KALU 9.30.2013 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2013 |
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from _______________________________ to_________________________________________ |
Commission File Number: 0-52105
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 94-3030279 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
| | |
27422 Portola Parkway, Suite 200 Foothill Ranch, California | | 92610-2831 |
(Address of principal executive offices) | | (Zip Code) |
| (949) 614-1740 | |
(Registrant’s telephone number, including area code) |
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | Accelerated filer o |
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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
As of October 18, 2013, there were 18,762,017 shares of common stock of the registrant outstanding.
TABLE OF CONTENTS
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
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| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| (Unaudited) | | |
| (In millions of dollars, except share and per share amounts) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 224.6 |
| | $ | 273.4 |
|
Short-term investments | 115.9 |
| | 85.0 |
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Receivables: | | | |
Trade, less allowance for doubtful receivables of $0.8 at September 30, 2013 and December 31, 2012 | 122.1 |
| | 123.8 |
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Other | 14.5 |
| | 3.4 |
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Inventories | 207.9 |
| | 186.0 |
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Prepaid expenses and other current assets | 67.6 |
| | 70.1 |
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Total current assets | 752.6 |
| | 741.7 |
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Property, plant, and equipment – net | 411.7 |
| | 384.3 |
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Net asset in respect of VEBA | 385.7 |
| | 365.9 |
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Deferred tax assets – net (including deferred tax liability relating to the VEBAs of $144.9 at September 30, 2013 and $136.9 at December 31, 2012) | 61.6 |
| | 102.0 |
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Intangible assets – net | 34.1 |
| | 35.4 |
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Goodwill | 37.2 |
| | 37.2 |
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Other assets | 109.1 |
| | 86.0 |
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Total | $ | 1,792.0 |
| | $ | 1,752.5 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 71.3 |
| | $ | 62.5 |
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Accrued salaries, wages, and related expenses | 39.0 |
| | 39.3 |
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Other accrued liabilities | 40.9 |
| | 51.8 |
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Payable to affiliate | — |
| | 7.9 |
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Short-term capital lease | 0.2 |
| | 0.1 |
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Total current liabilities | 151.4 |
| | 161.6 |
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Net liability in respect of VEBA | 4.0 |
| | 5.3 |
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Deferred tax liability | 1.1 |
| | — |
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Long-term liabilities | 154.0 |
| | 134.5 |
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Long-term debt | 386.4 |
| | 380.3 |
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Total liabilities | 696.9 |
| | 681.7 |
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Commitments and contingencies – Note 8 |
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Stockholders’ equity: | | | |
Preferred stock, 5,000,000 shares authorized at both September 30, 2013 and December 31, 2012; no shares were issued and outstanding at September 30, 2013 and December 31, 2012 | — |
| | — |
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Common stock, par value $0.01, 90,000,000 shares authorized at both September 30, 2013 and at December 31, 2012; 21,112,701 shares issued and 18,672,017 shares outstanding at September 30, 2013; 21,037,841 shares issued and 19,313,235 shares outstanding at December 31, 2012 | 0.2 |
| | 0.2 |
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Additional paid in capital | 1,022.4 |
| | 1,017.7 |
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Retained earnings | 212.2 |
| | 151.2 |
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Treasury stock, at cost, 2,440,684 shares at September 30, 2013 and 1,724,606 shares at December 31, 2012, respectively | (116.8 | ) | | (72.3 | ) |
Accumulated other comprehensive loss | (22.9 | ) | | (26.0 | ) |
Total stockholders’ equity | 1,095.1 |
| | 1,070.8 |
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Total | $ | 1,792.0 |
| | $ | 1,752.5 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
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| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (Unaudited) |
| (In millions of dollars, except share and per share amounts) |
Net sales | $ | 319.9 |
| | $ | 335.5 |
| | $ | 986.2 |
| | $ | 1,046.1 |
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Costs and expenses: | | | | | | | |
Cost of products sold: | | | | | | | |
Cost of products sold, excluding depreciation and amortization and other items | 259.5 |
| | 268.9 |
| | 784.6 |
| | 851.4 |
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Unrealized (gains) losses on derivative instruments | (1.5 | ) | | (12.3 | ) | | 3.4 |
| | (15.3 | ) |
Depreciation and amortization | 6.9 |
| | 6.7 |
| | 20.9 |
| | 19.6 |
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Selling, administrative, research and development, and general (includes accumulated other comprehensive income reclassifications related to VEBA adjustments of $1.3 and $1.8 for the quarters ended September 30, 2013 and September 30, 2012, respectively, and $4.1 and $5.4 for the nine months ended September 30, 2013 and September 30, 2012, respectively) | 13.4 |
| | 16.0 |
| | 45.6 |
| | 48.3 |
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Other operating charges, net | — |
| | — |
| | — |
| | 0.1 |
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Total costs and expenses | 278.3 |
| | 279.3 |
| | 854.5 |
| | 904.1 |
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Operating income | 41.6 |
| | 56.2 |
| | 131.7 |
| | 142.0 |
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Other (expense) income: | | | | | | | |
Interest expense | (8.8 | ) | | (9.2 | ) | | (27.1 | ) | | (19.8 | ) |
Other income, net (includes accumulated other comprehensive income reclassifications for realized gains on available for sale securities of $0.2 and $0.8 for the quarter and nine months ended September 30, 2013, respectively) | 2.9 |
| | 0.4 |
| | 3.1 |
| | 2.2 |
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Income before income taxes | 35.7 |
| | 47.4 |
| | 107.7 |
| | 124.4 |
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Income tax provision (includes aggregate income tax expense from reclassification items of $(0.5) and $(0.7) for the quarters ended September 30, 2013 and September 30, 2012, respectively, and $(1.3) and $(2.1) for the nine months ended September 30, 2013 and September 30, 2012, respectively) | (10.3 | ) | | (18.2 | ) | | (30.2 | ) | | (47.7 | ) |
Net income | $ | 25.4 |
| | $ | 29.2 |
| | $ | 77.5 |
| | $ | 76.7 |
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| | | | | | | |
Earnings per common share, Basic: | | | | | | | |
Net income per share | $ | 1.37 |
| | $ | 1.52 |
| | $ | 4.09 |
| | $ | 4.01 |
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Earnings per common share, Diluted: | | | | | | | |
Net income per share | $ | 1.34 |
| | $ | 1.51 |
| | $ | 4.02 |
| | $ | 3.98 |
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Weighted-average number of common shares outstanding (in thousands): | | | | | | | |
Basic | 18,548 |
| | 19,154 |
| | 18,915 |
| | 19,104 |
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Diluted | 19,058 |
| | 19,288 |
| | 19,267 |
| | 19,240 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
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| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (Unaudited) |
| (In millions of dollars) |
Net income | $ | 25.4 |
| | $ | 29.2 |
| | $ | 77.5 |
| | $ | 76.7 |
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Other comprehensive income: | | | | | | | |
Reclassification adjustments: | | | | | | | |
Amortization of net actuarial loss relating to VEBAs | 0.3 |
| | 0.8 |
| | 1.0 |
| | 2.3 |
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Amortization of prior service cost relating to VEBAs | 1.0 |
| | 1.0 |
| | 3.1 |
| | 3.1 |
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Reclassification of unrealized gain upon sale of available for sale securities | (0.2 | ) | | — |
| | (0.8 | ) | | — |
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Unrealized gain on available for sale securities | 0.4 |
| | 0.3 |
| | 0.9 |
| | 0.6 |
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Foreign currency translation adjustment | (0.3 | ) | | (0.5 | ) | | 0.5 |
| | (0.4 | ) |
Other comprehensive income, before tax | 1.2 |
| | 1.6 |
| | 4.7 |
| | 5.6 |
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Income tax expense related to items of other comprehensive income | (0.6 | ) | | (0.7 | ) | | (1.6 | ) | | (2.1 | ) |
Other comprehensive income, net of tax | 0.6 |
| | 0.9 |
| | 3.1 |
| | 3.5 |
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Comprehensive income | $ | 26.0 |
| | $ | 30.1 |
| | $ | 80.6 |
| | $ | 80.2 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED STOCKHOLDERS’ EQUITY
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
| | | | | | | (Unaudited) | | | | | |
| (In millions of dollars, except for shares) |
BALANCE, December 31, 2012 | 19,313,235 |
| | $ | 0.2 |
| | $ | 1,017.7 |
| | $ | 151.2 |
| | $ | (72.3 | ) | | $ | (26.0 | ) | | $ | 1,070.8 |
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Net income | — |
| | — |
| | — |
| | 77.5 |
| | — |
| | — |
| | 77.5 |
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Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 3.1 |
| | 3.1 |
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Issuance of non-vested shares to employees | 76,336 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Issuance of common shares to non-employee directors | 2,916 |
| | — |
| | 0.2 |
| | — |
| | — |
| | — |
| | 0.2 |
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Issuance of common shares to employees upon vesting of restricted stock units and performance shares | 36,503 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Cancellation of employee non-vested shares | (820 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares | (40,075 | ) | | — |
| | (2.4 | ) | | — |
| | — |
| | — |
| | (2.4 | ) |
Repurchase of common stock | (707,077 | ) | | — |
| | — |
| | — |
| | (43.9 | ) | | — |
| | (43.9 | ) |
Distribution from bankruptcy trust | (9,001 | ) | | — |
| | — |
| | 0.6 |
| | (0.6 | ) | | — |
| | — |
|
Cash dividends on common stock ($0.90 per share) | — |
| | — |
| | — |
| | (17.3 | ) | | — |
| | — |
| | (17.3 | ) |
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest | — |
| | — |
| | 1.0 |
| | — |
| | — |
| | — |
| | 1.0 |
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Amortization of unearned equity compensation | — |
| | — |
| | 5.9 |
| | — |
| | — |
| | — |
| | 5.9 |
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Dividends on unvested equity awards that were canceled | — |
| | — |
| | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
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BALANCE, September 30, 2013 | 18,672,017 |
| | $ | 0.2 |
| | $ | 1,022.4 |
| | $ | 212.2 |
| | $ | (116.8 | ) | | $ | (22.9 | ) | | $ | 1,095.1 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
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| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2013 | | 2012 |
| (Unaudited) (In millions of dollars) |
Cash flows from operating activities: | | | |
Net income | $ | 77.5 |
| | $ | 76.7 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation of property, plant and equipment | 19.6 |
| | 18.3 |
|
Amortization of definite-lived intangible assets | 1.3 |
| | 1.3 |
|
Amortization of debt discount and debt issuance costs | 8.2 |
| | 7.2 |
|
Deferred income taxes | 40.9 |
| | 44.8 |
|
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest | (1.0 | ) | | (1.3 | ) |
Non-cash equity compensation | 6.1 |
| | 5.4 |
|
Net non-cash LIFO benefit | (19.7 | ) | | (13.5 | ) |
Non-cash unrealized losses (gains) on derivative positions | 2.3 |
| | (16.4 | ) |
Amortization of option premiums paid | — |
| | 0.3 |
|
Losses on disposition of property, plant and equipment | 0.2 |
| | — |
|
Gain on disposition of available for sale securities | (0.4 | ) | | — |
|
Non-cash net periodic pension benefit income relating to VEBAs | (16.9 | ) | | (8.9 | ) |
Other non-cash (benefit) charges | (4.6 | ) | | 1.1 |
|
Changes in operating assets and liabilities: | | | |
Trade and other receivables | (6.7 | ) | | (58.0 | ) |
Inventories (excluding LIFO benefit/charge) | (2.2 | ) | | 30.2 |
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Prepaid expenses and other current assets | 0.1 |
| | 1.7 |
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Accounts payable | 8.7 |
| | 4.4 |
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Accrued liabilities | (12.3 | ) | | 15.7 |
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Payable to affiliate | (7.9 | ) | | (0.4 | ) |
Long-term assets and liabilities, net | (2.6 | ) | | (1.9 | ) |
Net cash provided by operating activities | 90.6 |
| | 106.7 |
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Cash flows from investing activities: | | | |
Capital expenditures | (47.0 | ) | | (25.7 | ) |
Purchase of available for sale securities | (201.8 | ) | | (80.0 | ) |
Proceeds from disposition of available for sale securities | 170.7 |
| | — |
|
Change in restricted cash | 0.7 |
| | 6.8 |
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Net cash used in investing activities | (77.4 | ) | | (98.9 | ) |
Cash flows from financing activities: | | | |
Proceeds from issuance of senior notes | — |
| | 225.0 |
|
Cash paid for financing costs | — |
| | (6.6 | ) |
Repayment of promissory notes | — |
| | (4.7 | ) |
Repayment of capital lease | — |
| | (0.1 | ) |
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest | 1.0 |
| | 1.3 |
|
Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares | (2.4 | ) | | (2.2 | ) |
Repurchase of common stock | (43.9 | ) | | — |
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Cash dividend paid to stockholders | (17.3 | ) | | (14.7 | ) |
Cash dividend returned to the Company | 0.6 |
| | — |
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Net cash (used in) provided by financing activities | (62.0 | ) | | 198.0 |
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Net (decrease) increase in cash and cash equivalents during the period | (48.8 | ) | | 205.8 |
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Cash and cash equivalents at beginning of period | 273.4 |
| | 49.8 |
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Cash and cash equivalents at end of period | $ | 224.6 |
| | $ | 255.6 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
1. Summary of Significant Accounting Policies
This Quarterly Report on Form 10-Q (this "Report") should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
Organization and Nature of Operations. Kaiser Aluminum Corporation (together with its subsidiaries, unless the context otherwise requires, the “Company”) specializes in the production of semi-fabricated specialty aluminum products, such as aluminum sheet and plate and extruded and drawn products, used primarily in aerospace/high strength, general engineering, automotive, and other industrial end market applications. The Company has one operating segment, Fabricated Products. See Note 12 for additional information regarding the Company’s reportable segment and its other business units.
Principles of Consolidation and Basis of Presentation. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable for interim periods and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows. The results of operations for the Company’s interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2013 fiscal year. The financial information as of December 31, 2012 is derived from the Company’s audited consolidated financial statements and footnotes for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in accordance with 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 Company’s 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 Company’s consolidated financial position and results of operations.
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. The Company recorded net non-cash LIFO benefits of approximately $6.8 and $5.7 during the quarters ended September 30, 2013 and September 30, 2012, respectively. The Company recorded net non-cash LIFO benefits of approximately $19.7 and $13.5 during the nine months ended September 30, 2013 and September 30, 2012, respectively. These amounts are primarily a result of changes in metal prices and changes in inventory volumes. The excess of current cost over the stated LIFO value of inventory at September 30, 2013 and December 31, 2012 was $4.8 and $24.5, respectively. 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. All of the Company’s inventories at September 30, 2013 and December 31, 2012 were included in the Fabricated Products segment (see Note 2 for the components of inventories).
Property, Plant, and Equipment – Net. Property, plant and equipment is recorded at cost (see Note 2). Construction in progress is included within Property, plant, and equipment – net on the Consolidated Balance Sheets. Interest related to the construction of qualifying assets is capitalized as part of the construction costs. The aggregate amount of interest capitalized is limited to the interest expense incurred in the period. The amount of interest expense capitalized as construction in progress was $1.0 and $0.3 during the quarters ended September 30, 2013 and September 30, 2012, respectively. The amount of interest expense capitalized as construction in progress was $2.1 and $1.4 for the nine months ended September 30, 2013 and September 30, 2012.
Depreciation is computed using the straight-line method at rates based on the estimated useful lives of the various classes of assets. Capital lease assets and leasehold improvements are depreciated on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. Depreciation expense is not included in Cost of products sold, excluding depreciation and amortization, but is included in Depreciation and amortization on the Statements of Consolidated Income. For the quarters ended September 30, 2013 and September 30, 2012, the Company recorded depreciation expense of $6.3 and $6.1, respectively, relating to the Company’s operating facilities in its Fabricated Products segment. For the nine months ended September 30, 2013 and September 30, 2012, the Company recorded depreciation expense of $19.3 and $17.9, respectively, relating to the Company’s operating facilities in its Fabricated Products segment. An immaterial amount of depreciation expense was also recorded relating to the Company’s Corporate and Other business unit for all periods presented in this Report.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
New Accounting Pronouncements.
Accounting Standards Update (“ASU”) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), was issued in January 2013. ASU 2013-01 clarifies that ordinary trade receivables and payables are not within the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Financial Accounting Standards Board Accounting Standards Codification or subject to a master netting arrangement or similar agreement. The adoption of ASU 2013-01 by the Company in the first quarter of 2013 did not have a material impact on the consolidated financial statements.
ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), was issued in February 2013. This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. Amounts not required under GAAP to be reclassified in their entirety to net income are to be disclosed as provided by GAAP. The adoption of ASU 2013-02 by the Company in the first quarter of 2013 did not have a material impact on the consolidated financial statements.
ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. (“ASU 2013-11”), was issued in July 2013. ASU 2013-11 requires an entity to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset resulting from a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, when the above situation is not available at the reporting date or the tax law of the applicable jurisdiction does not require the entity to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. An entity is required to adopt ASU 2013-11 for annual and interim periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2013-11 to have a material impact on its financial statements.
2. Supplemental Balance Sheet Information
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
Cash and Cash Equivalents. | | | |
Cash and money market funds | $ | 89.5 |
| | $ | 107.9 |
|
Commercial paper | 135.1 |
| | 165.5 |
|
Total | $ | 224.6 |
| | $ | 273.4 |
|
|
| | | | | | | |
Trade Receivables. | | | |
Billed trade receivables | $ | 116.5 |
| | $ | 124.4 |
|
Unbilled trade receivables | 6.4 |
| | 0.2 |
|
Trade receivables, gross | 122.9 |
| | 124.6 |
|
Allowance for doubtful receivables | (0.8 | ) | | (0.8 | ) |
Trade receivables, net | $ | 122.1 |
| | $ | 123.8 |
|
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
| | | | | | | |
Inventories. | | | |
Finished products | $ | 68.6 |
| | $ | 59.9 |
|
Work-in-process | 70.1 |
| | 55.5 |
|
Raw materials | 50.9 |
| | 53.9 |
|
Operating supplies and repair and maintenance parts | 18.3 |
| | 16.7 |
|
Total | $ | 207.9 |
| | $ | 186.0 |
|
|
| | | | | | | |
Prepaid Expenses and Other Current Assets. | | | |
Current derivative assets – Notes 9 and 10 | $ | 0.7 |
| | $ | 3.0 |
|
Current deferred tax assets | 59.5 |
| | 59.5 |
|
Current portion of option premiums paid – Notes 9 and 10 | — |
| | 0.1 |
|
Short-term restricted cash | 1.3 |
| | 1.3 |
|
Prepaid taxes | 2.4 |
| | 2.1 |
|
Prepaid expenses | 3.7 |
| | 4.1 |
|
Total | $ | 67.6 |
| | $ | 70.1 |
|
|
| | | | | | | |
Property, Plant and Equipment - Net. | | | |
Land and improvements | $ | 22.6 |
| | $ | 22.6 |
|
Buildings and leasehold improvements | 52.5 |
| | 50.9 |
|
Machinery and equipment | 416.5 |
| | 400.4 |
|
Construction in progress | 50.1 |
| | 20.8 |
|
Active property, plant and equipment, gross | 541.7 |
| | 494.7 |
|
Accumulated depreciation | (131.0 | ) | | (111.4 | ) |
Active property, plant and equipment, net | 410.7 |
| | 383.3 |
|
Idled equipment | 1.0 |
| | 1.0 |
|
Total | $ | 411.7 |
| | $ | 384.3 |
|
|
| | | | | | | |
Other Assets. | | | |
Derivative assets – Notes 9 and 10 | $ | 83.6 |
| | $ | 55.5 |
|
Restricted cash | 9.3 |
| | 10.0 |
|
Long-term income tax receivable | — |
| | 2.9 |
|
Deferred financing costs | 9.6 |
| | 11.7 |
|
Deferred compensation plan assets | 6.3 |
| | 5.6 |
|
Other | 0.3 |
| | 0.3 |
|
Total | $ | 109.1 |
| | $ | 86.0 |
|
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
| | | | | | | |
Other Accrued Liabilities. | | | |
Current derivative liabilities – Notes 9 and 10 | $ | 4.0 |
| | $ | 3.1 |
|
Current portion of option premiums received – Notes 9 and 10 | 0.1 |
| | 0.1 |
|
Uncleared cash disbursement | 7.8 |
| | 4.7 |
|
Accrued income taxes and taxes payable | 5.7 |
| | 3.1 |
|
Accrued annual VEBA contribution | — |
| | 20.0 |
|
Short-term environmental accrual – Note 8 | 5.3 |
| | 3.0 |
|
Accrued interest | 10.3 |
| | 3.7 |
|
Short-term deferred revenue | 1.9 |
| | 6.7 |
|
Other | 5.8 |
| | 7.4 |
|
Total | $ | 40.9 |
| | $ | 51.8 |
|
|
| | | | | | | |
Long-term Liabilities. | | | |
Derivative liabilities – Notes 9 and 10 | $ | 90.7 |
| | $ | 63.5 |
|
Income tax liabilities | 9.8 |
| | 15.1 |
|
Workers’ compensation accruals | 22.9 |
| | 24.0 |
|
Long-term environmental accrual – Note 8 | 16.5 |
| | 18.7 |
|
Long-term asset retirement obligations | 3.9 |
| | 3.8 |
|
Deferred compensation liability | 6.7 |
| | 5.8 |
|
Long-term capital lease | 0.1 |
| | 0.2 |
|
Other long-term liabilities | 3.4 |
| | 3.4 |
|
Total | $ | 154.0 |
| | $ | 134.5 |
|
|
| | | | | | | |
Long-term Debt. — Note 3 | | | |
Senior notes | $ | 225.0 |
| | $ | 225.0 |
|
Cash convertible senior notes | 161.4 |
| | 155.3 |
|
Total | $ | 386.4 |
| | $ | 380.3 |
|
3. Long-Term Debt and Credit Facility
Senior Notes
On May 23, 2012, the Company issued $225.0 principal amount of 8.250% Senior Notes due June 1, 2020 (the “Senior Notes”) at par. Interest expense, including amortization of deferred financing costs, relating to the Senior Notes was $4.8 and $14.5 for the quarter and nine months ended September 30, 2013, respectively. Interest expense, including amortization of deferred financing costs, relating to the Senior Notes was $4.9 and $7.0 for the quarter and nine months ended September 30, 2012, respectively, of which a portion is capitalized as Construction in progress. See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report Form 10-K for the year ended December 31, 2012 for additional information regarding the Senior Notes.
Cash Convertible Senior Notes
Convertible Notes. In March 2010, the Company issued $175.0 principal amount of 4.5% Cash Convertible Senior Notes due April 1, 2015 (the “Convertible Notes”). The Convertible Notes are not convertible into the Company's common stock or any other securities, but instead will be settled in cash. The Company accounts for the cash conversion feature of the Convertible Notes as a separate derivative instrument (the “Bifurcated Conversion Feature”) with the fair value on the issuance date equaling the original issue discount for purposes of accounting for the debt component of the Convertible Notes. The following tables provide additional information regarding the Convertible Notes:
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
Principal amount | $ | 175.0 |
| | $ | 175.0 |
|
Less: unamortized issuance discount | (13.6 | ) | | (19.7 | ) |
Carrying amount, net of discount | $ | 161.4 |
| | $ | 155.3 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Contractual coupon interest | $ | 2.0 |
| | $ | 2.0 |
| | $ | 5.9 |
| | $ | 5.9 |
|
Amortization of discount | 2.0 |
| | 1.9 |
| | 6.0 |
| | 5.4 |
|
Amortization of deferred financing costs | 0.3 |
| | 0.3 |
| | 0.9 |
| | 0.9 |
|
Total interest expense1 | $ | 4.3 |
| | $ | 4.2 |
| | $ | 12.8 |
| | $ | 12.2 |
|
____________
| |
1 | A portion of the interest relating to the Convertible Notes is capitalized as Construction in progress. |
The Convertible Notes’ conversion rate is subject to adjustment based on the occurrence of certain events. As of September 30, 2013, the conversion rate was 20.7714 shares per $1,000 principal amount of the Convertible Notes and the equivalent conversion price was approximately $48.14 per share, reflecting cumulative adjustments for quarterly dividends paid in excess of $0.24 per share.
Holders may convert their Convertible Notes at any time on or after January 1, 2015. Additionally, holders may convert the Convertible Notes before January 1, 2015 in certain limited circumstances determined by (i) the trading price of the Convertible Notes, (ii) the occurrence of specified corporate events, or (iii) the market price of the Company's common stock. Because the Company's closing stock price exceeded 130% of the conversion price for 20 trading days during a period of 30 consecutive trading days ending on September 30, 2013, the last trading date of the third quarter of 2013, holders may convert the Convertible Notes during the fourth quarter of 2013. The Company believes that the market value of the Convertible Notes will continue to exceed the amount of cash payable upon conversion, making early conversion unlikely. As of September 30, 2013, no Convertible Notes had been converted.
Convertible Note Hedge Transactions. In March 2010, the Company purchased cash settled call options (the “Call Options”) that have an exercise price equal to the conversion price of the Convertible Notes and an expiration date that is the same as the maturity or on the earlier conversion date of the Convertible Notes. If the Company exercises the Call Options, the aggregate amount of cash it would receive from the counterparties to the Call Options would equal the aggregate amount of cash that the Company would be required to pay to the holders of the converted Convertible Notes, less the principal amount thereof. Contemporaneous with the purchase of the Call Options, the Company also sold net-share-settled warrants (the “Warrants”) with an exercise date of July 1, 2015 relating to approximately 3.6 million shares of the Company’s common stock. At September 30, 2013, the exercise prices were $48.14 per share and $61.14 per share for the Call Options and the Warrants, respectively, reflecting cumulative adjustments for quarterly dividends paid in excess of $0.24 per share.
See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information regarding the Convertible Notes, the Call Options and the Warrants.
See “Fair Values of Financial Assets and Liabilities - All Other Financial Assets and Liabilities” in Note 10 for information relating to the estimated fair value of the Senior Notes and Convertible Notes.
Revolving Credit Facility
The Company’s credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions party thereto (the “Revolving Credit Facility”) provides the Company with a $300.0 funding commitment through September 30, 2016. The Company had $263.9 of borrowing availability under the Revolving Credit Facility at September 30, 2013, based on the borrowing base determination then in effect. At September 30, 2013, there were no borrowings under the Revolving Credit Facility and $6.9 was being used to support outstanding letters of credit, leaving $257.0 of net borrowing
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
availability. The interest rate applicable to any overnight borrowings under the Revolving Credit Facility would have been 4.0% at September 30, 2013.
See Note 4 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information regarding the Revolving Credit Facility.
4. Goodwill and Intangible Assets
In 2010, the Company acquired the Florence, Alabama facility, which manufactures bare mechanical alloy wire products, nails and aluminum rod for aerospace, general engineering, and automotive applications, in addition to other non-core end use applications. At September 30, 2013, the net book value of the Florence property, plant and equipment was $4.6, and the carrying value of the goodwill and intangible assets related to the Florence, Alabama facility were $3.1 and $3.2, respectively. The goodwill arising from the acquisition represents the commercial opportunity for the Company to sell small-diameter rod, bar and wire products to its core end market segments. The identifiable intangible assets acquired in the acquisition consisted of customer relationships and backlog.
The Company’s accounting policy is to perform an annual goodwill impairment test during the fourth quarter of each year or whenever events or changes in circumstances indicate that goodwill or the carrying value of intangible assets may not be recoverable. As of September 30, 2013, following a qualitative review of the Florence reporting unit, the Company performed a quantitative impairment test and determined that no impairment of its goodwill and intangible assets was required. However, given the potential for continued weakness in the current economy, customer supply chain rebalancing, changes in customer quality standards, and the resulting adverse impact on sales volumes and product costs at the Florence, Alabama facility, it is possible that the carrying values of its related assets, including goodwill, could be impaired following the annual fourth quarter impairment test or within the next 12 months.
5. Income Tax Matters
The provision for incomes taxes, for each period presented, consisted of the following:
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Domestic | $ | 14.7 |
| | $ | 17.7 |
| | $ | 41.1 |
| | $ | 45.8 |
|
Foreign | (4.4 | ) | | 0.5 |
| | (10.9 | ) | | 1.9 |
|
Total | $ | 10.3 |
| | $ | 18.2 |
| | $ | 30.2 |
| | $ | 47.7 |
|
The income tax provision for the three months ended September 30, 2013 and September 30, 2012 was $10.3 and $18.2, reflecting an effective tax rate of 28.9% and 38.4%, respectively. The difference between the effective tax rate and the projected blended statutory tax rate for the three months ended September 30, 2013 was primarily the result of a decrease from a bilateral Advanced Pricing Agreement between Canada and the U.S for $2.7, resulting in a 7.7% decrease in the effective rate. As a result of the advanced pricing agreement, a refund of $2.9 which represents amounts previously paid against Canadian accrued taxes, is expected to be received within the next twelve months. Such amount was included in Other receivables at September 30, 2013.
The difference between the effective tax rate and the projected blended statutory tax rate for the three months ended September 30, 2012 was primarily the result of an increase in unrecognized tax benefits, including interest and penalties, of $0.3, resulting in a 0.7% increase in the effective tax rate.
The income tax provision for the nine months ended September 30, 2013 and September 30, 2012 was $30.2 and $47.7, reflecting an effective tax rate of 28.1% and 38.4%, respectively. The difference between the effective tax rate and the projected blended statutory tax rate for the nine months ended September 30, 2013 was primarily the result of (i) a decrease in unrecognized tax benefits, including interest and penalties, of $7.7, resulting in a 7.1% decrease in the effective tax rate due to an audit settlement with the Canada Revenue Agency Competent Authority on February 28, 2013 for the 1998-2004 tax years and (ii) a decrease from a bilateral Advanced Pricing Agreement between Canada and the U.S for $2.7, resulting in a 2.5% decrease in the effective rate. As a result of the audit settlement and advanced pricing agreement with Canada, a refund of
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
$10.7, which represents amounts previously paid against Canadian accrued taxes, is expected to be received within the next twelve months. Such amount was included in Other receivables at September 30, 2013.
The difference between the effective tax rate and the projected blended statutory tax rate for the nine months ended September 30, 2012 was primarily the result of an increase in unrecognized tax benefits, including interest and penalties, of $0.7, resulting in a 0.6% increase in the effective tax rate.
The Company’s gross unrecognized benefits relating to uncertain tax positions were $6.9 and $15.7 at September 30, 2013 and December 31, 2012, respectively, of which, $5.8 and $14.6 would impact the effective tax rate at September 30, 2013 and December 31, 2012, respectively, if and when the gross unrecognized tax benefits are recognized.
The Company expects its gross unrecognized tax benefits to be reduced by $3.0 within the next 12 months.
See Note 7 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information regarding income taxes.
6. Employee Benefits
Pension and Similar Benefit Plans. The Company has provided contributions to (i) multi-employer pension plans sponsored by the United Steel, Paper and Foresting, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union AFL-CIO, CLC (“USW”) and International Association of Machinists and certain other unions at certain of the Company’s production facilities, (ii) defined contribution 401(k) savings plans for hourly bargaining unit employees and salaried and certain hourly non-bargaining unit employees, (iii) a defined benefit plan for salaried employees at the Company’s London, Ontario facility, and (iv) a non-qualified, unfunded, unsecured plan of deferred compensation for key employees who would otherwise suffer a loss of benefits under the Company’s defined contribution plan. See Note 8 and Note 9 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information with respect to the Company’s benefit plans.
VEBA Postretirement Medical Obligations. Certain retirees receive medical coverage through participation in a voluntary employees beneficiary association (“VEBA”) for the benefit of certain union retirees, their surviving spouses and eligible dependents (the “Union VEBA”) or a VEBA that provides benefits for certain other eligible retirees, their surviving spouses and eligible dependents (the “Salaried VEBA” and, together with the Union VEBA, the “VEBAs”). The Union VEBA is managed by four trustees, two of which are appointed by the Company. Its assets are managed by an independent fiduciary. The Salaried VEBA is managed by trustees who are independent of the Company.
The Company has no claim to the plan assets of the VEBAs nor any obligation to fund their liabilities. The benefits paid by the VEBAs are at the sole discretion of the respective VEBA trustees and are outside the Company's control. The Company’s only financial obligations to the VEBAs are (i) to make an annual variable cash contribution (described below) and (ii) to pay up to $0.3 of the annual administrative expenses of the VEBAs. Nevertheless, the Company accounts for the VEBAs as defined benefit postretirement plans with the current VEBA assets and future variable contributions from the Company, and earnings thereon, operating as a cap on the benefits to be paid.
Under this accounting treatment, the funding status of the VEBAs could result in a liability or asset position on the Company's Consolidated Balance Sheets, but such liability or asset has no impact on the Company's cash flow or liquidity. Only the Company's obligation to make an annual variable cash contribution can have a material impact to the Company's cash flow or liquidity. The formula determining the annual variable contribution amount 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 payments may not exceed $20.0 annually, and payments are allocated between the Union VEBA and the Salaried VEBA at 85.5% and 14.5%, respectively. Amounts owing by the Company to the VEBAs are recorded on the Company’s Consolidated Balance Sheets at the end of each year, under Other accrued liabilities (until paid in cash), with a corresponding increase in Net assets in respect of VEBA, a decrease in Net liability in respect of VEBA, or a combination thereof. The variable contributions with respect to 2012 totaled the maximum of $20.0 and were paid during the first quarter of 2013.
Components of Net Periodic Pension Benefit (Income) Cost. The Company’s results of operations included the following impacts associated with the Canadian defined benefit plan and the VEBAs: (i) charges for service rendered by employees; (ii) a charge for accretion of interest; (iii) a benefit for the return on plan assets; and (iv) amortization of net gains or losses on assets, prior service costs associated with plan amendments and actuarial differences. Net periodic pension benefit cost related to the Canadian defined benefit plan was not material for the quarter and nine months ended September 30, 2013 and September 30,
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
2012. The following table presents the components of net periodic pension benefit income for the VEBAs and charges relating to all other employee benefit plans for the quarter and nine months ended September 30, 2013 and September 30, 2012:
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
VEBAs: | | | | | | | |
Service cost | $ | 0.6 |
| | $ | 0.9 |
| | $ | 1.9 |
| | $ | 2.6 |
|
Interest cost | 3.6 |
| | 4.4 |
| | 10.9 |
| | 13.4 |
|
Expected return on plan assets | (11.1 | ) | | (10.0 | ) | | (33.8 | ) | | (30.3 | ) |
Amortization of prior service cost | 1.0 |
| | 1.0 |
| | 3.1 |
| | 3.1 |
|
Amortization of net actuarial loss | 0.3 |
| | 0.8 |
| | 1.0 |
| | 2.3 |
|
Total net periodic pension benefit income relating to VEBAs | (5.6 | ) | | (2.9 | ) | | (16.9 | ) | | (8.9 | ) |
Deferred compensation plan | 0.4 |
| | 0.3 |
| | 0.8 |
| | 0.8 |
|
Defined contribution plans | 1.3 |
| | 1.3 |
| | 6.6 |
| | 6.3 |
|
Multiemployer pension plans | 0.9 |
| | 0.9 |
| | 2.6 |
| | 2.6 |
|
Total | $ | (3.0 | ) | | $ | (0.4 | ) | | $ | (6.9 | ) | | $ | 0.8 |
|
The following table presents the allocation of the (income) charges detailed above, by segment (see Note 12):
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Fabricated Products | $ | 2.2 |
| | $ | 2.1 |
| | $ | 8.8 |
| | $ | 8.5 |
|
All Other | (5.2 | ) | | (2.5 | ) | | (15.7 | ) | | (7.7 | ) |
Total | $ | (3.0 | ) | | $ | (0.4 | ) | | $ | (6.9 | ) | | $ | 0.8 |
|
For all periods presented, the net periodic pension benefit income relating to the VEBAs are included as a component of Selling, administrative, research and development and general expense within All Other. Further, substantially all of the Fabricated Products segment’s employee benefits related charges are in Cost of products sold, excluding depreciation and amortization and other items with the balance in Selling, administrative, research and development, and general.
See Note 8 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information with respect to the VEBAs and key assumptions used with respect to the Company’s pension plans and key assumptions made in computing the net obligation of each VEBA.
7. Employee Incentive Plans
Short-term Incentive Plans (“STI Plans”)
The Company has a short-term incentive compensation plan for senior management and certain other employees payable at the Company’s election in cash, shares of common stock, or a combination of cash and shares of common stock. Amounts earned under the plan are based primarily on the “economic value added,” or EVA, of the Company’s Fabricated Products business, adjusted for certain safety and performance factors. EVA, as defined by the Company’s STI Plans, is the excess of the Company’s adjusted pre-tax operating income for a particular year over a pre-determined percentage of the adjusted net assets of the immediately preceding year, measured over a one-year period. Most of the Company’s production facilities have similar programs for both hourly and salaried employees.
Total costs relating to STI Plans were recorded as follows, for each period presented:
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Cost of products sold, excluding depreciation and amortization and other items | $ | 1.0 |
| | $ | 1.1 |
| | $ | 3.4 |
| | $ | 3.4 |
|
Selling, administrative, research and development, and general | 2.4 |
| | 2.8 |
| | 8.9 |
| | 7.6 |
|
Total costs recorded in connection with STI Plans | $ | 3.4 |
| | $ | 3.9 |
| | $ | 12.3 |
| | $ | 11.0 |
|
The following table presents the allocation of the charges detailed above, by segment:
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Fabricated Products | $ | 2.4 |
| | $ | 2.6 |
| | $ | 8.6 |
| | $ | 7.6 |
|
All Other | 1.0 |
| | 1.3 |
| | 3.7 |
| | 3.4 |
|
Total costs recorded in connection with STI Plans | $ | 3.4 |
| | $ | 3.9 |
| | $ | 12.3 |
| | $ | 11.0 |
|
Long-term Incentive Programs (“LTI Programs”)
General. Officers and other key employees of the Company or one or more of its subsidiaries, as well as directors of the Company, are eligible to participate in the Kaiser Aluminum Corporation Amended and Restated 2006 Equity and Performance Incentive Plan (as amended, 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, a total of 2,722,222 common shares have been authorized for issuance under the Equity Incentive Plan. At September 30, 2013, 840,693 common shares were available for additional awards under the Equity Incentive Plan.
Non-vested Common Shares, Restricted Stock Units and Performance Shares. The Company grants non-vested common shares to its non-employee directors, executive officers and other key employees. The Company also grants restricted stock units to certain employees. The restricted stock units have rights similar to the rights of non-vested common shares, and the employee will receive one common share for each restricted stock unit upon the vesting of the restricted stock unit. In addition to non-vested common shares and restricted stock units, the Company also grants performance shares to executive officers and other key employees. Such awards are subject to performance requirements pertaining to the Company’s EVA as set forth in each year’s LTI Program, measured over a three-year performance period. EVA, as defined in the Company’s LTI Programs, is the excess of the Company’s adjusted pre-tax operating income for a particular year over a pre-determined percentage of the adjusted net assets of the immediately preceding year. 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 period.
See Note 10 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information with respect to the Equity Incentive Plan and the detailed vesting requirements for the different types of equity awards described above.
Non-cash Compensation Expense. Compensation expense relating to all awards under the Equity Incentive Plan are included in Selling, administrative, research and development, and general. Recorded non-cash compensation expense by type of award under LTI Programs were as follows, for each period presented:
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Service-based non-vested common shares and restricted stock units | $ | 0.9 |
| | $ | 0.7 |
| | $ | 3.4 |
| | $ | 3.1 |
|
Performance shares | 0.5 |
| | 0.9 |
| | 2.5 |
| | 2.1 |
|
Total non-cash compensation expense | $ | 1.4 |
| | $ | 1.6 |
| | $ | 5.9 |
| | $ | 5.2 |
|
The following table presents the allocation of the charges detailed above, by segment:
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Fabricated Products | $ | 0.5 |
| | $ | 0.4 |
| | $ | 1.7 |
| | $ | 1.5 |
|
All Other | 0.9 |
| | 1.2 |
| | 4.2 |
| | 3.7 |
|
Total non-cash compensation expense | $ | 1.4 |
| | $ | 1.6 |
| | $ | 5.9 |
| | $ | 5.2 |
|
Unrecognized Gross Compensation Cost Data. The following table presents unrecognized gross compensation cost data as of September 30, 2013:
|
| | | | | |
| Unrecognized gross compensation costs, by award type | | Expected period (in years) over which the remaining gross compensation costs will be recognized, by award type |
Service-based non-vested common shares and restricted stock units | $ | 4.6 |
| | 1.6 |
Performance shares | $ | 7.1 |
| | 2.1 |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
Summary of Activity. A summary of the activity with respect to non-vested common shares, restricted stock units and performance shares for the nine months ended September 30, 2013 is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| Non-Vested Common Shares | | Restricted Stock Units | | Performance Shares |
| Shares | | Weighted-Average Grant-Date Fair Value per Share | | Units | | Weighted-Average Grant-Date Fair Value per Unit | | Shares | | Weighted-Average Grant-Date Fair Value per Share |
Outstanding at December 31, 2012 | 158,684 |
| | $ | 42.47 |
| | 5,183 |
| | $ | 43.99 |
| | 583,950 |
| | $ | 41.78 |
|
Granted | 76,336 |
| | 58.65 |
| | 2,600 |
| | 57.70 |
| | 175,317 |
| | 57.75 |
|
Vested | (90,233 | ) | | 42.31 |
| | (2,311 | ) | | 42.74 |
| | (34,192 | ) | | 34.84 |
|
Forfeited | (820 | ) | | 53.00 |
| | — |
| | — |
| | — |
| | — |
|
Canceled | — |
| | — |
| | — |
| | — |
| | (162,521 | ) | | 34.58 |
|
Outstanding at September 30, 2013 | 143,967 |
| | $ | 51.09 |
| | 5,472 |
| | $ | 51.03 |
| | 562,554 |
| | $ | 49.26 |
|
A summary of select activity with respect to non-vested common shares, restricted stock units and performance shares for the nine months ended September 30, 2012 is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| Non-Vested Common Shares | | Restricted Stock Units | | Performance Shares |
| Shares | | Weighted-Average Grant-Date Fair Value per Share | | Units | | Weighted-Average Grant-Date Fair Value per Unit | | Shares | | Weighted-Average Grant-Date Fair Value per Share |
Granted | 92,949 |
| | $ | 45.03 |
| | 2,486 |
| | $ | 44.46 |
| | 215,579 |
| | $ | 44.47 |
|
Vested | (134,746 | ) | | $ | 24.30 |
| | (3,375 | ) | | $ | 25.77 |
| | (7,952 | ) | | $ | 18.89 |
|
Stock Options. The Company has fully-vested stock options from a one-time issuance in 2007. As of both September 30, 2013 and December 31, 2012, 20,791 fully-vested options were outstanding, in each case exercisable to purchase common shares at $80.01 per share and having a remaining contractual life of 3.50 and 4.25 years, respectively. The average fair value of the options granted was $39.90. No new options were granted and no existing options were forfeited or exercised during the nine months ended September 30, 2013.
Vested Stock. From time to time, the Company issues common shares to non-employee directors electing to receive common shares in lieu of all or a portion of their annual retainer fees. The fair value of these common shares is based on the fair value of the shares at the date of issuance and is immediately recognized in earnings as a period expense. For the nine months ended September 30, 2013 and September 30, 2012, in each case the Company recorded $0.2 relating to common shares granted to non-employee directors in lieu of all or a portion of their annual retainer fees.
Under the Equity Incentive Plan, participants may elect to have the Company withhold common shares to satisfy minimum statutory tax withholding obligations arising in connection with the exercise of stock options and vesting of non-vested shares, restricted stock units and performance shares. Any such shares withheld are canceled by the Company on the applicable vesting dates, which correspond to the times at which income to the employee is recognized. When the Company withholds these common shares, the Company is required to remit to the appropriate taxing authorities the fair value of the shares withheld as of the vesting date. During the nine months ended September 30, 2013 and September 30, 2012, 40,075 and 45,801 common shares, respectively, were withheld and canceled for this purpose.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
8. Commitments and Contingencies
Commitments. The Company has a variety of financial commitments, including purchase agreements, forward foreign exchange and forward sales contracts, indebtedness (and related Call Options and Warrants) and letters of credit (see Note 3 and Note 9).
Refer to Note 11 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for information relating to minimum rental commitments under operating leases. There had been no material changes to such scheduled rental commitments as of September 30, 2013.
Environmental Contingencies. The Company is subject to a number of environmental laws and regulations, to potential fines or penalties assessed for alleged breaches of the environmental laws and regulations, and to potential claims based upon such laws and regulations.
The Company has established procedures for regularly evaluating environmental loss contingencies. The Company’s environmental accruals represent the Company’s undiscounted estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, existing requirements, currently available facts, existing technology, and the Company’s assessment of the likely remediation actions to be taken.
During 2012, the Company submitted a final feasibility study, after public comment and agency review, to the Washington State Department of Ecology (“Washington State Ecology”) which included recommendations for remediation alternatives to primarily address the historical use of oils containing polychlorinated biphenyls, or PCBs, at the Company’s Trentwood facility in Spokane, Washington. During the third quarter of 2012, Washington State Ecology and the Company signed an amended work order allowing certain remediation activities to begin and to initiate a treatability study in regards to proposed PCB remediation methods. The Company continues to work with Washington State Ecology in developing the implementation work plans, which are subject to Washington State Ecology approval. The Company has begun implementation of certain approved sections of the work plan during the third quarter of 2013.
At September 30, 2013, the Company’s environmental accrual of $21.8 represented the Company’s estimate of the incremental cost based on proposed alternatives in the final feasibility study related to the Company’s Trentwood facility in Spokane, Washington and on investigational studies and other remediation activities occurring at the Company’s Newark, Ohio and certain other locations owned and formally owned by the Company. Once the remediation actions are approved, the Company expects the implementation could occur over a period of 30 years.
As additional facts are developed, feasibility studies are completed, draft remediation plans are modified, necessary regulatory approvals for the implementation of remediation are obtained, alternative technologies are developed, and/or other factors change, there may be revisions to management’s estimates, and actual costs may exceed the current environmental accruals. The Company believes at this time 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 $19.1 over the remediation period. It is reasonably possible that the Company’s recorded estimate may change in the next 12 months.
Other Contingencies. The Company is party to various lawsuits, claims, investigations, and administrative proceedings that arise in connection with 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 merit. The Company accrues for a legal liability when it is both probable that a liability has been incurred and the amount of the loss is reasonably estimable. Quarterly, in addition to when changes in facts and circumstances require it, the Company reviews and adjusts these accruals 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 impact on the Company’s consolidated financial position, operating results, or liquidity.
9. Derivative Financial Instruments and Related Hedging Programs
Overview. In conducting its business, the Company 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 sale of fabricated aluminum products and the purchase of metal used as raw material for its fabrication operations, (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in its production processes, and (iii) foreign currency requirements with respect to its foreign subsidiaries and cash commitments for equipment purchases denominated in foreign currency.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
Additionally, in connection with the issuance of the Convertible Notes, the Company purchased cash-settled Call Options relating to the Company’s common stock to limit its exposure to the cash conversion feature of the Convertible Notes (see Note 3).
Hedges of Operational Risks. The Company’s 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 fluctuations to its customers. However, in certain instances the Company enters into firm-price arrangements with its customers and incurs price risk on its anticipated aluminum purchases with respect to such customer orders. The Company uses third-party hedging instruments to limit exposure to metal price risks related to firm-price customer sales contracts. See Note 10 for additional information regarding the Company’s material derivative positions relating to hedges of operational risks, and their respective fair values.
A majority of the Company’s derivative contracts relating to hedges of operational risks contain credit risk-related contingency features that could require the Company to provide additional collateral in the event the Company’s credit rating were to be downgraded. To minimize the exposure to additional collateral requirements related to its liability hedge positions, the Company allocates hedging transactions among its counterparties, uses options as part of its hedging activities, or both. The aggregate fair value of the Company’s derivative instruments that contain credit risk-related contingency features and were in a net liability position at September 30, 2013 was $4.6.
The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur significant loss from the failure of any counterparties to perform under any agreements.
During the nine months ended September 30, 2013 and September 30, 2012, total fabricated products shipments that contained firm price terms were (in millions of pounds) 87.2 and 139.0, respectively. At September 30, 2013, the Fabricated Products segment held contracts for the delivery of fabricated aluminum products that had the effect of creating price risk on anticipated purchases of aluminum for the remainder of 2013, 2014 and 2015 and thereafter, totaling approximately (in millions of pounds) 37.3, 19.0 and 1.3, respectively.
Hedges Relating to the Convertible Notes. As described in Note 3, the Company issued Convertible Notes in the aggregate principal amount of $175.0 in March 2010. The conversion feature of the Convertible Notes can only be settled in cash and must be bifurcated from the Convertible Notes and treated as a separate derivative instrument for financial reporting purposes. In order to offset the cash flow risk associated with the Bifurcated Conversion Feature, the Company purchased Call Options, which are accounted for as derivative instruments. The Company expects that the realized gain or loss from the Call Options will substantially offset the realized loss or gain of the Bifurcated Conversion Feature upon maturity of the Convertible Notes. However, because valuation assumptions for the Bifurcated Conversion Feature and the Call Option are not identical, over time the Company expects to record net unrealized gains and losses due to mark-to-market adjustments to the fair values of the two derivatives. See Note 10 for additional information regarding the fair values of the Bifurcated Conversion Feature and the Call Options.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
Realized and Unrealized Gains and Losses. Realized and unrealized (losses) gains associated with all derivative contracts consisted of the following, for each period presented:
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Realized (losses) gains: | | | | | | | |
Aluminum | $ | (2.0 | ) | | $ | (3.3 | ) | | $ | (3.6 | ) | | $ | (7.7 | ) |
Natural Gas | (0.5 | ) | | (1.6 | ) | | (1.3 | ) | | (5.5 | ) |
Electricity | 0.3 |
| | (0.8 | ) | | 0.2 |
| | (3.0 | ) |
Foreign Currency | (0.1 | ) | | — |
| | (0.1 | ) | | — |
|
Total realized losses | $ | (2.3 | ) | | $ | (5.7 | ) | | $ | (4.8 | ) | | $ | (16.2 | ) |
Unrealized gains (losses): | | | | | | | |
Aluminum | $ | 1.7 |
| | $ | 8.3 |
| | $ | (4.5 | ) | | $ | 8.8 |
|
Natural Gas | — |
| | 3.0 |
| | 0.8 |
| | 4.7 |
|
Electricity | (0.3 | ) | | 1.0 |
| | 0.3 |
| | 1.8 |
|
Foreign Currency | 0.1 |
| | — |
| | — |
| | — |
|
Call Options relating to the Convertible Notes | 31.0 |
| | 10.2 |
| | 27.9 |
| | 5.8 |
|
Bifurcated Conversion Feature of the Convertible Notes | (29.4 | ) | | (10.3 | ) | | (26.8 | ) | | (4.7 | ) |
Total unrealized gains (losses) | $ | 3.1 |
| | $ | 12.2 |
| | $ | (2.3 | ) | | $ | 16.4 |
|
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
The following table summarizes the Company’s material derivative positions at September 30, 2013:
|
| | | | |
Commodity | | Maturity Period (month/year) | Notional Amount of contracts (mmlbs) |
Aluminum — | | | |
Fixed priced purchase contracts | | 10/13 through 12/15 | 48.7 |
|
Fixed priced sales contracts | | 10/13 through 12/13 | 1.2 |
|
Midwest premium swap contracts1 | | 10/13 through 12/15 | 47.0 |
|
|
| | | | |
Energy | | Maturity Period (month/year) | Notional Amount of contracts (mmbtu) |
Natural gas —2 | | | |
Call option purchase contracts | | 10/13 through 12/13 | 240,000 |
|
Put option sales contracts | | 10/13 through 12/13 | 240,000 |
|
Fixed priced purchase contracts | | 10/13 through 12/15 | 6,330,000 |
|
|
| | | | |
Electricity | | Maturity Period (month/year) | Notional Amount of contracts (Mwh) |
Fixed priced purchase contracts | | 10/13 through 12/15 | 405,625 |
|
|
| | | | | |
Foreign Currency | | Maturity Period (month/year) | Notional Amount of contracts (as shown) |
Euro — | | | |
Fixed priced purchase contracts | | 11/13 through 1/14 | € | 1,486,965 |
|
GBP — | | | |
Fixed priced purchase contracts | | 1/14 through 5/14 | £ | 44,106 |
|
|
| | | | |
Hedges Relating to the Convertible Notes | | Contract Period (month/year) | Notional Amount of contracts (Common Shares) |
Bifurcated Conversion Feature3 | | 3/10 through 3/15 | 3,634,995 |
|
Call Options3 | | 3/10 through 3/15 | 3,634,995 |
|
______________________
| |
1 | Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on the Company’s purchases of primary aluminum. |
| |
2 | As of September 30, 2013, the Company’s exposure to fluctuations in natural gas prices had been substantially reduced for approximately 78%, 82% and 58% of the expected natural gas purchases for the remainder of 2013, 2014 and 2015, respectively. |
| |
3 | The Bifurcated Conversion Feature represents the cash conversion feature of the Convertible Notes. The Call Options expire on the maturity or earlier conversion of the Convertible Notes and have an exercise price equal to the conversion price of the Convertible Notes, subject to anti-dilution adjustments substantially similar to the anti-dilution adjustments for the Convertible Notes. Although the fair value of the Call Options is derived from a notional number of shares of the Company’s common stock, the Call Options may only be settled in cash. |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
The Company enters into derivative contracts with counterparties, some of which are subject to enforceable master netting arrangements and some of which are not. The Company reflects the fair value of its derivative contracts on a gross basis on the Consolidated Balance Sheets (see Note 2).
The following tables present offsetting information regarding the Company’s derivatives by type of counterparty as of September 30, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Derivative Assets and Collateral Held by Counterparty |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount |
Counterparty (with Netting Agreements) | $ | 0.7 |
| | $ | — |
| | $ | 0.7 |
| | $ | 0.6 |
| | $ | — |
| | $ | 0.1 |
|
Counterparty (without Netting Agreements)1 | 83.3 |
| | — |
| | 83.3 |
| | — |
| | — |
| | 83.3 |
|
Counterparty (with partial Netting Agreements) | 0.3 |
| | — |
| | 0.3 |
| | 0.3 |
| | — |
| | — |
|
Total | $ | 84.3 |
| | $ | — |
| | $ | 84.3 |
| | $ | 0.9 |
| | $ | — |
| | $ | 83.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Derivative Liabilities and Collateral Held by Counterparty |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
Counterparty (with Netting Agreements) | $ | (2.8 | ) | | $ | — |
| | $ | (2.8 | ) | | $ | (0.6 | ) | | $ | — |
| | $ | (2.2 | ) |
Counterparty (without Netting Agreements)1 | (90.3 | ) | | — |
| | (90.3 | ) | | — |
| | — |
| | (90.3 | ) |
Counterparty (with partial Netting Agreements) | (1.7 | ) | | — |
| | (1.7 | ) | | (0.3 | ) | | — |
| | (1.4 | ) |
Total | $ | (94.8 | ) | | $ | — |
| | $ | (94.8 | ) | | $ | (0.9 | ) | | $ | — |
| | $ | (93.9 | ) |
_________________
| |
1 | Such amounts include the fair value of the Bifurcated Conversion Feature and Call Options at September 30, 2013 (see Note 10). |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
The following tables present offsetting information regarding the Company’s derivatives by type of counterparty as of December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Derivative Assets and Collateral Held by Counterparty |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount |
Counterparty (with Netting Agreements) | $ | 2.3 |
| | $ | — |
| | $ | 2.3 |
| | $ | 1.0 |
| | $ | — |
| | $ | 1.3 |
|
Counterparty (without Netting Agreements)1 | 55.9 |
| | — |
| | 55.9 |
| | — |
| | — |
| | 55.9 |
|
Counterparty (with partial Netting Agreements) | 0.3 |
| | — |
| | 0.3 |
| | 0.2 |
| | — |
| | 0.1 |
|
Total | $ | 58.5 |
| | $ | — |
| | $ | 58.5 |
| | $ | 1.2 |
| | $ | — |
| | $ | 57.3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Derivative Liabilities and Collateral Held by Counterparty |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
Counterparty (with Netting Agreements) | $ | (1.7 | ) | | $ | — |
| | $ | (1.7 | ) | | $ | (1.0 | ) | | $ | — |
| | $ | (0.7 | ) |
Counterparty (without Netting Agreements)1 | (63.8 | ) | | — |
| | (63.8 | ) | | — |
| | — |
| | (63.8 | ) |
Counterparty (with partial Netting Agreements) | (1.2 | ) | | — |
| | (1.2 | ) | | (0.2 | ) | | — |
| | (1.0 | ) |
Total | $ | (66.7 | ) | | $ | — |
| | $ | (66.7 | ) | | $ | (1.2 | ) | | $ | — |
| | $ | (65.5 | ) |
_________________
| |
1 | Such amounts include the fair value of the Bifurcated Conversion Feature and Call Options at December 31, 2012 (see Note 10). |
10. Fair Value Measurements
Overview
The Company applies the fair value hierarchy established by GAAP for the recognition and measurement of assets and liabilities. An asset or liability’s fair value classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers counterparty risk in its assessment of fair value.
The fair values of financial assets and liabilities are measured on a recurring basis. The Company has elected not to carry any financial assets and liabilities at fair value, other than as required by GAAP. Financial assets and liabilities that the Company carries at fair value as required by GAAP include: (i) its derivative instruments; (ii) the plan assets of the VEBAs and the Company’s Canadian defined benefit pension plan measured annually at December 31; and (iii) available for sale securities, consisting of debt investment securities and investments related to the Company’s deferred compensation plan (see Note 6).
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
The Company records certain other financial assets and liabilities at carrying value (see the tables below for the fair value disclosure of those assets and liabilities).
The majority of the Company’s non-financial assets and liabilities, which include goodwill, intangible assets, inventories and property, plant, and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill), an evaluation of a non-financial asset or liability is required, potentially resulting in an adjustment to the carrying amount of such asset or liability. For the quarter and nine months ended September 30, 2013 and September 30, 2012, the Company concluded that none of its non-financial assets and liabilities subject to fair value assessments on a non-recurring basis required a material adjustment to the carrying amount of such assets and liabilities (see Note 4).
Fair Values of Financial Assets and Liabilities
Fair Values of Derivative Assets and Liabilities. The Company’s derivative contracts are valued at fair value using significant observable and unobservable inputs.
Commodity, Foreign Currency and Energy Hedges - 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 Company has some derivative contracts, however, that do not have observable market quotes. For these financial instruments, management uses significant other observable inputs (e.g., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors, such as bid/offer spreads.
Bifurcated Conversion Feature and Call Options - The fair value of the Bifurcated Conversion Feature is measured as the difference in the estimated fair value of the Convertible Notes and the estimated fair value of the Convertible Notes without the cash conversion feature. The Convertible Notes are valued based on the trading price of the Convertible Notes each period-end (see “All Other Financial Assets and Liabilities” below). The fair value of the Convertible Notes without the cash conversion feature is the present value of the series of the remaining fixed income cash flows under the Convertible Notes, with a mandatory redemption in 2015.
The Company determines the fair value of the Call Options using a binomial lattice valuation model. The inputs to the model at September 30, 2013 were as follows:
|
| | | |
The Company’s stock price at September 30, 2013 | $ | 71.25 |
|
Quarterly dividend yield (per share) upon purchase of the Call Option1 | $ | 0.24 |
|
Risk-free interest rate2 | 0.21 | % |
Credit spread (basis points)3 | 228 |
|
Expected volatility rate4 | 17.0 | % |
______________________
| |
1 | The quarterly dividend in the third quarter of 2013 was $0.30 per share, but the model assumes a $0.24 per share quarterly dividend as was paid at the inception of the Call Options. Quarterly dividends in excess of $0.24 per share do not affect the Call Options’ value due to anti-dilution adjustments. |
| |
2 | The risk-free rate was based on the 1.5-year Constant Maturity Treasury rate on September 30, 2013. |
| |
3 | The credit spread is based on the Company’s long-term credit rating of BB- issued by Standard & Poor’s and a senior unsecured credit rating of Ba3 issued by Moody’s. |
| |
4 | The volatility rate was based on both observed volatility, which is based on the Company’s historical stock price, and implied volatility from the Company’s traded options. Such volatility was further adjusted to take into consideration market participant risk tolerance. |
VEBA and Canadian Pension Plan Assets. The fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan is measured annually on December 31. In determining the fair value of the plan assets at each annual period end, the Company utilizes primarily the results of valuations supplied by the investment advisors responsible for managing the assets of each plan. See Note 13 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information with respect to the fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan.
Available for sale securities. The Company holds debt investment securities. The fair value of the debt investment securities is determined based on valuation models that use observable market data. Such fair value input is considered a Level 2 input.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
The amortized cost for available for sale securities approximates their fair value. At September 30, 2013, the remaining maturity period with respect to short-term investments ranged from one day to approximately 18 months. In addition to debt investment securities, the Company also holds assets in various investment funds at certain registered investment companies in connection with its deferred compensation program (see Note 6). Such assets are accounted for as available for sale securities and are measured and recorded at fair value based on the net asset value of the investment funds on a recurring basis. Such fair value input is considered either a Level 1 or Level 2 input depending on whether the investment fund is traded on a public exchange.
All Other Financial Assets and Liabilities. The Company believes that the fair value of its cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective carrying values due to their short maturities and nominal credit risk.
The fair value of the Convertible Notes and Senior Notes are based on the trading prices of the notes and are considered a Level 1 input in the fair value hierarchy (see Note 3 for the carrying values of the Convertible Notes and the Senior Notes).
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
The following table presents the Company’s financial instruments, classified under the appropriate level of the fair value hierarchy, as of September 30, 2013: |
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
FINANCIAL ASSETS: | | | | | | | |
Derivative instruments: | | | | | | | |
Aluminum - | | | | | | | |
Fixed priced purchase contracts | $ | — |
| | $ | 0.4 |
| | $ | — |
| | $ | 0.4 |
|
Fixed priced sales contracts | — |
| | 0.1 |
| | — |
| | 0.1 |
|
Electricity - | | | | | | | |
Fixed priced purchase contracts | — |
| | 0.6 |
| | — |
| | 0.6 |
|
Hedges Relating to the Convertible Notes - | | | | | | | |
Call Options | — |
| | 83.2 |
| | — |
| | 83.2 |
|
| | | | | | | |
All Other Financial Assets: | | | | | | | |
Cash and cash equivalents | 89.5 |
| | 135.1 |
| | — |
| | 224.6 |
|
Short-term investments | — |
| | 115.9 |
| | — |
| | 115.9 |
|
Deferred compensation plan asset | — |
| | 6.3 |
| | — |
| | 6.3 |
|
Total Assets | $ | 89.5 |
| | $ | 341.6 |
| | $ | — |
| | $ | 431.1 |
|
| | | | | | | |
FINANCIAL LIABILITIES: | | | | | | | |
Derivative instruments: | | | | | | | |
Aluminum - | | | | | | | |
Fixed priced purchase contracts | $ | — |
| | $ | (1.7 | ) | | $ | — |
| | $ | (1.7 | ) |
Midwest premium swap contracts | — |
| | — |
| | (0.8 | ) | | (0.8 | ) |
Natural Gas - | | | | | | | |
Put option sales contracts | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
Fixed priced purchase contracts | — |
| | (2.0 | ) | | — |
| | (2.0 | ) |
Electricity - | | | | | | | |
Fixed priced purchase contracts | — |
| | (1.3 | ) | | — |
| | (1.3 | ) |
Hedges Relating to the Convertible Notes - | | | | | | | |
|