) carryforwards
available to reduce future cash payments for income taxes in the United States. Such NOL
carryforwards expire periodically through 2027. The Company also had $32.1 of other tax attributes,
including $31.7 of alternative minimum tax (AMT) credit carryforwards with an indefinite life,
available to offset regular federal income tax requirements. The remaining tax attributes are
general business credits that will expire periodically through 2011.
In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities,
tax planning strategies and projected future taxable income in making this assessment. As of
December 31, 2008, due to uncertainties surrounding the realization of some of the Companys
deferred tax assets including state NOLs sustained during the prior years and expiring tax
benefits, the Company has a valuation allowance of $29.5 against its deferred tax assets. When
recognized, the tax benefits relating to any reversal of the valuation allowance will be recorded
as a reduction of income tax expense pursuant to ASC 852-740-45.
Foreign taxes primarily represent Canadian income taxes in connection with the operations of
the Companys London, Ontario facility and United Kingdom income taxes in connection with the
operations related to the Companys ownership in Anglesey. The provision for income tax is based on
the projected rate for each applicable period.
Other. The Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states and foreign jurisdictions. The Canada Revenue Agency audited and
issued assessment notices for 1998 through 2001 for which Notices of Objection have been filed. In
addition, the Canada Revenue Agency has audited and issued assessment notices for 2002 through
2004, of which $7.9 has been paid to the Canada Revenue Agency against previously accrued tax
reserves in the third quarter of 2009. There is an additional Canadian Provincial income tax
assessment of $1.0 for the 2002 through 2004 income tax audit that is anticipated to be paid
against previously accrued tax reserves in the fourth quarter of 2009. Certain past years are
still subject to examination by taxing authorities, and the use of NOL carryforwards in future
periods could trigger a review of attributes and other tax matters in years that are not otherwise
subject to examination.
No U.S. federal or state liability has been recorded for the undistributed earnings of the
Companys Canadian subsidiary at December 31, 2008. These undistributed earnings are considered to
be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or
foreign withholding taxes has been provided on such undistributed earnings. Determination of the
potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes
is not practicable because of the complexities associated with its hypothetical calculation.
16
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company had gross unrecognized tax benefits of $14.6 and $15.8 at September 30, 2009 and
December 31, 2008, respectively. The change during the quarter and nine months ended September 30,
2009 was primarily due to currency fluctuations and the settlement of a Canada Revenue Agency
income tax audit for the tax years 2002 through 2004. The Company recognizes interest and
penalties related to these unrecognized tax benefits in the income tax provision. The Company had
approximately $5.7 and $9.4 accrued at September 30, 2009 and December 31, 2008, respectively, for
interest and penalties. Of the $9.4 of total interest and penalties at December 31, 2008, $5.2 is
included in current liabilities and $4.2 is included in Long-term liabilities in the Consolidated
Balance Sheet. Of the $5.7 of total interest and penalties at September 30, 2009, $.3 is included
in current liabilities and $5.4 is included in Long-term liabilities in the Consolidated Balance
Sheet. During the quarter and nine months ended September 30, 2009, the Company reduced its
liability for interest and penalties by approximately $2.5 and $3.7, respectively, predominantly
due to the settlement of a Canada Revenue Agency income tax audit for tax years 2002 through 2004.
During the nine months ended September 30, 2009, the foreign currency impact on gross unrecognized
tax benefits, interest and penalties resulted in a $2.0 currency translation adjustment that was
recorded in Accumulated other comprehensive income, of which $1.6 related to gross unrecognized tax
benefits and $.4 related to accrued interest and penalties. The Company expects its gross
unrecognized tax benefits to be reduced by $.7 within the next twelve months in connection with a
Canadian income tax audit.
9. Employee Benefits
Pension and Similar Plans. Pensions and similar plans include:
| Monthly contributions of one dollar per hour worked by each bargaining unit employee to the appropriate multi-employer pension plans sponsored by the United Steelworkers, International Brotherhood of Teamsters, and International Association of Machinists at certain of our production facilities. The Company currently estimates that contributions will range from $2 to $4 per year. | ||
| A defined contribution 401(k) savings plan for hourly bargaining unit employees at five of the Companys production facilities. The Company is required to make contributions to this plan for active bargaining unit employees at four of these production facilities ranging from (in whole dollars) $800 to $2,400 per employee per year, depending on the employees age. The Company currently estimates that contributions to such plans will range from $1 to $3 per year. | ||
| A defined benefit plan for our salaried employees at the Companys facility in London, Ontario with annual contributions based on each salaried employees age and years of service. At December 31, 2008, approximately 53% of the plan assets were invested in equity securities, 40% of plan assets were invested in debt securities and the remaining plan assets were invested in short term securities. The Companys investment committee reviews and evaluates the investments portfolio. The asset mix target allocation on the long term investments is approximately 60% in equity securities and 36% in debt securities with the remaining assets in short term securities. | ||
| A defined contribution savings plan for salaried and certain hourly employees providing for a concurrent match up to 4% of certain contributions made by employees plus an annual contribution of between 2% and 10% of their compensation depending on their age and years of service. All new hires after January 1, 2004 receive a fixed 2% contribution annually. The Company currently estimates that the contributions to such plan will range from $4 to $6 per year. | ||
| A non-qualified defined contribution plan for key employees who would otherwise suffer a loss of benefits under the Companys defined contribution plan as a result of the limitations imposed by the Internal Revenue Code. |
Postretirement Medical Obligations. As a part of the Companys reorganization efforts, the
Companys postretirement medical plan was terminated in 2004. Participants were given the option of
coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), with the
Companys filing of its plan of reorganization as the qualifying event, or participation in the
applicable VEBA (the Union VEBA) or the VEBA that provides benefits for certain other eligible
retirees and their surviving spouse and eligible dependents (the Salaried VEBA)). Qualifying
bargaining unit employees who do not, or are not eligible to, elect COBRA coverage are covered by
the Union VEBA. The Salaried VEBA covers all other retirees including employees who retired prior
to the 2004 termination of the prior plan or who retire with the required age and service
requirements so long as their
17
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
employment commenced prior to February 2002. The benefits paid by the VEBAs are at the sole
discretion of the respective VEBA trustees and are outside the Companys control.
As of the date of filing of this Report, the Companys only obligation to the Union VEBA and
the Salaried VEBA is an annual variable cash contribution which, with respect to the Union VEBA
terminates for periods beginning after December 31, 2012. The amount to be contributed to the VEBAs
through 2012 is 10% of the first $20.0 of annual cash flow (as defined; in general terms, the
principal elements of cash flow are earnings before interest expense, provision for income taxes,
and depreciation and amortization less cash payments for, among other things, interest, income
taxes and capital expenditures), plus 20% of annual cash flow, as defined, in excess of $20.0. Such
annual payments may not exceed $20.0 and are also limited (with no carryover to future years) to
the extent that the payments would cause the Companys liquidity to be less than $50.0. Such
amounts are determined on an annual basis and payable within 120 days following the end of each
fiscal year, or within 15 days following the date on which the Company files its Annual Report on
Form 10-K with the SEC (or, if no such report is required to be filed, within 15 days of the
delivery of the independent auditors opinion of the Companys annual financial statements),
whichever is earlier. At December 31, 2008, the Company had preliminarily determined that $4.2 and
$.7 were owed to the Union VEBA and the Salaried VEBA, respectively, under the contribution
obligation, which amounts were recorded in Other accrued liabilities in the Companys Consolidated
Balance Sheets with a corresponding increase/decrease in Net asset/liability in respect of VEBA. In
March 2009, these amounts were paid to the VEBAs following the final determination of the
contribution obligation. In addition, the Company is obligated to pay one-half of the
administrative expenses of the Union VEBA, up to $.3, in each successive calendar year. During
2008, the Company paid $.1 in administrative expenses of the Union VEBA. No administrative expenses
of the Union VEBA were paid for the nine months ended September 30, 2009. As of September 30,
2009, the Union VEBA owns approximately 24% of the Companys outstanding common stock.
For accounting purposes, after discussions with the staff of the SEC, the Company treats the
postretirement medical benefits to be paid by the VEBAs and the Companys related annual variable
contribution obligations as defined benefit postretirement plans with the current VEBA assets and
future variable contributions described above, and earnings thereon, operating as a cap on the
benefits to be paid. While the Companys only obligation to the VEBAs is to pay the annual variable
contribution amount and the Company has no control over the plan assets, the Company nonetheless
accounts for net periodic postretirement benefit costs in accordance with ASC 715-60, and records
any difference between the assets of each VEBA and its accumulated postretirement benefit
obligation in the Companys financial statements.
18
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of Net Periodic Benefit Cost and Cash Flow and Charges. The following tables
present the components of net periodic benefit cost for the quarters and nine month periods ended
September 30, 2009 and 2008:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
VEBAs: |
||||||||||||||||
Service cost |
$ | .6 | $ | .4 | $ | 1.7 | $ | 1.3 | ||||||||
Interest cost |
4.6 | 4.3 | 14.0 | 12.8 | ||||||||||||
Expected return on plan assets |
(5.2 | ) | (5.2 | ) | (15.7 | ) | (15.5 | ) | ||||||||
Amortization of prior service cost |
.4 | .2 | 1.2 | .6 | ||||||||||||
Amortization of net loss |
.9 | .1 | 2.8 | .3 | ||||||||||||
1.3 | (.2 | ) | 4.0 | (.5 | ) | |||||||||||
Defined contribution plans |
2.3 | 2.6 | 7.5 | 8.6 | ||||||||||||
$ | 3.6 | $ | 2.4 | $ | 11.5 | $ | 8.1 | |||||||||
The following tables present the allocation of these charges:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Fabricated Products segment |
$ | 2.2 | $ | 2.3 | $ | 6.6 | $ | 7.5 | ||||||||
Corporate and Other segment |
1.4 | .1 | 4.9 | .6 | ||||||||||||
$ | 3.6 | $ | 2.4 | $ | 11.5 | $ | 8.1 | |||||||||
For all periods presented, substantially all of the Fabricated Products segments related
charges are in Cost of products sold, excluding depreciation, amortization and other items, with
the balance being in Selling, administrative, research and development and general expense.
See Note 10 of Notes to Consolidated Financial Statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2008 for key assumptions used with respect to
the Companys pension and similar plans, and key assumptions made in computing the net obligation
of each VEBA.
10. Employee Incentive Plans
Short term incentive plans
The Company has a short term incentive compensation plan for senior management and certain
salaried employees payable at the Companys election in cash, non-restricted shares of common
stock, or a combination of cash and non-restricted shares. Amounts earned under the plan are based
primarily on EVA of the Companys core Fabricated Products business, adjusted for certain safety
and performance factors. Most of the Companys production facilities have similar programs for both
hourly and salaried employees.
Long term incentive plans
General. On July 6, 2006, the 2006 Equity and Performance Incentive Plan (as amended, the
Equity Incentive Plan) became effective. Officers and other key employees of the Company or one
or more of its subsidiaries, as well as directors and directors emeritus of the Company, are
eligible to participate in the Equity Incentive Plan. The Equity Incentive Plan permits the
granting of awards in the form of options to purchase common shares, stock appreciation rights,
shares of non-vested and vested stock, restricted stock units, performance shares, performance
units and other awards. The Equity Incentive Plan will expire on July 6, 2016. No grants will be
made after that date, but all grants made on or prior to that date will continue in effect
thereafter subject to the terms thereof and of the Equity Incentive Plan. The Companys Board of
Directors may, in its discretion, terminate the Equity Incentive Plan at any time. The termination
of the Equity Incentive Plan will not affect the rights of participants or their successors under
any awards outstanding and not exercised in full on the date of termination. In December 2008, the
Company amended the Equity Incentive Plan to include a new French sub-plan in order to issue
restricted stock units to eligible employees of the Companys French subsidiary. Under the French
sub-plan, the restriction period on the
19
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
restricted stock units cannot be shorter than two years from the date of grant and the holder
of such restricted stock units is not entitled to dividend equivalent payments in the event that
the Company declares dividends on shares of its common stock. In June 2009, the Company amended the
Equity Incentive Plan to clarify and confirm that directors emeritus are permitted to participate
in the Equity Incentive Plan.
Subject to certain adjustments that may be required from time to time to prevent dilution or
enlargement of the rights of participants under the Equity Incentive Plan, upon its effectiveness,
2,222,222 common shares were reserved for issuance under the Equity Incentive Plan. At September
30, 2009, 815,357 common shares were available for additional awards under the Equity Incentive
Plan.
Compensation charges, all of which are included in Selling, administrative, research and
development and general expenses, related to the Equity Incentive Plan for the quarters and nine
month periods ended September 30, 2009 and 2008 were as follows:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service-based vested
and non-vested common
shares and restricted
stock units |
$ | 1.9 | $ | 2.3 | $ | 7.1 | $ | 7.3 | ||||||||
Performance shares |
.2 | .4 | 1.0 | 1.1 | ||||||||||||
Service-based stock options |
.1 | .1 | .2 | .2 | ||||||||||||
Total compensation charge |
$ | 2.2 | $ | 2.8 | $ | 8.3 | $ | 8.6 | ||||||||
Non-vested Common Shares, Restricted Stock Units, and Performance Shares. In March 2009, the
Company granted 180,696 non-vested common shares, 5,181 restricted stock units and 455,880
performance shares to executive officers and other key employees. The performance shares were
granted under the 2009 2011 LTI Program.
During the quarter ended June 30, 2009, the Company granted 1,778 non-vested common shares and
4,318 performance shares to a member of the senior management. In addition, the Company granted
13,920 non-vested common shares to its non-employee directors and issued an additional 3,734 common
shares to non-employee directors who elected to receive shares of common stock in lieu of all or a
portion of their annual cash retainers. The Company also granted 435 non-vested common shares to
its director emeritus.
The non-vested common shares granted to executive officers and other members of senior
management during the quarters ended March 31, 2009 and June 30, 2009 are subject to a vesting
requirement that lapses in March 2012. The non-vested common shares granted to other key employees
in March 2009 vest one-third on each of the first, second and third anniversaries of the grant
date. The non-vested common shares granted to directors and a director emeritus in June 2009 are
subject to a vesting requirement that lapses on June 2, 2010. The total grant date fair value of
the non-vested shares issued, after assuming a forfeiture rate, is being amortized to expense over
the various vesting period on a ratable basis.
With the exception of restricted stock units granted under the French sub-plan, restricted
stock units have rights similar to the rights of non-vested common shares and vest one third on
each of the first, second and third anniversaries of the grant date. The employee will receive one
common share for each restricted stock unit upon the vesting of the restricted stock unit.
Restricted stock units granted under the French sub-plan vest two-thirds on the second anniversary
of the grant date and one third on the third anniversary of the grant date. The grant date fair
value of the restricted stock units issued, after assuming a forfeiture rate, is being amortized to
expense over the vesting period on a ratable basis.
The performance shares, granted in March 2009 and May 2009, are subject to performance
requirements pertaining to the Companys average annual EVA measured over a three year performance
period, 2009 through 2011. EVA is a measure of the Companys pretax operating income for a
particular year over a pre-determined percentage of net assets of the immediately preceding year,
as defined in the 2009 2011 LTI Program. The number of performance shares, if any, that will
ultimately vest and result in the issuance of common shares in 2012 will depend on the average
annual EVA achieved during the three year performance period. The Company accounts for these awards
at fair value. The total fair value to be recognized as compensation expense has been estimated
20
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
based on the most probable outcome of the performance condition which is evaluated quarterly
using the Companys forecast and actual results. The total fair value, based on the Companys best
estimate as of September 30, 2009, after assuming an estimated forfeiture rate, is being amortized
to expense over the requisite service period of three years on a ratable basis.
The fair value of the non-vested common shares, restricted stock units, and performance shares
was determined based on the closing trading price of the common shares on the grant date. A summary
of the activity with respect to non-vested common shares and restricted stock units for the nine
months ended September 30, 2009 is as follows:
Non-Vested | Restricted | |||||||||||||||
Common Shares | Stock Units | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Grant-Date | Grant-Date | |||||||||||||||
Fair Value | Fair Value | |||||||||||||||
Shares | per Share | Units | per Unit | |||||||||||||
Outstanding at January 1, 2009 |
553,712 | $ | 47.79 | 2,969 | $ | 36.05 | ||||||||||
Granted |
196,829 | 15.57 | 5,181 | 13.92 | ||||||||||||
Vested |
(490,721 | ) | 42.88 | (622 | ) | 68.60 | ||||||||||
Forfeited |
(5,668 | ) | 25.08 | | | |||||||||||
Outstanding at September 30, 2009 |
254,152 | $ | 32.75 | 7,528 | $ | 18.13 | ||||||||||
A summary of the activity with respect to the performance shares for the nine months ended
September 30, 2009 is as follows:
Performance Shares | ||||||||
Weighted- | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Fair Value | ||||||||
Shares | per Share | |||||||
Outstanding at January 1, 2009 |
89,951 | $ | 74.40 | |||||
Granted |
460,198 | 14.06 | ||||||
Vested |
(20,467 | ) | 24.83 | |||||
Forfeited |
(21,468 | ) | 27.15 | |||||
Outstanding at September 30, 2009 |
508,214 | $ | 23.75 | |||||
For the nine months ended September 30, 2008, 52,551 non-vested common shares were granted to
employees and non-employee directors at the weighted-average grant date fair value per share of
$71.79. Additionally, 702 shares of restricted stock units and 101,586 performance shares were
granted to employees during this period at the weighted-average grant date fair value per share of
$74.82 and $74.45, respectively. 37,249 non-vested common shares and 1,652 restricted stock units
vested during the nine months ended September 30, 2008.
As of September 30, 2009, there was $4.4 of unrecognized gross compensation cost related to
the non-vested common shares and the restricted stock units and $1.5 of gross unrecognized gross
compensation cost related to the performance shares. The cost related to the non-vested common
shares and the restricted stock units is expected to be recognized over a weighted-average period
of approximately 1.7 years and the cost related to the performance shares is expected to be
recognized over a weighted-average period of 2.2 years.
Stock Options. As of September 30, 2009, the Company had 22,077 outstanding options for
executives and other key employees to purchase its common shares. The options were granted on April
3, 2007 and have a contractual life of ten years. The options vested one-third on April 3, 2008 and
one-third on April 3, 2009, and will vest one-third on the third anniversary of the grant date. The
weighted-average fair value of the options granted was $39.90 (see Note 11 of Notes to Consolidated
Financial Statements included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2008 for key assumptions used in the Black Scholes pricing model). No new options were
granted during the nine months ended September 30, 2009.
21
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the Companys stock option activity for the nine months ended September 30, 2009
is as follows:
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Remaining | Aggregate | ||||||||||||||
Number of | Price per | Contractual | Intrinsic | |||||||||||||
Options | Share | Life | Value | |||||||||||||
(In years) | (In millions) | |||||||||||||||
Outstanding at January 1, 2009 |
22,077 | $ | 80.01 | | $ | | ||||||||||
Grants |
| | | | ||||||||||||
Forfeited |
| | | | ||||||||||||
Exercise |
| | | | ||||||||||||
Outstanding at September 30, 2009 |
22,077 | $ | 80.01 | 7.50 | $ | | ||||||||||
Fully vested and expected to vest at September 30, 2009 |
22,017 | $ | 80.01 | 7.50 | $ | | ||||||||||
Exercisable at September 30, 2009 |
15,143 | $ | 80.01 | 7.50 | $ | | ||||||||||
At September 30, 2009, there was $.1 of unrecognized compensation expense related to stock
options. The expense is expected to be recognized over a weighted-average period of 6 months.
11. Commitments and Contingencies
Commitments. The Company and its subsidiaries have a variety of financial commitments,
including purchase agreements, forward foreign exchange and forward sales contracts (see Note 12),
letters of credit (see Note 7), and guarantees. The Company and its subsidiaries also had
agreements to supply alumina to and to purchase aluminum from Anglesey through September 30, 2009
(See also Note 4 of Notes to Consolidated Financial Statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2008 for information regarding these
agreements). See also Note 3 for additional information regarding changes in the nature of
Angleseys operations as of September 30, 2009.
Refer to Note 12 of Notes to Consolidated Financial Statements included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2008 for information relating to minimum
rental commitments under operating leases. There have been no material changes to such scheduled
rental commitments as of the filing of this Report.
Environmental Contingencies. The Company and its subsidiaries are subject to a number of
environmental laws, fines or penalties assessed for alleged breaches of the environmental laws, and
to claims based upon such laws.
Based on the Companys evaluation of the existing environmental matters, the Company had
environmental accruals totaling $8.5 at September 30, 2009. Such amounts are primarily related to
potential solid waste disposal and soil and groundwater remediation matters. These environmental
accruals represent the Companys undiscounted estimate of costs reasonably expected to be incurred
based on presently enacted laws and regulations, currently available facts, existing technology,
and the Companys assessment of the likely remediation action to be taken. The Company expects that
these remediation actions will be taken over the next several years and estimates that expenditures
to be charged to these environmental accruals will be approximately $.7 in 2009, $2.0 in 2010, $2.4
in 2011, $.9 in 2012, and $2.5 in 2013 and thereafter.
As additional facts are developed and definitive remediation plans and necessary regulatory
approvals for implementation of remediation are established or alternative technologies are
developed, changes in these and other factors may result in actual costs exceeding the current
environmental accruals. The Company believes that it is reasonably possible that undiscounted costs
associated with these environmental matters may exceed current accruals by amounts that could be,
in the aggregate, up to an estimated $16.8. As the resolution of these matters is subject to
further regulatory review and approval, no specific assurance can be given as to when the factors
upon which a substantial portion of this estimate is based can be expected to be resolved. However,
the Company is currently working to resolve certain of these matters.
Other Contingencies. The Company and its subsidiaries are party to various lawsuits, claims,
investigations, and administrative proceedings that arise in connection with its past and current
operations. The Company evaluates such matters on a case by case basis, and its policy is to
vigorously contest any such claims it believes are without
22
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
merit. In accordance with ASC 450-20, the Company reserves for a legal liability when it is
both probable that a liability has been incurred and the amount of the loss can be reasonably
estimated. Quarterly, in addition to when changes in facts and circumstances require it, the
Company reviews and adjusts these reserves to reflect the impacts of negotiations, settlements,
rulings, advice of legal counsel and other information, and events pertaining to a particular case.
While uncertainties are inherent in the final outcome of such matters and it is presently
impossible to determine the actual cost that may ultimately be incurred, management believes that
it has sufficiently reserved for such matters and that the ultimate resolution of pending matters
will not have a material adverse impact on its consolidated financial position, operating results,
or liquidity.
12. Derivative Financial Instruments and Related Hedging Programs
In conducting its business, the Company, from time to time, enters into derivative
transactions, including forward contracts and options, to limit its economic (i.e., cash) exposure
resulting from (i) metal price risk related to its sales of fabricated aluminum products and the
purchase of metal used as raw materials for its fabrication operations, (ii) the energy price risk
from fluctuating prices for natural gas used in its production process, and (iii) foreign currency
requirements with respect to its cash commitments for equipment purchases and with respect to its
foreign subsidiaries and affiliate. As the Companys hedging activities are generally designed to
lock-in a specified price or range of prices, realized gains or losses on the derivative contracts
utilized in the hedging activities generally offset at least a portion of any losses or gains,
respectively, on the transactions being hedged at the time the transaction occurs. However, due to
mark-to-market accounting, during the life of the derivative contract, significant unrealized,
non-cash gains and losses are recorded in the income statement as a reduction or increase in Cost
of products sold, excluding depreciation, amortization and other items. The Company may also be
exposed to margin calls, which the Company tries to minimize or offset through counterparty credit
lines and/or use of options. From time to time, the Company may modify the terms of the derivative
contracts based on operational needs.
The Companys pricing of fabricated aluminum products is generally intended to lock-in a
conversion margin (representing the value added from the fabrication process(es)) and to pass metal
price risk on to its customers. However, in certain instances the Company does enter into firm
price arrangements. In such instances, the Company has price risk on its anticipated primary
aluminum purchases in respect of the customers orders. The Company currently uses third party
hedging instruments to limit exposure to primary aluminum price risks related to substantially all
fabricated products firm price arrangements.
Total fabricated products shipments during the nine months ended September 30, 2009 and 2008
that contained fixed price terms were (in millions of pounds) 128.7 and 184.9, respectively. At
September 30, 2009, the Fabricated Products business held contracts for the delivery of fabricated
aluminum products that have the effect of creating price risk on anticipated purchases of primary
aluminum during the last three months of 2009 and for the period 2010 through 2012 totaling
approximately (in millions of pounds): 2009 47.2, 2010 91.5, 2011 79.9, and 2012 13.4.
23
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the Companys material derivative positions at September 30,
2009:
Notional | ||||||||||||
Amount of | ||||||||||||
Contracts | Fair | |||||||||||
Commodity | Period | (mmlbs) | Value | |||||||||
Aluminum |
||||||||||||
Option purchase contracts |
10/2009 through 12/2011 | 193.8 | $ | 7.8 | ||||||||
Fixed priced purchase contracts |
10/2009 through 12/2012 | 184.5 | $ | (19.7 | ) | |||||||
Fixed priced sales contracts |
10/2009 through 12/2011 | 17.6 | $ | .2 | ||||||||
Regional premium swap contracts(1) |
10/2009 through 12/2012 | 173.6 | $ | |
Notional | ||||||||||||
Amount of | ||||||||||||
Contracts | Fair | |||||||||||
Foreign Currency | Period | (mm) | Value | |||||||||
Pound Sterling |
||||||||||||
Fixed priced purchase contracts |
10/2009 | £ | 7.1 | $ | (.3 | ) | ||||||
Euro |
||||||||||||
Fixed priced purchase contracts |
10/2009 through 3/2010 | | .5 | $ | |
Notional | ||||||||||||
Amount of | ||||||||||||
Contracts | Fair | |||||||||||
Energy | Period | (mmbtu) | Value | |||||||||
Natural gas |
||||||||||||
Fixed priced purchase contracts(2) |
10/2009 through 2/2011 | 1,300,000 | $ | (.8 | ) |
(1) | Regional premiums represent the premium over the LME price for primary aluminum which is incurred on the Companys purchases of primary aluminum. | |
(2) | As of September 30, 2009, the Companys exposure to increases and decreases in natural gas prices had been substantially limited for approximately 91% of the expected natural gas purchases for October 2009 through December 2009, approximately 15% of the expected natural gas purchases for 2010, and an insignificant percentage of expected natural gas purchases for 2011. |
The Company reflects the fair value of its derivative contracts on a gross basis in the
Consolidated Balance Sheets (See Note 6). As more fully discussed in Note 1, the Company reflects
changes in the fair value of its derivative instruments in Net income (rather than deferring such
gains/losses to the date of the underlying transactions to which the related hedges occur). The
realized and unrealized gains (losses) for the quarters and nine month periods ended September 30,
2009 and 2008 were as follows:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Realized gains (losses): |
||||||||||||||||
Aluminum |
$ | (7.2 | ) | $ | 1.7 | $ | (20.7 | ) | $ | 10.4 | ||||||
Foreign currency |
(2.7 | ) | (.4 | ) | (13.3 | ) | .5 | |||||||||
Natural gas |
(2.0 | ) | (.2 | ) | (8.5 | ) | .1 | |||||||||
Total realized gains (losses) |
$ | (11.9 | ) | $ | 1.1 | $ | (42.5 | ) | $ | 11.0 | ||||||
Unrealized gains (losses): |
||||||||||||||||
Aluminum |
$ | 22.1 | $ | (26.0 | ) | $ | 29.9 | $ | 5.7 | |||||||
Foreign currency |
3.1 | (10.1 | ) | 15.3 | (8.2 | ) | ||||||||||
Natural gas |
1.9 | (7.7 | ) | 4.2 | (3.5 | ) | ||||||||||
Total unrealized gains (losses) |
$ | 27.1 | $ | (43.8 | ) | $ | 49.4 | $ | (6.0 | ) | ||||||
Both realized and unrealized gains (losses) on derivative instruments are included in Cost of
products sold, excluding depreciation, amortization and other items, for the periods presented.
All of the Companys derivative contracts contain credit-risk related contingencies. If the
fair value of the Companys net derivative positions with the counterparty exceeds a specified
threshold, if any, the counterparty is required to transfer cash collateral in excess of the
threshold to the Company. Conversely, if the fair value of the net derivative positions falls below
a specified threshold, the Company is required to transfer cash collateral below the threshold to
the counterparty. At September 30, 2009, the Company had no margin deposits with its counterparties
as a result of the credit-risk related contingency features.
24
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Earnings Per Share
ASC 260-10-45-60A defines unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities
and requires inclusion of such securities in the computation of earnings per share pursuant to the
two-class method. On January 1, 2009, the Company adopted FSP EITF 03-6-1, subsequently codified by
ASC 260-10-65-2, which mandates the application of the foregoing principles to all financial
statements issued for fiscal years beginning after December 2008, and requires retrospective
application. As certain of the Companys unvested share-based payment awards contain
nonforfeitable rights to dividends and dividend equivalents, the Company used the two-class method
in the computation of earnings per share for the quarter and nine months ended September 30, 2009
and retrospectively adjusted its earnings per share data for the quarter and nine months ended
September 30, 2008.
Basic and diluted earnings per share using the two-class method for the quarters and nine
month periods ended September 30, 2009 and 2008 were calculated as follows:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Numerator: |
||||||||||||||||
Net Income (loss) |
$ | 23.0 | $ | (22.1 | ) | $ | 46.4 | $ | 39.8 | |||||||
Less: net income
attributable to
participating securities
(1) |
(.2 | ) | (.1 | ) | (1.2 | ) | (1.1 | ) | ||||||||
Net income (loss)
available to common
stockholders |
$ | 22.8 | $ | (22.2 | ) | $ | 45.2 | $ | 38.7 | |||||||
Denominator: |
||||||||||||||||
Weighted-average common
shares outstanding Basic |
19,981,715 | 19,995,073 | 19,567,963 | 20,031,802 | ||||||||||||
Weighted-average common
shares outstanding
Diluted |
19,981,715 | 19,995,073 | 19,567,963 | 20,031,802 | ||||||||||||
Income (loss) per common share: |
||||||||||||||||
Basic |
$ | 1.14 | $ | (1.11 | ) | $ | 2.31 | $ | 1.93 | |||||||
Diluted |
$ | 1.14 | $ | (1.11 | ) | $ | 2.31 | $ | 1.93 |
(1) | Net income attributable to participating securities for a given period includes both distributed and undistributed net income, as applicable. Undistributed net losses are not allocated to participating securities, however, as such securities do not have an obligation to fund net losses of the Company. | |
Distributed net income attributed to participating securities represents dividend and dividend equivalents declared on the participating securities that the Company expects to ultimately vest. Distributed net income to participating securities was $.1 for each of the quarters ended September 30, 2009 and 2008 and was $.3 for each of the nine month periods ended September 30, 2009 and 2008. | ||
For the quarter ended September 30, 2009, undistributed net income attributed to participating securities was $.1. For the quarter ended September 30, 2008, the Company incurred an undistributed loss, none of which was allocated to participating securities. Undistributed net income attributed to participating securities was $.9 and $.8 for the nine month periods ended September 30, 2009 and 2008, respectively. | ||
For the quarter and nine months ended September 30, 2009 and the nine months ended September 30, 2008, undistributed net income was apportioned to common stockholders and participating securities based on the weighted average number of each class of securities outstanding during the applicable period as a percentage of the combined weighted average number of these securities outstanding during the period. For the nine months ended September 30, 2009 and 2008, undistributed net income apportioned to the participating securities represented approximately 3% of total undistributed net income. For the three months ended September 30, 2009, undistributed net income apportioned to participating securities represented approximately 1% of net income. |
In computing the diluted weighted average common shares outstanding for the quarters and nine
month periods ended September 30, 2009 and 2008, the Company used the two-class method assuming
that participating securities are not exercised, vested or converted. The Company included the
dilutive effect of stock options in calculating the
25
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
diluted weighted average common shares. Options to purchase 22,077 common shares at an average
exercise price per share of $80.01 were outstanding at both September 30, 2009 and 2008. The
potential dilutive effect of such shares was zero for each of the quarters ended September 30, 2009
and 2008 and for each of the nine month periods ended September 30, 2009 and 2008.
For the nine months ended September 30, 2009 and 2008, the Company paid a total of $14.7, or
$.72 per common share, and $12.4, or $.60 per common share, respectively, in cash dividends to
stockholders, including the holders of restricted stock, and dividend equivalents to the holders of
restricted stock units and to the holders of performance shares with respect to one half of the
performance shares.
14. Segment and Geographical Area Information
The Companys primary line of business is the production of semi-fabricated specialty aluminum
products. In addition, the Company owns a 49% interest in Anglesey. As described in Note 3,
Anglesey operated as an aluminum smelter until September 30, 2009 and commenced remelt and casting
of secondary aluminum products in the fourth quarter of 2009.
The Companys continuing operations are organized and managed by product type and include two
operating segments of the aluminum industry and a Corporate segment. The aluminum industry segments
consist of: Fabricated Products and Primary Aluminum. The Fabricated Products segment sells
value-added products such as heat treat aluminum sheet and plate, extrusions and forgings which are
used in a wide range of industrial applications, including aerospace, defense, automotive and
general engineering end-use applications. The Primary Aluminum segment conducts hedging activities
in respect of the Companys exposure to primary aluminum price risk and, through its investment in
Anglesey, produces commodity grade aluminum sow and/or value-added products such as ingot and
billet for which the Company received a premium over normal commodity market prices.
The accounting policies of the segments are the same as those described in Note 1 of Notes to
Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2008 and as further described in Note 1 of this Report. Segment results are
evaluated internally by management before any allocation of corporate overhead and without any
charge for income taxes, interest expense, or Other operating charges, net.
Financial information by operating segment for the quarters and nine month periods ended
September 30, 2009 and 2008 is as follows:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net Sales: |
||||||||||||||||
Fabricated Products |
$ | 215.1 | $ | 334.9 | $ | 660.7 | $ | 1,043.3 | ||||||||
Primary Aluminum |
36.9 | 34.3 | 89.3 | 138.4 | ||||||||||||
$ | 252.0 | $ | 369.2 | $ | 750.0 | $ | 1,181.7 | |||||||||
Segment Operating Income (Loss): |
||||||||||||||||
Fabricated Products |
$ | 26.4 | $ | 19.5 | $ | 59.0 | $ | 102.4 | ||||||||
Primary Aluminum |
27.5 | (44.9 | ) | 58.8 | 3.8 | |||||||||||
Corporate and Other |
(11.3 | ) | (12.5 | ) | (33.9 | ) | (37.8 | ) | ||||||||
Other Operating Benefits, Net |
| 1.4 | .9 | 1.2 | ||||||||||||
Total operating income (loss) |
$ | 42.6 | $ | (36.5 | ) | $ | 84.8 | $ | 69.6 | |||||||
Interest expense |
(.2 | ) | (.3 | ) | (.6 | ) | (.8 | ) | ||||||||
Other income (expense), net |
.1 | (.2 | ) | | 1.0 | |||||||||||
Income (Loss) before income taxes |
$ | 42.5 | $ | (37.0 | ) | $ | 84.2 | $ | 69.8 | |||||||
26
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Depreciation and Amortization: |
||||||||||||||||
Fabricated Products |
$ | 3.9 | $ | 3.6 | $ | 12.2 | $ | 10.8 | ||||||||
Corporate and Other |
| | .1 | | ||||||||||||
$ | 3.9 | $ | 3.6 | $ | 12.3 | $ | 10.8 | |||||||||
Capital expenditures, net of change in accounts payable: |
||||||||||||||||
Fabricated Products |
$ | 13.7 | $ | 22.7 | $ | 50.3 | $ | 61.0 | ||||||||
Corporate and Other |
.7 | | .7 | | ||||||||||||
$ | 14.4 | $ | 22.7 | $ | 51.0 | $ | 61.0 | |||||||||
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Segment assets: |
||||||||
Fabricated Products |
$ | 448.8 | $ | 498.8 | ||||
Primary Aluminum (1) |
28.2 | 99.9 | ||||||
Corporate and Other (2) |
558.5 | 546.7 | ||||||
$ | 1,035.5 | $ | 1,145.4 | |||||
(1) | Primary Aluminum includes the Companys derivative assets. | |
(2) | Corporate and Other includes all of the Companys Cash and cash equivalents, Net assets in respect of VEBA and net deferred income tax assets. |
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Income Taxes Paid: |
||||||||||||||||
Fabricated Products |
||||||||||||||||
United States |
$ | .9 | $ | | $ | 2.7 | $ | 1.9 | ||||||||
Canada |
7.9 | 1.3 | 8.3 | 3.3 | ||||||||||||
$ | 8.8 | $ | 1.3 | $ | 11.0 | $ | 5.2 | |||||||||
15. Restructuring costs and other charges
Fourth Quarter 2008 Restructuring Plans
In December 2008, the Company announced plans to close operations at its Tulsa, Oklahoma
facility and significantly reduce operations at its Bellwood, Virginia facility. The Tulsa,
Oklahoma facility produced, and the Bellwood, Virginia facility primarily produced, extruded rod
and bar products sold principally to service centers for general engineering applications. The
operations and workforce reductions were a result of deteriorating economic and market conditions.
Approximately 45 employees at the Tulsa, Oklahoma facility and 125 employees at the Bellwood,
Virginia facility were affected. As a result, the Company incurred restructuring costs and other
charges of $8.8 during the fourth quarter of 2008, of which $4.5 was related to involuntary
employee terminations and $4.3 related to asset impairments. During the first quarter of 2009, the
Company recorded additional charges of $1.2 in connection with these restructuring efforts,
consisting primarily of contract termination and facility shut-down costs. Approximately $.6 of the
first quarter expense represents cash obligations, with the balance represented by non-cash
charges. The restructuring efforts initiated during the fourth quarter of 2008 were substantially
completed by the end of the first quarter of 2009.
All restructuring costs and other charges described above were incurred and recorded in the
Companys Fabricated Products segment.
27
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Second Quarter 2009 Restructuring Plans
In May 2009, the Company announced plans to: (i) further curtail operations at its Bellwood,
Virginia facility to focus solely on drive shaft and seamless tube products and (ii) shut down the
Bellwood, Virginia facility temporarily during the month of July 2009, in response to planned
shutdowns in the automotive industry and continued weak economic and market conditions. In
addition, the Company reduced its personnel in certain other locations in the quarter ended June
30, 2009, in an effort to streamline costs. Approximately 85 employees were affected by the
reduction in force, principally at the Bellwood location. In connection with the foregoing plans,
the Company recorded restructuring costs and other charges of $5.1 in the second quarter of 2009.
Of these charges, $4.8 were related to involuntary employee terminations and other personnel costs,
and the remaining $.3 were principally related to a non-cash asset impairment. Of the
personnel-related costs recorded during the second quarter, approximately $.8 represented
incremental non-cash expense during the period, in connection with the accelerated vesting of
previously granted share-based payments. During the quarter ended September 30, 2009, the Company
recorded a restructuring charge of $.1 representing an adjustment to the estimated costs of its
second quarter 2009 restructuring plans. The restructuring efforts initiated during the second
quarter of 2009 were substantially completed by the end of the third quarter of 2009.
Of the $5.1 restructuring costs and other charges incurred in the quarter ended June 30, 2009,
$4.2 were incurred and recorded in the Companys Fabricated Products segment, with the remaining
$.9 incurred and reported in the Companys Corporate segment. The $.1 restructuring cost recorded
in the quarter ended September 30, 2009 was incurred in the Companys Fabricated Products segment.
28
KAISER
ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the activity relating to cash obligations arising from the
Companys restructuring plans:
Employee | ||||||||||||
Termination | ||||||||||||
and Other | Facility | |||||||||||
Personnel | related | |||||||||||
Costs | costs | Total | ||||||||||
Restructuring obligations at December 31, 2008 |
$ | 4.5 | $ | | $ | 4.5 | ||||||
Cash restructuring costs and other charges: |
||||||||||||
Recorded in the quarter ended March 31, 2009 (1) |
.2 | .4 | .6 | |||||||||
Recorded in the quarter ended June 30, 2009 (2) |
4.0 | .1 | 4.1 | |||||||||
Recorded in the quarter ended September 30, 2009 (2) |
.1 | | .1 | |||||||||
Total cash restructuring costs and other charges
recorded for the nine months ended September 30, 2009 |
4.3 | .5 | 4.8 | |||||||||
Cash payments during the nine months ended September 30, 2009 |
(5.0 | ) | (.5 | ) | (5.5 | ) | ||||||
Restructuring obligations at September 30, 2009 |
$ | 3.8 | $ | | $ | 3.8 | ||||||
(1) | In connection with the fourth quarter 2008 restructuring plans described above. | |
(2) | In connection with the second quarter 2009 restructuring plans described above. |
16. Supplemental cash flow information
Nine Months | ||||||||
Ended September 30, | ||||||||
2009 | 2008 | |||||||
Supplemental disclosure of cash flow information: |
||||||||
Interest paid, net of capitalized interest of $1.5 and zero, respectively |
$ | | $ | .6 | ||||
Income taxes paid |
$ | 11.0 | $ | 5.2 | ||||
Supplemental disclosure of non-cash transactions: |
||||||||
Dividend declared and unpaid |
$ | | $ | 4.8 | ||||
Acquisition of leased equipment |
$ | .1 | $ | | ||||
17. Subsequent events
The Company has evaluated events subsequent to September 30, 2009 to assess the need for
potential recognition or disclosure in this Report. Such events were evaluated through October 28,
2009, the date these financial statements were issued. Based upon this evaluation, it was
determined that no subsequent events occurred that require recognition in the financial statements
and that the following item represents a subsequent event that merit disclosure herein:
On October 13, 2009, the Companys Board of Directors approved the declaration of a quarterly
cash dividend of $.24 per common share to stockholders of record at the close of business on
October 23, 2009, payable on November 13, 2009.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Item should be read in conjunction with Part I, Item., Financial Statements of this
Report.
This Report contains statements which constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a
number of places in this Report and can be identified by the use of forward-looking terminology
such as believes, expects, may, estimates, will, should, plans, or anticipates or
comparable terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve significant risks
and uncertainties, and that actual results may vary materially from those in the forward-looking
statements as a result of various factors. These factors include: the effectiveness of managements
strategies and decisions; general economic and business conditions; developments in technology; new
or modified statutory or regulatory requirements; and changing prices and market conditions. Part
I, Item 1A. Risk Factors included in
29
our Annual Report on Form 10-K for the year ended December 31, 2008, identifies other factors
that could cause actual results to vary. No assurance can be given that these are all of the
factors that could cause actual results to vary materially from the forward-looking statements.
Managements discussion and analysis of financial condition and results of operations (MD&A)
is designed to provide a reader of our financial statements with a narrative from the perspective
of our management on our financial condition, results of operations, liquidity, and certain other
factors that may affect our future results. Our MD&A is presented in six sections:
| Overview; | ||
| Results of Operations; | ||
| Liquidity and Capital Resources; | ||
| Contractual Obligations, Commercial Commitments, and Off-Balance-Sheet and Other Arrangements; | ||
| Critical Accounting Estimates and Policies; and | ||
| New Accounting Pronouncements. |
We believe our MD&A should be read in conjunction with the Consolidated Financial Statements
and related Notes included in Part II, Item 8. Financial Statements and Supplementary Data of our
Annual Report on Form 10-K for the year ended December 31, 2008.
In the discussion of operating results below, certain items are referred to as non-run-rate
items. For purposes of such discussion, non-run-rate items are items that, while they may recur
from period to period, (i) are particularly material to results, (ii) affect costs primarily as a
result of external market factors, and (iii) may not recur in future periods if the same level of
underlying performance were to occur. Non-run-rate items are part of our business and operating
environment but are worthy of being highlighted for the benefit of the users of the financial
statements. Our intent is to allow users of the financial statements to consider our results both
in light of and separately from items such as fluctuations in underlying metal prices, natural gas
prices, and currency exchange rates.
Overview
We are a leading North American manufacturer of semi-fabricated specialty aluminum products
for aerospace / high strength, general engineering and custom automotive and industrial
applications. In addition, we own a 49% interest in Anglesey Aluminium Limited (Anglesey), which
owns a facility in Holyhead, Wales that had operated as an aluminum smelter until September 30,
2009 and commenced remelt and casting of secondary aluminum products in the fourth quarter of 2009.
We have two reportable operating segments, Fabricated Products and Primary Aluminum, and a
Corporate segment. The Fabricated Products segment is comprised of all of our operations within the
fabricated aluminum products industry including ten fabricating facilities in North America at
September 30, 2009. The Fabricated Products segment sells value-added products such as heat treat
aluminum sheet and plate, extrusions and forgings which are used in a wide range of industrial
applications, including aerospace, defense, automotive and general engineering end-use
applications.
The Primary Aluminum segment conducts hedging activities in respect of our exposure to primary
aluminum price risk and, through our ownership interest in Anglesey, produces commodity grade
aluminum sow and/or value-added products such as ingot and billet for which we receive a premium
over normal commodity market prices.
30
Changes in global, regional, or country-specific economic conditions can have a significant
impact on overall demand for aluminum-intensive fabricated products in the market segments in which
we participate. Such changes in demand can directly affect our earnings by impacting the overall
volume and mix of such products sold. Overall demand for our fabricated products dramatically
declined in the first nine months of 2009 as compared to 2008. Weak end-use demand, along with
significant inventory de-stocking by our service center customers and others in the value stream,
has adversely impacted our shipments in 2009.
Primary aluminum prices fell significantly over the course of the last half of 2008 and
partially recovered in the second and third quarters of 2009. The average London Metal Exchange,
or LME, transaction price per pound of primary aluminum for the nine months ended September 30,
2009 and September 30, 2008 were $.70 and $1.28, respectively. The average LME transaction price
per pound of primary aluminum for the quarter ended September 30, 2009 and September 30, 2008 was
$.82 and $1.26, respectively. At October 15, 2009, the LME transaction price per pound of primary
aluminum was $.83. The Companys Fabricated Products segment operates its business with an intent
to remain neutral to primary aluminum price changes by passing such price changes on to its
customers or, to the extent it has firm price contracts, hedging such exposures to primary aluminum
prices with counterparties.
Our operating results are also, albeit to a lesser degree, sensitive to changes in prices for
natural gas and changes in certain foreign exchange rates. All of the foregoing have been subject
to significant price fluctuations over recent years. For a discussion of our sensitivity to changes
in market conditions, see Part I, Item 3. Quantitative and Qualitative Disclosures About Market
Risks of this Report.
Highlights of the quarter ended September 30, 2009 include:
| Fabricated Products segment shipments of 106 million pounds, a 4% increase from the second quarter of 2009. Compared to the prior year quarter, third quarter 2009 shipments of fabricated products were lower due to weaker demand, notwithstanding higher aerospace and general engineering plate shipments. | ||
| Consolidated net income of $23.0 million, or $1.14 per diluted share, which includes $27.0 million of pre-tax, non-cash mark-to-market gains on our derivative positions. | ||
| Cash generated from operations of $32.6 million; no borrowings under the Revolving Credit Facility as of September 30, 2009 and $157 million of borrowing capacity as of that date. | ||
| Dividend payment on August 17, 2009 of $4.8 million, or $.24 per common share, to stockholders of record at the close of business on July 27, 2009. | ||
| The planned, full curtailment of smelting operations at the Anglesey, Wales facility, in which we have a 49% interest, on September 30, 2009. |
Results of Operations
Consolidated Selected Operational and Financial Information
The table below provides selected operational and financial information on a consolidated
basis (in millions of dollars, except shipments and average sales prices).
The following data should be read in conjunction with our interim consolidated financial
statements and the notes thereto contained elsewhere herein. See Note 16 of Notes to Consolidated
Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Data of
our Annual Report on Form 10-K for the year ended December 31, 2008 for further information
regarding segments. Interim results are not necessarily indicative of those for a full year.
31
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In millions of dollars, except | ||||||||||||||||
shipments and average sales price) | ||||||||||||||||
Shipments (millions of pounds): |
||||||||||||||||
Fabricated Products |
105.7 | 135.3 | 316.1 | 435.6 | ||||||||||||
Primary Aluminum |
41.0 | 24.2 | 113.7 | 98.0 | ||||||||||||
146.7 | 159.5 | 429.8 | 533.6 | |||||||||||||
Average Realized Third Party Sales Price (per pound): |
||||||||||||||||
Fabricated Products (1) |
$ | 2.03 | $ | 2.48 | $ | 2.09 | $ | 2.40 | ||||||||
Primary Aluminum (2) |
$ | .90 | $ | 1.42 | $ | .79 | $ | 1.41 | ||||||||
Net Sales: |
||||||||||||||||
Fabricated Products |
$ | 215.1 | $ | 334.9 | $ | 660.7 | $ | 1,043.3 | ||||||||
Primary Aluminum |
36.9 | 34.3 | 89.3 | 138.4 | ||||||||||||
Total Net Sales |
$ | 252.0 | $ | 369.2 | $ | 750.0 | $ | 1,181.7 | ||||||||
Segment Operating Income (Loss): |
||||||||||||||||
Fabricated Products (3)(4) |
$ | 26.4 | $ | 19.5 | $ | 59.0 | $ | 102.4 | ||||||||
Primary Aluminum (5) |
27.5 | (44.9 | ) | 58.8 | 3.8 | |||||||||||
Corporate and Other |
(11.3 | ) | (12.5 | ) | (33.9 | ) | (37.8 | ) | ||||||||
Other Operating Benefits, Net |
| 1.4 | .9 | 1.2 | ||||||||||||
Total Operating Income (Loss) |
$ | 42.6 | $ | (36.5 | ) | $ | 84.8 | $ | 69.6 | |||||||
Net Income (Loss) |
$ | 23.0 | $ | (22.1 | ) | $ | 46.4 | $ | 39.8 | |||||||
Capital Expenditures, net of change in accounts payable |
$ | 14.4 | $ | 22.7 | $ | 51.0 | $ | 61.0 |
(1) | Average realized prices for the Companys Fabricated Products segment are subject to fluctuations due to changes in product mix as well as underlying primary aluminum prices and are not necessarily indicative of changes in underlying profitability. See Part I, Item 1. Business included in our Annual Report on Form 10-K for the year ended December 31, 2008. | |
(2) | Average realized prices for the Companys Primary Aluminum segment exclude derivative gains/ losses. | |
(3) | Fabricated Products segment operating results for the quarter and nine months ended September 30, 2009 include non-cash last-in, first-out (LIFO) inventory charges (benefits) of $6.9 million and $(6.3) million, respectively, and metal (gains) losses of approximately $(11.2) million and $5.3 million, respectively. Also included in the Fabricated Products segment operating results for the nine months ended September 30, 2009 are a $9.3 million lower of cost or market inventory write-down recognized in the first quarter of 2009 and $5.5 million of restructuring charges ($5.4 million of which were recorded in the first half of 2009), relating to the restructuring plans principally involving our Tulsa, Oklahoma and Bellwood, Virginia facilities. Fabricated Products segment operating results for the quarter and nine months ended September 30, 2008 include a non-cash LIFO inventory charge of $.7 million and $31.3 million, respectively, and metal (losses) gains of approximately $(3.2) million and $23.7 million, respectively. | |
(4) | Fabricated Products segment operating results include non-cash mark-to-market gains (losses) on natural gas and foreign currency hedging activities totaling $2.6 million and $(9.7) million in the quarters ended September 30, 2009 and 2008, respectively. Fabricated Products segment results also include non-cash mark-to-market gains (losses) on natural gas and foreign currency hedging activities totaling $5.4 million and $(5.2) million in the nine months ended September 30, 2009 and 2008, respectively. For further discussion regarding mark-to-market matters, see Note 12 of Notes to Interim Consolidated Financial Statements included in Part I, Item 1. Financial Statements of this Report. | |
(5) | Primary Aluminum segment operating results include non-cash mark-to-market gains (losses) on primary aluminum hedging activities totaling $22.0 million and $(26.1) million and on foreign currency derivatives totaling $2.4 million and $(8.0) million for the quarters ended September 30, 2009 and 2008, respectively. Primary Aluminum segment results also include non-cash mark-to-market gains (losses) on primary aluminum hedging activities totaling $29.9 million and $5.7 million and on foreign currency derivatives totaling $14.1 million and $(6.5) million for the nine months ended September 30, 2009 and 2008, respectively. For further discussion regarding mark-to-market matters, see Note 12 of Notes to Interim Consolidated Financial Statements included in Part I, Item 1. Financial Statements of this Report. Also included in the quarter and nine months ended September 30, 2008 were $20.1 million and $26.8 million of adverse impact from the Anglesey outage as a result of a fire that occurred in June 2008. |
32
Summary. We reported net income of $24.0 million for the quarter ended September 30, 2009
compared to a net loss of $22.1 million for the quarter ended September 30, 2008. For the nine
months ended September 30, 2009, we reported net income of $47.4 million compared to net income of
$39.8 million for the nine months ended September 30, 2008. Both quarters and nine month periods
include a number of non-run-rate items that are more fully explained in the sections below.
Our operating income for the quarter ended September 30, 2009 was $42.6 million compared to an
operating loss of $36.5 million for the quarter ended September 30, 2008. Included in the operating
income for the quarter ended September 30, 2009 were $27.0 million of unrealized mark-to-market
gains on our derivative positions. Included in the operating loss for the quarter ended September
30, 2008 was $43.8 million of unrealized mark-to-market losses on our derivative positions. Our
operating income for the nine months ended September 30, 2009 was $84.8 million compared to $69.6
million for the nine months ended September 30, 2008. Included in operating income for the nine
months ended September 30, 2009 were $49.4 million of unrealized mark-to-market gains on our
derivative positions. Included in operating income for the nine months ended September 30, 2008
were $6.0 million of unrealized mark-to-market losses on our derivative positions. The increase in
operating income for the quarter and nine months ended September 30, 2009 is more fully explained
below in the Segment Information section below.
Net Sales. We reported Net sales in the quarter ended September 30, 2009 of $252.0 million
compared to $369.2 million in the quarter ended September 30, 2008. The decrease in revenues during
the quarter ended September 30, 2009 is primarily the result of a 22% decrease in our Fabricated
Products segment shipment volume, an 18% decrease in Fabricated Products segment realized prices,
and a 37% decrease in Primary Aluminum segment pricing, all partially offset by 69% increase in
Primary Aluminum segment shipment volume. The increase in Primary Aluminum shipments is due to the
production interruption in the third quarter of 2008 caused by a fire at the facility (see Segment
InformationPrimary Aluminum section below). The decrease in Fabricated Products segment prices
primarily reflects the pass-through to customers of lower underlying hedged alloyed metal prices.
For the nine months ended September 30, 2009, we reported net sales of $750.0 million compared
to $1,181.7 million for the nine months ended September 30, 2008. The decrease in revenues during
the nine months ended September 30, 2009 is primarily the result of a 27% decrease in our
Fabricated Products segment shipment volume, a 13% decrease in Fabricated Products segment realized
prices, and a 44% decrease in Primary Aluminum segment pricing, all partially offset by a 16%
increase in Primary Aluminum segment shipment volume. The increase in Primary Aluminum shipments is
due to the production interruption in the third quarter of 2008 caused by a fire at the facility
(see Segment InformationPrimary Aluminum section below). The decrease in Fabricated Products
segment prices reflects the pass-through to customers of lower underlying hedged alloyed metal
prices, partially offset by an increase in value-added revenue per pound. Increases or decreases in
primary aluminum market prices do not necessarily directly translate to increased or decreased
profitability because (i) a substantial portion of the business conducted by the Fabricated
Products segment passes primary aluminum price changes directly onto customers and (ii) our hedging
activities in support of Fabricated Products firm price sales agreements limit our realized losses
as well as realized gains from primary metal price changes.
Cost of Products Sold Excluding Depreciation, Amortization and Other Items. Cost of products
sold, excluding depreciation, amortization and other items for the quarter ended September 30, 2009
totaled $188.3 million, or 75% of Net sales, compared to $383.7 million, or 104% of Net sales, in
the quarter ended September 30, 2008. Included in Cost of products sold, excluding depreciation,
amortization and other items were $27.0 million and $(43.8) million of non-cash mark-to-market
gains (losses) on our derivative positions in the quarter ended September 30, 2009 and 2008,
respectively.
Cost of products sold, excluding depreciation, amortization and other items for the nine
months ended September 30, 2009 totaled $584.2 million, or 78% of Net sales, compared to $1,044.2
million, or 88% of Net sales, in the nine months ended September 30, 2008. Included in Cost of
products sold, excluding depreciation, amortization and other items were $49.4 million and $(6.0)
million of non-cash mark-to-market gains (losses) on our derivative positions in the nine months
ended September 30, 2009 and 2008, respectively. See Segment Information section below for a
detailed discussion of the comparative results of operations for the quarters and nine month
periods ended September 30, 2009 and 2008.
33
Lower of Cost or Market Inventory Write-down. We recorded a lower of cost or market inventory
write-down of $9.3 million in the first quarter of 2009, as the result of declining metal prices.
There were no additional lower of cost or market inventory write-downs during the nine months ended
September 30, 2009 or the nine months ended September 30, 2008.
Impairment of Investment in Anglesey. For the nine months ended September 30, 2009, the
Company recorded charges of $1.8 million relating to its investment in Anglesey. Such charges were
all recorded in the first six months of 2009. For the quarter ended September 30, 2009, no
additional impairment charges were recorded, due to the suspension of the equity method of
accounting, as more fully described in Note 3 of Notes to Interim Consolidated Financial Statements
included in Part I, Item 1. Financial Statements of this Report.
Restructuring Costs and Other Charges. In December 2008, we announced plans to close our
Tulsa, Oklahoma facility and to curtail operations at our Bellwood, Virginia facility. During the
first quarter of 2009, we recorded $1.2 million in restructuring charges primarily related to
contract termination costs and other costs pertaining to the December 2008 restructuring
initiatives.
In May 2009, we announced plans to (i) further curtail operations at our Bellwood, Virginia
facility to focus solely on drive shaft and seamless tube products and (ii) shut down the Bellwood,
Virginia facility temporarily during the month of July 2009, in response to planned shutdowns in
the automotive industry and continued weak economic and market conditions. We also reduced
personnel at certain of our other locations. Approximately 85 employees were affected by the
reduction in force, principally at the Bellwood, Virginia location. In connection with these
restructuring plans, we recorded restructuring costs and other charges of $5.1 million in the
second quarter of 2009. Of these charges, $4.8 million were related to involuntary employee
terminations and other personnel costs, and the remaining $.3 million were principally related to a
non-cash asset impairment. Of the personnel-related costs recorded during the second quarter,
approximately $.8 million represented incremental non-cash expense during the period, in connection
with the accelerated vesting of a portion of previously granted share-based compensation. During
the quarter ended September 30, 2009, we recorded a restructuring charge of $.1 million
representing an adjustment to the estimated costs of the restructuring initiatives undertaken in
the second quarter of 2009.
See Note 15 of Notes to Interim Consolidated Financial Statements included in Part I, Item 1.
Financial Statements of this Report for additional information regarding the costs incurred in
connection with our restructuring plans.
Depreciation and Amortization. Depreciation and amortization for the quarter ended September
30, 2009 was $3.9 million compared to $3.6 million for the quarter ended September 30, 2008.
Depreciation and amortization for the nine months ended September 30, 2009 was $12.3 million
compared to $10.8 million for the nine months ended September 30, 2008. The increase is primarily
the result of placing additional construction in progress into service throughout 2008.
Selling, Administrative, Research and Development, and General. Selling, administrative,
research and development, and general expense totaled $17.1 million in the quarter ended September
30, 2009 compared to $19.8 million in the quarter ended September 30, 2008. Selling,
administrative, research and development, and general expense totaled $52.1 million in the nine
months ended September 30, 2009 compared to $58.3 million in the nine months ended September 30,
2008. The decrease in selling, administrative, research and development and general expenses for
both the quarter ended September 30, 2009 and nine months ended September 30, 2009, as compared to
the corresponding periods in 2008, is principally due to: (i) the net reductions in administrative
expense within our Corporate and Other segment (See Segment InformationCorporate and Other
section below) and (ii) overhead cost reductions in the Fabricated Products segment.
34
Other Operating Benefits, Net. For the nine months ended September 30, 2009 and for the
quarter and nine months ended September 30, 2008, other operating benefits consisted primarily of
the recovery of a pre-chapter 11 emergence obligation owed to us, for which we had previously
fully-reserved against any expected collection.
Interest Expense. Interest expense was $.2 million in the quarter ended September 30, 2009, as
compared to $.3 million for the quarter ended September 30, 2008. Interest expense was $.6 million
for the nine months ended September 30, 2009, as compared to $.8 million for the nine months ended
September 30, 2008.
Other Income (Expense), Net. Other income (expense), net was $.1 million for the quarter ended
September 30, 2009, as compared to $(.2) million in the quarter ended September 30, 2008. Other
income (expense), net was zero in the nine months ended September 30, 2009, compared to $1.0
million in the nine months ended September 30, 2008. The decrease for the nine months ended
September 30, 2009 was primarily related to lower interest income as a result of declining interest
rates.
Income Tax Provision. The income tax provision for the nine months ended September 30, 2009
was $37.8 million, for an effective tax rate of 44.9%. The effective tax rate for the nine months
ended September 30, 2008 was approximately 43%. The difference between the effective tax rate and
the projected blended statutory tax rate for the nine months ended September 30, 2009 was primarily
related to the impact of a non-deductible compensation expense, resulting in an increase to the
income tax provision. The effective tax rate for the nine months ended September 30, 2008 was
impacted by (i) the accounting for the income tax effects of equity income in our investment in
Anglesey, which had the impact of increasing the effective tax rate; (ii) unrecognized tax
benefits, including interest and penalties, and (iii) changes in the United Kingdom and Canadian
income tax rates and geographical distribution of income for the period.
Derivatives
In conducting our business, we, from time to time, enter into derivative transactions,
including forward contracts and options, to limit our economic (i.e., cash) exposure resulting from
(i) metal price risk related to our sales of fabricated aluminum products and the purchase of metal
used as raw materials for our fabrication operations, (ii) the energy price risk from fluctuating
prices for natural gas used in our production process, and (iii) foreign currency requirements with
respect to our cash commitments for equipment purchases and with respect to our foreign
subsidiaries and affiliate. As our hedging activities are generally designed to lock-in a specified
price or range of prices, realized gains or losses on the derivative contracts utilized in the
hedging activities generally offset at least a portion of any losses or gains, respectively, on the
transactions being hedged at the time the transactions occur. However, due to mark-to-market
accounting, during the term of the derivative contract, significant unrealized, non-cash gains and
losses may be recorded in the income statement as a reduction or increase in Cost of products sold,
excluding depreciation, amortization and other items. We may also be exposed to margin calls placed
on derivative contracts, which we try to minimize or offset through counterparty credit lines
and/or the use of options. From time to time, we may modify the terms of the derivative contracts
based on operational needs.
The fair value of our derivatives recorded on the Consolidated Balance Sheets at September 30,
2009 and December 31, 2008 was a net liability of $12.8 million and $59.6 million, respectively.
The primary reasons for the decrease in the net liability were settlements of derivatives during
the nine months ended September 30, 2009, giving rise to realized losses of $42.5 million for the
period, and an increase in metal prices, the effect of changes in outstanding foreign currency
hedge positions and changes in foreign currency rates compared to December 31, 2008. The settlement
of derivatives and changes in market value of contracts resulted in the recognition of $27.0
million and $49.4 million of unrealized mark-to-market gains on derivatives for the quarter and
nine months ended September 30, 2009, respectively, which we consider to be a non-run-rate item
(see Note 12 of Notes to Interim Consolidated Financial Statements included in Part I, Item 1.
Financial Statements of this Report).
35
Segment Information
Our continuing operations are organized and managed by product type and include two operating
segments and a Corporate segment. The accounting policies of the segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8.
Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year ended
December 31, 2008 and as further described in Note 1 of Notes to Interim Consolidated Financial
Statements included in Part I, Item 1. Financial Statements of this Report. Segment results are
evaluated internally by us before any allocation of Corporate overhead and without any charge for
income taxes, interest expense, or Other operating charges, net.
Fabricated Products
The table below provides selected operational and financial information (in millions of
dollars except shipments and average sales prices) for our Fabricated Products segment:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Shipments (mm pounds) |
105.7 | 135.3 | 316.1 | 435.6 | ||||||||||||
Composition of average realized third-part sales
price (per pound): |
||||||||||||||||
Hedged cost of alloyed metal |
$ | .91 | $ | 1.28 | $ | .87 | $ | 1.23 | ||||||||
Average realized third party value-added revenue |
1.12 | 1.20 | 1.22 | 1.17 | ||||||||||||
Average realized third party sales price |
$ | 2.03 | $ | 2.48 | $ | 2.09 | $ | 2.40 | ||||||||
Net sales |
$ | 215.1 | $ | 334.9 | $ | 660.7 | $ | 1,043.3 | ||||||||
Segment operating income |
$ | 26.4 | $ | 19.5 | $ | 59.0 | $ | 102.4 |
Net sales of fabricated products decreased by 36% to $215.1 million for the quarter ended
September 30, 2009 as compared to the quarter ended September 30, 2008, primarily due to a 22%
decrease in shipments and an 18% decrease in average realized prices. Shipments of products for
aerospace and high-strength applications were 18% lower in the quarter ended September 30, 2009 as
compared to the quarter ended September 30, 2008, reflecting significant supply chain de-stocking
and weaker demand for all aerospace and high strength products (including plate, sheet, cold finish
rod and bar, and drawn tube products), partially offset by higher contractual aerospace plate
shipments. Shipments of general engineering products and automotive and custom industrial products
declined 23% in the quarter ended September 30, 2009 as compared to the same quarter of 2008,
reflecting continued weak ground transportation and other end-use demand and service center demand.
The reduction in average realized prices primarily reflected the pass through to customers of 29%
lower underlying hedged, alloyed metal prices.
For the nine months ended September 30, 2009 as compared to the nine months ended September
30, 2008, net sales of fabricated products decreased by 37% to $660.7 million, primarily due to a
27% decrease in shipments and a 13% decrease in average realized prices. Shipments of products for
aerospace and high-strength applications were 4% lower in the nine months ended September 30, 2009
as compared to the nine months ended September 30, 2008 due to weaker end-use and service center
demand, which was largely offset by significantly higher contractual
aerospace plate shipments. Shipments of general engineering products and automotive and custom
industrial products declined 36% in the nine months ended September 30, 2009 as compared to the
same period of 2008, reflecting continued weak end-use and service center demand.
The reduction in average realized prices reflected the pass through to customers of 29% lower
underlying hedged, alloyed metal prices, offset by a 4% increase in value-added revenue per pound.
The increase in value-added revenue per pound was largely due to a higher proportion of higher
value-added products within the mix of products shipped in the nine months ended September 30,
2009.
36
The table below provides shipment and value-added revenue information for our three end-use
product groupings for the quarters and nine month periods ended September 30, 2009 and 2008:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Shipments (mm lbs): |
||||||||||||||||
Aerospace and high strength products |
30.2 | 37.0 | 109.2 | 113.7 | ||||||||||||
General engineering products |
50.5 | 60.8 | 137.9 | 206.0 | ||||||||||||
All other products |
25.0 | 37.5 | 69.0 | 115.9 | ||||||||||||
105.7 | 135.3 | 316.1 | 435.6 | |||||||||||||
Value added revenue(1): |
||||||||||||||||
Aerospace and high strength products |
$ | 57.7 | $ | 77.4 | $ | 211.2 | $ | 235.9 | ||||||||
General engineering products |
41.8 | 60.1 | 122.7 | 193.2 | ||||||||||||
All other products |
19.0 | 24.9 | 50.9 | 80.0 | ||||||||||||
$ | 118.5 | $ | 162.4 | $ | 384.8 | $ | 509.1 | |||||||||
Value added revenue per pound: |
||||||||||||||||
Aerospace and high strength products |
$ | 1.91 | $ | 2.09 | $ | 1.93 | $ | 2.08 | ||||||||
General engineering products |
.83 | .99 | .89 | .94 | ||||||||||||
All other products |
.76 | .67 | .74 | .69 | ||||||||||||
$ | 1.12 | $ | 1.20 | $ | 1.22 | $ | 1.17 |
(1) | Value added revenue represents net sales less hedged cost of alloyed metal. |
Based on recent trends, managements expectations for our Fabricated Products segment in the fourth
quarter of 2009 include the following:
| Aerospace and High Strength. We are optimistic about the long-term fundamentals of the aerospace industry and believe build rates of commercial aircraft will continue to be strong. However, lower demand due to destocking in the supply chain will continue in the near-term. Orders shifted from the third quarter are expected to result in higher fourth quarter plate shipments. Overall, average shipments in the last six months of 2009 should be at the pace of the second quarter of 2009. | ||
| General Engineering. Visibility remains limited. The pace of service center destocking has moderated, with inventories at historic lows for many general engineering products. End-user demand should continue at the current level, but reflect normal seasonal downturns in the fourth quarter. | ||
| Automotive and All Other. Slight improvement in demand for our automotive products over the very weak pace of the first half of 2009 should continue, but with automotive build rates still substantially below historic levels. Our shipments should also reflect seasonal weakness due to the normal year-end shutdowns. |
Operating income for the quarter ended September 30, 2009 was $26.4 million as compared to
$19.5 million for the third quarter of 2008. Operating income for the nine months ended September
30, 2009 was $59.0 million as compared to $102.4 million for the first nine months of 2008.
Operating income for each of the quarters and nine month periods ended September 30, 2009 and 2008
includes several large non-run-rate items. These items are listed below (in millions of dollars):
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Operating income |
$ | 26.4 | $ | 19.5 | $ | 59.0 | $ | 102.4 | ||||||||
Impact to operating income of non-run-rate items: |
||||||||||||||||
Metal (losses) gains (before considering LIFO) |
11.2 | (3.2 | ) | (5.3 | ) | 23.7 | ||||||||||
Non-cash LIFO benefits (charges) |
(6.9 | ) | (.7 | ) | 6.3 | (31.3 | ) | |||||||||
Non-cash lower of cost or market inventory write-down |
| | (9.3 | ) | | |||||||||||
Mark-to-market gains (losses) on derivative instruments |
2.6 | (9.7 | ) | 5.4 | (5.2 | ) | ||||||||||
Restructuring charges |
(.1 | ) | | (5.5 | ) | | ||||||||||
Pre-emergence related environmental costs (1) |
(.1 | ) | (.6 | ) | (.6 | ) | (1.9 | ) | ||||||||
Total non-run-rate items |
6.7 | (14.2 | ) | (9.0 | ) | (14.7 | ) | |||||||||
Operating income excluding non-run-rate items |
$ | 19.7 | $ | 33.7 | $ | 68.0 | $ | 117.1 | ||||||||
37
(1) | Pre-emergence related environmental costs were related to environmental issues at our Spokane, Washington facility that existed before our emergence from chapter 11 bankruptcy in July 2006. |
As noted above, operating income excluding identified non-run-rate items for the quarter ended
September 30, 2009 of $19.7 million was $14.0 million lower than the third quarter of 2008.
Operating income excluding identified non-run-rate items for the nine months ended September 30,
2009 of $68.0 million was $49.1 million lower than the first nine months of 2008. Operating income
for the quarter and nine months ended September 30, 2009 as compared to the same periods in 2008
reflects the following impacts:
3Q09 vs. 3Q08 | 9M09 vs. 9M08 | |||||||
Favorable | Favorable | |||||||
(unfavorable) | (unfavorable) | |||||||
Sales impact |
$ | (28.7 | ) | $ | (70.2 | ) | ||
Manufacturing efficiency improvements |
7.4 | 1.0 | ||||||
Energy costs |
6.4 | 14.4 | ||||||
Freight |
1.7 | 5.9 | ||||||
Currency exchange related |
.6 | 3.5 | ||||||
Depreciation expense |
(.3 | ) | (1.5 | ) | ||||
Other |
(1.1 | ) | (2.2 | ) |
Segment operating results for the quarters ended September 30, 2009 and 2008 include gains
(losses) on intercompany hedging activities with the Primary Aluminum segment totaling $(5.9)
million and $5.5 million, respectively. Segment operating results for the nine months ended
September 30, 2009 and 2008 include gains (losses) on intercompany hedging activities with the
Primary Aluminum segment totaling $(39.6) million and $28.8 million, respectively. These amounts
eliminate in consolidation.
Primary Aluminum
The table below provides selected operational and financial information (in millions of
dollars except shipments and average sales prices) for our Primary Aluminum segment:
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Shipments (mm pounds) |
41.0 | 24.2 | 113.7 | 98.0 | ||||||||||||
Average realized third party sales price (per pound) |
$ | .90 | $ | 1.42 | $ | .79 | $ | 1.41 | ||||||||
Net sales |
$ | 36.9 | $ | 34.3 | $ | 89.3 | $ | 138.4 | ||||||||
Segment operating income (loss) |
$ | 27.5 | $ | (44.9 | ) | $ | 58.8 | $ | 3.8 |
During the quarter ended September 30, 2009, third party net sales of primary aluminum
increased by 8% compared to the prior year quarter, as a 69% increase in shipments was partially
offset by a 36% decrease in average realized pricing. During the nine months ended September 30,
2009, third party net sales of primary aluminum decreased by 35% compared to the prior year period,
with a 44% decrease in average realized pricing partially offset by a 16% increase in shipments.
The increase in Primary Aluminum shipments for the quarter and nine
months ended September 30, 2009 over the prior periods reflected the
lower shipment volume in the third quarter 2008 due to a production
interruption resulting from a fire at Anglesey, as discussed below. The net sales and average realized sales prices
did not consider the impact of
hedging transactions.
The following table recaps the major components of segment operating results for the quarter
and nine month periods ended September 30, 2009 and 2008 (in millions of dollars) and the
discussion following the table addresses the primary factors leading to the differences. Many of
these factors indicated are subject to significant fluctuation from period to period. See Part I,
Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31,
2008.
38
Quarter | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Profit on metal sales (net of alumina sales) (1) |
$ | 6.7 | $ | 1.6 | $ | 9.5 | $ | 18.5 | ||||||||
Anglesey (2) |
.4 | (8.4 | ) | .4 | 4.0 | |||||||||||
Impairment of investment in Anglesey |
| | (1.8 | ) | | |||||||||||
Internal hedging gains (losses) with Fabricated Products (3) |
5.9 | (5.5 | ) | 39.6 | (28.8 | ) | ||||||||||
Derivative settlement gains (losses) Pounds Sterling (4) |
(2.7 | ) | (.1 | ) | (12.2 | ) | .5 | |||||||||
Derivative settlement gains (losses) External metal hedging (4) |
(7.2 | ) | 1.6 | (20.7 | ) | 10.4 | ||||||||||
Mark-to-market gains (losses) on derivative instruments (4)(5) |
24.4 | (34.1 | ) | 44.0 | (.8 | ) | ||||||||||
$ | 27.5 | $ | (44.9 | ) | $ | 58.8 | $ | 3.8 | ||||||||
(1) | Operating income represents earnings on metal purchases from Anglesey and resold by us and on alumina purchases from third parties by us and sold to Anglesey. This is impacted by the market price for primary aluminum and alumina pricing, offset by the impact of foreign currency translation. | |
(2) | Represents our share of earnings (losses) from Anglesey, which for the quarter and nine months ended September 30, 2008 included an estimated $20 million adverse impact from a fire in June 2008. Angleseys results also include, for all periods presented, foreign currency transaction gains (losses) relating to our settlement of trade payables to Anglesey denominated in Pounds Sterling. | |
(3) | Eliminates in consolidation. | |
(4) | Impacted by positions and market prices. | |
(5) | We consider mark-to-market gains and losses on derivative instruments to be non-run-rate income items. |
Through the quarter ended September 30, 2009, Anglesey operated under a power agreement that
provided sufficient power to sustain its aluminum reduction operations at near-full capacity. As
we previously announced, the power agreement expired at the end of September 2009. Despite
Angleseys efforts to find a sustainable alternative to its power supply needs, no sources of power
were identified to allow for the uninterrupted continuation of smelting operations beyond the power
contract expiration date. Accordingly, Anglesey fully curtailed its smelting operations as of
September 30, 2009. Anglesey commenced remelt and casting operations to produce secondary aluminum
billet in the fourth quarter of 2009.
We fully impaired our investment in Anglesey in the fourth quarter of 2008, concluding that we
should not expect to receive any dividends from Anglesey in the foreseeable future. This
determination was made taking into account Angleseys full curtailment of its smelting operations,
which we had anticipated as a likely possibility, due to its inability to obtain affordable power,
the cash requirements for redundancy and pension payments, and the uncertainty with respect to the
future of its operations. For the first half of 2009, based upon our continued assessment of the
facts and circumstances, we recorded additional impairment charges of $1.8 million relating to our
investment in Anglesey, such that our investment balance remained at zero.
For the quarter ended September 30 2009, Anglesey incurred a significant net loss, primarily
as the result of recording charges for employee termination costs in connection with the cessation
of its smelting operations. As a result of such loss and as we did not and are not obligated to
(i) advance any funds to Anglesey, (ii) guarantee any obligations of Anglesey, or (iii) make any
commitments to provide any financial support for Anglesey, we suspended the use of equity method of
accounting with respect to our ownership in Anglesey during the quarter ended September 30, 2009.
Accordingly, we did not recognize our share of Angleseys net loss for such period. We do not
anticipate resuming the use of the equity method of accounting with respect to our investment in
Anglesey unless our share of any future net income of Anglesey equals or is greater than our share
of net losses not recognized during any periods for which the equity method was suspended. As of
the date of filing of this Report, we do not expect the occurrence of such event during the next 12
months.
In June 2008, Anglesey suffered a significant failure in the rectifier yard that resulted in a
localized fire in one of the power transformers. As a result of the fire, Anglesey operated below
its production capacity during the latter half of 2008 until normal production resumed in December
2008 and incurred incremental costs, primarily associated with repair and maintenance costs, as
well as loss of margin due to the outage. Anglesey has property damage and business interruption
insurance that is expected to recover financial losses (net of applicable deductibles). Anglesey
received a partial insurance settlement payment of $20.0 million in December 2008 of which $10.0
million was
39
recorded as our equity income. During the first quarter of 2009, Anglesey received another
partial insurance settlement of $8.2 million, 49% of which (or $4.0 million) was recorded as our
equity income. We fully impaired the value of our share of the insurance proceeds received by
Anglesey in 2008 and during the first quarter of 2009, as reflected in our equity income, because
we do not expect to receive any such proceeds through the distribution of dividends. Anglesey did
not receive any insurance settlements during the second or third quarters of 2009 and the timing
and amount of any remaining insurance recovery are uncertain. We currently anticipate that we would
not receive any portion of Anglesey insurance recoveries, in the form of potential dividends by
Anglesey, relating to the fire.
Although we have suspended equity accounting with respect to our interest in Anglesey, the
Primary Aluminum segment will continue to reflect the impact of hedging activities with respect to
aluminum price risk for the entire company and include the revenue and costs associated with our
purchase and sale of our share of Angleseys secondary aluminum billet production. We expect the
Primary Aluminum segment results to reflect a net realized loss of approximately $5 million in the
fourth quarter of 2009 related to metal hedge positions that were placed when we determined that
Anglesey production no longer provided a natural hedge for Fabricated Products firm price customer
commitments. Further, Anglesey purchases its own material for its
remelt and casting operations and sells its output to Rio Tinto and us, in proportion to our
respective ownership interests. We expect Angleseys maximum production of secondary aluminum to
ultimately reach approximately 140 million pounds per year, 49% of which will be sold to us in
transactions structured to largely eliminate metal price and currency exchange rate risks with
respect to our income and cash flow related to Anglesey.
Corporate and Other
Corporate operating expenses represent corporate general and administrative expenses that are
not allocated to our business segments. Corporate operating expenses exclude Other operating
charges, net discussed above.
Corporate operating costs for the quarter ended September 30, 2009 were $1.2 million lower
than such costs for the quarter ended September 30, 2008. This decrease in Corporate operating
costs is primarily related to: (i) a $.4 million decrease in short term incentive compensation
accrual, (ii) a $.6 million reduction in cost associated with stock-based compensation expense,
(iii) a $.9 million reduction in professional fees, primarily audit fees, and (iv) a $1.0 million
decline of in environmental related costs, due to charges incurred in 2008 relating to certain of
our former production facilities. Such decreases were partially offset by a $1.5 million increase
in voluntary employee beneficiary association (VEBA) net periodic benefit cost and a $.2 million
increase in various other administrative costs.
Corporate operating costs for the nine months ended September 30, 2009 were $3.9 million lower
than such costs for the nine months ended September 30, 2008. This decrease in Corporate operating
costs is primarily related to a $4.8 million decrease in administrative expenses, partially offset
by $.9 million of restructuring costs and other charges incurred in the second quarter 2009. The
decrease in administrative expenses reflects: (i) a $3.0 million decrease in short term incentive
compensation accrual, (ii) a $3.3 million reduction in professional fees, primarily audit fees,
(iii) a $1.2 million decline in environmental related costs, due to charges incurred in 2008
relating to certain of our former production facilities, (iv) a $1.1 million reduction in cost
based upon timing of vesting and changes in vesting assumptions relating to performance shares, and
(v) a $.7 million aggregate decrease in various other administrative costs, primarily personnel
compensation. Such decreases were partially offset by a $4.5 million increase in VEBA net periodic
benefit cost.
We consider the restructuring costs and other charges, the environmental costs incurred in
2008 in connection with certain of our former production facilities, and the VEBA net period
benefit costs discussed above to be non-run-rate items.
Liquidity and Capital Resources
Summary
Cash
and cash equivalents were $34.6 million as of September 30, 2009, up from $.2 million as
of December 31, 2008. In addition to cash and cash equivalents, our revolving credit facility is a
source of liquidity for operations. Borrowing on the revolving credit facility was zero at
September 30, 2009, down from $36.0 million at December
40
31, 2008. Operating income and net cash inflows from changes in certain current assets and
liabilities during the nine months ended September 30, 2009 contributed to the repayment of
revolving credit borrowings and the increase in cash and cash equivalents. Of the $119.2 million
of net cash provided by operating activities for the nine months ended September 30, 2009,
approximately $63.5 million is attributable to operating income for the period. Significant cash
flows from changes in current assets and liabilities include decreases in inventories ($43.7
million), in trade and other receivables ($31.9 million), and in net receivables from affiliate
($5.8 million). Partially offsetting these cash inflows was a $31.2 million decrease in other
accrued liabilities.
Cash equivalents consist primarily of money market accounts and other highly liquid
investments with an original maturity of three months or less when purchased. Our liquidity is
affected by restricted cash that is pledged as collateral for derivative contracts with our
counterparties and for certain letters of credit, or restricted to use for workers compensation
requirements and certain agreements. Short term restricted cash, included in Prepaid expenses and
other current assets, totaled $.9 million and $1.4 million as of September 30, 2009 and December
31, 2008, respectively. Long term restricted cash, which was included in Other Assets, was $17.8
million and $35.4 million as of September 30, 2009 and December 31, 2008, respectively. Included in
long term restricted cash at September 30, 2009 and December 31, 2008 were zero and $17.2 million,
respectively, of margin call deposits with our counterparties relating to our derivative positions.
During the fourth quarter of 2009, we expect to incur approximately $11 million of net cash
outflows from the settlement of payables to affiliate and collection of trade receivables generated
from Anglesey operating activities. We anticipate that such cash activity may have a significant
effect on the net cash flows of our Primary Aluminum segment, and on a consolidated basis, for the
fourth quarter of 2009.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing
activities for the nine months ended September 30, 2009 and 2008 (in millions of dollars):
Nine Months | ||||||||
Ended September 30, | ||||||||
2009 | 2008 | |||||||
Total cash provided by (used in): |
||||||||
Operating activities: |
||||||||
Fabricated Products |
$ | 123.0 | $ | 39.2 | ||||
Primary Aluminum |
30.1 | 3.7 | ||||||
Corporate and Other |
(33.9 | ) | (39.4 | ) | ||||
$ | 119.2 | $ | 3.5 | |||||
Investing activities: |
||||||||
Fabricated Products |
(50.3 | ) | (61.0 | ) | ||||
Primary Aluminum |
17.2 | | ||||||
Corporate and Other |
.2 | (3.9 | ) | |||||
$ | (32.9 | ) | $ | (64.9 | ) | |||
Financing activities: |
||||||||
Corporate and Other |
(51.9 | ) | (6.2 | ) | ||||
$ | (51.9 | ) | $ | (6.2 | ) | |||
Operating Activities
Fabricated Products During the nine months ended September 30, 2009, Fabricated Products
operating activities provided $123.0 million of cash compared to the nine months ended September
30, 2008 when Fabricated Products operating activities provided $39.2 million of cash. Cash
provided in the nine months ended September 30, 2009 was related primarily to operating income
($69.7 million) and decreased working capital ($53.3 million). Cash provided in the nine months
ended September 30, 2008 was primarily related to operating income ($153.6 million) largely offset
by increased working capital ($114.4 million).
41
Primary Aluminum During the nine months ended September 30, 2009, Primary Aluminum
operating activities provided $30.1 million in cash compared to the nine months ended September 30,
2008, when Primary Aluminum operating activities provided $3.7 million of cash. Cash provided in
the nine months ended September 30, 2009 was primarily due to operating income ($17.9 million) and
a decrease in working capital ($12.2 million). Cash provided in the nine months ended September 30,
2008 was primarily due to dividends received from Anglesey ($3.9 million) and operating income
($1.2 million), partially offset by an increase in working capital ($1.4 million).
Corporate and Other Corporate and Other operating activities used $33.9 million of cash
during the nine months ended September 30, 2009 compared to the nine months ended September 30,
2008, when Corporate and Other operating activities used $39.4 million of cash. Cash outflows from
Corporate and Other operating activities in the nine months ended September 30, 2009 include $4.9
million of payments to the VEBAs, payments of $5.1 million in relation to our short term incentive
program, and payments of $23.9 million in respect of general and administrative costs. Cash
outflows from Corporate and Other operating activities in the nine months ended September 30, 2008
primarily included $8.4 million of payments to the VEBAs, payments of $8.0 million in relation to
our short term incentive program and payments of $23.1 million in respect of general and
administrative costs. The amount of cash outflows for general and administrative costs in a given
period can be significantly affected by the timing of disbursements.
Investing Activities
Fabricated
Products - Cash used in investing activities for Fabricated
Products was $50.3
million in the nine months ended September 30, 2009. This compares to the nine months ended
September 30, 2008 when Fabricated Products investing activities used $61.0 million in cash. See
"Capital Expenditures below for additional information.
Primary Aluminum Investing activities in the Primary Aluminum segment is related to margin
deposits required as cash collateral with our derivative counterparties. We received $17.2 million
of margin deposits back from the counterparties during the nine months ended September 30, 2009 as
a result of an increase in our aggregate derivative fair value from December 31, 2008.
Corporate and Other Investing activities in the Corporate and Other segment for the nine
months ended September 30, 2009 is primarily related to a $.9 million decrease in restricted cash, largely offset by capital
spending.
Financing Activities
Corporate and Other Cash used in the nine months ended September 30, 2009 was $51.9
million. The cash outflow was primarily related to the repayment of net borrowings under our
revolving credit facility of $36.0 million and $14.7 million in cash dividends paid to
stockholders. Cash used in the nine months ended September 30, 2008 was primarily related to cash
dividends paid to stockholders.
Sources of Liquidity
Our most significant sources of liquidity are funds generated by operating activities,
available cash and cash equivalents, and borrowing availability under our revolving credit
facility. We believe funds generated from the expected results of operations, together with
available cash and cash equivalents and borrowing availability under our revolving credit facility,
will be sufficient to finance expansion plans and strategic initiatives, which could include
acquisitions, for at least the next 12 months. There can be no assurance, however, that we will
continue to generate cash flows at or above current levels or that we will be able to maintain our ability to
borrow under our revolving credit facility.
Under the revolving credit facility, we are able to borrow (or obtain letters of credit) from
time to time in an aggregate amount equal to the lesser of $265.0 million or a borrowing base
comprised of eligible accounts receivable, eligible inventory and certain eligible machinery,
equipment and real estate, reduced by certain reserves, all as specified in the revolving credit
facility. In addition, of the aggregate amount available under the revolving credit facility, up
to $60.0 million may be utilized for letters of credit. The revolving credit facility matures in
July 2011, at which time all principal amounts outstanding thereunder will be due and payable.
Borrowings under the revolving credit facility bear interest at a rate equal to either a base prime
rate or LIBOR, at our option, plus a
42
specified variable percentage determined by reference to the then remaining borrowing
availability under the revolving credit facility. The revolving credit facility may, subject to
certain conditions and the agreement of lenders thereunder, be increased up to $275.0 million. At
September 30, 2009, based on the borrowing base determination in effect as of that date, we had
$166.6 million available for borrowing and letters of credit under the revolving credit facility,
of which $10.0 million supports outstanding letters of credit, leaving $156.6 million for
additional borrowing and letters of credit.
As of October 15, 2009, the date of the most recent borrowing base determination as of the
filing of this Report, we had $169.3 million available for borrowings and letters of credit under
the revolving credit facility, of which $10.0 million supports outstanding letters of credit,
leaving $159.3 million for additional borrowing and letters of credit. No borrowings were
outstanding as of October 15, 2009 under the revolving credit facility.
Amounts owed under the revolving credit facility may be accelerated upon the occurrence of
various events of default including, without limitation, the failure to make principal or interest
payments when due and breaches of covenants, representations and warranties. The revolving credit
facility is secured by a first priority lien on substantially all of our assets and the assets of
our domestic operating subsidiaries that are also borrowers thereunder. The revolving credit
facility, as amended, places restrictions on our ability and certain of our subsidiaries to, among
other things, incur debt, create liens, make investments, pay dividends, repurchase stock, sell
assets, undertake transactions with affiliates and enter into unrelated lines of business.
Capital Expenditures
A component of our long-term strategy is our capital expenditure program including our organic
growth initiatives. The following table presents our capital expenditures for the nine months ended
September 30, 2009 and 2008 (in millions of dollars):
Nine Months | ||||||||
Ended September 30, | ||||||||
2009 | 2008 | |||||||
Kalamazoo, Michigan facility (1) |
$ | 38.4 | $ | 12.4 | ||||
Spokane, Washington facility (2) |
3.4 | 26.7 | ||||||
Other (3) |
6.0 | 22.0 | ||||||
Change in accounts payable associated with capital expenditures |
3.2 | (.1 | ) | |||||
Total capital expenditures, net of change in accounts payable |
$ | 51.0 | $ | 61.0 | ||||
(1) | The Kalamazoo, Michigan facility is planned to be equipped with two extrusion presses and a remelt operation. We expect it will significantly improve the capabilities and efficiencies of our rod and bar operations, enhance the market position of such products, and be a platform to enable further extruded products growth for automotive applications. Completion of this investment program is expected to occur in early 2010. We estimate that an additional $20 million to $25 million will be incurred in connection with this investment program in the remainder of 2009 and that $20 million to $25 million will be incurred in 2010. | |
(2) | Inclusive of the $139 million heat treat plate expansion project at our Trentwood facility in Spokane, Washington. This project, substantially completed in October 2008, significantly increased our heat treat plate production capacity and augmented our product offerings by increasing the thickness of heat treat stretched plate we can produce for aerospace, defense and general engineering applications. | |
(3) | Other capital spending was spread among most of our manufacturing locations on projects expected to reduce operating costs, improve product quality, increase capacity or enhance operational security. |
Total capital expenditures for Fabricated Products are currently expected to be in the $70
million to $80 million range for all of 2009 and are expected to be funded using cash from
operations or borrowings under our revolving credit facility or other third party financing
arrangements.
The level of anticipated capital expenditures for future periods may be adjusted from time to
time depending on our business plans, price outlook for fabricated aluminum products, our ability
to maintain adequate liquidity and other factors. No assurance can be provided as to the timing or
success of any such expenditures.
Dividends
43
During the first nine months of 2009, we paid a total of $14.7 million, or $.72 per common
share, in cash dividends to our stockholders, including the holders of restricted stock, and
dividend equivalents to the holders of restricted stock units and the holders of performance shares
with respect to half of the performance shares.
On October 13, 2009, our Board of Directors approved the declaration of a quarterly cash
dividend of $.24 per common share to stockholders of record at the close of business on October 23,
2009, payable on November 13, 2009.
Future declaration and payment of dividends, if any, will be at the discretion of the Board of
Directors and will be dependent upon our results of operations, financial condition, cash
requirements, future prospects and other factors. We can give no assurance that any dividends will
be declared or paid in the future. Our revolving credit facility, as amended on January 9, 2009,
restricts our ability to pay dividends. We may pay cash dividends only if we maintain $100 million
in borrowing availability thereunder and are not in default or would not be in default as a result
of the dividend payment, and such dividends cannot exceed $25 million during any fiscal year.
Stock Repurchase Plan
During the second quarter of 2008, our Board of Directors authorized the repurchase of up to
$75 million of our common shares, with repurchase transactions to occur in open-market or privately
negotiated transactions at such times and prices as management deemed appropriate and to be funded
with our excess liquidity after giving consideration to internal and external growth opportunities
and future cash flows. The program may be modified, extended or terminated by our Board of
Directors at any time. We did not repurchase any of our common shares under this program during the
nine months ended September 30, 2009. As of September 30, 2009, $46.9 million remained available
for repurchases under the existing repurchase authorization.
Our revolving credit facility, as amended on January 9, 2009, prohibits us from making further
share repurchases. As a result, we can no longer repurchase our common shares under our stock
repurchase plan or otherwise, or withhold common shares to satisfy employee minimum statutory
withholding obligations in connection with the vesting of equity awards under our compensation
programs, without lender approval.
Environmental Commitments and Contingencies
We are subject to a number of environmental laws and regulations, to fines or penalties
assessed for alleged breaches of the environmental laws and regulations, and to claims and
litigation based upon such laws and regulations. Based on our evaluation of these and other
environmental matters, we have established environmental accruals of $8.5 million at September 30,
2009. However, we believe that it is reasonably possible that changes in various factors could
cause costs associated with these environmental matters to exceed current accruals by amounts that
could be, in the aggregate, up to an estimated $16.8 million, primarily in connection with our
ongoing efforts to address the historical use of oils containing polychlorinated biphenyls, or
PCBs, at the Trentwood facility in Spokane, Washington where we are working with regulatory
authorities and performing studies and remediation pursuant to several consent orders with the
State of Washington.
Contractual Obligations, Commercial Commitments, and Off-Balance Sheet and Other Arrangements
During the nine months ended September 30, 2009, we granted additional stock-based awards to
certain members of management under our stock-based long term incentive plan (see Note 10 of Notes
to Interim Consolidated Financial Statements included in Part I, Item 1. Financial Statements of
this Report). Additional awards are expected to be made in future years.
With the exception of the stock-based awards granted in the nine months ended September 30,
2009, there has been no other material change in our contractual obligations other than in the
ordinary course of business since the end of fiscal 2008. See Part II, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008, for additional information regarding our
contractual obligations, commercial commitments, and off-balance-sheet and other arrangements.
44
Critical Accounting Estimates and Policies
Our consolidated financial statements are prepared in accordance with United States generally
accepted accounting principles (US GAAP). In connection with the preparation of our financial
statements, we are required to make assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the
related disclosures. We base our assumptions, estimates and judgments on historical experience,
current trends and other factors that management believes to be relevant at the time our
consolidated financial statements are prepared. On a regular basis, management reviews the
accounting policies, assumptions, estimates and judgments to ensure that our financial statements
are presented fairly and in accordance with US GAAP. However, because future events and their
effects cannot be determined with certainty, actual results could differ from our assumptions and
estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 of Notes to Consolidated Financial
Statements included in Part II, Item 8. Financial Statements and Supplementary Data of our Annual
Report on Form 10-K for the year ended December 31, 2008. We discuss our critical accounting
estimates in Part II, Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2008.
There has been no material change in our critical accounting estimates since the end of fiscal
2008. Changes to our significant accounting policies since the end of fiscal 2008 are discussed in
Note 1 of Notes to Interim Consolidated Financial Statements included in Part I, Item 1. Financial
Statements of this Report.
New Accounting Pronouncements
For a discussion of all recently adopted and recently issued but not yet adopted accounting
pronouncements, see New Accounting Pronouncements in Note 1 of Notes to Interim Consolidated
Financial Statements included in Part I, Item 1. Financial Statements of this Report.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our operating results are sensitive to changes in the prices of primary aluminum and
fabricated aluminum products, and also depend to a significant degree upon the volume and mix of
all products sold. As discussed more fully in Note 12 of Notes to Interim Consolidated Financial
Statements included in Part I, Item 1. Financial Statements of this Report, we historically have
utilized hedging transactions to lock-in a specified price or range of prices for certain products
which we sell or consume in our production process and to mitigate our exposure to changes in
foreign currency exchange rates and energy prices.
Primary Aluminum. As a result of the full curtailment of Angleseys smelting operations at
September 30, 2009 and the commencement of secondary aluminum remelt and casting operations
discussed in Part I, Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations (see Results of Operations Segment Information Primary Aluminum) of
this Report, we believe our exposure to aluminum price risk, with respect to our income and cash
flow related to our share of Anglesey production, has largely been eliminated.
Our pricing of fabricated aluminum products is generally intended to lock-in a conversion
margin (representing the value added from the fabrication process(es)) and to pass metal price risk
on to customers. However, in certain instances, we do enter into firm price arrangements. In such
instances, we have price risk on anticipated aluminum purchases in respect of the customer orders.
We currently use third party hedging instruments to limit exposure to primary aluminum price risks
related to substantially all fabricated products firm price arrangements, which may have an adverse
effect on our financial position, results of operations and cash flows.
Total fabricated products shipments during the nine months ended September 30, 2009 and 2008
for which we had price risk were (in millions of pounds) 128.7 and 184.9, respectively. At
September 30, 2009, sales contracts for the delivery of fabricated aluminum products that have the
effect of creating price risk on anticipated primary aluminum purchases for the last nine months of
2009 and for the period 2010 through 2012 totaling approximately (in millions of pounds): 2009
47.2, 2010 91.5, 2011 79.9, and 2012 13.4.
45
Foreign Currency. We, from time to time, will enter into forward exchange contracts to hedge
material exposures for foreign currencies. Our primary foreign exchange exposure is our operating
costs of our London, Ontario facility and for cash commitments for equipment purchases.
Because we do not anticipate recognizing equity income or losses relating to our investment in
Anglesey for at least the next 12 months, and because we expect to purchase and sell our share of
Anglesey secondary aluminum production under pricing mechanisms that are intended to eliminate
metal price risk and currency exchange risk, the Pound Sterling exchange exposure related to
Angleseys earnings is effectively eliminated in the near-term. As of September 30, 2009, we had
forward purchase agreements for a total of 7.1 million Pounds Sterling for the month of October
2009 related to Pound Sterling denominated trade payables for our purchase of our share of Anglesey
production through the end of the third quarter.
Energy. We are exposed to energy price risk from fluctuating prices for natural gas. We
estimate that, before consideration of any hedging activities and the potential to pass through
higher natural gas prices to customers, each $1.00 change in natural gas prices (per mmbtu) impacts
our annual operating costs by approximately $3.4 million.
We from time to time in the ordinary course of business enter into hedging transactions with
major suppliers of energy and energy-related financial investments. As of September 30, 2009, the
Companys exposure to increases and decreases in natural gas prices had been substantially limited
for approximately 91% of the expected natural gas purchases for October 2009 through December 2009,
approximately 15% of the expected natural gas purchases for 2010, and an insignificant percentage
of the expected natural gas purchases for 2011.
Item 4. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports under the Securities Exchange Act of 1934 is processed,
recorded, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is accumulated and communicated to
management, including the principal executive officer and principal financial officer, to allow for
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures was performed as of the end of the
period covered by this Report under the supervision of and with the participation of our
management, including the principal executive officer and principal financial officer. Based on
that evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period covered by this
Report at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting. We had no changes in our internal
control over financial reporting during the period covered by this Report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings. |
Reference is made to Part I, Item 3. Legal Proceedings included in our Annual Report on Form
10-K for the year ended December 31, 2008 for information concerning material legal proceedings
with respect to the Company. There have been no material developments since December 31, 2008.
Item 1A. | Risk Factors. |
46
Reference is made to Part I, Item 1A. Risk Factors included in our Annual Report on Form
10-K for the year ended December 31, 2008 for information concerning risk factors. There have been
no material changes in the risk factors since December 31, 2008.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
Item 5. | Other Information. |
None.
47
Item 6. | Exhibits. |
*31.1 | Certification of Jack A. Hockema pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Daniel J. Rinkenberger pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1 | Certification of Jack A. Hockema pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
*32.2 | Certification of Daniel J. Rinkenberger pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KAISER ALUMINUM CORPORATION |
||||
/s/ Daniel J. Rinkenberger | ||||
Daniel J. Rinkenberger | ||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
||||
/s/ Neal West | ||||
Neal West | ||||
Vice President and Chief Accounting Officer (Principal Accounting Officer) |
||||
Date: October 28, 2009
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INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
*31.1
|
Certification of Jack A. Hockema pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2
|
Certification of Daniel J. Rinkenberger pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1
|
Certification of Jack A. Hockema pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
*32.2
|
Certification of Daniel J. Rinkenberger pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
50