Edgar Filing: KAISER ALUMINUM CORP

KALU 6.30.2014 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________________ to_________________________________________

Commission File Number: 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 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):



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

As of July 21, 2014, there were 17,871,808 shares of common stock of the registrant outstanding.

TABLE OF CONTENTS



PART I
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3. Quantitative and Qualitative Disclosures About Market Risk	51
Item 4. Controls and Procedures	52

PART II
Item 1. Legal Proceedings	54
Item 1A. Risk Factors	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3. Defaults Upon Senior Securities	54
Item 4. Mine Safety Disclosures	54
Item 5. Other Information	55
Item 6. Exhibits	55

SIGNATURES	56

INDEX OF EXHIBITS	57

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS



	June 30, 2014			December 31, 2013
	(Unaudited)
	(In millions of dollars, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	174.2		$	169.5
Short-term investments	127.2			129.5
Receivables:
Trade, less allowance for doubtful receivables of $0.8 at June 30, 2014 and December 31, 2013	123.1			119.8
Other	11.0			13.4
Inventories	198.1			214.4
Prepaid expenses and other current assets	135.5			44.2
Total current assets	769.1			690.8
Property, plant, and equipment – net	441.4			429.3
Net assets of VEBAs	422.2			406.0
Deferred tax assets – net (including deferred tax liability relating to the VEBAs of $158.4 at June 30, 2014 and $152.4 at December 31, 2013)	45.8			69.1
Intangible assets – net	32.9			33.7
Goodwill	37.2			37.2
Other assets	24.0			104.8
Total	$	1,772.6		$	1,770.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	72.1		$	62.9
Accrued salaries, wages, and related expenses	33.8			42.7
Other accrued liabilities	115.1			44.8
Current portion of long-term debt	167.9			—
Short-term capital lease	0.1			0.2
Total current liabilities	389.0			150.6
Deferred tax liability	1.2			1.2
Long-term liabilities	63.7			146.4
Long-term debt	225.0			388.5
Total liabilities	678.9			686.7
Commitments and contingencies – Note 7
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized at both June 30, 2014 and December 31, 2013; no shares were issued and outstanding at June 30, 2014 and December 31, 2013	—			—
Common stock, par value $0.01, 90,000,000 shares authorized at both June 30, 2014 and at December 31, 2013; 21,236,249 shares issued and 17,932,785 shares outstanding at June 30, 2014; 21,103,700 shares issued and 18,147,017 shares outstanding at December 31, 2013	0.2			0.2
Additional paid in capital	1,026.0			1,023.1
Retained earnings	261.4			233.8
Treasury stock, at cost, 3,303,464 shares at June 30, 2014 and 2,956,683 shares at December 31, 2013, respectively	(176.2		)	(152.2		)
Accumulated other comprehensive loss	(17.7		)	(20.7		)
Total stockholders’ equity	1,093.7			1,084.2
Total	$	1,772.6		$	1,770.9

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENTS OF CONSOLIDATED INCOME



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Unaudited)
	(In millions of dollars, except share and per share amounts)
Net sales	$	344.1		$	328.9		$	679.2		$	666.3
Costs and expenses:
Cost of products sold:
Cost of products sold, excluding depreciation and amortization and other items	275.5			261.5			558.4			525.1
Unrealized (gains) losses on derivative instruments	(1.6		)	4.2			(3.6		)	4.9
Depreciation and amortization	7.7			7.0			15.1			14.0
Selling, administrative, research and development, and general
Selling, administrative, research and development, and general	22.0			21.8			42.3			43.5
Net periodic pension benefit income relating to VEBAs (includes accumulated other comprehensive income reclassifications related to VEBA of $2.0 and $1.4 for the quarters ended June 30, 2014 and June 30, 2013, respectively, and $4.5 and $2.8 for the six months ended June 30, 2014 and June 30, 2013, respectively)	(6.1		)	(5.7		)	(11.7		)	(11.3		)
Total selling, administrative, research and development, and general	15.9			16.1			30.6			32.2
Other operating charges, net	0.2			—			0.2			—
Total costs and expenses	297.7			288.8			600.7			576.2
Operating income	46.4			40.1			78.5			90.1
Other (expense) income:
Interest expense	(9.2		)	(9.0		)	(18.0		)	(18.3		)
Other income (expense), net (includes accumulated other comprehensive income reclassifications for realized gains on available for sale securities of $0.1 and $0.2 for the quarters ended June 30, 2014 and June 30, 2013, respectively, and $0.2 and $0.6 for the six months ended June 30, 2014 and June 30, 2013, respectively)	1.8			(0.8		)	3.7			0.2
Income before income taxes	39.0			30.3			64.2			72.0
Income tax provision (includes aggregate income tax expense from reclassification items of $(0.7) and $(0.4) for the quarters ended June 30, 2014 and June 30, 2013, respectively, and $(1.6) and $(0.8) for the six months ended June 30, 2014 and June 30, 2013, respectively)	(14.5		)	(11.7		)	(23.9		)	(19.9		)
Net income	$	24.5		$	18.6		$	40.3		$	52.1

Earnings per common share, Basic:
Net income per share	$	1.38		$	0.99		$	2.25		$	2.73
Earnings per common share, Diluted:
Net income per share	$	1.33		$	0.98		$	2.18		$	2.70
Weighted-average number of common shares outstanding (in thousands):
Basic	17,841			18,742			17,889			19,027
Diluted	18,458			18,945			18,512			19,256

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



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Unaudited)
	(In millions of dollars)
Net income	$	24.5		$	18.6		$	40.3		$	52.1
Other comprehensive income:
VEBAs:
Reclassification adjustments:
Amortization of net actuarial (gains) losses	(0.6		)	0.4			(0.9		)	0.7
Amortization of prior service cost	2.6			1.0			5.4			2.1
Other comprehensive income relating to VEBAs	2.0			1.4			4.5			2.8
Available for sale securities:
Unrealized gains on available for sale securities	0.2			0.2			0.3			0.5
Reclassification adjustments
Reclassification of unrealized gain upon sale of available for sale securities	(0.1		)	(0.2		)	(0.2		)	(0.6		)
Other comprehensive income (loss) relating to available for sale securities	0.1			—			0.1			(0.1		)
Foreign currency translation adjustment	(0.1		)	0.4			0.1			0.8
Other comprehensive income, before tax	2.0			1.8			4.7			3.5
Income tax benefit (expense) related to items of other comprehensive income	0.1			(0.5		)	(1.7		)	(1.0		)
Other comprehensive income, net of tax	2.1			1.3			3.0			2.5
Comprehensive income	$	26.6		$	19.9		$	43.3		$	54.6

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



	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, 2013	18,147,017		$	0.2	$	1,023.1		$	233.8		$	(152.2	)	$	(20.7	)	$	1,084.2
Net income	—		—		—			40.3			—			—			40.3
Other comprehensive income, net of tax	—		—		—			—			—			3.0			3.0
Issuance of non-vested shares to employees and non-employee directors	118,638		—		—			—			—			—			—
Issuance of common shares to non-employee directors	2,548		—		0.2			—			—			—			0.2
Issuance of common shares to employees upon vesting of restricted stock units and performance shares	44,895		—		—			—			—			—			—
Cancellation of employee non-vested shares	(526	)	—		—			—			—			—			—
Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares	(33,006	)	—		(2.4		)	—			—			—			(2.4		)
Repurchase of common stock	(346,781	)	—		—			—			(24.0		)	—			(24.0		)
Cash dividends on common stock ($0.70 per share)	—		—		—			(12.8		)	—			—			(12.8		)
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest	—		—		0.8			—			—			—			0.8
Amortization of unearned equity compensation	—		—		4.3			—			—			—			4.3
Dividends on unvested equity awards that were canceled	—		—		—			0.1			—			—			0.1
BALANCE, June 30, 2014	17,932,785		$	0.2	$	1,026.0		$	261.4		$	(176.2	)	$	(17.7	)	$	1,093.7

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



	Six Months Ended
	June 30,
	2014			2013
	(Unaudited) (In millions of dollars)
Cash flows from operating activities:
Net income	$	40.3		$	52.1
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment	14.3			13.1
Amortization of definite-lived intangible assets	0.8			0.9
Amortization of debt discount and debt issuance costs	5.8			5.4
Deferred income taxes	22.4			26.1
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest	(0.8		)	(0.9		)
Non-cash equity compensation	4.5			4.7
Non-cash unrealized (gains) losses on derivative positions	(4.9		)	5.4
Non-cash impairment charges	0.2			—
Losses on disposition of property, plant and equipment	0.1			0.1
Gain on disposition of available for sale securities	—			(0.3		)
Non-cash net periodic pension benefit income relating to VEBAs	(11.7		)	(11.3		)
Other non-cash changes in assets and liabilities	0.3			(2.5		)
Changes in operating assets and liabilities:
Trade and other receivables	(0.9		)	(4.5		)
Inventories	16.3			(16.9		)
Prepaid expenses and other current assets¹	(2.1		)	(1.7		)
Accounts payable	12.2			9.1
Accrued liabilities¹	(10.2		)	(0.2		)
Annual variable cash contributions to VEBAs	(16.0		)	(20.0		)
Payable to affiliate	—			(7.9		)
Long-term assets and liabilities, net¹	0.7			(1.8		)
Net cash provided by operating activities	71.3			48.9
Cash flows from investing activities:
Capital expenditures	(30.1		)	(26.0		)
Purchase of available for sale securities	(23.4		)	(98.2		)
Proceeds from disposition of available for sale securities	25.0			135.7
Change in restricted cash	—			0.7
Net cash (used in) provided by investing activities	(28.5		)	12.2
Cash flows from financing activities:
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest	0.8			0.9
Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares	(2.4		)	(2.2		)
Repurchase of common stock	(23.7		)	(39.9		)
Cash dividend paid to stockholders	(12.8		)	(11.6		)
Net cash used in financing activities	(38.1		)	(52.8		)
Net increase in cash and cash equivalents during the period	4.7			8.3
Cash and cash equivalents at beginning of period	169.5			273.4
Cash and cash equivalents at end of period	$	174.2		$	281.7

________________


¹	Excludes the reclassification of derivatives relating to the Convertible Notes from long-term to current as the amounts have no impact on cash flow - see Note 3 and Note 9.

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, 2013.

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, primarily used in aerospace/high strength, general engineering, automotive, and other industrial end market applications. The Company has one operating segment, Fabricated Products. See Note 11 for additional information regarding the Company’s reportable segment and its other business units.

Principles of Consolidation and Basis of Presentation. The accompanying unaudited 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 required by GAAP for complete financial statements. In management’s opinion, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. 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 2014 fiscal year. The financial information as of December 31, 2013 is derived from the Company’s audited consolidated financial statements and footnotes for the year ended December 31, 2013 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. During the quarter and six months ended June 30, 2014, the Company decremented a prior year, higher cost LIFO layer which resulted in charges of $0.6 and $2.4, respectively. The excess of current cost over the stated LIFO value of inventory at June 30, 2014 and December 31, 2013 was $17.4 and $0.4, 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 June 30, 2014 and December 31, 2013 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 $0.8 and $0.7 during the quarters ended June 30, 2014 and June 30, 2013, respectively. The amount of interest expense capitalized as construction in progress was $1.9 and $1.1 for the six months ended June 30, 2014 and June 30, 2013, respectively.

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. For the quarters ended June 30, 2014 and June 30, 2013, the Company recorded depreciation expense of $7.3 and $6.5, respectively, relating to the Company’s operating facilities in its Fabricated Products segment. For the six months ended June 30, 2014 and June 30, 2013, the Company recorded depreciation expense of $14.1 and $13.0, 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 All 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. 2013-11, 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, 2013. The Company’s adoption of ASU 2013-11 in the first quarter of 2014 did not have a material impact on its financial statements.

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), was issued in May 2014. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The Company expects to adopt ASU 2014-09 for the fiscal year ending December 31, 2016 and the Company will continue to assess the impact on its financial statements.

ASU No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period - Consensus of the FASB Emerging Issues Task Force (“ASU 2014-12”), was issued in June 2014. ASU 2014-12 requires an entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Additionally, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered; if the performance target becomes probable of being achieved before the end of the requisite service period, then the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. Finally, the total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest, and should be adjusted to reflect those awards that ultimately vest. An entity is required to adopt ASU 2014-12 for annual and interim periods beginning after December 15, 2015. The Company does not expect the adoption of ASU 2014-12 to have a material impact on its financial statements.

2. Supplemental Balance Sheet Information



	June 30, 2014		December 31, 2013
Cash and Cash Equivalents.
Cash and money market funds	$	69.7	$	57.7
Commercial paper	104.5		111.8
Total	$	174.2	$	169.5



Trade Receivables.
Billed trade receivables	$	123.7		$	120.2
Unbilled trade receivables	0.2			0.4
Trade receivables, gross	123.9			120.6
Allowance for doubtful receivables	(0.8		)	(0.8		)
Trade receivables, net	$	123.1		$	119.8

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	$	60.4	$	72.5
Work-in-process	64.3		75.9
Raw materials	53.3		47.2
Operating supplies and repair and maintenance parts	20.1		18.8
Total	$	198.1	$	214.4



Prepaid Expenses and Other Current Assets.
Current derivative assets – Notes 8 and 9	$	90.3	$	2.0
Current deferred tax assets	36.7		36.7
Short-term restricted cash	0.3		0.3
Prepaid taxes	1.8		—
Other	6.4		5.2
Total	$	135.5	$	44.2



Property, Plant and Equipment - Net.
Land and improvements	$	22.8		$	22.6
Buildings and leasehold improvements	54.7			53.0
Machinery and equipment	491.2			425.6
Construction in progress	24.7			66.0
Active property, plant and equipment, gross	593.4			567.2
Accumulated depreciation	(152.0		)	(137.9		)
Total	$	441.4		$	429.3



Other Assets.
Derivative assets – Notes 8 and 9	$	0.3	$	79.8
Restricted cash	9.3		9.3
Deferred financing costs	6.7		8.9
Deferred compensation plan assets	7.4		6.5
Other	0.3		0.3
Total	$	24.0	$	104.8



Other Accrued Liabilities.
Current derivative liabilities – Notes 8 and 9	$	89.5	$	1.8
Uncleared cash disbursements	9.1		9.6
Accrued income taxes and taxes payable	6.3		4.6
Accrued annual VEBA contribution	—		16.0
Short-term environmental accrual – Note 7	3.6		2.8
Accrued interest	3.6		3.7
Other	3.0		6.3
Total	$	115.1	$	44.8

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)



Long-Term Liabilities.
Derivative liabilities – Notes 8 and 9	$	0.5	$	84.3
Income tax liabilities	5.2		5.0
Workers’ compensation accruals	24.4		23.3
Long-term environmental accrual – Note 7	18.6		20.0
Long-term asset retirement obligations	4.3		4.0
Deferred compensation liability	7.7		7.0
Long-term capital lease	0.1		0.1
Other long-term liabilities	2.9		2.7
Total	$	63.7	$	146.4



Long-Term Debt — Note 3.
Senior notes	$	225.0	$	225.0
Cash convertible senior notes	—		163.5
Total	$	225.0	$	388.5

3. Debt and Credit Facility

Senior Notes

In May 2012, the Company issued $225.0 principal amount of 8.25% Senior Notes due June 1, 2020 (the “Senior Notes”) at 100% of the principal amount. Interest expense, including amortization of deferred financing costs, relating to the Senior Notes was $4.9 and $9.7 for the quarter and six months ended June 30, 2014, respectively. Interest expense, including amortization of deferred financing costs, relating to the Senior Notes was $4.8 and $9.6 for the quarter and six months ended June 30, 2013, respectively. A portion of the interest relating to the Senior Notes 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, 2013 for additional information regarding the Senior Notes.

Cash Convertible Senior Notes

Convertible Notes. In March 2010, the Company issued $175.0 principal amount of 4.50% Cash Convertible Senior Notes due April 1, 2015 (the “Convertible Notes”). The Convertible Notes are unsecured obligations of the Company. 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:



	June 30, 2014			December 31, 2013
Principal amount	$	175.0		$	175.0
Less: unamortized issuance discount	(7.1		)	(11.5		)
Carrying amount, net of discount	$	167.9		$	163.5

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 June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Contractual coupon interest	$	1.9	$	1.9	$	3.9	$	3.9
Amortization of discount	2.3		2.1		4.4		4.0
Amortization of deferred financing costs	0.3		0.3		0.6		0.6
Total interest expense¹	$	4.5	$	4.3	$	8.9	$	8.5

____________


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, including, but not limited to, the payment of quarterly cash dividends on the Company’s common stock in excess of $0.24 per share. As of June 30, 2014 the conversion rate was 20.8549 shares per $1,000 principal amount of the Convertible Notes and the equivalent conversion price was approximately $47.95 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 and, in certain limited circumstances, before January 1, 2015. Pursuant to one of the early conversion provisions, if the Company's closing stock price exceeds 130% of the conversion price for 20 trading days during the final 30 consecutive trading days of a quarter, holders may convert the Convertible Notes during the following quarter. Under this provision, holders were able to convert during the second quarter of this year, and an immaterial amount of Convertible Notes was presented for conversion during the second quarter of 2014 for settlement in the third quarter. This provision was also triggered at June 30, 2014, allowing holders to present Convertible Notes for early conversion during the third quarter of 2014.

During the second quarter of 2014, the Convertible Notes were reclassified as current liability and the carrying amount, net of discount, was included in the Consolidated Balance Sheet as Current portion of long-term debt as of June 30, 2014.

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 will cover 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”) which are exercisable on a prorated basis for 120 trading days commencing July 1, 2015 relating to approximately 3.6 million shares of the Company’s common stock. The Call Option and the Warrants have anti-dilution provisions substantially similar to the Convertible Notes. At June 30, 2014, the exercise prices were $47.95 per share and $60.89 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, 2013 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 9 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 $258.3 of borrowing availability under the Revolving Credit Facility at June 30, 2014, based on the borrowing base determination then in effect. At June 30, 2014, there were no borrowings under the Revolving Credit Facility and $7.4 was being used to support outstanding letters of credit, leaving $250.9 of net borrowing availability. The interest rate applicable to any overnight borrowings under the Revolving Credit Facility would have been 4.0% at June 30, 2014.

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)

4. Income Tax Matters

The provision for incomes taxes, for each period presented, consisted of the following:



	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Domestic	$	13.9	$	11.1	$	23.0	$	26.5
Foreign	0.6		0.6		0.9		(6.6		)
Total	$	14.5	$	11.7	$	23.9	$	19.9

The income tax provision for the quarters ended June 30, 2014 and June 30, 2013 was $14.5 and $11.7, reflecting an effective tax rate of 37.0% and 38.6%, respectively. There was no material difference between the effective tax rate and the projected blended statutory tax rate for the quarter ended June 30, 2014.

The difference between the effective tax rate and the projected blended statutory tax rate for the quarter ended June 30, 2013 was primarily the result of an increase in unrecognized tax benefits, including interest and penalties, of $0.3, resulting in a 0.9% increase in the effective tax rate.

The income tax provision for the six months ended June 30, 2014 and June 30, 2013 was $23.9 and $19.9, reflecting an effective tax rate of 37.2% and 27.7%, respectively. There was no material difference between the effective tax rate and the projected blended statutory tax rate for the six months ended June 30, 2014.

The difference between the effective tax rate and the projected blended statutory tax rate for the six months ended June 30, 2013 was the result of a decrease in unrecognized tax benefits, including interest and penalties, of $7.2, resulting in a 10.0% decrease in the effective tax rate. The decrease in unrecognized tax benefits was primarily a result of an audit settlement with the Canada Revenue Agency Competent Authority on February 28, 2013 for the 1998-2004 tax years which resulted in a cash tax benefit to the Company of $7.7, of which $7.2 has been received as of June 30, 2014. In addition, during the third quarter of 2013, the Company signed an advance pricing agreement with the Canada Revenue Agency, which resulted in an additional cash tax benefit of $2.8, which is expected to be refunded within the next 12 months.

The Company’s gross unrecognized benefits relating to uncertain tax positions was $3.8 at both June 30, 2014 and December 31, 2013, of which, $2.7 will go through the Company’s income tax provision and thus impact the effective tax rate at both June 30, 2014 and December 31, 2013, if and when the gross unrecognized tax benefits are recognized.

The Company expects its gross unrecognized tax benefits to be reduced by $1.8 within the next 12 months.

See Note 6 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, 2013 for additional information regarding income taxes.

5. 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 Forestry, 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 7 and Note 8 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, 2013 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 and two of which are appointed by the USW. Its assets are managed by an independent fiduciary. The Salaried VEBA is managed by trustees who are independent of the Company.

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 has no ownership interest in the assets of the VEBAs nor any obligation to fund their liabilities. The benefits paid by the VEBAs to the plan participants are made 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) an annual variable cash contribution (described below) and (ii) reimbursement of annual administrative expenses of the VEBAs up to $0.3 in the aggregate. Nevertheless, the Company accounts for the VEBAs as defined benefit postretirement plans with the maximum benefits payable equal to the total of the current VEBA assets and any future variable contributions from the Company and earnings thereon.

Under this accounting treatment, the funding status of the VEBAs is reflected as a net asset or liability on the Company's Consolidated Balance Sheets, but such net asset or liability has no impact on the Company's cash flow or liquidity. The only impact that the VEBAs have on the Company’s cash flow or liquidity is with respect to the Company's obligations to make an annual variable cash contribution and to reimburse a portion of the VEBAs’ administrative expenses. The amount of annual variable cash contribution to be made by the Company is determined as follows: 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 in Other accrued liabilities (until paid in cash), with a corresponding increase in Net assets of VEBAs, a decrease in Net liabilities of VEBAs, or a combination thereof. The annual variable cash contributions with respect to 2013 and 2012 totaled $16.0 and $20.0 at December 31, 2013 and December 31, 2012, respectively, and were paid during the subsequent first quarters.

Components of Net Periodic Pension Benefit (Income) Cost. The Company’s results of operations included the following impacts associated with the VEBAs and the Canadian defined benefit plan: (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 six months ended June 30, 2014 and June 30, 2013. 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 six months ended June 30, 2014 and June 30, 2013:



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
VEBAs:
Service cost	$	0.5		$	0.7		$	1.1		$	1.3
Interest cost	4.2			3.7			8.3			7.3
Expected return on plan assets	(12.8		)	(11.5		)	(25.6		)	(22.7		)
Amortization of prior service cost	2.6			1.0			5.4			2.1
Amortization of net actuarial (gain) loss	(0.6		)	0.4			(0.9		)	0.7
Total net periodic pension benefit (income) expense relating to VEBAs	(6.1		)	(5.7		)	(11.7		)	(11.3		)
Deferred compensation plan	0.4			—			0.6			0.4
Defined contribution plans	1.5			1.3			5.5			5.3
Multiemployer pension plans	0.9			0.9			1.8			1.7
Total	$	(3.3	)	$	(3.5	)	$	(3.8	)	$	(3.9	)

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 allocation of the (income) charges detailed above, by reportable segment and business unit (see Note 11):



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Fabricated Products	$	2.3		$	2.0		$	6.9		$	6.6
All Other	(5.6		)	(5.5		)	(10.7		)	(10.5		)
Total	$	(3.3	)	$	(3.5	)	$	(3.8	)	$	(3.9	)

For all periods presented, the net periodic pension benefit income relating to the VEBAs are included as Net periodic pension benefit income relating to VEBAs 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 remaining balance in Selling, administrative, research and development, and general.

See Note 7 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 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.

6. Employee Incentive Plans

Short-Term Incentive Plans (“STI Plans”)

The Company has annual short-term incentive compensation plans 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 2013 STI plan were based primarily on the economic value added (“EVA”) of the Company’s Fabricated Products business, adjusted for certain safety and individual 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. Amounts, if any, that will be earned under the 2014 STI plan are based on the Company’s adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBIDTA”), modified for certain safety, quality, delivery, cost and individual performance factors. The Adjusted EBITDA targets under the 2014 STI plan were determined based on the EVA of the Company’s Fabricated Products business. 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:



	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Cost of products sold, excluding depreciation and amortization and other items	$	1.4	$	1.3	$	2.5	$	2.4
Selling, administrative, research and development, and general	3.2		3.5		4.5		6.5
Total costs recorded in connection with STI Plans	$	4.6	$	4.8	$	7.0	$	8.9

The following table presents the allocation of the charges detailed above, by segment:



	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Fabricated Products	$	3.5	$	3.3	$	5.4	$	6.2
All Other	1.1		1.5		1.6		2.7
Total costs recorded in connection with STI Plans	$	4.6	$	4.8	$	7.0	$	8.9

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)

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 June 30, 2014, 698,231 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. Performance shares granted prior to 2014 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 under the prior year programs and result in the issuance of common shares depends on the average annual EVA achieved for the specified three-year performance period. Performance shares granted in 2014 are subject to market-based requirements pertaining to the Company’s total shareholder return (“TSR”) over a three-year performance period compared to the TSR of a specified group of peer companies. The number of performance shares, if any, that will ultimately vest under the 2014-2016 LTI program and result in the issuance of common shares depends on the percentile ranking of the Company’s TSR compared to the group of peer companies.

During the first quarter of 2014, a portion of the performance shares granted under the 2011-2013 LTI program vested (see “Summary of Activity” below). The vesting of performance shares and resulting issuance and delivery of common shares, if any, under the 2012-2014 and 2013-2015 LTI programs will occur in 2015 and 2016, respectively. The vesting of performance shares and resulting issuance and delivery of common shares, if any, under the 2014-2016 LTI program will occur in 2017. Holders of performance shares do not receive voting rights through the ownership of such shares.

See Note 9 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, 2013 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. Non-cash compensation expense by type of award under LTI Programs were as follows, for each period presented:



	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Service-based non-vested common shares and restricted stock units	$	1.2	$	0.8	$	2.3	$	2.5
Performance shares	0.5		1.1		1.0		2.0
Market-based shares	0.6		—		1.0		—
Total non-cash compensation expense	$	2.3	$	1.9	$	4.3	$	4.5

The following table presents the allocation of the charges detailed above, by segment:



	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Fabricated Products	$	1.1	$	0.6	$	2.1	$	1.2
All Other	1.2		1.3		2.2		3.3
Total non-cash compensation expense	$	2.3	$	1.9	$	4.3	$	4.5

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)

Unrecognized Gross Compensation Cost Data. The following table presents unrecognized gross compensation cost data as of June 30, 2014:



	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	$	9.5	2.9
Performance shares	$	3.0	1.5
Market-based shares	$	5.7	2.6

Summary of Activity. A summary of the activity with respect to non-vested common shares, restricted stock units and performance shares for the six months ended June 30, 2014 is as follows:



	Non-Vested Common Shares				Restricted Stock Units				Performance Shares				Performance Shares (Market-Based)
	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		Shares		Weighted-Average Grant-Date Fair Value per Share
Outstanding at December 31, 2013	143,967		$	51.09	5,472		$	51.03	562,554		$	49.26	—		—
Granted	118,638		66.31		2,235		67.42		—		—		160,868		83.18
Vested	(62,659	)	52.43		(2,350	)	46.83		(42,545	)	47.04		—		—
Forfeited	(526	)	55.03		—		—		(1,682	)	50.40		(235	)	83.18
Canceled	—		—		—		—		(139,384	)	46.77		—		—
Outstanding at June 30, 2014	199,420		$	59.71	5,357		$	59.71	378,943		$	50.43	160,633		83.18

A summary of select activity with respect to non-vested common shares, restricted stock units and performance shares for the six months ended June 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
Granted	74,236		$	58.49	2,600		$	57.70	170,298		$	57.57
Vested	(81,161	)	$	41.67	(2,311	)	$	42.74	(32,312	)	$	34.13

Stock Options. The Company has fully-vested stock options from a one-time issuance in 2007. As of both June 30, 2014 and December 31, 2013, 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 2.75 and 3.25 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 six months ended June 30, 2014.

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 each six months period ended June 30, 2014 and June 30, 2013, 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.

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)

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 or earlier dates when service requirements are satisfied, 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 six months ended June 30, 2014 and June 30, 2013, 33,006 and 36,221 common shares, respectively, were withheld and canceled for this purpose. The withholding of common shares by us could be deemed a purchase of the common shares.

7. 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 8).

Refer to Note 10 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, 2013 for information relating to minimum rental commitments under operating leases and purchase obligations. There were no material changes to such scheduled rental commitments and purchase obligations as of June 30, 2014.

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.

In 2012, the Company submitted a final feasibility study to the Washington State Department of Ecology (“Washington State Ecology”) that included recommendations for remediation alternatives primarily to address the historical use of oils containing polychlorinated biphenyls, ("PCBs") at the Company’s Spokane (Trentwood), Washington facility. The Company also signed an amended work order in 2012 with Washington State Ecology allowing certain remediation activities to begin the initiation of a treatability study in regards to proposed PCB remediation methods. The Company began implementation of certain approved sections of the work plan during the third quarter of 2013 and continues to work with Washington State Ecology in developing the implementation work plans, which are subject to Washington State Ecology approval.

During 2013, at the request of the Ohio Environmental Protection Agency (the “OEPA”), the Company initiated an investigational study of its Newark, Ohio facility related to historical on-site waste disposal. As this work continues and progresses to a risk assessment and feasibility study, the Company will establish and update estimates for probable and estimable remediations, if any. The actual and final cost for remediation will not be fully determinable until a final feasibility study is submitted and accepted by the OEPA and work plans are prepared, which is expected to occur in the next 18 to 24 months.

At June 30, 2014, the Company’s environmental accrual of $22.2 represented the Company’s estimate of the incremental remediation cost based on proposed alternatives in the final feasibility study related to the Company’s Spokane (Trentwood), Washington facility and currently available facts with respect to its Newark, Ohio facility and certain other locations owned or formally owned by the Company. In accordance with approved and proposed remediation action plans, the Company expects that the implementation and ongoing monitoring could occur over a period of 30 or more 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 $24.9 over the remediation period. It is reasonably possible that the Company’s recorded estimate may change in the next 12 months. Refer to Note 10 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, 2013 for information relating to environmental contingencies.

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 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 accrued 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.

8. 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. 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).

The Company’s derivative activities are overseen by the Hedging Committee, which is composed of the chief executive officer, the chief financial officer, the chief accounting officer, the vice president of metal risk and other officers and employees that the chief executive officer selects. The Hedging Committee meets regularly to review derivative positions and strategy and reports to the Company’s Board of Directors on the scope of its activities.

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 through to its customers. However, in certain instances the Company enters into firm-price arrangements with its customers for stipulated volumes to be delivered in the future. Because the Company generally purchases primary and secondary aluminum on a floating price basis, the volume that it has committed to sell to its customers under a firm-price arrangement creates metal price risks for the Company. The Company uses third-party hedging instruments to limit exposure to metal price risks related to firm-price customer sales contracts. See Note 9 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 June 30, 2014 and December 31, 2013 was $0.2 and $1.6, respectively.

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 six months ended June 30, 2014 and June 30, 2013, total fabricated products shipments that contained firm-price terms were (in millions of pounds) 68.5 and 58.2, respectively. At June 30, 2014, 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 2014, and 2015, totaling approximately (in millions of pounds) 49.3 and 4.3, 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, if any, from the Call Options will substantially offset the realized loss, if any, of the Bifurcated Conversion Feature upon maturity of the Convertible Notes. However, because assumptions used to determine the fair values of the Call Option and the Bifurcated Conversion Feature are not identical, net unrealized mark-to-market gains and losses on the two derivatives are recorded from quarter to quarter. See Note 9 for additional information regarding the fair values of the Call Options and the Bifurcated Conversion Feature.

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 gains (losses) associated with all derivative contracts consisted of the following, for each period presented:



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Realized gains (losses):
Aluminum	$	1.3		$	(1.6	)	$	2.1		$	(1.6	)
Natural Gas	0.5			(0.1		)	1.2			(0.8		)
Electricity	(0.5		)	(0.1		)	—			(0.1		)
Total realized gains (losses)	$	1.3		$	(1.8	)	$	3.3		$	(2.5	)
Unrealized gains (losses):
Aluminum	$	0.6		$	(1.8	)	$	2.3		$	(6.2	)
Natural Gas	(0.2		)	(1.9		)	0.6			0.8
Electricity	1.2			(0.6		)	0.7			0.6
Foreign Currency	(0.1		)	0.1			(0.1		)	(0.1		)
Call Options relating to the Convertible Notes	2.5			(9.1		)	6.9			(3.1		)
Bifurcated Conversion Feature of the Convertible Notes	(2.0		)	8.2			(5.5		)	2.6
Total unrealized gains (losses)	$	2.0		$	(5.1	)	$	4.9		$	(5.4	)

The following table summarizes the Company’s material derivative positions at June 30, 2014:



Aluminum	Maturity Period (month/year)	Notional Amount of contracts (mmlbs)
Fixed price purchase contracts	7/14 through 12/15	44.1
Fixed price sales contracts	7/14 through 12/14	1.3
Midwest premium swap contracts¹	7/14 through 12/15	42.3



Natural Gas²	Maturity Period (month/year)	Notional Amount of contracts (mmbtu)
Fixed price purchase contracts	7/14 through 12/16	6,150,000



Electricity	Maturity Period (month/year)	Notional Amount of contracts (Mwh)
Fixed price purchase contracts	7/14 through 12/15	285,625



Hedges Relating to the Convertible Notes	Contract Period (month/year)	Notional Amount of contracts (Common Shares)
Bifurcated Conversion Feature³	3/10 through 3/15	3,649,608
Call Options³	3/10 through 3/15	3,649,608

______________________


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 June 30, 2014, the Company’s exposure to fluctuations in natural gas prices had been substantially reduced for approximately 88%, 82% and 30% of the expected natural gas purchases for the remainder of 2014, 2015 and 2016, respectively.

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 June 30, 2014:



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)	$	2.0	$	—	$	2.0	$	0.8	$	—	$	1.2
Counterparty (without Netting Agreements)¹	87.6		—		87.6		—		—		87.6
Counterparty (with partial Netting Agreements)	1.0		—		1.0		0.3		—		0.7
Total	$	90.6	$	—	$	90.6	$	1.1	$	—	$	89.5



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)	$	(0.8	)	$	—	$	(0.8	)	$	(0.8	)	$	—	$	—
Counterparty (without Netting Agreements)¹	(88.7		)	—		(88.7		)	—			—		(88.7		)
Counterparty (with partial Netting Agreements)	(0.5		)	—		(0.5		)	(0.3		)	—		(0.2		)
Total	$	(90.0	)	$	—	$	(90.0	)	$	(1.1	)	$	—	$	(88.9	)

_________________


¹	Such amounts include the fair value of the Bifurcated Conversion Feature and Call Options at June 30, 2014 (see Note 9).

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, 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)	$	1.0	$	—	$	1.0	$	0.8	$	—	$	0.2
Counterparty (without Netting Agreements)¹	80.4		—		80.4		—		—		80.4
Counterparty (with partial Netting Agreements)	0.4		—		0.4		0.4		—		—
Total	$	81.8	$	—	$	81.8	$	1.2	$	—	$	80.6



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)	$	(1.6	)	$	—	$	(1.6	)	$	(0.8	)	$	—	$	(0.8	)
Counterparty (without Netting Agreements)¹	(83.2		)	—		(83.2		)	—			—		(83.2		)
Counterparty (with partial Netting Agreements)	(1.3		)	—		(1.3		)	(0.4		)	—		(0.9		)
Total	$	(86.1	)	$	—	$	(86.1	)	$	(1.2	)	$	—	$	(84.9	)

_________________


¹	Such amounts include the fair value of the Bifurcated Conversion Feature and Call Options at December 31, 2013 (see Note 9).

9. 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 evaluated and measured on a recurring basis. As part of that evaluation process, the Company reviews the underlying inputs that are significant to the fair value measurement of financial instruments to determine if a transfer among hierarchy levels is appropriate. The Company historically has not had significant transfers into or out of each hierarchy level.

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)

Financial assets and liabilities that the Company measures 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 5). 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 measured 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 six months ended June 30, 2014 and June 30, 2013, 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.

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, Energy and Foreign Currency Derivatives - 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, however, has some derivative contracts that do not have observable market quotes. For these financial instruments, management uses significant unobservable inputs (e.g., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors, such as bid/offer spreads. The fair value of these financial instruments are classified as Level 3 in the fair value hierarchy.

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 maturity of April 1, 2015. During the second quarter of 2014, the Bifurcated Conversion Feature and Call Options were reclassified as current liabilities and assets, respectively, and were included in the Consolidated Balance Sheet as a portion of Other accrued liabilities and Prepaid expenses and other current assets, respectively, as of June 30, 2014.

The Company determines the fair value of the Call Options using a binomial lattice valuation model. The inputs to the model at June 30, 2014 were as follows:



The Company’s stock price at June 30, 2014	$	72.87
Quarterly dividend yield (per share) upon purchase of the Call Option¹	$	0.24
Risk-free interest rate²	0.08		%
Credit spread (basis points)³	130
Expected volatility rate⁴	17.0		%

______________________


¹	The quarterly dividend in the second quarter of 2014 was $0.35 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 six-month Constant Maturity Treasury rate and one-year Constant Maturity Treasury rate on June 30, 2014.


³	The credit spread is based on the Company’s long-term credit rating of BB issued by Standard & Poor’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.

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 aggregate fair value of our derivatives, recorded on the Consolidated Balance Sheets at June 30, 2014 and December 31, 2013, was a net asset of $0.6 and a net liability of $4.3, respectively. The increase in net position from liability to asset during the six months ended June 30, 2014 was primarily due to changes in the underlying commodity and energy prices during such period. Changes in the fair value of our derivative contracts relating to operational hedging activities are reflected in operating income. Such changes in the fair value of these contracts resulted in the recognition of a $3.5 unrealized mark-to-market gain during the six months ended June 30, 2014.

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 12 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, 2013 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, which consist of commercial paper and corporate bonds, is determined based on valuation models that use observable market data. At June 30, 2014, the remaining maturity period with respect to short-term investments ranged from 32 days to approximately nine 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 5). 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. The fair value input of the available for sale securities is considered either a Level 1 or Level 2 input depending on whether the debt security or investment fund is traded on a public exchange. The amortized cost for available for sale securities approximates their fair value.

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 is based on their trading prices and is 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 June 30, 2014:



	Level 1		Level 2			Level 3		Total
FINANCIAL ASSETS:
Derivative Instruments:
Aluminum -
Fixed price purchase contracts	$	—	$	0.8		$	—	$	0.8
Midwest premium swap contracts	—		—			1.4		1.4
Natural Gas -
Fixed price purchase contracts	—		0.9			—		0.9
Electricity -
Fixed price purchase contracts	—		1.0			—		1.0
Hedges Relating to the Convertible Notes -
Call Options	—		86.5			—		86.5

All Other Financial Assets:
Cash and cash equivalents	69.7		104.5			—		174.2
Short-term investments	—		127.2			—		127.2
Deferred compensation plan asset	—		7.4			—		7.4
Total assets	$	69.7	$	328.3		$	1.4	$	399.4

FINANCIAL LIABILITIES:
Derivative Instruments:
Aluminum -
Fixed price purchase contracts	$	—	$	(0.5	)	$	—	$	(0.5	)
Natural Gas -
Fixed price purchase contracts	—		(0.6		)	—		(0.6		)
Electricity -
Fixed price purchase contracts	—		(0.2		)	—		(0.2		)
Hedges Relating to the Convertible Notes -
Bifurcated Conversion Feature	—		(88.7		)	—		(88.7		)

All Other Financial Liabilit