Document
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 March 31, 2018 |
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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: 1-09447
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.) |
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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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (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 |
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| Emerging growth company o |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 23, 2018, there were 16,760,939 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 (UNAUDITED)
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| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (In millions of dollars, except share and per share amounts) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 135.0 |
| | $ | 51.1 |
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Short-term investments | 83.8 |
| | 183.7 |
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Receivables: | | | |
Trade receivables, net | 185.3 |
| | 165.0 |
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Other | 18.2 |
| | 15.5 |
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Contract assets | 57.5 |
| | — |
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Inventories | 176.8 |
| | 207.9 |
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Prepaid expenses and other current assets | 25.7 |
| | 33.4 |
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Total current assets | 682.3 |
| | 656.6 |
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Property, plant and equipment, net | 578.7 |
| | 571.4 |
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Deferred tax assets, net | 63.7 |
| | 72.0 |
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Intangible assets, net | 24.6 |
| | 25.0 |
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Goodwill | 18.8 |
| | 18.8 |
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Other assets | 37.3 |
| | 41.4 |
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Total | $ | 1,405.4 |
| | $ | 1,385.2 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 120.2 |
| | $ | 90.0 |
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Accrued salaries, wages and related expenses | 28.7 |
| | 42.6 |
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Other accrued liabilities | 35.6 |
| | 40.5 |
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Total current liabilities | 184.5 |
| | 173.1 |
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Net liabilities of Salaried VEBA | 31.9 |
| | 31.9 |
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Deferred tax liabilities | 4.3 |
| | 4.3 |
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Long-term liabilities | 61.3 |
| | 60.0 |
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Long-term debt | 369.8 |
| | 369.6 |
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Total liabilities | 651.8 |
| | 638.9 |
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Commitments and contingencies – Note 6 |
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Stockholders' equity: | | | |
Preferred stock, 5,000,000 shares authorized at both March 31, 2018 and December 31, 2017; no shares were issued and outstanding at March 31, 2018 and December 31, 2017 | — |
| | — |
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Common stock, par value $0.01, 90,000,000 shares authorized at both March 31, 2018 and at December 31, 2017; 22,460,642 shares issued and 16,782,536 shares outstanding at March 31, 2018; 22,393,537 shares issued and 16,773,586 shares outstanding at December 31, 2017 | 0.2 |
| | 0.2 |
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Additional paid in capital | 1,051.8 |
| | 1,055.9 |
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Retained earnings | 111.7 |
| | 85.5 |
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Treasury stock, at cost, 5,678,106 shares at March 31, 2018 and 5,619,951 shares at December 31, 2017, respectively | (364.7 | ) | | (358.6 | ) |
Accumulated other comprehensive loss | (45.4 | ) | | (36.7 | ) |
Total stockholders' equity | 753.6 |
| | 746.3 |
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Total | $ | 1,405.4 |
| | $ | 1,385.2 |
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The accompanying notes to interim consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
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| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
| (In millions of dollars, except share and per share amounts) |
Net sales | $ | 388.0 |
| | $ | 355.3 |
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Costs and expenses: | | | |
Cost of products sold, excluding depreciation and amortization and other items1 | 316.7 |
| | 262.7 |
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Depreciation and amortization | 10.5 |
| | 9.6 |
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Selling, general, administrative, research and development2 | 23.6 |
| | 23.7 |
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Other operating charges, net
| 0.1 |
| | — |
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Total costs and expenses | 350.9 |
| | 296.0 |
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Operating income | 37.1 |
| | 59.3 |
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Other (expense) income: | | | |
Interest expense | (5.6 | ) | | (5.6 | ) |
Other income, net – Note 9 | 0.1 |
| | 0.8 |
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Income before income taxes | 31.6 |
| | 54.5 |
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Income tax provision | (5.9 | ) | | (18.5 | ) |
Net income | $ | 25.7 |
| | $ | 36.0 |
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Net income per common share: | | | |
Basic | $ | 1.54 |
| | $ | 2.07 |
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Diluted | $ | 1.51 |
| | $ | 2.04 |
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Weighted-average number of common shares outstanding (in thousands): | | | |
Basic | 16,707 |
| | 17,385 |
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Diluted | 17,031 |
| | 17,603 |
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| | | |
Dividends declared per common share | $ | 0.55 |
| | $ | 0.50 |
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____________________
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1 | See Note 4 for discussion of our adoption of ASU 2017-12 (as defined in Note 1) and the related reclassification of amounts previously presented in the Statements of Consolidated Income within Unrealized (gain) loss on derivative instruments and now included within Cost of products sold, excluding depreciation and amortization and other items. |
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2 | See Note 1 for discussion of our adoption of ASU 2017-07 (as defined in Note 1) and the related reclassification of amounts previously presented in the Statements of Consolidated Income within Selling, general, administrative, research and development and now included within Other (expense) income. |
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
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| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
| (In millions of dollars) |
Net income | $ | 25.7 |
| | $ | 36.0 |
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Other comprehensive (loss) income, net of tax – Note 7: | | | |
Defined benefit pension plan and Salaried VEBA | 1.2 |
| | 0.9 |
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Available for sale securities | (0.2 | ) | | 0.1 |
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Cash flow hedges | (9.3 | ) | | 0.3 |
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Other comprehensive (loss) income, net of tax | (8.3 | ) | | 1.3 |
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Comprehensive income | $ | 17.4 |
| | $ | 37.3 |
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The accompanying notes to interim consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (UNAUDITED)
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
| (In millions of dollars, except share and per share amounts) |
BALANCE, December 31, 2017 | 16,773,586 |
| | $ | 0.2 |
| | $ | 1,055.9 |
| | $ | 85.5 |
| | $ | (358.6 | ) | | $ | (36.7 | ) | | $ | 746.3 |
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Cumulative-effect adjustment1 | — |
| | — |
| | — |
| | 10.5 |
| | — |
| | (0.4 | ) | | 10.1 |
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BALANCE, January 1, 2018 | 16,773,586 |
| | $ | 0.2 |
| | $ | 1,055.9 |
| | $ | 96.0 |
| | $ | (358.6 | ) | | $ | (37.1 | ) | | $ | 756.4 |
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Net income | — |
| | — |
| | — |
| | 25.7 |
| | — |
| | — |
| | 25.7 |
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Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (8.3 | ) | | (8.3 | ) |
Issuance of common shares to employees upon vesting of restricted stock units and performance shares | 135,134 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares | (68,029 | ) | | — |
| | (6.9 | ) | | — |
| | — |
| | — |
| | (6.9 | ) |
Repurchase of common stock | (58,155 | ) | | — |
| | — |
| | — |
| | (6.1 | ) | | — |
| | (6.1 | ) |
Cash dividends on common stock and restricted shares and dividend equivalents on restricted stock units and performance shares | — |
| | — |
| | — |
| | (10.0 | ) | | — |
| | — |
| | (10.0 | ) |
Amortization of unearned equity compensation | — |
| | — |
| | 2.8 |
| | — |
| | — |
| | — |
| | 2.8 |
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BALANCE, March 31, 2018 | 16,782,536 |
| | $ | 0.2 |
| | $ | 1,051.8 |
| | $ | 111.7 |
| | $ | (364.7 | ) | | $ | (45.4 | ) | | $ | 753.6 |
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1 | See Note 1 for discussion of our adoption of ASC 606 and ASU 2016-01 (as defined in Note 1). |
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
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| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
| (In millions of dollars) |
Cash flows from operating activities: | | | |
Net income | $ | 25.7 |
| | $ | 36.0 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation of property, plant and equipment | 10.1 |
| | 9.2 |
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Amortization of definite-lived intangible assets | 0.4 |
| | 0.4 |
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Amortization of debt discount and debt issuance costs | 0.3 |
| | 0.3 |
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Deferred income taxes | 7.9 |
| | 18.1 |
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Non-cash equity compensation | 2.8 |
| | 3.0 |
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Gain on disposition of available for sale securities | (1.1 | ) | | (0.7 | ) |
Non-cash unrealized loss (gain) on derivative instruments | — |
| | (15.1 | ) |
Non-cash asset impairment charge | 0.1 |
| | — |
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Other non-cash changes in assets and liabilities | 8.1 |
| | (0.1 | ) |
Changes in operating assets and liabilities: | | | |
Trade and other receivables | (23.0 | ) | | (19.2 | ) |
Contract assets | (1.9 | ) | | — |
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Inventories | (9.6 | ) | | (1.9 | ) |
Prepaid expenses and other current assets | (2.2 | ) | | (3.3 | ) |
Accounts payable | 32.0 |
| | 9.4 |
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Accrued liabilities | (7.3 | ) | | (11.4 | ) |
Annual variable cash contributions to VEBAs | (15.7 | ) | | (20.0 | ) |
Long-term assets and liabilities, net | (0.5 | ) | | (0.6 | ) |
Net cash provided by operating activities1 | 26.1 |
| | 4.1 |
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Cash flows from investing activities2: | | | |
Capital expenditures | (19.7 | ) | | (14.8 | ) |
Purchase of available for sale securities | — |
| | (74.7 | ) |
Proceeds from disposition of available for sale securities | 100.3 |
| | 110.9 |
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Net cash provided by investing activities | 80.6 |
| | 21.4 |
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Cash flows from financing activities2: | | | |
Repayment of capital lease | (0.2 | ) | | (0.2 | ) |
Cancellation of shares to cover employees' tax withholdings upon vesting of non-vested shares | (6.9 | ) | | (4.4 | ) |
Repurchase of common stock | (5.7 | ) | | (32.6 | ) |
Cash dividends and dividend equivalents paid | (10.0 | ) | | (9.3 | ) |
Net cash (used in) financing activities | (22.8 | ) | | (46.5 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash during the period | 83.9 |
| | (21.0 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 64.3 |
| | 67.7 |
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Cash, cash equivalents and restricted cash at end of period | $ | 148.2 |
| | $ | 46.7 |
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____________________
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1 | See Note 8 for adjustments made to arrive at our Consolidated Balance Sheet as of January 1, 2018 upon adopting ASC 606 (as defined in Note 1). |
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2 | See Note 12 for the supplemental disclosure on non-cash transactions. |
The accompanying notes to interim consolidated financial statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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, 2017. Unless the context otherwise requires, references in these notes to interim consolidated financial statements - unaudited to "Kaiser Aluminum Corporation," "we," "us," "our," "the Company" and "our Company" refer collectively to Kaiser Aluminum Corporation and its subsidiaries.
Organization and Nature of Operations. Kaiser Aluminum Corporation specializes in the production of semi-fabricated specialty aluminum mill products, such as aluminum plate and sheet and extruded and drawn products, for the following end market applications: aerospace and high strength ("Aero/HS products"), automotive applications ("Automotive Extrusions"), general engineering ("GE products") and other industrial ("Other products"). Our business is organized into one operating segment, Fabricated Products. See Note 13 for additional information regarding our reportable segment and business unit.
Principles of Consolidation and Basis of Presentation. The accompanying unaudited consolidated financial statements include the accounts of our 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 ("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 our interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2018 fiscal year. The financial information as of December 31, 2017 is derived from our audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2017. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation. On the Statements of Consolidated Income, prior period presentation of Unrealized loss (gain) on derivative instruments is now contained within "Cost of products sold, excluding depreciation and amortization and other items." See Note 4 for additional details.
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 our 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 our consolidated financial position and results of operations.
Fair Value Measurements. We apply the fair value hierarchy established by GAAP for the recognition and measurement of certain financial 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, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty risk in our assessment of fair value. We also review the underlying inputs that are significant to the fair value measurement of financial instruments to determine if a transfer among hierarchy levels is appropriate. We historically have not had significant transfers into or out of each hierarchy level.
Financial assets and liabilities that we measure at fair value each period include our derivative instruments, equity investments related to our deferred compensation plan and debt investment securities classified as available for sale securities (see Note 3). Additionally, we measure at fair value once each year at December 31 the plan assets of the Salaried VEBA (defined in Note 3) and our Canadian defined benefit pension plan. We record our remaining financial assets and liabilities at carrying value.
For a majority of our non-financial assets and liabilities, which include goodwill, intangible assets, inventories and property, plant and equipment, we are not required to measure their fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill), an evaluation of the affected non-financial asset or liability will be required, which could result in a reduction to the carrying amount of such asset or liability.
We concluded that none of our other 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 for the quarter ended March 31, 2018.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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. At March 31, 2018 and December 31, 2017, the current cost of our inventory exceeded its stated LIFO value by $32.3 million and $24.3 million, respectively. Other inventories are stated on the first-in, first-out basis and consist of operating supplies, which are materials and supplies to be consumed during the production process. 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 our inventories at March 31, 2018 and December 31, 2017 were included in the Fabricated Products segment (see Note 2 for the components of inventories).
Replacement Parts. Replacement parts consist of preventative maintenance and capital spare parts, which are stated on the first-in, first-out basis. Replacement parts are recorded within Prepaid expenses and other current assets or Other assets depending on whether or not the expected utilization of the replacement parts is to occur within the current operating cycle.
Property, Plant and Equipment, Net. Property, plant and equipment, net is recorded at cost and includes construction in progress (see Note 2). Interest related to the construction of qualifying assets is capitalized as part of the construction costs. The amount of interest expense capitalized as construction in progress was $0.5 million in each of the quarters ended March 31, 2018 and March 31, 2017.
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.
We classify assets as held for sale only when an asset is being actively marketed and expected to sell within 12 months. Assets held for sale are initially measured at the lesser of the assets' carrying amount and the fair value less costs to sell.
Derivative Financial Instruments. Consistent with guidelines established by management and approved by our Board of Directors, we use derivative financial instruments to mitigate our exposure to changes in the market price of aluminum, alloying metals and energy and, to a lesser extent, foreign currency exchange rates. We do not use derivative financial instruments for trading or other speculative purposes. Hedging transactions are executed centrally on behalf of all of our operations to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors.
We reflect the fair value of all of our derivative instruments on our Consolidated Balance Sheets (see Note 4). The fair value of hedges settling within one year is included in Prepaid expenses and other current assets or Other accrued liabilities. The fair value of hedges settling beyond one year is included in Other assets or Long-term liabilities.
Prior to our adoption of ASU 2017-12 (as defined below under "Adoption of New Accounting Standards"), we did not meet the documentation requirements for hedge (deferral) accounting related to our aluminum and energy derivatives. Accordingly, we recorded unrealized gain or loss associated with these hedges in the Statements of Consolidated Income. Subsequent to our adoption of ASU 2017-12 on January 1, 2018, our aluminum and energy derivatives qualified for hedge (deferral) accounting and, as such, we designated such hedges as cash flow hedges. Forward swap contracts for zinc and copper ("Alloy Hedges") used in our fabrication operations are also designated as cash flow hedges. Unrealized gains and losses associated with our cash flow hedges are deferred in Other comprehensive income, net of tax and reclassified to Cost of products sold, excluding depreciation and amortization and other items when such hedges settle (see Note 4).
From time to time, we enter into foreign currency forward contracts to protect the value of anticipated foreign currency expenses associated with cash commitments for equipment purchases. We do not meet the documentation requirements for hedge (deferral) accounting related to foreign currency derivatives and, as such, gains and losses (both unrealized and realized) related to our foreign currency forward contracts are reflected as an increase or reduction in Other income, net.
Self Insurance of Workers' Compensation and Employee Healthcare Liabilities. We self-insure the majority of the costs of workers' compensation benefits and employee healthcare benefits and rely on insurance coverage to protect us from large losses on individual claims. Workers' compensation liabilities are based on a combination of estimates for: (i) incurred-but-not-reported claims and (ii) the ultimate expense of incurred claims. Such estimates are based on judgment, using our historical claims data and information and analysis provided by actuarial and claims advisors, our insurance carriers and other professionals. Our undiscounted workers' compensation liabilities were estimated at $26.1 million and $24.8 million as of March 31, 2018 and December 31, 2017, respectively. However, we account for our workers' compensation accrued liability on
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
a discounted basis, using a discount rate of 2.75% and 2.25% at March 31, 2018 and December 31, 2017, respectively. Accrued liabilities for employee healthcare benefits, which are estimates of unpaid incurred medical and prescription drug costs as provided by our healthcare administrators, were $3.1 million and $3.5 million as of March 31, 2018 and December 31, 2017, respectively.
Short-Term Incentive Plans ("STI Plans"). We have annual short-term incentive compensation plans for senior management and certain other employees payable at our election in cash, shares of common stock, or a combination of cash and shares of common stock. Amounts earned under STI Plans are based on our adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), modified for certain safety, quality, delivery, cost and individual performance factors. The Adjusted EBITDA targets are determined based on the return on adjusted net assets of our Fabricated Products business. Most of our production facilities have similar programs for both hourly and salaried employees. As of March 31, 2018, we had a liability of $4.5 million recorded within Accrued salaries, wages and related expenses for estimated probable future payments relating to the three month performance period of our 2018 STI Plan.
Long-Term Incentive Programs ("LTI Programs"). Executive officers and other key employees of the Company, as well as non-employee directors of the Company, are eligible to participate in the Kaiser Aluminum Corporation 2016 Equity and Incentive Compensation Plan approved by stockholders on May 26, 2016 ("2016 Plan"). At March 31, 2018, 586,137 shares were available for awards under the 2016 Plan. We issue new shares of our common stock upon vesting under the 2016 Plan.
Adoption of New Accounting Pronouncements
Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09") was issued in May 2014 and 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. We adopted ASU 2014-09, including its subsequent amendments as codified under Accounting Standards Codification Topic 606 ("ASC 606"), during the quarter ended March 31, 2018. Upon adoption under the modified retrospective method, we elected to apply the guidance only to contracts that were not completed at the date of initial application, which resulted in a cumulative-effect increase of $10.1 million (see Note 8) to our Retained earnings (net of a $3.3 million tax impact) on January 1, 2018. Comparative information in this report has not been adjusted and continues to be reported under previous revenue recognition guidance within Accounting Standards Codification Topic 605 ("ASC 605"). See Statement of Consolidated Stockholders' Equity and Note 8 for details of the significant changes and quantitative impacts of the changes, as well as our policy on revenue recognition.
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), was issued in January 2016. The amendments in ASU 2016-01 require equity investments to be measured at fair value with changes in fair value recognized in net income. Equity investments related to our deferred compensation plan that had previously been accounted for as available for sale securities are now accounted for as equity investments with changes in fair value recorded within net income. As such, we recorded a cumulative-effect increase of $0.4 million to our Retained earnings (net of a $0.2 million tax impact) on January 1, 2018 to remove the balance of mark-to-market adjustments recorded within Accumulated other comprehensive income at December 31, 2017. See Note 3 for additional details on our deferred compensation program, including the fair value of related equity investments.
ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"), was issued in March 2017. ASU 2017-07 amends the requirements related to the income statement presentation of the components of net periodic benefit cost for our defined benefit pension and other postretirement plans. Specifically, ASU 2017-07 requires us to: (i) disaggregate the current-service-cost component from the "other components" of net benefit cost and present it with other current compensation costs for related employees in the income statement and (ii) present the other components elsewhere in the income statement and outside of income from operations. As a result of our retrospective adoption of ASU 2017-07, we reclassified amounts that had previously been presented within Selling, general, administrative, research and development to Other (expense) income in the Statements of Consolidated Income. See Note 3 for further discussion of our defined benefit pension and other postretirement plans.
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), was issued in August 2017. The amendments under ASU 2017-12 refine and expand hedge accounting requirements for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the related notes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. There was no cumulative effect adjustment to
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
record as a result of early adopting ASU 2017-12 in the quarter ended March 31, 2018; however, we designated all of our outstanding commodity hedges as cash flow hedges beginning January 1, 2018. We therefore have significantly reduced the mark-to-market adjustments that have historically been recorded within the Statements of Consolidated Income. These adjustments have instead been recorded within Other comprehensive (loss) income, net of tax beginning in the quarter ended March 31, 2018. See Note 4 for further discussion of our derivatives and hedging programs.
There were no material impacts on our consolidated financial statements resulting from our adoption in the quarter ended March 31, 2018 of ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
Accounting Pronouncements Issued But Not Yet Adopted
ASU No. 2016-02, Leases (Topic 842): Amendments to the Financial Accounting Standards Board Accounting Standards Codification ("ASU 2016-02"), was issued in February 2016. Under ASU 2016-02, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). ASU 2016-02 becomes effective for us in the first quarter of 2019. We are currently assessing the impact and expect the adoption of this ASU in 2019 to have a material impact on our consolidated financial statements.
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), was issued in June 2016. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available-for-sale debt securities will be replaced with a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowances for losses. We are currently in the process of evaluating the impact of adopting ASU 2016-13 in 2020 but do not expect it to have a material effect on our consolidated financial statements.
2. Supplemental Balance Sheet Information
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (In millions of dollars) |
Cash and Cash Equivalents | | |
|
Cash and money market funds | $ | 17.3 |
| | $ | 23.5 |
|
Commercial paper | 117.7 |
| | 27.6 |
|
Total | $ | 135.0 |
| | $ | 51.1 |
|
| | | |
Trade Receivables, Net | | | |
Billed trade receivables | $ | 186.1 |
| | $ | 165.9 |
|
Unbilled trade receivables | 0.4 |
| | 0.3 |
|
Trade receivables, gross | 186.5 |
| | 166.2 |
|
Allowance for doubtful receivables | (1.2 | ) | | (1.2 | ) |
Trade receivables, net | $ | 185.3 |
| | $ | 165.0 |
|
| | | |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (In millions of dollars) |
Inventories | | | |
Finished products | $ | 40.5 |
| | $ | 63.8 |
|
Work-in-process | 63.3 |
| | 78.3 |
|
Raw materials | 68.2 |
| | 61.3 |
|
Operating supplies | 4.8 |
| | 4.5 |
|
Total | $ | 176.8 |
| | $ | 207.9 |
|
| | | |
Property, Plant and Equipment, Net | | | |
Land and improvements | $ | 21.1 |
| | $ | 21.1 |
|
Buildings and leasehold improvements | 91.9 |
| | 92.1 |
|
Machinery and equipment | 698.6 |
| | 689.1 |
|
Construction in progress | 42.9 |
| | 35.1 |
|
Property, plant and equipment, gross | 854.5 |
| | 837.4 |
|
Accumulated depreciation | (277.7 | ) | | (267.9 | ) |
Assets held for sale | 1.9 |
| | 1.9 |
|
Property, plant and equipment, net | $ | 578.7 |
| | $ | 571.4 |
|
| | | |
Other Accrued Liabilities | | | |
Uncleared cash disbursements | $ | 4.7 |
| | $ | 7.3 |
|
Accrued income taxes and taxes payable | 10.8 |
| | 6.8 |
|
Accrued annual contribution to VEBAs – Note 3 | — |
| | 15.7 |
|
Accrued interest | 8.4 |
| | 2.9 |
|
Other | 11.7 |
| | 7.8 |
|
Total | $ | 35.6 |
| | $ | 40.5 |
|
| | | |
Long-Term Liabilities | | | |
Workers' compensation accruals | $ | 23.2 |
| | $ | 22.6 |
|
Long-term environmental accrual – Note 6 | 14.7 |
| | 15.8 |
|
Other long-term liabilities | 23.4 |
| | 21.6 |
|
Total | $ | 61.3 |
| | $ | 60.0 |
|
3. Employee Benefits
Pension and Similar Benefit Plans. We provide contributions to: (i) defined contribution 401(k) savings plans for salaried employees and certain hourly employees; (ii) a non-qualified, unfunded, unsecured plan of deferred compensation (see "Deferred Compensation Program" below); (iii) 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"), the International Association of Machinists and certain other unions at certain of our production facilities; and (iv) a defined benefit plan for salaried employees at our London, Ontario (Canada) facility.
Deferred Compensation Program. We have a non-qualified, unsecured plan of deferred compensation for key employees who would otherwise suffer a loss of benefits under our defined contribution plan as a result of the limitations imposed by the Internal Revenue Code of 1986. Despite the plan being an unfunded plan, we make an annual contribution to a rabbi trust to fulfill future funding obligations as contemplated by the terms of the plan. These assets are held in various investment funds at certain registered investment companies. Upon adoption of ASU 2016-01 on January 1, 2018 (see Note 1), these investments
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
are now accounted for as equity investments with changes in fair value recorded within Other income, net. Assets of our deferred compensation program are classified within Level 2 of the fair value hierarchy and are measured and recorded at fair value based on their quoted market prices. The fair value of these assets at March 31, 2018 and December 31, 2017 was $9.9 million and $9.8 million, respectively, and are included in Other assets. Offsetting liabilities relating to the deferred compensation plan are included in Long-term liabilities.
Salaried VEBA Postretirement Obligation. Certain retirees who retired prior to 2004 and certain employees who were hired prior to February 2002 and have subsequently retired or will retire with the requisite age and service, along with their surviving spouses and eligible dependents, are eligible to participate in a voluntary employees' beneficiary association ("VEBA") that provides healthcare cost, medical cost and long-term care insurance cost reimbursement benefits ("Salaried VEBA"). We have an ongoing obligation with no express termination date to make variable cash contributions up to a maximum of $2.9 million each year to the Salaried VEBA. We paid the maximum of $2.9 million with respect to 2017 during the quarter ended March 31, 2018. We account for the Salaried VEBA as a defined benefit plan in our financial statements.
Union VEBA Postretirement Obligation. Certain other eligible retirees represented by certain unions along with their surviving spouses and eligible dependents participate in a separate VEBA ("Union VEBA"). During the quarter ended March 31, 2018, we made a $12.8 million cash contribution to the Union VEBA with respect to the nine months ended September 30, 2017. This was our final contribution. We have no ongoing obligation to make further contributions to the Union VEBA.
Fair Value of Plan Assets. The plan assets of the Salaried VEBA and our Canadian pension plan are measured annually on December 31 and reflected in our Consolidated Balance Sheets at fair value. In determining the fair value of the plan assets at an annual period end, we utilize primarily the results of valuations supplied by the investment advisors responsible for managing the assets of each plan, which we independently review for reasonableness.
The following tables present the total expense (income) related to all benefit plans for the periods presented (in millions of dollars):
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Included within Fabricated Products: | | | |
Deferred compensation plan | $ | — |
| | $ | 0.1 |
|
Defined contribution plans | 3.8 |
| | 4.1 |
|
Multiemployer pension plans | 1.2 |
| | 1.1 |
|
Total Fabricated Products1 | $ | 5.0 |
| | $ | 5.3 |
|
| | | |
Included within All Other: | | | |
Deferred compensation plan | $ | 0.1 |
| | $ | 0.4 |
|
Defined contribution plans | 0.5 |
| | 0.5 |
|
Net periodic postretirement benefit cost relating to Salaried VEBA | 1.5 |
| | 1.1 |
|
Gain on removal of Union VEBA net assets | — |
| | (1.3 | ) |
Total All Other2 | $ | 2.1 |
| | $ | 0.7 |
|
Total | $ | 7.1 |
| | $ | 6.0 |
|
____________________
| |
1 | 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, general, administrative, research and development ("SG&A and R&D"). |
| |
2 | On January 1, 2018, we retrospectively adopted ASU 2017-07 (see Note 1). As such, the current service cost component of Net periodic postretirement benefit cost related to Salaried VEBA is included within the Statements of Consolidated Income in SG&A and R&D for all periods presented. We reclassified all other components of Net periodic postretirement |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
benefit cost relating to the Salaried VEBA, as well as Gain on removal of Union VEBA net assets that had previously been presented within SG&A and R&D, to Other income, net in the Statements of Consolidated Income.
Components of Net Periodic Benefit Cost. Our results of operations included the following impacts associated with the Canadian defined benefit plan and the Salaried VEBA: (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 benefit cost related to the Canadian defined benefit plan was not material for the quarters ended March 31, 2018 and March 31, 2017.
The following table presents the components of Net periodic postretirement benefit cost relating to Salaried VEBA for the periods presented (in millions of dollars):
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Salaried VEBA1: | | | |
Interest cost | $ | 0.7 |
| | $ | 0.7 |
|
Expected return on plan assets | (0.7 | ) | | (1.0 | ) |
Amortization of prior service cost2 | 1.3 |
| | 1.2 |
|
Amortization of net actuarial loss | 0.2 |
| | 0.2 |
|
Total net periodic postretirement benefit cost relating to Salaried VEBA | $ | 1.5 |
| | $ | 1.1 |
|
____________________
| |
1 | The service cost was insignificant for all periods presented. |
| |
2 | We amortize prior service cost on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan participants. |
4. Derivatives, Hedging Programs and Other Financial Instruments
Overview
In conducting our business, we enter into derivative transactions, including forward contracts and options, to limit our exposure to: (i) metal price risk related to our sale of fabricated aluminum products and the purchase of metal used as raw material for our fabrication operations; (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in our production processes; and (iii) foreign currency requirements with respect to our foreign subsidiaries and cash commitments for equipment purchases denominated in foreign currency.
Our derivative activities are overseen by a committee ("Hedging Committee"), which is composed of our chief executive officer, chief operating officer, chief financial officer, chief accounting officer, treasurer and other officers and employees selected by the chief executive officer. The Hedging Committee meets regularly to review commodity price exposure, derivative positions and strategy. Management reviews the scope of the Hedging Committee's activities with our Board of Directors.
We are exposed to counterparty credit risk on all of our derivative instruments, which we manage by monitoring the credit quality of our counterparties and allocating our hedging positions among multiple counterparties to limit exposure to any single entity. Our counterparties are major, investment grade financial institutions or trading companies. Hedging transactions are governed by negotiated reciprocal credit lines, which generally require collateral to be posted above specified credit thresholds. We believe the risk of loss is remote and contained due to counterparty credit quality, our diversification practice and collateral requirements.
In a majority of our hedging counterparty agreements, our counterparty offers us a credit line that adjusts up or down, depending on our liquidity. Below specified liquidity thresholds, we may have to post collateral if the fair value of our net liability with such counterparty exceeds our reduced credit line. We manage this risk by allocating hedging transactions among multiple counterparties, using options as part of our hedging activities, or both. The aggregate fair value of our derivative
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
instruments that were in a net liability position was $1.6 million and $0.1 million at March 31, 2018 and December 31, 2017, respectively, and we had no collateral posted as of those dates.
Additionally, our firm-price customer sales commitments create incremental customer credit risk related to metal price movements. Under certain circumstances, we mitigate this risk by periodically requiring cash collateral from them, which we classify as deferred revenue and include as a component of Other accrued liabilities. At both March 31, 2018 and December 31, 2017, we had no cash collateral posted from any of our customers. For more information about concentration risks concerning customers and suppliers, see Note 13.
Aluminum Hedges. Our pricing of fabricated aluminum products is generally intended to lock in a conversion margin (representing the value added from the fabrication process(es)) and to pass through metal price fluctuations to our customers. For some of our higher value added products sold on a spot basis, the pass through of metal price movements can sometimes lag by as much as several months, with a favorable impact to us when metal prices decline and an adverse impact to us when metal prices increase. Additionally, in certain instances, we enter into firm-price arrangements with our customers for stipulated volumes to be delivered in the future. Because we generally purchase primary and secondary aluminum on a floating price basis, the lag in passing through metal price movements to customers on some of our higher value added products sold on a spot basis and the volume that we have committed to sell to our customers under a firm-price arrangement create metal price risk for us. We use third-party hedging instruments to limit exposure to metal price risk related to the metal pass through lag on some of our products and firm-price customer sales contracts.
Alloying Metal Hedges. We enter into agreements with suppliers to purchase alloying metals (zinc and copper) used as raw materials in our fabrication operations at fluctuating prices that we are unable to pass along to our customers. We mitigate our exposure to metal price risk by entering into Alloy Hedges with third-party financial institutions at predetermined/fixed prices at stated delivery dates.
Energy Hedges. We are exposed to risk of fluctuating prices for natural gas and electricity. We, from time to time, in the ordinary course of business, enter into hedging transactions and/or physical delivery commitments with third parties to mitigate our risk from fluctuations in natural gas and electricity prices.
Notional Amount of Derivative Contracts
The following table summarizes our derivative positions at March 31, 2018:
|
| | | | |
Aluminum | Maturity Period (month/year) | | Notional Amount of Contracts (mmlbs) |
Fixed price purchase contracts | 4/18 through 12/21 | | 141.0 |
|
Fixed price sales contracts | 4/18 through 11/19 | | 3.9 |
|
Midwest premium swap contracts1 | 4/18 through 12/21 | | 136.7 |
|
|
| | | | |
Alloying Metals | Maturity Period (month/year) | | Notional Amount of Contracts (mmlbs) |
Fixed price purchase contracts | 4/18 through 12/18 | | 6.1 |
|
|
| | | | |
Natural Gas2 | Maturity Period (month/year) | | Notional Amount of Contracts (mmbtu) |
Fixed price purchase contracts | 4/18 through 12/20 | | 3,520,000 |
|
|
| | | | |
Electricity3 | Maturity Period (month/year) | | Notional Amount of Contracts (Mwh) |
Fixed price purchase contracts | 1/20 through 12/20 | | 175,680 |
|
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
|
| | | | |
Euro4 | Maturity Period (month/year) | | Notional Amount of Contracts (euro) |
Fixed price purchase contracts | 4/18 | | 64,555 |
|
____________________
| |
1 | Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on our purchases of primary aluminum. |
| |
2 | As of March 31, 2018, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 72% of the expected natural gas purchases for the remainder of 2018, 70% of the expected natural gas purchases for 2019 and 69% of the expected natural gas purchases for 2020. |
| |
3 | As of March 31, 2018, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 53% of our expected electricity purchases for the remainder of 2018, 2019 and 2020. |
| |
4 | We are exposed to foreign currency exchange risk related to firm-price agreements for equipment purchases from foreign manufacturers. We use non-designated foreign currency forward contracts designed to line up with the timing and amounts of scheduled payments to the foreign equipment manufacturers to mitigate our exposure to currency exchange rate fluctuations on these purchases. |
Adoption of ASU 2017-12
Prior to our adoption of ASU 2017-12 on January 1, 2018, changes in the fair value of non-designated hedges (aluminum and energy) were recorded within Unrealized loss (gain) on derivative instruments in the Statements of Consolidated Income. Upon settlement, realized gain or loss was recorded within Cost of products sold, excluding depreciation and amortization and other items, with an offsetting reversal of previously recognized unrealized amounts recorded within Unrealized loss (gain) on derivative instruments.
Beginning with our adoption of ASU 2017-12 (see Note 1), aluminum and energy hedges that were non-designated prior to 2018 are now designated as cash flow hedges. As these previously non-designated hedges are settled, unrealized gains and losses recognized subsequent to December 31, 2017 are reclassified from Accumulated other comprehensive loss to Cost of products sold, excluding depreciation and amortization.
(Gain) Loss
See Note 7 for the total amount of gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments that was reported in Accumulated other comprehensive income ("AOCI"), as well as the related reclassifications into earnings and tax effects. Cumulative gains and losses related to cash flow hedges are reclassified out of AOCI when the associated hedged commodity purchases impact earnings.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
The location and amount of (gain) loss included on the Statements of Consolidated Income within the Fabricated Products segment associated with all derivative contracts consisted of the following for each period presented (in millions of dollars):
|
| | | | | | | | | | | |
| Quarter Ended March 31, 2018 | | Quarter Ended March 31, 2017 |
| Cost of products sold, excluding depreciation and amortization and other items1 | | Cost of products sold, excluding depreciation and amortization and other items1 | | Unrealized (gain) loss on derivative instruments |
Total amounts of income and expense line items presented in the statements of consolidated income in which the effects of hedges are recorded | $ | 316.7 |
| | $ | 277.8 |
| | $ | (15.1 | ) |
| | | | | |
(Gain) loss recognized in income related to cash flow hedges: | | | | | |
Aluminum | $ | 0.3 |
| | $ | — |
| | $ | — |
|
Alloy Hedges | (0.4 | ) | | (0.1 | ) | | — |
|
Total gain recognized in income | $ | (0.1 | ) | | $ | (0.1 | ) | | $ | — |
|
| | | | | |
| | | | | |
(Gain) loss recognized in income related to non-designated hedges: | | | | | |
Aluminum | $ | — |
| | $ | (4.6 | ) | | $ | (16.3 | ) |
Natural gas | — |
| | — |
| | 1.2 |
|
Total gain recognized in income | $ | — |
| | $ | (4.6 | ) | | $ | (15.1 | ) |
____________________
| |
1 | Beginning with our adoption of ASU 2017-12 effective January 1, 2018, we no longer have Unrealized loss (gain) on derivative instruments on the Statements of Consolidated Income as all of our commodity hedges are designated as cash flow hedges. As such, all Unrealized loss (gain) on derivative instruments is reported in AOCI. For the quarter ended March 31, 2017, Unrealized loss (gain) on derivative instruments was reclassified to Cost of products sold, excluding depreciation and amortization and other items in the Statements of Consolidated Income to conform to the current period's presentation, for a combined total of $262.7 million. The amounts comprising both line items are presented separately here for comparative purposes. |
Fair Values of Derivative Contracts
The fair values of our derivative contracts are based upon trades in liquid markets. Valuation model inputs can be verified, and valuation techniques do not involve significant judgment. The fair values of such financial instruments are classified within Level 2 of the fair value hierarchy.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
The following table presents the fair value of our derivative financial instruments as of the period presented (in millions of dollars):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Derivative Assets | | Derivative Liabilities | | Net Amount | | Derivative Assets | | Derivative Liabilities | | Net Amount |
Cash Flow Hedges: | | | | | | | | | | | |
Aluminum – | | | | | | | | | | | |
Fixed price purchase contracts | $ | 4.6 |
| | $ | (4.4 | ) | | $ | 0.2 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Fixed price sales contracts | 0.2 |
| | — |
| | 0.2 |
| | — |
| | — |
| | — |
|
Midwest premium swap contracts | 6.2 |
| | (0.1 | ) | | 6.1 |
| | — |
| | — |
| | — |
|
Alloying metals – Fixed price purchase contracts | 0.3 |
| | (0.2 | ) | | 0.1 |
| | 0.9 |
| | — |
| | 0.9 |
|
Natural gas – Fixed price purchase contracts | 0.1 |
| | (0.5 | ) | | (0.4 | ) | | — |
| | — |
| | — |
|
Electricity – Fixed price purchase contracts | — |
| | (0.3 | ) | | (0.3 | ) | | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Non-Designated Hedges: | | | | | | | | | | | |
Aluminum – | | | | | | | | | | | |
Fixed price purchase contracts | — |
| | — |
| | — |
| | 22.5 |
| | — |
| | 22.5 |
|
Fixed price sales contracts | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
Midwest premium swap contracts | — |
| | — |
| | — |
| | 1.7 |
| | (0.1 | ) | | 1.6 |
|
Natural gas – Fixed price purchase contracts | — |
| | — |
| | — |
| | 0.2 |
| | (0.5 | ) | | (0.3 | ) |
Electricity – Fixed price purchase contracts | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
| | | | | | | | | | | |
Total1 | $ | 11.4 |
| | $ | (5.5 | ) | | $ | 5.9 |
| | $ | 25.3 |
| | $ | (0.8 | ) | | $ | 24.5 |
|
____________________
| |
1 | All of our derivative contracts with counterparties are subject to enforceable master netting arrangements. We reflect the fair value of our derivative contracts on a gross basis on the Consolidated Balance Sheets. |
The following table presents the balance sheet location of derivative assets and liabilities for the periods presented (in millions of dollars):
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Assets: | | | |
Prepaid expenses and other current assets | $ | 9.0 |
| | $ | 18.9 |
|
Other assets | 2.4 |
| | 6.4 |
|
Total assets | $ | 11.4 |
| | $ | 25.3 |
|
| | | |
Liabilities: | | | |
Other accrued liabilities | $ | (3.1 | ) | | $ | (0.3 | ) |
Long-term liabilities | (2.4 | ) | | (0.5 | ) |
Total Liabilities | $ | (5.5 | ) | | $ | (0.8 | ) |
Fair Value of Other Financial Instruments
Cash and Cash Equivalents. See Note 2 for components of cash and cash equivalents.
Available for Sale Securities. We hold debt investment securities that are accounted for as available for sale securities. The fair value of the debt investment securities, which consist of commercial paper, is determined based on valuation models that
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
use observable market data. At March 31, 2018, all of our short-term investments had maturity dates within 12 months. We review our debt investment portfolio for other-than-temporary impairment at least quarterly or when there are changes in credit risk or other potential valuation concerns. At March 31, 2018 and December 31, 2017, the total unrealized loss, net of tax, included in AOCI was immaterial and was not other-than-temporarily impaired. We believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the unrealized loss on these securities was due to normal market fluctuations, and not due to increased credit risk or other valuation concerns. The fair value input of our available for sale securities, which are classified within Level 2 of the fair value hierarchy, is calculated based on broker quotes. The amortized cost for available for sale securities approximates their fair value.
The following table presents our other financial assets, classified under the appropriate level of the fair value hierarchy, as of March 31, 2018 (in millions of dollars):
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | $ | 17.3 |
| | $ | 117.7 |
| | $ | — |
| | $ | 135.0 |
|
Short-term investments | — |
| | 83.8 |
| | — |
| | 83.8 |
|
Total | $ | 17.3 |
| | $ | 201.5 |
| | $ | — |
| | $ | 218.8 |
|
The following table presents our other financial assets, classified under the appropriate level of the fair value hierarchy, as of December 31, 2017 (in millions of dollars):
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | $ | 23.5 |
| | $ | 27.6 |
| | $ | — |
| | $ | 51.1 |
|
Short-term investments | — |
| | 183.7 |
| | — |
| | $ | 183.7 |
|
Total | $ | 23.5 |
| | $ | 211.3 |
| | $ | — |
| | $ | 234.8 |
|
All Other Financial Assets and Liabilities. We believe that the fair values of our accounts receivable, contract assets, accounts payable and accrued liabilities approximate their respective carrying values due to their short maturities and nominal credit risk.
5. Debt and Credit Facility
Senior Notes
In May 2016, we issued $375.0 million principal amount of 5.875% unsecured senior notes due May 15, 2024 ("Senior Notes") at 100% of the principal amount. The unamortized amount of debt issuance costs as of March 31, 2018 was $5.2 million. Interest expense, including amortization of debt issuance costs, relating to the Senior Notes was $5.7 million for each of the quarters ended March 31, 2018 and March 31, 2017. A portion of the interest relating to the Senior Notes was capitalized as construction in progress. The effective interest rate of the Senior Notes is approximately 6.1% per annum, taking into account the amortization of debt issuance costs. The fair value of the outstanding Senior Notes, which are Level 1 liabilities, was approximately $390.3 million and $399.9 million at March 31, 2018 and December 31, 2017, respectively.
Revolving Credit Facility
Our credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions party thereto ("Revolving Credit Facility") provides us with a $300.0 million funding commitment through December 2020. We had $300.0 million of borrowing availability under the Revolving Credit Facility at March 31, 2018, based on the borrowing base determination then in effect. At March 31, 2018, there were no borrowings under the Revolving Credit Facility and $8.1 million was being used to support outstanding letters of credit, leaving $291.9 million of net borrowing availability. The interest rate applicable to any overnight borrowings under the Revolving Credit Facility would have been 5.00% at March 31, 2018.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
6. Commitments and Contingencies
Commitments. We have a variety of financial commitments, including purchase agreements, forward foreign exchange and forward sales contracts, indebtedness and letters of credit (see Note 4 and Note 5).
Environmental Contingencies. We are subject to a number of environmental laws and regulations, to potential fines or penalties assessed for alleged breaches of such laws and regulations and to potential claims based upon such laws and regulations. We are also subject to legacy environmental contingencies related to activities that occurred at operating facilities within Fabricated Products prior to July 6, 2006 while such operating facilities were being operated by a predecessor, which represent the majority of our environmental accruals. The status of these environmental contingencies are discussed below. We have established procedures for regularly evaluating environmental loss contingencies. Our environmental accruals represent our undiscounted estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, existing requirements, currently available facts, existing technology and our assessment of the likely remediation actions to be taken.
We continue to pursue remediation activities, primarily to address the historical use of oils containing polychlorinated biphenyls ("PCBs") at our Spokane, Washington ("Trentwood") facility. Our remediation efforts are in collaboration with the Washington State Department of Ecology ("Washington State Ecology"), to which we submitted a feasibility study in 2012 of remediation alternatives and from which we received permission to begin certain remediation activities pursuant to a signed work order. As we have finished a number of sections of the work plan, we have received approval from Washington State Ecology on satisfactory completion of those sections. Additionally, in cooperation with Washington State Ecology, to determine the treatability and evaluate the feasibility of removing PCBs from ground water under the Trentwood facility, we constructed a pilot test facility and began treatment operations at the test facility in the first half of 2016. As the success of the new methodology cannot be reasonably determined at this time, it is possible we may need to make upward adjustments to our related accruals as facts and cost estimates regarding the groundwater treatment method and the operation of the treatment facility become available.
During 2013, at the request of the Ohio Environmental Protection Agency ("OEPA"), we initiated an investigational study of the Newark, Ohio ("Newark") facility related to historical on-site waste disposal. Since 2014, we have completed a number of preliminary steps in the preparation of completing the final risk assessment and feasibility study, both of which are subject to review and approval by the OEPA. As work continues and progresses to a final risk assessment and feasibility study, we will establish and update estimates for probable and estimable remediation, 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 12 to 18 months.
At March 31, 2018, our environmental accrual of $16.6 million represented our estimate of the incremental remediation cost based on: (i) proposed alternatives in the final feasibility study related to the Trentwood facility; (ii) currently available facts with respect to our Newark facility; and (iii) facts related to certain other locations owned or formerly owned by us. In accordance with approved and proposed remediation action plans, we expect 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. We believe 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 $12.2 million over the remediation period. It is reasonably possible that our recorded estimate will change in the next 12 months.
Other Contingencies. We are party to various lawsuits, claims, investigations and administrative proceedings that arise in connection with past and current operations. We evaluate such matters on a case-by-case basis and our policy is to vigorously contest any such claims we believe are without merit. We accrue 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, we review and adjust 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, we believe that we have sufficiently accrued for such matters and that the ultimate resolution of pending matters will not have a material impact on our consolidated financial position, operating results or liquidity.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
7. Accumulated Other Comprehensive (Loss) Income
The following table presents the changes in the accumulated balances for each component of AOCI for each period presented (in millions of dollars):
|
| | | | | | | | |
| | Quarter Ended |
| | March 31, |
| | 2018 | | 2017 |
Defined Benefit Pension Plan and Salaried VEBA: | | | | |
Beginning balance | | $ | (38.5 | ) | | $ | (37.1 | ) |
Amortization of net actuarial loss1 | | 0.2 |
| | 0.2 |
|
Amortization of prior service cost1 | | 1.3 |
| | 1.2 |
|
Less: income tax expense2 | | (0.3 | ) | | (0.5 | ) |
Net amortization reclassified from AOCI to Net income | | 1.2 |
| | 0.9 |
|
Other comprehensive income, net of tax | | 1.2 |
| | 0.9 |
|
Ending balance | | $ | (37.3 | ) | | $ | (36.2 | ) |
| | | | |
Available for Sale Securities: | | | | |
Beginning balance | | $ | 0.9 |
| | $ | 0.8 |
|
Unrealized gain on available for sale securities | | 1.0 |
| | 1.1 |
|
Less: income tax expense | | (0.2 | ) | | (0.4 | ) |
Net unrealized gain on available for sale securities | | 0.8 |
| | 0.7 |
|
Reclassification of unrealized gain upon sale of available for sale securities3 | | (1.5 | ) | | (0.9 | ) |
Less: income tax benefit2 | | 0.5 |
| | 0.3 |
|
Net gain reclassified from AOCI to Net income | | (1.0 | ) | | (0.6 | ) |
Other comprehensive (loss) income, net of tax | | (0.2 | ) | | 0.1 |
|
Ending balance | | $ | 0.7 |
| | $ | 0.9 |
|
| | | | |
Cash Flow Hedges: | | | | |
Beginning balance | | $ | 0.5 |
| | $ | (0.2 | ) |
Unrealized (loss) gain on cash flow hedges | | (12.2 | ) | | 0.3 |
|
Less: income tax benefit (expense) | | 3.0 |
| | (0.1 | ) |
Net unrealized (loss) gain on cash flow hedges | | (9.2 | ) | | 0.2 |
|
Reclassification of unrealized (gain) loss upon settlement of cash flow hedges4 | | (0.1 | ) | | 0.2 |
|
Less: income tax expense2 | | — |
| | (0.1 | ) |
Net (gain) loss reclassified from AOCI to Net income | | (0.1 | ) | | 0.1 |
|
Other comprehensive (loss) income, net of tax | | (9.3 | ) | | 0.3 |
|
Ending balance | | $ | (8.8 | ) | | $ | 0.1 |
|
| | | | |
Foreign Currency Translation: | | | | |
Beginning balance | | $ | — |
| | $ | (0.2 | ) |
Other comprehensive income, net of tax | | — |
| | — |
|
Ending balance | | $ | — |
| | $ | (0.2 | ) |
| | | | |
Total AOCI ending balance | | $ | (45.4 | ) | | $ | (35.4 | ) |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
____________________
| |
1 | Amounts amortized out of AOCI relating to Salaried VEBA adjustments were included within Other income, net, as a component of Net periodic postretirement benefit cost relating to Salaried VEBA. |
| |
2 | Income tax amounts reclassified out of AOCI were included as a component of Income tax provision. |
| |
3 | Amounts reclassified out of AOCI relating to sales of available for sale securities were included as a component of Other income, net. We use the specific identification method to determine the amount reclassified out of AOCI. |
| |
4 | Amounts reclassified out of AOCI relating to cash flow hedges were included as a component of Cost of products sold, excluding depreciation and amortization and other items. As of March 31, 2018, we estimate a net mark-to-market loss before tax of $8.0 million in AOCI will be reclassified into Net income within the next 12 months. |
8. Revenue Recognition
Prior to the Adoption of ASC 606. Prior to our adoption of ASC 606 on January 1, 2018, we recognized revenue on a gross basis when all of the following criteria were met: (i) persuasive evidence of an arrangement existed; (ii) title, ownership and risk of loss had passed to the customer; (iii) the price to the customer was fixed or determinable; and (iv) collection of the resulting receivable was reasonably assured. Provisions for estimated sales returns from and allowances to customers were made in the same period as the related revenues were recognized, based on historical experience or the specific identification of an event necessitating a reserve.
Subsequent to the Adoption of ASC 606. Subsequent to our adoption of ASC 606 on January 1, 2018 (see "New Accounting Pronouncements" in Note 1), we recognize revenue as we fulfill our performance obligations and transfer control of products to our customers. For products that have an alternative use and/or for which we do not have an enforceable right to payment (including a reasonable profit) during the production process, we recognize revenue at a point in time. For products that have no alternative use and for which we have an enforceable right to payment (including a reasonable profit) throughout the production process, we recognize revenue over time. In general, a majority of our Aero/HS products and a substantial portion of our Automotive Extrusions are recognized over time, with the remainder of our products recognized at a point in time.
For the majority of our business, contracts with customers begin when we acknowledge a purchase order for a specific customer order of product to be delivered in the near term. These purchase orders are short term in nature, although they may reference a longer term "blanket purchase order" or a "terms and conditions" agreement, both of which may span multiple years. For revenue recognized at a point in time, transfer of control usually occurs upon shipment or upon customer receipt of the product, depending on shipping terms. For contracts recognized over time, control transfer occurs incrementally during our production process as progress is made on fulfilling the performance obligation. We use the input method of determining our progress, capturing direct costs beginning at the point that billet or cast ingot is introduced into production at either the extrusion phase or the rolling phase, respectively. We believe the input method more accurately reflects the transfer of control as it represents the best information available of work completed to date for which we have an enforceable right to payment. For products in production, we recognize revenue using estimates of the cost incurred to date plus a reasonable margin. As the duration of our contracts for accounting purposes are typically less than one year, we do not present quantitative information about the aggregate transaction price allocated to unsatisfied performance obligations at the end of the reporting period.
We adjust the amount of revenue recognized on all products, regardless of timing of revenue recognition, for variable price consideration, which could include metal market price adjustments, volume rebates and sales discounts. We estimate rebate and discount values based on forecasted order data and historical payment trends for specific customers, adjusted as necessary at each reporting period. Accounts receivable is recorded when our right to consideration becomes unconditional. Payment terms for a majority of our domestic customers are 30 days after invoice date. To accommodate shipping time to overseas locations, payment terms for foreign customers are typically several weeks longer than domestic terms. As such, we do not adjust the promised amount of consideration for the effects of a significant financing component as we do not expect the period between the transfer of products to our customers and receipt of payment will be greater than one year.
Contract assets primarily relate to our enforceable right to consideration for work completed but not billed at the reporting date on contracts for products recognized over time. Contract assets also include amounts related to our contractual right to consideration for finished goods recognized over time that were in transit as of period end.
Incremental Costs of Obtaining a Contract. We expense the costs of obtaining a contract as incurred as the amortization period of the asset that we otherwise would have recognized is one year or less.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Shipping and Handling Activities. We account for shipping and handling activities that occur after the customer has obtained control of a product as fulfillment activities (i.e., an expense) rather than as a promised service (i.e., a revenue element).
The following table presents the impact on our opening Consolidated Balance Sheet as of January 1, 2018 of adopting ASC 606 (in millions of dollars):
|
| | | | | | | | | | | |
| December 31, 2017 As Reported | | Cumulative-effect Adjustments1 | | January 1, 2018 As Adjusted |
Contract assets | $ | — |
| | $ | 55.6 |
| | $ | 55.6 |
|
Inventories | 207.9 |
| | (40.7 | ) | | 167.2 |
|
Total current assets | 656.6 |
| | 14.9 |
| | 671.5 |
|
Deferred tax assets, net
| 72.0 |
| | (3.3 | ) | | 68.7 |
|
Total assets | $ | 1,385.2 |
| | $ | 11.6 |
| | $ | 1,396.8 |
|
Other accrued liabilities | 40.5 |
| | 1.5 |
| | 42.0 |
|
Total current liabilities | 173.1 |
| | 1.5 |
| | 174.6 |
|
Total liabilities | $ | 638.9 |
| | $ | 1.5 |
| | $ | 640.4 |
|
Retained earnings | 85.5 |
| | 10.1 |
| | 95.6 |
|
Total stockholders’ equity | 746.3 |
| | 10.1 |
| | 756.4 |
|
Total liabilities and stockholders’ equity | $ | 1,385.2 |
| | $ | 11.6 |
| | $ | 1,396.8 |
|
____________________
| |
1 | Included in the cumulative-effect adjustment was a charge of $5.0 million as a result of decrementing higher cost prior LIFO layers. |
The following table presents the impact of adopting ASC 606 on our Consolidated Balance Sheet for the period presented (in millions of dollars):
|
| | | | | | | | | | | |
| March 31, 2018 As Reported | | Adjustments | | March 31, 2018 without Adoption of ASC 606 |
Contract assets | $ | 57.5 |
| | $ | (57.5 | ) | | $ | — |
|
Inventories | 176.8 |
| | 36.1 |
| | 212.9 |
|
Total current assets | 682.3 |
| | (21.4 | ) | | 660.9 |
|
Deferred tax assets, net
| 63.7 |
| | 3.3 |
| | 67.0 |
|
Total assets | $ | 1,405.4 |
| | $ | (18.1 | ) | | $ | 1,387.3 |
|
Other accrued liabilities | 35.6 |
| | (3.5 | ) | | 32.1 |
|
Total current liabilities | 184.5 |
| | (3.5 | ) | | 181.0 |
|
Total liabilities | $ | 651.8 |
| | $ | (3.5 | ) | | $ | 648.3 |
|
Retained earnings | 111.7 |
| | (14.6 | ) | | 97.1 |
|
Total stockholders’ equity | 753.6 |
| | (14.6 | ) | | 739.0 |
|
Total liabilities and stockholders’ equity | $ | 1,405.4 |
| | $ | (18.1 | ) | | $ | 1,387.3 |
|
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
The following table presents the impact of adopting ASC 606 on our Statements of Consolidated Income for the period presented (in millions of dollars, except per share amounts):
|
| | | | | | | | | | | |
| Quarter Ended March 31, 2018 As Reported | | Adjustments | | Quarter Ended March 31, 2018 without Adoption of ASC 606 |
Net sales | $ | 388.0 |
| | $ | (1.7 | ) | | $ | 386.3 |
|
Cost of products sold, excluding depreciation and amortization and other items1 | 316.7 |
| | 4.2 |
| | 320.9 |
|
Operating income | 37.1 |
| | (5.9 | ) | | 31.2 |
|
Income before income taxes | 31.6 |
| | (5.9 | ) | | 25.7 |
|
Income tax provision | (5.9 | ) | | 1.4 |
| | (4.5 | ) |
Net income | $ | 25.7 |
| | $ | (4.5 | ) | | $ | 21.2 |
|
| | | | | |
Net income per common share: | | | | | |
Basic | $ | 1.54 |
| | $ | (0.27 | ) | | $ | 1.27 |
|
Diluted | $ | 1.51 |
| | $ | (0.26 | ) | | $ | 1.25 |
|
____________________
| |
1 | Included in the "as reported" amounts was the benefit of having decremented higher cost prior LIFO layers as part of the cumulative-effect adjustment of adopting ASC 606, as discussed in the opening balance sheet table above. |
The following table presents the impact of adopting ASC 606 on our Statements of Consolidated Comprehensive Income for the period presented (in millions of dollars):
|
| | | | | | | | | | | |
| Quarter Ended March 31, 2018 As Reported | | Adjustments | | Quarter Ended March 31, 2018 without Adoption of ASC 606 |
Net income | $ | 25.7 |
| | $ | (4.5 | ) | | $ | 21.2 |
|
Comprehensive income (loss) | $ | 17.4 |
| | $ | (4.5 | ) | | $ | 12.9 |
|
The following table presents the impact of adopting ASC 606 on our Statements of Consolidated Cash Flows for the period presented (in millions of dollars):
|
| | | | | | | | | | | |
| Quarter Ended March 31, 2018 As Reported | | Adjustments | | Quarter Ended March 31, 2018 without Adoption of ASC 606 |
Net income | $ | 25.7 |
| | $ | (4.5 | ) | | $ | 21.2 |
|
Changes in operating assets and liabilities: | | | | | |
Contract assets | (1.9 | ) | | 1.9 |
| | — |
|
Inventories | (9.6 | ) | | 4.6 |
| | (5.0 | ) |
Accrued liabilities | (7.3 | ) | | (2.0 | ) | | (9.3 | ) |
Net cash provided by operating activities | $ | 26.1 |
| | $ | — |
| | $ | 26.1 |
|
The primary driver of the impacts described above related to contracts that had been recognized at a point in time under previous revenue guidance that are now recognized earlier in the process due to over time recognition under ASC 606.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
9. Other Income, Net
Other income, net, consisted of the following for each period presented (in millions of dollars):
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Interest income | $ | 0.1 |
| | $ | — |
|
Net periodic postretirement benefit cost relating to Salaried VEBA | (1.5 | ) | | (1.1 | ) |
Gain on removal of Union VEBA net assets | — |
| | 1.3 |
|
Realized gain on investments | 1.6 |
| | 0.7 |
|
All other expense, net | (0.1 | ) | | (0.1 | ) |
Other income, net | $ | 0.1 |
| | $ | 0.8 |
|
10. Income Tax Matters
The provision for income taxes for each period presented consisted of the following (in millions of dollars):
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Domestic | $ | 5.6 |
| | $ | 18.3 |
|
Foreign | 0.3 |
| | 0.2 |
|
Total | $ | 5.9 |
| | $ | 18.5 |
|
The income tax provision for the quarters ended March 31, 2018 and March 31, 2017 was $5.9 million and $18.5 million, respectively, reflecting an effective tax rate of 18.6% and 34.0%, respectively. The difference between the effective tax rate and the projected blended statutory tax rate for the quarter ended March 31, 2018 was primarily due to: (i) a decrease of $1.8 million (or 5.6% of taxable income) for the recognition of excess tax benefits from stock-based compensation and (ii) a decrease of $0.8 million (or 2.7% of taxable income) to the valuation allowance for certain state net operating losses, partially offset by (iii) an increase of $0.6 million (or 1.9% of taxable income) related to non-deductible compensation expense.
The difference between the effective tax rate and the projected blended statutory tax rate for the quarter ended March 31, 2017 was due to: (i) a decrease of $1.6 million (or 2.9% of taxable income) for the recognition of excess tax benefits from stock-based compensation and (ii) a decrease of $0.4 million (or 0.8% of taxable income) to the valuation allowance for certain state net operating losses.
Our gross unrecognized benefits relating to uncertain tax positions were $1.5 million at both March 31, 2018 and December 31, 2017, of which, $0.4 million would be recorded through our income tax provision and thus impact the effective tax rate at both March 31, 2018 and December 31, 2017 if the gross unrecognized tax benefits were to be recognized.
We do not expect our gross unrecognized tax benefits to significantly change within the next 12 months.
The Tax Cuts and Jobs Act ("The Tax Act") was enacted on December 22, 2017. The Tax Act reduces the US federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. We are applying the guidance in SAB 118 when accounting for the enactment-date effects of the Tax Act. Our accounting for the Tax Act is incomplete, as noted at year-end. However, we were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments at December 31, 2017 associated with the reduction of the US federal corporate tax rate, the deemed repatriation transition tax and IRC Section 162(m). During the quarter ended March 31, 2018, we recognized no adjustments to the provisional amounts recorded at December 31, 2017, and have not completed our accounting for all of the tax effects of the Tax Act. We are awaiting further guidance from U.S. federal and state regulatory bodies with regards to the final accounting and reporting of these items in the several jurisdictions where we file tax returns. In all cases, we will continue to make and refine
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
our calculations as additional analysis is completed. Our estimates may also be affected as we gain a more thorough understanding of the tax law.
11. Net Income Per Share and Stockholders' Equity
Net Income Per Share. Basic net income per share is computed by dividing distributed and undistributed net income allocable to common shares by the weighted-average number of common shares outstanding during the applicable period. The basic weighted-average number of common shares outstanding during the period excludes unvested share-based payment awards. Diluted net income per share was calculated under the treasury stock method for the quarters ended March 31, 2018 and March 31, 2017, which in both periods was more dilutive than the two-class method.
The following table sets forth the computation of basic and diluted net income per share for periods presented (in millions of dollars, except share and per share amounts):
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Numerator: | | | |
Net income | $ | 25.7 |
| | $ | 36.0 |
|
Denominator – Weighted-average common shares outstanding (in thousands): | | | |
Basic | 16,707 |
| | 17,385 |
|
Add: dilutive effect of non-vested common shares, restricted stock units and performance shares | 324 |
| | 218 |
|
Diluted | 17,031 |
| | 17,603 |
|
| | | |
Net income per common share, Basic: | $ | 1.54 |
| | $ | 2.07 |
|
Net income per common share, Diluted: | $ | 1.51 |
| | $ | 2.04 |
|
The following securities were excluded from the weighted-average diluted shares computation for the periods presented as their inclusion would have been anti-dilutive (in thousands of shares):
|
| | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Options to purchase common shares1 | — |
| | 2 |
|
Non-vested common shares, restricted stock units and performance shares | — |
| | 64 |
|
Total excluded | — |
| | 64 |
|
____________________
| |
1 | Related to the 1,543 fully-vested stock options that were outstanding as of March 31, 2017 and subsequently expired on April 2, 2017. |
Dividends. During the quarters ended March 31, 2018 and March 31, 2017, we paid a total of approximately $10.0 million and $9.3 million, respectively, in cash dividends to stockholders, including the holders of restricted stock, and in dividend equivalents to the holders of certain restricted stock units and performance shares.
Treasury Stock. From time to time, we repurchase shares pursuant to a stock repurchase program authorized by our Board of Directors. Repurchase transactions will occur at such times and prices as management deems appropriate and will be funded with our excess liquidity after giving consideration to, among other things, internal and external growth opportunities and future cash flows. Repurchases may be in open-market transactions or in privately negotiated transactions and the program may be modified or terminated by our Board of Directors at any time.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Repurchases of our common stock pursuant to the stock repurchase program is recorded as Treasury stock and consisted of the following for each period presented:
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Number of common shares repurchased | 58,155 |
| | 415,346 |
|
Weighted-average repurchase price (dollars per share) | $ | 104.50 |
| | $ | 78.70 |
|
Total cost of repurchased common shares (in millions of dollars) | $ | 6.1 |
| | $ | 32.7 |
|
At March 31, 2018, $104.5 million were available to repurchase our common shares pursuant to the stock repurchase program.
Preferred Stock. In connection with a tax asset protection rights plan, our Board of Directors declared a dividend, payable April 22, 2016, of one right for each outstanding share of our common stock. In general, if the rights become exercisable, each right would allow its holder to purchase one one-hundredth of a share of our Series A Preferred Stock. The authorized number of shares of Series A Preferred Stock is 900,000.
12. Supplemental Cash Flow Information
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
| (In millions of dollars) |
Interest paid | $ | 0.3 |
| | $ | 0.3 |
|
Non-cash investing and financing activities (included in Accounts payable): | | | |
Unpaid purchases of property and equipment | $ | 5.2 |
| | $ | 3.7 |
|
Stock repurchases not yet settled | $ | 0.5 |
| | $ | 2.0 |
|
| | | |
| March 31, 2018 |
| | March 31, 2017 |
|
| (In millions of dollars) |
Components of cash, cash equivalents and restricted cash: | | | |
Cash and cash equivalents | $ | 135.0 |
| | $ | 34.4 |
|
Restricted cash included in Prepaid expenses and other current assets1 | 0.3 |
| | 0.3 |
|
Restricted cash included in Other assets1 | 12.9 |
| | 12.0 |
|
Total cash, cash equivalents and restricted cash shown in the Statements of Consolidated Cash Flows | $ | 148.2 |
| | $ | 46.7 |
|
____________________
| |
1 | We are required to keep on deposit certain amounts that are pledged or held as collateral relating to workers' compensation and other agreements. We account for such deposits as restricted cash. From time to time, such restricted funds could be returned to us or we could be required to pledge additional cash. |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
13. Segment and Geographical Area Information
Our primary line of business is the production of semi-fabricated specialty aluminum products, such as aluminum plate and sheet and extruded and drawn products, primarily used in Aero/HS products, Automotive Extrusions, GE products and Other products. We operate 11 focused production facilities in the United States and one in Canada. Consistent with the manner in which our chief operating decision maker reviews and evaluates our business, the Fabricated Products business is treated as a single operating segment. At March 31, 2018, approximately 63% of our employees were covered by collective bargaining agreements and approximately 6% of our employees were covered by collective bargaining agreements with expiration dates occurring within one year from March 31, 2018.
In addition to the Fabricated Products segment, we have a business unit, All Other, which provides general and administrative support for our operations. For purposes of segment reporting under GAAP, we treat the Fabricated Products segment as a reportable segment. All Other is not considered a reportable segment.
The accounting policies of our Fabricated Products segment are the same as those described in Note 1. Segment results are evaluated internally by management before any allocation of corporate overhead and without any charge for income taxes, interest expense or other net operating charges.
The following tables provide financial information by reporting segment and business unit for each period or as of each period end, as applicable (in millions of dollars):
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Net sales: | | | |
Fabricated Products | $ | 388.0 |
| | $ | 355.3 |
|
Segment operating income (loss): | | | |
Fabricated Products | $ | 49.5 |
| | $ | 70.6 |
|
All Other | (12.4 | ) | | (11.3 | ) |
Total operating income | $ | 37.1 |
| | $ | 59.3 |
|
Interest expense | (5.6 | ) | | (5.6 | ) |
Other income, net | 0.1 |
| | 0.8 |
|
Income before income taxes | $ | 31.6 |
| | $ | 54.5 |
|
Depreciation and amortization: | | | |
Fabricated Products | $ | 10.3 |
| | $ | 9.4 |
|
All Other | 0.2 |
| | 0.2 |
|
Total depreciation and amortization | $ | 10.5 |
| | $ | 9.6 |
|
Capital expenditures: | | | |
Fabricated Products | $ | 19.6 |
| | $ | 14.6 |
|
All Other | 0.1 |
| | 0.2 |
|
Total capital expenditures | $ | 19.7 |
| | $ | 14.8 |
|
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Assets: | | | |
Fabricated Products | $ | 1,086.3 |
| | $ | 1,046.8 |
|
All Other1 | 319.1 |
| | 338.4 |
|
Total assets | $ | 1,405.4 |
| | $ | 1,385.2 |
|
____________________
| |
1 | Assets in All Other represent primarily all of our cash, cash equivalents and restricted cash, short-term investments, financial derivative assets, deferred compensation program assets and net deferred income tax assets. |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Net sales by end market applications and by timing of transfer for the Fabricated Products segment were as follows (in millions of dollars):
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Net sales: | | | |
Aero/HS products | $ | 170.2 |
| | $ | 167.5 |
|
Automotive Extrusions | 60.5 |
| | 53.0 |
|
GE products | 143.3 |
| | 123.2 |
|
Other products | 14.0 |
| | 11.6 |
|
Total net sales | $ | 388.0 |
| | $ | 355.3 |
|
| | | |
Timing of revenue recognition – Note 8: | | | |
Products transferred at a point in time | $ | 156.6 |
| | n/a |
|
Products transferred over time | 231.4 |
| | n/a |
|
Total net sales | $ | 388.0 |
| | |
Geographic information for income taxes paid was as follows (in millions of dollars):
|
| | | | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Income taxes paid: | | | |
Fabricated Products – | | | |
Domestic | $ | 0.2 |
| | $ | 0.1 |
|
Foreign | — |
| | 0.1 |
|
Total income taxes paid | $ | 0.2 |
| | $ | 0.2 |
|
Concentrations. For the quarter ended March 31, 2018, one customer represented 27% and another represented 13% of Fabricated Products Net sales. For the quarter ended March 31, 2017, one customer represented 29% and another represented 10% of Fabricated Products Net Sales.
At March 31, 2018, one customer represented 24% and a second customer represented 16% of Trade receivables, net. One individual customer accounted for 22% and another individual customer accounted for 14% of Trade receivables, net at December 31, 2017.
Information for delivery of our primary aluminum supply from our major suppliers was as follows:
|
| | | | | |
| Quarter Ended |
| March 31, |
| 2018 | | 2017 |
Percentage of total primary aluminum supply (lbs): | | | |
Supply from our top five major suppliers | 81 | % | | 86 | % |
Supply from our largest supplier | 39 | % | | 37 | % |
Supply from our second and third largest suppliers combined | 27 | % | | 34 | % |
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
14. Condensed Guarantor and Non-Guarantor Financial Information
During the quarter ended June 30, 2016, we issued $375.0 million aggregate principal amount of our Senior Notes. The Senior Notes were issued by Kaiser Aluminum Corporation ("Parent") pursuant to an indenture dated May 12, 2016 ("Indenture") with Wells Fargo Bank, National Association, as trustee ("Trustee"). The obligations of the Parent under the Indenture are guaranteed by Kaiser Aluminum Investments Company, Kaiser Aluminum Fabricated Products, LLC and Kaiser Aluminum Washington, LLC, ("Guarantor Subsidiaries"). All Guarantor Subsidiaries are 100% owned by the Parent. The guarantees are full and unconditional and joint and several but have customary releases in the following situations: (i) the sale of the Guarantor Subsidiary or all of its assets; (ii) the declaration of a Guarantor Subsidiary as an unrestricted subsidiary under the Indenture; (iii) the termination or release of the Guarantor Subsidiary's guarantee of certain other indebtedness; or (iv) our exercise of legal defeasance or covenant defeasance or the discharge of our obligations under the Indenture.
The following condensed consolidating financial information as of March 31, 2018 and December 31, 2017, and for the quarters ended March 31, 2018 and March 31, 2017 present: (i) the financial position, results of operation and cash flows for each of (a) Parent, (b) the Guarantor Subsidiaries on a combined basis and (c) the Non-Guarantor Subsidiaries on a combined basis; (ii) the "Consolidating Adjustments," which represent the adjustments necessary to eliminate the investments in our subsidiaries, other intercompany balances and other intercompany sales and cost of sales among Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries; and (iii) the resulting totals, reflecting information for us on a consolidated basis, as reported. The condensed consolidating financial information should be read in conjunction with the consolidated financial statements herein.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions of dollars)
March 31, 2018 |
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 131.7 |
| | $ | 3.3 |
| | $ | — |
| | $ | 135.0 |
|
Short-term investments | | — |
| | 83.8 |
| | — |
| | — |
| | 83.8 |
|
Receivables: | | | | | | | | | | |
Trade receivables, net | | — |
| | 178.5 |
| | 6.8 |
| | — |
| | 185.3 |
|
Intercompany loans receivable | | 99.9 |
| | 0.1 |
| | 0.6 |
| | (100.6 | ) | | — |
|
Other | | — |
| | 17.6 |
| | 0.6 |
| | — |
| | 18.2 |
|
Contract assets | | — |
| | 57.5 |
| | — |
| | — |
| | 57.5 |
|
Inventories | | — |
| | 166.5 |
| | 10.3 |
| | — |
| | 176.8 |
|
Prepaid expenses and other current assets | | 0.1 |
| | 25.2 |
| | 0.4 |
| | — |
| | 25.7 |
|
Total current assets | | 100.0 |
| | 660.9 |
| | 22.0 |
| | (100.6 | ) | | 682.3 |
|
Investments in and advances to subsidiaries | | 1,034.5 |
| | 49.0 |
| | — |
| | (1,083.5 | ) | | — |
|
Property, plant and equipment, net | | — |
| | 548.8 |
| | 29.9 |
| | — |
| | 578.7 |
|
Long-term intercompany loans receivable | | — |
| | — |
| | 12.4 |
| | (12.4 | ) | | — |
|
Deferred tax assets, net | | — |
| | 59.0 |
| | — |
| | 4.7 |
| | 63.7 |
|
Intangible assets, net | | — |
| | 24.6 |
| | — |
| | — |
| | 24.6 |
|
Goodwill | | — |
| | 18.8 |
| | — |
| | — |
| | 18.8 |
|
Other assets | | — |
| | 37.3 |
| | — |
| | — |
| | 37.3 |
|
Total | | $ | 1,134.5 |
| | $ | |