UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

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

 

 

For the quarterly period ended March 31, 2008

 

 

Commission file number 0-52105

 

KAISER ALUMINUM CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Registrant’s telephone number, including area code:

(949) 614-1740

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes þ     No o

 

 

As of April 30, 2008, there were 20,607,051 shares of the Common Stock of the registrant outstanding.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

PART I — FINANCIAL INFORMATION

 

 

CONSOLIDATED BALANCE SHEETS

 

 

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

STATEMENTS OF CONSOLIDATED INCOME

 

 

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)

 

 

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

STATEMENTS OF CONSOLIDATED CASH FLOWS

 

 

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts)
(Unaudited)

 

 

This Report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

Principles of Consolidation and Basis of Presentation.  The consolidated financial statements include the statements of the Company and its wholly owned subsidiaries. Investments in 50%-or-less-owned entities are accounted for primarily by the equity method. The only such entity for the periods covered by this Report was Anglesey Aluminium Limited (“Anglesey”). Intercompany balances and transactions are eliminated.

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature unless otherwise noted, necessary for a fair statement of the results for the interim periods presented.

 

Use of Estimates and Assumptions.  The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company’s consolidated financial position and results of operation.

 

Operating results for the quarter ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008.

 

Recognition of sales.  Sales are recognized when title, ownership and risk of loss pass to the buyer and collectibility is reasonably assured. From time to time, in the ordinary course of business, the Company may enter into agreements with customers requiring the Company to allocate certain amounts of its annual capacity in return for a fee. Such fees are recognized as revenue ratably over the life of the agreement which may be in excess of one year in length.

 

In certain circumstances, based on the terms of certain sales contracts which provide for periodic, such as quarterly or annually, billing throughout the contract, the Company may recognize revenue prior to billing the customer. At March 31, 2008 and December 31, 2007, the Company had $6.2 and $1.9 of unbilled receivables respectively, which is included within Trade receivables on the Company’s Consolidated Balance Sheets. A provision for estimated sales returns from and allowances to customers is made in the same period as the related revenues are recognized, based on historical experience or the specific identification of an event necessitating a reserve.

 

Earnings per Share.  Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the applicable period. The shares owned by a voluntary employee beneficiary association (“VEBA”) for the benefit of certain union retirees, their surviving spouses and eligible dependents (the “Union VEBA”) that are subject to transfer restrictions, while treated in the Consolidated Balance Sheets as being similar to treasury stock (i.e., as a reduction in Stockholders’ equity), are included in the computation of basic shares outstanding in the Statements of Consolidated Income because such shares were irrevocably issued and have full dividend and voting rights.

 

Diluted earnings per share is computed by dividing earnings by the sum of (a) the weighted average number of common shares outstanding during the period and (b) the dilutive effect of potential common share equivalents consisting of non-vested common shares, restricted stock units, performance shares and stock options (see Note 14).

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Restricted Cash.  The Company is required to keep certain amounts on deposit relating to workers’ compensation, collateral for certain letters of credit and other agreements totaling $15.9 at both March 31, 2008 and December 31, 2007. Of the restricted cash balance, $1.5 were considered short term and were included in Prepaid expenses and other current assets on the Consolidated Balance Sheets at both March 31, 2008 and December 31, 2007; $14.4 were considered long term and were included in Other assets on the Consolidated Balance Sheets at both March 31, 2008 and December 31, 2007(see Note 6).

 

Stock-Based Employee Compensation.  In March 2008, the Company granted performance shares to executive officers and other key employees under a long term incentive program for 2008 through 2010 (the “2008 — 2010 LTI Program”). These awards are subject to performance requirements pertaining to the Company’s economic value added (“EVA”) performance measured over a three year period. The EVA is a measure of the excess of the Company’s pretax operating income for a particular year over a pre-determined percentage of the net assets of the immediately preceding year, as defined in the 2008 — 2010 LTI Program. The number of performance shares that will ultimately vest and result in the issuance of common shares in 2011 will depend on the average annual EVA achieved for the three year performance period. The Company accounts for these awards at fair value in accordance with Statement of Accounting Standards No. 123 (revised 2004), Share-based Payments (“SFAS No. 123R”). The fair value is measured based on the most probable outcome of the performance condition which is estimated quarterly using the Company’s plan and actual results. The Company expenses the fair value, after assuming an estimated forfeiture rate, over the three year performance period on a ratable basis. During the quarter ended March 31, 2008, $.2 was recognized in connection with the performance shares (see Note 10).

 

Realization of excess tax benefits.  Beginning on January 1, 2008, the Company made an accounting policy election to follow the tax law ordering approach in assessing the realization of excess tax benefits upon vesting of non-vested share awards and performance shares, exercising of stock options and payment of dividend on non-vested share awards and performance shares expected to vest. Under the tax law ordering approach, realization of excess tax benefits is determined based on the ordering provisions of the tax law. Current year deductions, which include the tax benefits from current year equity award activities, are used first before using the Company’s net operating loss (“NOL”) carryforwards from prior years. Under this method, Additional capital would be credited when an excess tax benefit is realized, creating an additional paid in capital (“APIC”) pool, to absorb potential future tax deficiencies resulting from vesting of non-vested share awards and exercising of stock options.

 

Adoption of Emerging Issues Task Force Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, (“EITF Issue 06-11”). Beginning January 1, 2008, the Company adopted EITF Issue 06-11. In accordance with the EITF Issue, the Company records a credit to Additional capital for tax deductions resulting from a dividend payment on non-vested share awards the Company expects to vest. The adoption of EITF Issue 06-11 did not have any impact on the Company’s consolidated financial statement during the quarter ended March 31, 2008.

 

Adoption of Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115, (“SFAS No. 159”). On January 1, 2008, the Company adopted SFAS 159 which permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option) with changes in fair value reported in earnings. The Company already records derivative contracts at fair value in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). The adoption of SFAS No. 159 had no impact on the consolidated financial statements as management did not elect the fair value option for any other financial instruments or certain other assets and liabilities.

 

Fair Value Measurements.  On January 1, 2008, the Company adopted Statement of Accounting Standards No. 157, Fair Value Measurements, (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.

 

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in Statement of Accounting Standards No. 13, Accounting for Leases. SFAS No. 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

 

 

The Company’s derivative contracts are valued at fair value using significant other observable and unobservable inputs. Such financial instruments consist of primary aluminum, natural gas, and foreign currency contracts. The fair values of these derivative contracts are based upon trades in liquid markets, such as aluminum options. Valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.

 

The Company has other derivative contracts that do not have observable market quotes. For these financial instruments, management uses significant other observable inputs (i.e., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors such as bid/offer spreads.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table presents the Company’s assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of March 31, 2008:

 

 

Financial instruments classified as Level 3 in the fair value hierarchy represent derivative contracts in which management has used at least one significant unobservable input in the valuation model. The following table presents a reconciliation of activity for such derivative contracts on a net basis:

 

 

New Accounting Pronouncements.  Statement of Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”) was issued in December 2007. SFAS No. 141R establishes principles and requirements for how the acquiror of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141R also provides guidance on how the acquiror should recognize and measure the goodwill acquired in the business combination and determine what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for the Company in its fiscal year beginning January 1, 2009. Most of the requirements of SFAS No. 141R are only to be applied prospectively to business combinations entered into on or after January 1, 2009.

 

Statement of Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”) was issued in December 2007. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company in its fiscal year beginning January 1, 2009. The adoption of SFAS No. 160 is not currently expected to have a material impact on the Company’s consolidated financial statements.

 

Statement of Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement 133 (’SFAS No. 161”) was issued in March 2008. SFAS No. 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, SFAS No. 161 will have on its consolidated financial statements.

 

 

Inventories are stated at the lower of cost or market value. For the Fabricated Products segment, finished products, work in process and raw material inventories are stated on the last-in, first-out (“LIFO”) basis and other inventories, principally operating supplies and repair and maintenance parts, are stated at average cost. All inventories in the Primary Aluminum segment are stated on the first-in, first-out (“FIFO”) basis. Inventory costs consist of material, labor and manufacturing overhead, including depreciation. Abnormal costs, such as idle facility expenses, freight, handling costs and spoilage, are accounted for as current period charges.

 

Inventories consist of the following:

 

 

The Company recorded net non-cash LIFO charges of approximately $14.4 and $8.0 during the quarters ended March 31, 2008 and 2007, respectively. These amounts are primarily a result of changes in metal prices and changes in inventory volumes.

 

The Company has a larger volume of raw materials, work in process and finished products than its long-term historical average, and the price for such goods reflected in the opening inventory balance at the Company’s emergence from chapter 11 bankruptcy on July 6, 2006, given the application of fresh start accounting, is higher than long term historical averages. As such, with the inevitable ebb and flow of business cycles, non-cash LIFO charges and potential lower of cost and market adjustments will result when inventory levels drop and/or margins compress. Such adjustments could be material to results in future periods.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The Company has a 49% ownership interest in Anglesey, which owns an aluminum smelter at Holyhead, Wales. The Company accounts for its 49% ownership in Anglesey using the equity method. The Company’s equity in income before income taxes of Anglesey is treated as a reduction (increase) in cost of products gross of our share of United Kingdom corporation tax. The income tax effects of the Company’s equity in income are included in the Company’s income tax provision.

 

The nuclear plant that supplies power to Anglesey is currently slated for decommissioning in late 2010. For Anglesey to be able to continue its aluminum reduction operations past September 2009, when its current power contract expires, Anglesey will have to secure power at prices that make its aluminum reduction operation viable. No assurances can be provided that Anglesey will be successful in this regard. In addition, given the potential for future shutdown and related costs, Anglesey temporarily suspended dividends during the last half of 2006 and the first half of 2007 while it studied future cash requirements. Based on a review of cash anticipated to be available for future cash requirements, Anglesey removed the temporary suspension of dividends in 2007. Dividends in respect of the Company’s ownership interest totaled $14.3 in 2007 resulting in a reduction of the Investment in unconsolidated affiliate. Dividends over the past five years have fluctuated substantially depending on various operational and market factors. During the last five years, cash dividends received were as follows: 2007— $14.3, 2006 — $11.8, 2005 — $9.0, 2004 — $4.5 and 2003 — $4.3. During April 2008, Anglesey declared an additional dividend totaling $8.0, of which $3.9 was received on April 18, 2008 in respect of the Company’s ownership interest. No assurance can be given that Anglesey will not suspend dividends again in the future.

 

The following table shows a summary of Anglesey’s selected operating results for the quarters ended March 31, 2008 and 2007:

 

 

 

 

At March 31, 2008 and December 31, 2007, the receivables from Anglesey were zero and $9.5, respectively.

 

As a result of fresh start accounting, the Company decreased its investment in Anglesey upon emergence from chapter 11 bankruptcy on July 6, 2006 (see Note 2 of Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007). The $11.6 difference between the Company’s share of Anglesey’s equity and the investment amount reflected in the Company’s balance sheet is being amortized (included in Cost of products sold) over the period from July 2006 to September 2009, the end of the current power contract. The non-cash amortization was approximately $.9 for the quarters ended March 31, 2008 and 2007. At March 31, 2008, the remaining unamortized amount was $5.4.

 

In the quarter ended March 31, 2008, the Company recorded a $.1 charge for share-based equity compensation for employees of Anglesey who participate in the employee share savings plan of its parent (“Rio Tinto”). The $.1 has been recognized as a reduction in the equity in earnings of Anglesey for the quarter ended March 31, 2008. In accordance with Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (“APB No. 18”), this transaction has been accounted for as a capital transaction of Anglesey. As a

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

result, the Company increased its Additional capital for the quarter ended March 31, 2008 by $.1 rather than adjust its Investment in and advances to unconsolidated affiliate.

 

In accordance with a separate agreement between Anglesey and Rio Tinto, Anglesey is required to pay to Rio Tinto, in cash, an amount equal to the difference between the share price on the date shares are purchased under the Rio Tinto employee share savings plan and the amount paid by the employees of Anglesey to purchase the shares under the Rio Tinto employee share savings plan. During the quarter ended March 31, 2008, Anglesey made a payment of $2.8 to Rio Tinto under this agreement. In accordance with APB No. 18, this payment has been accounted for as a capital distribution resulting in a reduction of $1.3 in both the Company’s Additional capital and the value of its investment in Anglesey on the balance sheet.

 

 

The Company has conditional asset retirement obligations (“CAROs”) at several of its fabricated products facilities. The vast majority of such CAROs consist of incremental costs that would be associated with the removal and disposal of asbestos (all of which is believed to be fully contained and encapsulated within walls, floors, ceilings or piping) at certain of the older plants if such plants were to undergo major renovation or be demolished. No plans currently exist for any such renovation or demolition of such facilities and the Company’s current assessment is that the most probable scenarios are that no such CARO would be triggered for 20 or more years, if at all.

 

The Company’s estimates and judgments that affect the probability weighted estimated future contingent cost amounts did not change during the quarter ended March 31, 2008. The Company’s results for the quarters ended March 31, 2008 and 2007 both included an incremental accretion of the estimated liability of $.1 (recorded in Cost of products sold). The estimated fair value of the CAROs at March 31, 2008 was $3.1.

 

Anglesey (see Note 3) also recorded CARO liabilities of approximately $24.0 in its financial statements as of March 31, 2007. The United Kingdom generally accepted accounting principles treatment applied by Anglesey was not consistent with the principles of Statement of Accounting Standards No. 143, Accounting for Asset Retirement Obligations or Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. Accordingly, the Company adjusted Anglesey’s recording of the CARO to comply with GAAP treatment. The Company adjusted its equity in earnings for Anglesey for the quarters ended March 31, 2008 and 2007 by $.3 and $.2, respectively, to reflect the impact of applying GAAP with respect to the Anglesey CARO liability.

 

For purposes of the Company’s fair value estimates with respect to the CARO liabilities, a credit adjusted risk free rate of 7.5% was used.

 

 

The major classes of property, plant, and equipment are as follows:

 

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

At March 31, 2008 the major components of Construction in progress were as follows (see Note 11):

 

 

For the quarters ended March 31, 2008 and 2007, the Company recorded depreciation expense of $3.5 and $2.6, respectively, relating to the Company’s operating facilities in its Fabricated Products segment. An immaterial amount of depreciation expense was also recorded in the Company’s Corporate segment for both periods.

 

 

Trade Receivables.  Trade receivables were comprised of the following:

 

 

Prepaid Expenses and Other Current Assets.  Prepaid expenses and other current assets were comprised of the following:

 

 

Other Assets.  Other assets were comprised of the following:

 

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Other Accrued Liabilities.  Other accrued liabilities were comprised of the following:

 

 

The accrued bank overdraft balance at March 31, 2008 and December 31, 2007 represents uncleared cash disbursements.

 

Long-term Liabilities.  Long-term liabilities were comprised of the following:

 

 

 

Upon emergence from chapter 11 bankruptcy on July 6, 2006, the Company and certain subsidiaries of the Company entered into a Senior Secured Revolving Credit Agreement with a group of lenders providing for a $200.0 revolving credit facility (the “Revolving Credit Facility”), of which up to a maximum of $60.0 may be utilized for letters of credit. Under the Revolving Credit Facility, the Company is able to borrow (or obtain letters of credit) from time to time in an aggregate amount equal to the lesser of a stated amount, initially $200.0, and a borrowing base comprised of eligible accounts receivable, eligible inventory and certain eligible machinery, equipment and real estate, reduced by certain reserves, all as specified in the Revolving Credit Facility. The Revolving Credit Facility matures in July 2011, at which time all principal amounts outstanding thereunder will be due and payable. Borrowings under the Revolving Credit Facility bear interest at a rate equal to either a base prime rate or LIBOR, at the Company’s option, plus a specified variable percentage determined by reference to the then remaining borrowing availability under the Revolving Credit Facility. The Revolving Credit Facility may, subject to certain conditions and the agreement of lenders thereunder, be increased to $275.0 at the request of the Company. During the fourth quarter of 2007, certain conditions were met and the Company and the lenders amended the Revolving Credit Facility, effective December 10, 2007, to increase the stated amount of the credit facility from $200.0 to $265.0.

 

Amounts owed under the Revolving Credit Facility may be accelerated upon the occurrence of various events of default set forth in the agreement, including, without limitation, the failure to make principal or interest payments when due, and breaches of covenants, representations and warranties. The Revolving Credit Facility is secured by a first priority lien on substantially all of the assets of the Company and certain of its U.S. operating subsidiaries that

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

are also borrowers thereunder. The Revolving Credit Facility places restrictions on the ability of the Company and certain of its subsidiaries to, among other things, incur debt, create liens, make investments, pay dividends, sell assets, undertake transactions with affiliates and enter into unrelated lines of business. At March 31, 2008, the Company was in full compliance with all covenants related to the Revolving Credit Facility.

 

At March 31, 2008, $262.8 was available for borrowing and letters of credit under the Revolving Credit Facility, no borrowings were outstanding, and approximately $12.6 of letters of credit were outstanding.

 

 

Tax Provision.  The provision for income taxes for the quarters ended March 31, 2008 and 2007 consisted of:

 

 

The income tax provision for the quarter ended March 31, 2008 was $29.4, with an effective tax rate of 43.0%. The effective tax rate of 43.0% was impacted by several factors including:

 

 

Deferred Income Taxes.  Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

Although the Company had approximately $981 of tax attributes, including the NOL carryforwards available at December 31, 2006 to offset the impact of future income taxes, the Company did not meet the “more likely than not” criteria for recognition of such attributes primarily because the Company did not have sufficient history of paying taxes. As such, the Company recorded a full valuation allowance against the amount of tax attributes available and no deferred tax asset was recognized. The benefit associated with any reduction of the valuation allowance was first utilized to reduce intangible assets with any excess being recorded as an adjustment to Stockholders’ equity rather than as a reduction of income tax expense. In order to assess whether a valuation allowance was still required at December 31, 2007, the Company executed a process for determining the need for a valuation allowance. At the conclusion of this process, the Company concluded that it had met the “more likely than not” criteria for recognition of its deferred tax assets and thus released the vast majority of the valuation allowance at December 31, 2007. In accordance with fresh start accounting, the release of the valuation allowance was taken as an adjustment to Stockholders’ equity rather than through the income statement. The Company maintains a valuation allowance on deferred tax assets that did not meet the “more likely than not” recognition criteria and these assets are primarily state NOL carryforwards that the Company believes will likely expire unused.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

At December 31, 2007, the Company had $897.5 of net operating loss carryforwards available to reduce future cash payments for income taxes in the United States. Of the $897.5 of NOL carryforwards, $1.0 relates to the excess tax benefits from employee restricted stock. Equity will be increased by $1.0 if and when such excess tax benefits are ultimately realized. Such NOL carryforwards expire periodically through 2027. The Company also had $90.1 of other tax attributes, including $88.4 of gross alternative minimum tax credit carryforwards with an indefinite life, available to offset regular federal income tax requirements. The remainder consists of general business credits that will expire periodically through 2011.

 

In assessing the realizability of deferred tax assets, management considers whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. As of December 31, 2007, due to uncertainties surrounding the realization of some of the Company’s deferred tax assets, including state NOLs sustained during the prior years and expiring tax benefits, the Company had a valuation allowance of $24.8 against its deferred tax assets. When recognized, the tax benefits relating to any reversal of the valuation allowance will be recorded as an adjustment to Stockholders’ equity rather than as a reduction of income tax expense. Valuation allowance adjustments related to post emergence events will flow through the tax provision.

 

Foreign taxes primarily represent Canadian income taxes in respect of the Company’s facility in London, Ontario and United Kingdom income taxes in respect of the Company’s ownership in Anglesey. The provision for income tax is based on an assumed effective rate for each applicable period.

 

Other.  The Company and its subsidiaries file income tax returns in the US federal jurisdiction and various states and foreign jurisdictions. The audit of the Company’s federal income tax return for the 2004 tax year was completed in April of 2008. The results of this examination did not have a material effect on the Company’s financial condition or results of operations. The Canada Revenue Agency audited and issued assessment notices for 1998 through 2001 for which Notices of Objection have been filed. The 2002 to 2004 tax years are currently under audit by the Canada Revenue Agency. The Company does not expect that the results of these examinations to have a material effect on its financial condition or results of operations. Certain past years are still subject to examination by taxing authorities and the use of NOL carryforwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.

 

No US federal or state liability has been recorded for the undistributed earnings of the Company’s Canadian subsidiary at March 31, 2008. These undistributed earnings are considered to be indefinitely reinvested. Accordingly, no provision for US federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred US income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation.

 

The Company had gross unrecognized tax benefits of $19.2 and $19.7 at March 31, 2008 and December 31, 2007, respectively. The change during the quarter ended March 31, 2008 was primarily due to currency fluctuations and a change in tax positions. The Company recognizes interest and penalties related to these unrecognized tax benefits in the income tax provision. During the quarter ended March 31, 2008, the Company recognized approximately $.6 in interest and penalties. During the first quarter of 2008, the foreign currency impact on gross unrecognized tax benefits, interest and penalties resulted in a $1.0 currency translation adjustment that was recorded in Accumulated other comprehensive income (loss), of which $.6 related to gross unrecognized tax benefits and $.4 related to accrued interest and penalties. Additionally, the Company had approximately $10.9 and $10.7 accrued at March 31, 2008 and December 31, 2007, respectively, for interest and penalties which were included in Long-term liabilities in the balance sheet. Due to the resolution of the US federal audit of the 2004 tax year, the Company’s gross unrecognized tax benefits will change within the next twelve months by $2.4.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

A summary of activities with respect to the gross unrecognized tax benefits for the quarter ended March 31, 2008 is as follows:

 

 

 

 

 

Pension and Similar Plans.  Pensions and similar plans include:

 

 

VEBA Update.  The Union VEBA had rights to receive 11,439,900 common shares upon the Company’s emergence from chapter 11 bankruptcy. However, prior to the Company’s emergence, the Union VEBA sold its rights to approximately 2,630,000 shares and received net proceeds of approximately $81.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

During the first quarter of 2007, 6,281,180 common shares were sold to the public by existing stockholders pursuant to a registered offering. The Company did not sell any shares in, and did not receive any proceeds from, the offering. The Union VEBA was one of the selling stockholders and, after the offering, owned approximately 26.7% of the outstanding common shares as of March 31, 2007. Of the 3,337,235 shares sold by the Union VEBA in the offering, 819,280 common shares were unable to be sold without the approval of the Company’s Board of Directors under an agreement restricting the Union VEBA’s ability to sell or otherwise transfer its common shares. However, during the first quarter of 2007, the Union VEBA received approval from the Company’s Board of Directors to include such shares in the offering.

 

The 819,280 previously restricted shares were treated as a reduction of Stockholders’ equity (at the $24.02 per share reorganization value) in the December 31, 2006 balance sheet. As a result of the relief of the restrictions, during the first quarter of 2007: (i) the value of the 819,280 shares previously restricted was added to VEBA assets at the approximate $58.19 per share price realized by the Union VEBA in the offering (totaling $47.7); (ii) approximately $19.7 of the December 31, 2006 reduction in Stockholders’ equity associated with the restricted shares (common shares owned by Union VEBA subject to restrictions) was reversed; and (iii) the difference between the two amounts (approximately $23, net of income taxes of $5) was credited to Additional capital.

 

During the fourth quarter of 2007, the Union VEBA sold an additional 627,200 shares following receipt of approval of the Company’s Board of Directors. The 627,200 shares sold resulted in (i) an increase of $45.1 in VEBA assets at an approximate $72.03 weighted average per share price realized by the Union VEBA, (ii) a reduction of $15.1 in common stock owned by the Union VEBA (at the $24.02 per share reorganization value), and (iii) the difference between the two amounts (approximately $25.2, net of income taxes of $4.9) was credited to Additional capital. After the sale, the Union VEBA owned approximately 23.5% of the outstanding common stock as of March 31, 2008.

 

As of the date of filing of this Report, the Company’s only obligation to the Union VEBA and the Salaried VEBA is an annual variable cash contribution. The amount to be contributed to the VEBAs is 10% of the first $20.0 of annual cash flow (as defined; in general terms, the principal elements of cash flow are earnings before interest expense, provision for income taxes and depreciation and amortization less cash payments for, among other things, interest, income taxes and capital expenditures), plus 20% of annual cash flow, as defined, in excess of $20.0. Such annual payments may not exceed $20.0 and are also limited (with no carryover to future years) to the extent that the payments would cause the Company’s liquidity to be less than $50.0. Such amounts are determined on an annual basis and payable upon the earlier of (a) 120 days following the end of fiscal year, or within 15 days following the date on which the Company files its Annual Report on Form 10-K with the Securities and Exchange Commission (“SEC”) (or, if no such report is required to be filed, within 15 days of the delivery of the independent auditor’s opinion of the Company’s annual financial statements). At December 31, 2007, the Company had preliminarily determined that $8.8 was owed to the VEBAs under this arrangement which was recorded in Other accrued liabilities in the Company’s consolidated balance sheet and a corresponding increase in Net assets in respect of VEBAs. In March 2008, $8.4 was paid to the VEBAs based on the final calculation of the amount owed under the agreement and the remaining $.4 of the accrual at the end of December 31, 2007 was released with a corresponding reduction in Net assets in respect of VEBAs.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Components of Net Periodic Benefit Cost and Cash Flow and Charges.  The following tables present the components of net periodic pension benefits cost for the quarters ended March 31, 2008 and 2007:

 

 

The following tables present the allocation of these charges:

 

 

For all periods presented, substantially all of the Fabricated Products segment’s related charges are in Cost of products sold excluding depreciation with the balance being in Selling, administrative, research and development and general expense.

 

See Note 10 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 for key assumptions with respect to the Company’s pension plans and key assumptions made in computing the net obligations of each VEBA.

 

 

General.  Upon the Company’s emergence from chapter 11 bankruptcy, the 2006 Equity and Performance Incentive Plan (as amended, the “Equity Incentive Plan”) became effective. Officers and other key employees of the Company or one or more of its subsidiaries, as well as directors of the Company, are eligible to participate in the Equity Incentive Plan. The Equity Incentive Plan permits the granting of awards in the form of options to purchase common shares, stock appreciation rights, shares of non-vested and vested stock, restricted stock units, performance shares, performance units and other awards. The Equity Incentive Plan will expire on July 6, 2016. No grants will be made after that date, but all grants made on or prior to that date will continue in effect thereafter subject to the terms thereof and of the Equity Incentive Plan. The Company’s Board of Directors may, in its discretion, terminate the Equity Incentive Plan at any time. The termination of the Equity Incentive Plan will not affect the rights of participants or their successors under any awards outstanding and not exercised in full on the date of termination.

 

Subject to certain adjustments that may be required from time to time to prevent dilution or enlargement of the rights of participants under the Equity Incentive Plan, upon its effectiveness 2,222,222 common shares were reserved for issuance under the Equity Incentive Plan.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Compensation charges, all of which are included in Selling, administrative, research and development and general expenses, related to the Equity Incentive Plan for the quarters ended March 31, 2008 and 2007 were as follows:

 

 

At March 31, 2008, 1,467,661 common shares were available for additional awards under the Equity Incentive Plan.

 

Non-vested Common Shares, Restricted Stock Units and Performance Shares.  In March 2008, the Company granted 39,354 non-vested common shares, 702 restricted stock units and 96,480 performance shares to executive officers and other key employees under the 2008 — 2010 LTI Program.

 

The non-vested common shares are subject to a three year vesting requirement that lapses on March 3, 2011. The total fair value of the shares issued, after assuming a 5% forfeiture rate, of $2.8 is being amortized to expense over a three year period on a ratable basis.

 

The restricted stock units have rights similar to the rights of non-vested common shares and the employee will receive one common share for each restricted stock unit upon the vesting of the restricted stock unit. The restricted stock units vest one third on the first anniversary of the grant date and one third on each of the second and third anniversaries of the date of issuance. The fair value of the restricted stock units issued, after assuming a 5% forfeiture rate, is being amortized to expense over the vesting period on a ratable basis.

 

The performance shares are subject to performance requirements pertaining to the Company’s average annual EVA measured over a three year period, 2008 through 2010. EVA is a measure of the Company’s pretax operating income for a particular year over a pre-determined percentage of net assets of the immediately preceding year, as defined in the 2008 — 2010 LTI Program. The number of performance shares, if any, that will ultimately vest and result in the issuance of common shares in 2011 will depend on the average annual EVA achieved for the three year performance period. The Company accounts for these awards at fair value in accordance with SFAS No. 123R. The total fair value to be recognized as compensation expense has been estimated based on the most probable outcome of the performance condition which is evaluated quarterly using the Company’s plan and actual results. Based on the Company’s best estimate, the total fair value to be recognized as compensation expense, after assuming an estimated forfeiture rate of 5%, of $6.9 is being amortized to expense over the requisite service period of three years on a ratable basis.

 

No awards were granted under the Equity Incentive Plan during the quarter ended March 31, 2007. There was no vesting of any awards during the quarter ended March 31, 2007.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The fair value of the non-vested common shares, restricted stock units and performance shares was determined based on the closing trading price of the common shares on the grant date. A summary of the activity with respect to non-vested common shares and restricted stock units for the quarter ended March 31, 2008 is as follows:

 

 

A summary of the activity with respect to the performance shares for the quarter ended March 31, 2008 is as follows:

 

 

Under the Equity Incentive Plan, the Company allows participants to elect to have the Company withhold common shares to satisfy statutory tax withholding obligations arising in connection with non-vested shares, restricted stock units, stock options and performance shares. When the Company withholds the shares, it is required to remit to the appropriate taxing authorities the fair value of the shares withheld and such shares are cancelled immediately. During the quarter ended March 31, 2008, there were no common shares withheld for statutory tax withholding.

 

As of March 31, 2008, there was $14.6 of unrecognized compensation cost related to the non-vested common shares and the restricted stock units and $6.7 of unrecognized compensation cost related to the performance shares. The cost related to the non-vested common shares and the restricted stock units is expected to be recognized over a weighted-average period of 1.7 years and the cost related to the performance shares is expected to be recognized over a weighted-average period of 2.9 years.

 

Stock Options.  As of March 31, 2008, the Company had 25,137 outstanding options, which were granted on April 3, 2007, for executives and other key employees to purchase its common shares with a contractual life of ten years. The weighted average fair value of the options granted was $39.90. No new options were granted during the quarter ended March 31, 2008.

 

The fair value of each of the Company’s stock option awards was estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of the Company’s stock option awards, which are subject to graded vesting, is expensed on a straight line basis over the

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

vesting period of the stock options. Due to the Company’s short trading history for its common shares following emergence from chapter 11 bankruptcy on July 6, 2006, expected volatility could not be reliably calculated based on the historical volatility of the common shares. As such, the Company determined volatility for use in the Black-Sholes option-pricing model using the volatility of the stock of a number of similar public companies over a period equal to the expected option life of six years. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon US Treasury bond on the date the stock option is awarded. The Company uses historical data to estimate employee terminations and the simplified method to estimate the expected option life within the valuation model.

 

The significant weighted average assumptions used in determining the grant date fair value of the option awards granted on April 3, 2007 were as follows:

 

 

A summary of the Company’s stock option activity for the quarter ended March 31, 2008 is as follows:

 

 

At March 31, 2008, there was $.6 of unrecognized compensation expense related to stock options. The expense is expected to be recognized over a weighted-average period of 2.0 years.

 

 

Commitments.  The Company and its subsidiaries have a variety of financial commitments, including purchase agreements, forward foreign exchange and forward sales contracts (see Note 12), letters of credit and guarantees. The Company and its subsidiaries also have agreements to supply alumina to and to purchase aluminum from Anglesey (see Note 3).

 

Minimum rental commitments under operating leases at December 31, 2007, are as follows: years ending December 31, 2008 — $3.8; 2009 — $3.5; 2010 — $2.0; 2011 — $.9 and 2012 and thereafter — $.5.

 

Environmental Contingencies.  The Company and its subsidiaries are subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims based upon such laws.

 

A substantial portion of the Company’s pre-emergence obligations, primarily in respect of non-owned locations, was resolved by the chapter 11 proceedings. Based on the Company’s evaluation of the remaining

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

environmental matters, the Company had environmental accruals totaling $7.7 at March 31, 2008. Such amounts are primarily related to potential solid waste disposal and soil and groundwater remediation matters. These environmental accruals represent the Company’s estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company’s assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that expenditures to be charged to these environmental accruals will be approximately $1.7 in 2008, $1.3 in 2009, $1.0 in 2010 , $.9 in 2011 and $2.9 in 2012 and thereafter.

 

As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could be, in the aggregate, up to an estimated $15.6. As the resolution of these matters is subject to further regulatory review and approval, no specific assurance can be given as to when the factors upon which a substantial portion of this estimate is based can be expected to be resolved. However, the Company is currently working to resolve certain of these matters.

 

Other Contingencies.  The Company and its subsidiaries are involved in various other claims, lawsuits, and proceedings relating to a wide variety of matters related to past or present operations. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

 

 

In conducting its business, the Company uses various instruments, including forward contracts and options, to manage the risks arising from fluctuations in aluminum prices, energy prices and exchange rates. The Company has historically entered into derivative transactions from time to time to limit its economic (i.e. cash) exposure resulting from (1) its anticipated sales of primary aluminum and fabricated aluminum products, net of expected purchase costs for items that fluctuate with aluminum prices, (2) the energy price risk from fluctuating prices for natural gas used in its production process, and (3) foreign currency requirements with respect to its cash commitments for equipment purchases and with foreign subsidiaries and its affiliate. As the Company’s hedging activities are generally designed to lock-in a specified price or range of prices, realized gains or losses on the derivative contracts utilized in the hedging activities (excluding the impact of mark-to-market fluctuations on those contracts discussed below) generally offset at least a portion of any losses or gains, respectively, on the transactions being hedged at the time the transaction occurs. However, due to mark-to-market accounting, during the life of the derivative contract, significant unrealized, non-cash, gains and losses may be recorded in the income statement as a reduction or increase in Cost of products sold excluding depreciation.

 

The Company’s share of primary aluminum production from Anglesey is approximately 150 million pounds annually. Because the Company purchases alumina for Anglesey at prices linked to primary aluminum prices, only a portion of the Company’s net revenues associated with Anglesey are exposed to price risk. The Company estimates the net portion of its share of Anglesey production exposed to primary aluminum price risk to be approximately 100 million pounds annually (before considering income tax effects).

 

The Company’s pricing of fabricated aluminum products is generally intended to lock-in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price risk on to its customers. However, in certain instances the Company does enter into firm price arrangements. In such instances, the Company does have price risk on its anticipated primary aluminum purchase in respect of the customer’s order. Total fabricated products shipments during the quarters ended March 31, 2008 and 2007 that contained fixed price terms were (in millions of pounds) 60.4 and 49.2, respectively.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

During the last three years, the volume of fabricated products shipments with underlying primary aluminum price risk were at least as much as the Company’s net exposure to primary aluminum price risk at Anglesey. As such, the Company considers its access to Anglesey production overall to be a “natural” hedge against fabricated products firm metal-price risks. However, since the volume of fabricated products shipped under firm prices may not match up on a month-to-month basis with expected Anglesey-related primary aluminum shipments and to the extent that firm price contracts from the Company’s Fabricated Products segment exceed the Anglesey related primary aluminum shipments, the Company may use third party hedging instruments to eliminate any net remaining primary aluminum price exposure existing at any time.

 

At March 31, 2008, the Fabricated Products business held contracts for the delivery of fabricated aluminum products that have the effect of creating price risk on anticipated purchases of primary aluminum during the last three quarters of 2008 and for the period 2009 through 2012 totaling approximately (in millions of pounds): 2008 — 161.2, 2009 — 90.8, 2010 — 87.5, 2011 — 78.3 and 2012 — 8.9.

 

The following table summarizes the Company’s material derivative positions at March 31, 2008:

 

 

 

 

 

 

The Company currently reflects changes in the market value of its derivative instruments in Net income (rather than deferring such gains/losses to the date of the underlying transactions to which the related hedges occur). Included in Net income for the quarter ended March 31, 2008 were realized gains of $2.4 and unrealized gains of

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

$32.9. Included in Net income for the quarter ended March 31, 2007 were realized losses of $1.9 and unrealized losses of $1.4.

 

13. Other Operating Charges, Net

 

Other operating charges, net, for the quarters ended March 31, 2008 and 2007, were as follows:

 

 

Post-emergence chapter 11-related items include primarily professional fees and expenses incurred after emergence which related directly to the Company’s reorganization.

 

 

Basic and diluted earnings per share for the quarters ended March 31, 2008 and 2007 were calculated as follows:

 

 

Options to purchase 25,137 common shares at an average exercise price per share of $80.01 were outstanding at March 31, 2008. 592,854 and 523,968 non-vested common shares and restricted stock units were outstanding at March 31, 2008 and 2007, respectively. 96,480 performance shares were outstanding at March 31, 2008. Diluted income per share reflects the potential dilutive effect of options to purchase common shares, non-vested common shares, restricted stock units and performance shares using the treasury stock method.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following were excluded from the weighted average diluted shares computation for the quarters ended March 31, 2008 and 2007 as their inclusion would have been anti-dilutive:

 

 

 

 

Also excluded from the weighted average diluted shares computation for the quarter ended March 31, 2008 were 96,480 performance shares as the performance shares were contingently issuable based on the Company’s performance over a three year period ending December 31, 2010 and the contingency was not met as of March 31, 2008.

 

On March 11, 2008, the Company’s Board of Directors declared a dividend of $3.7, or $.18 per common share, to stockholders of record at the close of business on April 25, 2008, which is payable on May 16, 2008. In addition, holders of restricted stock units as of April 25, 2008 have the right to receive a dividend equivalent of $.18 per underlying common share and the holders of performance shares as of April 25, 2008 have the right to received a dividend equivalent of $.18 per underlying common share with respect to one half of the performance shares.

 

 

The Company’s primary line of business is the production of fabricated aluminum products. In addition, the Company owns a 49% interest in Anglesey (see Note 3).

 

The Company’s continuing operations are organized and managed by product type and include two operating segments of the aluminum industry and the Corporate segment. The aluminum industry segments include: Fabricated Products and Primary Aluminum. The Fabricated Products segment sells value-added products such as heat treat aluminum sheet and plate, extrusions and forgings which are used in a wide range of industrial applications, including for automotive, aerospace and general engineering end-use applications. The Primary Aluminum segment produces, through its investment in Anglesey, commodity grade products as well as value-added products such as ingot and billet, for which the Company receives a premium over normal commodity market prices and conducts hedging activities in respect of the Company’s exposure to primary aluminum price risk. The accounting policies of the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Segment results are evaluated internally by management before any allocation of corporate overhead and without any charge for income taxes, interest expense or Other operating charges, net.

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Financial information by operating segment for the quarters ended March 31, 2008 and 2007 is as follows:

 

 

 

 

 

 

 

 

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

This Item should be read in conjunction with Part I, Item 1, of this Report.

 

This Report contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Report and can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include: the effectiveness of management’s strategies and decisions; general economic and business conditions; developments in technology; new or modified statutory or regulatory requirements; and changing prices and market conditions. This Item and Part I, Item 1A. “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2007, each identify other factors that could cause actual results to vary. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections:

 

 

We believe our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part II, Item 8. “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K for year ended December 31, 2007.

 

Unless otherwise noted, this MD&A relates only to results from continuing operations. In the discussion of operating results below, certain items are referred to as non-run-rate items. For purposes of such discussion, non-run-rate items are items that, while they may recur from period to period, are (i) particularly material to results, (ii) affect costs primarily as a result of external market factors, and (iii) may not recur in future periods if the same level of underlying performance were to occur. Non-run-rate items are part of our business and operating environment but are worthy of being highlighted for the benefit of the users of the financial statements. Our intent is to allow users of the financial statements to consider our results both in light of and separately from items such as fluctuations in underlying metal prices, natural gas prices and currency exchange rates.

 

Overview

 

We are a leading producer of fabricated aluminum products for aerospace / high strength, general engineering and custom automotive and industrial applications. In addition, we own a 49% interest in Anglesey Aluminium Limited (“Anglesey”), which owns and operates an aluminum smelter in Holyhead, Wales.

 

We have two reportable operating segments, Fabricated Products and Primary Aluminum, and our Corporate segment. The Fabricated Products segment is comprised of all of the operations within the fabricated aluminum products industry including our eleven fabrication facilities in North America at the end of March 31, 2008. The Fabricated Products segment sells value-added products such as heat treat aluminum sheet and plate, extrusions and forgings which are used in a wide range of industrial applications, including aerospace, defense, automotive and general engineering end-use applications.

The Primary Aluminum segment produces commodity grade products as well as value-added products such as ingot and billet, for which we receive a premium over normal commodity market prices, and conducts hedging activities in respect of our exposure to primary aluminum price risk.

 

Changes in global, regional, or country-specific economic conditions can have a significant impact on overall demand for aluminum-intensive fabricated products in the markets in which we participate. Such changes in demand can directly affect our earnings by impacting the overall volume and mix of such products sold. During 2007 and the first quarter of 2008, the markets for aerospace and high strength products in which we participate were strong, resulting in higher shipments and improved margins.

 

Changes in primary aluminum prices also affect our Primary Aluminum segment and expected earnings under any firm price fabricated products contracts. However, the impacts of such changes are generally offset by each other or by primary aluminum hedges. Our operating results are also, albeit to a lesser degree, sensitive to changes in prices for power and natural gas and changes in certain foreign exchange rates. All of the foregoing have been subject to significant price fluctuations over recent years. For a discussion of our sensitivity to changes in market conditions, see Item 3. “Quantitative and Qualitative Disclosures About Market Risks.”

 

During the quarter ended March 31, 2008, the average London Metal Exchange, or LME, transaction price per pound of primary aluminum was $1.24. During the quarter ended March 31, 2007, the average LME price per pound for primary aluminum was $1.27. At April 30, 2008, the LME price was approximately $1.31 per pound.

 

Management Review of the Quarter Ended March 31, 2008

 

Highlights: